Information contained herein is subject to completion or amendment. The notes
described herein may not be sold nor may offers to buy be accepted prior to
delivery of a final offering memorandum. This preliminary offering memorandum
or any part hereof will not constitute an offer to sell or the solicitation of
an offer to buy the notes described herein nor will there be any sale of such
notes in any jurisdiction in which such offer, solicitation or sale would be
unlawful prior to registration or qualification of the notes under the
securities laws of any such jurisdiction.
TAL ADVANTAGE I LLC
[TAL INTERNATIONAL]
[GRAPHIC OMITTED]
$680,000,000 FLOATING RATE SECURED NOTES, SERIES 2006-1
The $680,000,000 Floating Rate Secured Notes, Series 2006-1 (the "Series 2006-1
Notes") are being offered by Fortis Securities LLC and Credit Suisse Securities
(USA) LLC (the "Initial Purchasers"). The Series 2006-1 Notes will be issued
pursuant to, the Amended and Restated Indenture, dated as of , 2006
(the "Indenture") and the Series 2006-1 Supplement, dated as of , 2006
(the "Series 2006-1 Supplement), each entered into by and between TAL Advantage
I LLC (the "Issuer") and U.S. Bank National Association, as indenture trustee
(the "Indenture Trustee").
On the Closing Date, Financial Guaranty Insurance Company (the "Series
Enhancer"), a monoline insurance company rated "AAA/Aaa", will issue a
financial guaranty insurance policy (the "Policy") that will, subject to its
terms, guarantee the timely payment of scheduled interest on the Series 2006-1
Notes and the ultimate payment of the then unpaid principal balance of the
Series 2006-1 Notes, if any.
[FGIC]
[GRAPHIC OMITTED]
The assets of the Issuer, consisting primarily of the Managed Containers
(described herein) managed by TAL International Container Corporation ("TAL")
pursuant to the Management Agreement (described herein) and the Leases
(described herein) related to the Managed Containers, have been pledged to the
Indenture Trustee to secure repayment of the Series 2006-1 Notes and each other
Series of Notes now outstanding or hereafter issued by the Issuer. Any
additional Series of Notes issued by the Issuer may have terms significantly
different from those of the Series 2006-1 Notes.
Interest will accrue on the Series 2006-1 Notes during each Interest Accrual
Period at an annual rate equal to the sum of (x) One-Month LIBOR and (y) [ ]
of one percent (0.[ ]%) and will be payable to the Series 2006-1 Noteholders on
the 20th day of each month or, if such day is not a Business Day, on the next
Business Day. The Expected Final Maturity Date for the Series 2006-1 Notes is
the Payment Date in April 2016 (the "Series 2006-1 Expected Final Maturity
Date") and the Legal Final Maturity Date for the Series 2006-1 Notes is the
Payment Date in April 2021 (the "Series 2006-1 Legal Final Maturity Date"). The
Series 2006-1 Notes are expected to be sold to investors at a price equal to
100% of the principal amount thereof.
SEE "RISK FACTORS" BEGINNING ON PAGE 23 FOR A DISCUSSION OF CERTAIN FACTORS
THAT INVESTORS SHOULD CONSIDER IN CONNECTION WITH AN INVESTMENT IN THE
SERIES 2006-1 NOTES.
The Series 2006-1 Notes are being offered (the "Offering") by the Initial
Purchasers subject to prior sale, when, as and if delivered to, and accepted
by, the Initial Purchasers and subject to various prior conditions, including
the Initial Purchasers' right to reject orders in whole or in part. Except for
the Series 2006-1 Notes sold to Institutional Accredited Investors (as defined
herein), it is expected that delivery of the Notes will be made in book-entry
form through the facilities of The Depository Trust Company ("DTC").
CREDIT SUISSE FORTIS SECURITIES LLC
HSH NORDBANK AG WESTLB AG
BTMU CAPITAL CORPORATION ING FINANCIAL MARKETS LLC
The date of this Preliminary Offering Memorandum is April 3, 2006.
THE OFFERING OF THE SERIES 2006-1 NOTES HAS NOT BEEN REGISTERED AND
WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND THE SERIES 2006-1 NOTES MAY
NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS. ACCORDINGLY, THE SERIES 2006-1 NOTES MAY BE
OFFERED AND SOLD ONLY (1) OUTSIDE THE UNITED STATES WITHIN THE MEANING OF AND IN
COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"), OR (2)
WITHIN THE UNITED STATES (A) TO "QUALIFIED INSTITUTIONAL BUYERS" (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) IN RELIANCE ON RULE 144A OR
(B) TO INSTITUTIONAL "ACCREDITED INVESTORS" ("INSTITUTIONAL ACCREDITED
INVESTORS") AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES
ACT. FOR A DESCRIPTION OF CERTAIN RESTRICTIONS ON RESALES OR TRANSFERS, SEE
"RESTRICTIONS ON TRANSFERS AND NOTICE TO INVESTORS."
NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY
STATE OR FOREIGN SECURITIES COMMISSION HAS APPROVED OF THE SERIES 2006-1 NOTES
OR DETERMINED THAT THIS PRELIMINARY OFFERING MEMORANDUM IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PRELIMINARY OFFERING MEMORANDUM IS BEING DELIVERED SOLELY FOR
INFORMATIONAL PURPOSES IN CONNECTION WITH THE OFFERING OF THE SERIES 2006-1
NOTES AND MAY NOT BE USED FOR ANY OTHER PURPOSE, OR DISTRIBUTED OR CIRCULATED BY
THE RECIPIENT. EACH RECIPIENT HEREOF, BY ITS ACCEPTANCE OF THIS PRELIMINARY
OFFERING MEMORANDUM, SHALL BE DEEMED TO HAVE AGREED TO THE FOREGOING.
NONE OF THE ISSUER, THE INITIAL PURCHASERS OR ANY OTHER PERSON OR
ENTITY IS MAKING ANY REPRESENTATION OR WARRANTY TO ANY OFFEREE OR PURCHASER OF
THE SERIES 2006-1 NOTES REGARDING THE LEGALITY OF ANY INVESTMENT THEREIN BY SUCH
OFFEREE OR PURCHASER UNDER ANY APPLICABLE LAW.
THE DISTRIBUTION OF THIS PRELIMINARY OFFERING MEMORANDUM AND THE
OFFERING OF THE SERIES 2006-1 NOTES IN CERTAIN JURISDICTIONS ARE RESTRICTED BY
LAW. PERSONS WHO COME INTO POSSESSION OF THIS PRELIMINARY OFFERING MEMORANDUM
MUST INFORM THEMSELVES ABOUT AND OBSERVE ANY SUCH RESTRICTIONS. IN PARTICULAR,
THERE ARE RESTRICTIONS ON THE DISTRIBUTION OF THIS PRELIMINARY OFFERING
MEMORANDUM AND THE OFFER AND SALE OF THE SERIES 2006-1 NOTES. SEE "RESTRICTIONS
ON TRANSFERS AND NOTICE TO INVESTORS."
INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD.
THE INFORMATION CONTAINED IN THIS PRELIMINARY OFFERING MEMORANDUM WAS
OBTAINED FROM THE ISSUER, TAL, THE SERIES ENHANCER, AND OTHER SOURCES, BUT NO
ASSURANCE CAN BE GIVEN AS TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION.
THE INITIAL PURCHASERS DO NOT OFFER AN OPINION AS TO AND DO NOT ASSUME ANY
RESPONSIBILITY FOR THE ADEQUACY, ACCURACY OR COMPLETENESS OF ANY INFORMATION
CONTAINED HEREIN OR FOR THE OMISSION OF ANY INFORMATION RELATING THERETO, AND
THE INITIAL PURCHASERS SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE OF ANY KIND
RESULTING FROM THE USE OF THE INFORMATION CONTAINED HEREIN OR OTHERWISE
SUPPLIED. THE INITIAL PURCHASERS ASSUME NO RESPONSIBILITY FOR THE PERFORMANCE OF
ANY OBLIGATION OF THE ISSUER, TAL, THE INDENTURE TRUSTEE OR ANY OTHER PERSON
DESCRIBED IN THIS PRELIMINARY OFFERING MEMORANDUM OR FOR THE DUE EXECUTION,
VALIDITY OR ENFORCEABILITY OF THE SERIES 2006-1 NOTES OR ANY INSTRUMENT,
AGREEMENT OR DOCUMENT DELIVERED IN
i
CONNECTION WITH THE SERIES 2006-1 NOTES OR FOR THE VALUE OR VALIDITY OF ANY
LEASE, MANAGED CONTAINER OR OTHER PROPERTY INCLUDED WITHIN THE COLLATERAL.
AN INVESTOR OR POTENTIAL INVESTOR IN THE SERIES 2006-1 NOTES (AND EACH
EMPLOYEE, REPRESENTATIVE, OR OTHER AGENT OF SUCH PERSON OR ENTITY) MAY DISCLOSE
TO ANY AND ALL PERSONS, WITHOUT LIMITATION, THE TAX TREATMENT AND TAX STRUCTURE
OF THE TRANSACTION (AS DEFINED IN UNITED STATES TREASURY REGULATION SECTION
1.6011-4) AND ALL RELATED MATERIALS OF ANY KIND, INCLUDING OPINIONS OR OTHER TAX
ANALYSES, THAT ARE PROVIDED TO SUCH PERSON OR ENTITY. HOWEVER, SUCH PERSON OR
ENTITY MAY NOT DISCLOSE ANY OTHER INFORMATION RELATING TO THIS TRANSACTION
UNLESS SUCH INFORMATION IS RELATED TO SUCH TAX TREATMENT AND TAX STRUCTURE.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE ISSUER AND THE TERMS OF THIS OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THE CONTENTS OF THIS PRELIMINARY OFFERING MEMORANDUM ARE NOT
TO BE CONSTRUED AS LEGAL, BUSINESS, OR TAX ADVICE. EACH PROSPECTIVE INVESTOR
SHOULD CONSULT ITS OWN ATTORNEY, BUSINESS ADVISOR AND TAX ADVISOR AS TO LEGAL,
BUSINESS, OR TAX ADVICE.
NOTICE PURSUANT TO IRS CIRCULAR 230
THIS PRELIMINARY OFFERING MEMORANDUM IS NOT INTENDED OR WRITTEN BY THE
ISSUER OR ITS COUNSEL TO BE USED, AND CANNOT BE USED, BY ANY PERSON FOR THE
PURPOSE OF AVOIDING TAX PENALTIES THAT MAY BE IMPOSED UNDER U.S. TAX LAWS. THIS
PRELIMINARY OFFERING MEMORANDUM IS PROVIDED TO SUPPORT THE PROMOTION OR
MARKETING BY THE ISSUER OF THE SERIES 2006-1 NOTES. EACH TAXPAYER SHOULD SEEK
ADVICE BASED ON THE TAXPAYER'S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX
ADVISOR CONCERNING THE POTENTIAL TAX CONSEQUENCES OF AN INVESTMENT IN THE SERIES
2006-1 NOTES.
This Preliminary Offering Memorandum is confidential and has been
prepared by the Issuer solely for use in connection with the Offering.
Distribution of this Preliminary Offering Memorandum to any person other than
the offeree and those persons, if any, retained to advise such offeree with
respect hereto is unauthorized. Disclosure of the contents of this Preliminary
Offering Memorandum without the prior written consent of the Issuer is
prohibited. Each offeree, by accepting delivery of this Preliminary Offering
Memorandum, agrees to the foregoing and to make no photocopies of this
Preliminary Offering Memorandum or any documents delivered in connection
herewith and, if the offeree does not purchase any of the Series 2006-1 Notes or
the Offering is terminated, to destroy this Preliminary Offering Memorandum and
all documents delivered in connection herewith.
This Preliminary Offering Memorandum contains summaries believed to be
accurate with respect to certain terms of certain documents, but reference is
made hereby to the actual documents (copies of which will be made available to
prospective investors upon request to an Initial Purchaser) for complete
information with respect thereto. All such summaries are qualified in their
entirety by such reference.
By accepting delivery of this Preliminary Offering Memorandum each
person acknowledges that (i) it has been afforded an opportunity to request from
the Issuer and to review, and has received, all information considered by such
person to be necessary to verify the accuracy of or to supplement the
information contained herein, (ii) such person has not relied on the Initial
Purchasers or any affiliates of the Initial Purchasers in connection with such
person's investigation of the accuracy of such information or such person's
investment decision, (iii) no person has been authorized to give information or
to make any representation other than as contained herein and information given
by officers and employees of the Issuer in connection with investors'
examination of the Issuer and the terms of the Offering, and (iv) if given or
made, such other representation should not be relied upon as having been
authorized by the Issuer or the Initial Purchasers.
ii
The Series 2006-1 Notes sold to Qualified Institutional Buyers will be
represented by a permanent Rule 144A note in registered form without interest
coupons, which will be deposited with or on behalf of DTC and registered in the
name of Cede & Co., as nominee for DTC, except in certain limited circumstances.
The Series 2006-1 Notes sold to Institutional Accredited Investors will be
issued in registered and definitive form. The Series 2006-1 Notes offered to
non-U.S. persons in reliance on Regulation S will initially be issued in
book-entry form through the facilities of DTC for the accounts of Clearstream
Banking, Luxembourg, societe anonyme, formerly known as Cedelbank, societe
anonyme ("Clearstream") and Euroclear Bank S.A./N.V., as operator of the
Euroclear System ("Euroclear"), as participants in DTC. After the expiration of
the 40-day distribution compliance period specified in Regulation S, beneficial
interests in the Temporary Regulation S Global Note will be exchangeable for
interests in a corresponding permanent global note upon certification of
non-U.S. ownership. Other than beneficial interests in the Definitive Notes,
beneficial interests in the Series 2006-1 Notes will be shown on, and transfers
thereof will be effected only through, records maintained by DTC and its direct
and indirect participants.
FORWARD-LOOKING STATEMENTS
Certain statements contained in or incorporated by reference in this
Preliminary Offering Memorandum are forward-looking statements within the
meaning of Section 27A of the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, relating to future economic performance or
projections and other financial items. These statements can be identified by the
use of forward-looking words such as "may," "will," "should," "expects,"
"believes," "anticipates," "estimates," or other comparable words.
Forward-looking statements are subject to a variety of risks and uncertainties
described under "Risk Factors" in this Preliminary Offering Memorandum and other
factors that could cause actual results to differ materially from the projected
results. Those risks and uncertainties include, among others, general economic
and business conditions, regulatory initiatives and compliance with governmental
regulations, customer preferences and various other matters, many of which are
beyond the Issuer's control. The Issuer undertakes no obligation to update or
revise any forward-looking statement.
NOTICE TO NEW HAMPSHIRE RESIDENTS ONLY
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES
ANNOTATED, 1955, AS AMENDED, WITH THE STATE OF NEW HAMPSHIRE, NOR THE FACT THAT
A SECURITY IS EFFECTIVELY REGISTERED, OR A PERSON IS LICENSED, IN THE STATE OF
NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE
THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING.
NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE
FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF NEW
HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR
RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS
UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER,
OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
NOTICE TO FLORIDA RESIDENTS ONLY
THE SERIES 2006-1 NOTES ARE OFFERED PURSUANT TO A CLAIM OF EXEMPTION
UNDER SECTION 517.061 OF THE FLORIDA SECURITIES ACT AND HAVE NOT BEEN REGISTERED
UNDER SAID ACT IN THE STATE OF FLORIDA. ALL FLORIDA RESIDENTS (OTHER THAN EXEMPT
INSTITUTIONAL INVESTORS) HAVE THE RIGHT TO VOID THE PURCHASE OF THE SERIES
2006-1 NOTES WITHOUT PENALTY WITHIN THREE DAYS OF MAKING SUCH PURCHASE.
NOTICE TO UNITED KINGDOM RESIDENTS ONLY
ALL APPLICABLE PROVISIONS OF THE FINANCIAL SERVICES AND MARKETS ACT
2000 (THE "FSMA") AND THE PUBLIC OFFERS OF SECURITIES REGULATIONS 1995, AS
AMENDED, WITH RESPECT TO ANYTHING DONE BY ANY PERSON IN RELATION TO THE
iii
SERIES 2006-1 NOTES IN, FROM OR OTHERWISE INVOLVING THE UNITED KINGDOM MUST BE
COMPLIED WITH. THE SERIES 2006-1 NOTES (AND BENEFICIAL INTERESTS THEREIN) MAY
NOT BE OFFERED OR SOLD IN THE UNITED KINGDOM OTHER THAN TO PERSONS AUTHORIZED
UNDER FSMA OR OTHERWISE HAVING PROFESSIONAL EXPERIENCE IN MATTERS RELATING TO
INVESTMENTS AND QUALIFYING AS INVESTMENT PROFESSIONALS UNDER ARTICLE 19 OR
PERSONS QUALIFYING AS HIGH NET WORTH PERSONS UNDER ARTICLES 48 OR 49 OF THE
FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005, AS
AMENDED.
THIS PRELIMINARY OFFERING MEMORANDUM AND ANY OTHER INVITATION OR
INDUCEMENT TO BUY OR PARTICIPATE IN THE SERIES 2006-1 NOTES IS, AND MAY ONLY BE,
COMMUNICATED TO PERSONS WHO (I) ARE OUTSIDE THE UNITED KINGDOM; OR (II) HAVE
PROFESSIONAL EXPERIENCE RELATING TO INVESTMENTS; OR (III) ARE PERSONS FALLING
WITHIN ARTICLE 49(2)(a) TO (d) ("HIGH NET WORTH COMPANIES, UNINCORPORATED IN
ASSOCIATIONS, ETC.") OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL
PROMOTION) ORDER 2005 (SUCH PERSONS REFERRED TO AS "RELEVANT PERSONS"). THE
SERIES 2006-1 NOTES ARE AVAILABLE ONLY TO RELEVANT PERSONS AND THIS PRELIMINARY
OFFERING MEMORANDUM MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARE NOT
RELEVANT PERSONS. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS
COMMUNICATION RELATES IS AVAILABLE ONLY TO THE RELEVANT PERSONS AND WILL BE
ENGAGED IN ONLY WITH RELEVANT PERSONS. ANY OFFER OR SALE OF THE SERIES 2006-1
NOTES IN THE UNITED KINGDOM WILL BE SUBJECT TO ALL APPLICABLE PROVISIONS OF THE
FSMA WITH RESPECT TO ANYTHING DONE BY THE INITIAL PURCHASERS IN RELATION TO THE
SERIES 2006-1 NOTES IN, FROM, OR OTHERWISE INVOLVING THE UNITED KINGDOM.
NOTICE TO RESIDENTS OF THE REPUBLIC OF IRELAND
THIS PRELIMINARY OFFERING MEMORANDUM IS NOT A PROSPECTUS AND DOES NOT
CONSTITUTE AN INVITATION TO THE PUBLIC TO PURCHASE OR SUBSCRIBE FOR ANY OF THE
SERIES 2006-1 NOTES AND NEITHER IT NOR ANY FORM OF APPLICATION WILL BE ISSUED,
CIRCULATED OR DISTRIBUTED TO THE PUBLIC.
THIS PRELIMINARY OFFERING MEMORANDUM AND THE INFORMATION CONTAINED
HEREIN IS CONFIDENTIAL AND IS FOR THE USE SOLELY OF THE RECIPIENT TO WHOM IT IS
PROVIDED. ACCORDINGLY, IT MAY NOT BE REPRODUCED IN WHOLE OR IN PART, NOR MAY ITS
CONTENTS BE DISTRIBUTED IN WRITING OR ORALLY TO ANY THIRD PARTY AND IT MAY BE
READ SOLELY BY THE RECIPIENT TO WHOM IT IS ADDRESSED AND SUCH RECIPIENT'S
PROFESSIONAL ADVISORS.
REPORTS TO SERIES 2006-1 NOTEHOLDERS
Quarterly reports containing unaudited information concerning the
Issuer will be sent on behalf of the Issuer to the Indenture Trustee. Such
reports will not constitute financial statements prepared in accordance with
GAAP. The Issuer does not intend to send any of its financial reports to the
Series 2006-1 Noteholders other than as required by Rule 144A.
AVAILABLE INFORMATION
To permit compliance with Rule 144A, in connection with offers and
sales of the Series 2006-1 Notes, the Issuer will be required to furnish upon
request of a Series 2006-1 Noteholder to such Series 2006-1 Noteholder and a
prospective purchaser designated by such Series 2006-1 Noteholder, the
information required to be delivered under
iv
Rule 144A(d)(4) if at the time of such request the Issuer is not a reporting
company under Section 13 or Section 15(d) of the Exchange Act. The Issuer
currently is not a reporting company under the Exchange Act.
SERVICE MARKS MATTERS
The following items referred to in this Preliminary Offering
Memorandum are registered or unregistered service marks in the United States
and/or foreign jurisdictions pursuant to applicable intellectual property laws
and are the property of TAL: TAL(SM), Tradex(R), Trader(R) and Greyslot(R).
v
TABLE OF CONTENTS
PAGE
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FORWARD-LOOKING STATEMENTS .............................................. iii
NOTICE TO NEW HAMPSHIRE RESIDENTS ONLY .................................. iii
NOTICE TO FLORIDA RESIDENTS ONLY ........................................ iii
NOTICE TO UNITED KINGDOM RESIDENTS ONLY ................................. iii
NOTICE TO RESIDENTS OF THE REPUBLIC OF IRELAND .......................... iv
REPORTS TO SERIES 2006-1 NOTEHOLDERS .................................... iv
AVAILABLE INFORMATION ................................................... iv
SERVICE MARKS MATTERS ................................................... v
SUMMARY ................................................................. 1
RISK FACTORS ............................................................ 23
CONTAINERIZATION ........................................................ 37
THE ISSUER .............................................................. 41
THE MANAGER ............................................................. 42
TAL'S LEASING OPERATIONS ................................................ 43
THE INDENTURE TRUSTEE ................................................... 47
THE SERIES ENHANCER ..................................................... 48
DESCRIPTION OF THE POLICY ............................................... 50
USE OF PROCEEDS ......................................................... 53
DESCRIPTION OF THE COLLATERAL ........................................... 54
TAL'S FLEET PROFILE AND STATISTICS ...................................... 55
ISSUER'S FLEET PROFILE AND STATISTICS ................................... 60
DESCRIPTION OF THE MANAGEMENT AGREEMENT ................................. 63
DESCRIPTION OF THE CONTRIBUTION AND SALE AGREEMENT ...................... 70
DESCRIPTION OF THE SERIES 2006-1 NOTES AND THE INDENTURE ................ 74
DESCRIPTION OF THE ADMINISTRATION AGREEMENT ............................. 98
STRUCTURING ASSUMPTIONS ................................................. 100
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES ................... 106
NOTICE PURSUANT TO IRS CIRCULAR 230 ..................................... 106
CERTAIN STATE, LOCAL AND OTHER TAX CONSIDERATIONS ....................... 109
CERTAIN ERISA CONSIDERATIONS ............................................ 110
RESTRICTIONS ON TRANSFERS AND NOTICE TO INVESTORS ....................... 111
CERTAIN LEGAL INVESTMENT CONSIDERATIONS ................................. 114
PLAN OF DISTRIBUTION .................................................... 114
CO-MANAGERS ............................................................. 116
RATINGS OF THE OFFERED NOTES ............................................ 116
CERTAIN LEGAL MATTERS ................................................... 116
WHERE PROSPECTIVE INVESTORS CAN FIND MORE INFORMATION ................... 117
-i-
TABLE OF CONTENTS
(continued)
PAGE
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GENERAL INFORMATION ..................................................... 117
APPENDIX A INDEX OF TERMS
ANNEX A FORM OF PURCHASER LETTER
ANNEX B FORECASTED NET CASH FLOW BY PERIOD
ANNEX C MINIMUM TARGETED PRINCIPAL BALANCE BY PERIOD
ANNEX D SCHEDULED TARGETED PRINCIPAL BALANCE BY PERIOD
ANNEX E WAREHOUSE NOTES
ANNEX F CONSOLIDATED FINANCIAL STATEMENTS OF THE SERIES ENHANCER
-ii-
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE HEREIN.
CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY AND ELSEWHERE IN THIS
PRELIMINARY OFFERING MEMORANDUM ARE DEFINED IN THE "INDEX OF TERMS" ATTACHED AS
APPENDIX A TO THIS PRELIMINARY OFFERING MEMORANDUM.
- --------------------------------------------------------------------------------
ISSUER........................ TAL Advantage I LLC, a limited liability
company organized under the laws of the State
of Delaware. The principal executive office of
the Issuer is located at 100 Manhattanville
Road, Purchase, New York 10577-2135. Under the
Indenture, the Issuer from time to time may
issue additional Series of Notes (each, an
"Additional Series") pursuant to one or more
Supplements to the Indenture. See "-- Issuance
of Additional Series" below. The Issuer has
previously issued one Series of Notes: the
Series 2005-1 Notes. The Series 2005-1 Notes
(the Series 2005-1 Notes may be referred to
herein as the "Warehouse Notes") will remain
outstanding in part after the issuance and sale
of the Series 2006-1 Notes. See Annex E hereto
for a summary of some terms of the Warehouse
Notes, and "-- Warehouse Notes" below. The
Warehouse Notes are not offered hereby. All
notes issued by the Issuer represent
obligations solely of the Issuer, and will not
constitute the obligation of any other person
or entity.
SECURITIES OFFERED............ $680,000,000 Floating Rate Secured Notes,
Series 2006-1 issued by the Issuer under the
Series 2006-1 Supplement to the Indenture. The
Series 2006-1 Notes will be issued in minimum
denominations of $100,000 (or, if greater, the
U.S. dollar equivalent of 50,000 Euros) and
integral multiples thereof. Weekly, TAL remits
all amounts representing the Estimated Net
Operating Income with respect to the Managed
Containers to the Trust Account. See
"--Collections and Deposits by TAL" below. Such
amounts remitted to the Trust Account are then
used to pay certain expenses and principal and
interest payments owing to the holders of
Outstanding Notes and the balance will be
remitted to the Issuer, as described in "--Flow
of Funds" below.
RATING OF THE NOTES........... It is a condition to the initial offering of
the Series 2006-1 Notes that the Series 2006-1
Notes, taking into consideration the Policy,
will be rated "AAA" by Standard & Poor's
Ratings Services, a division of the McGraw-Hill
Companies, Inc. ("Standard & Poor's"), and
"Aaa" by Moody's Investors Service, Inc.
("Moody's"; each of Standard & Poor's and
Moody's may be referred to as a "Rating
Agency").
DESCRIPTION OF COLLATERAL..... Under the terms of the Indenture, the Issuer
will grant to the Indenture Trustee a security
interest in the Issuer's assets in order to
secure the Issuer's obligations under the
Indenture and all other Transaction Documents.
The Collateral will consist of all of the
Issuer's assets, including its right, title and
interest in and to (i) the Managed Containers
(including any and all substitutions therefor
acquired from time to time) and the other
Transferred Assets, (ii) the Trust Account, the
Restricted Cash Account, the
- --------------------------------------------------------------------------------
1
- --------------------------------------------------------------------------------
Temporary Loss Account, each Series Account,
and all amounts and Eligible Investments,
Financial Assets, Investment Property,
Securities Entitlements and all other
instruments, assets or amounts credited to any
of the foregoing or otherwise on deposit from
time to time in the foregoing, (iii) the
Contribution and Sale Agreement, any Hedge
Agreements, the Management Agreement and the
Intercreditor Agreement, (iv) all other assets
and properties of the Issuer, (v) all income,
payments and proceeds of the items of
Collateral described in (i), (ii), (iii) and
(iv) above, and all other assets granted to the
Indenture Trustee pursuant to the granting
clause of the Indenture (all of the foregoing
collectively, the "Collateral"). See
"Description of the Collateral" herein. See "--
Collections and Deposits by TAL" herein.
MANAGER....................... TAL International Container Corporation, a
corporation organized under the laws of the
State of Delaware. All Managed Containers will
be managed in accordance with the Management
Agreement. See "The Manager" and "Description
of the Management Agreement" herein.
INDENTURE TRUSTEE............. U.S. Bank National Association, a national
banking association. As of the date hereof, the
corporate trust office of the Indenture Trustee
is located at 60 Livingston Avenue, St. Paul,
Minnesota 55107, Mail Code EP-MN-WS3D (the
"Corporate Trust Office"). See "The Indenture
Trustee" herein.
SERIES ENHANCER............... Financial Guaranty Insurance Company, a New
York stock insurance corporation. See "The
Series Enhancer" herein.
POLICY........................ The Series Enhancer will issue the Policy as a
means of providing additional credit
enhancement to the Series 2006-1 Notes. Under
the Policy and subject to its terms, the Series
Enhancer will unconditionally guarantee the
timely payment of scheduled interest on the
Series 2006-1 Notes and, on the Series 2006-1
Legal Final Maturity Date, the payment of the
then unpaid principal balance of the Series
2006-1 Notes. Pursuant to an Insurance and
Indemnity Agreement to be entered into by and
among the Issuer, TAL, the Indenture Trustee,
and the Series Enhancer (the "Insurance
Agreement"), the Series Enhancer will be
entitled to receive a Premium and reimbursement
for any amounts paid under the Policy, together
with interest thereon (at a rate to be
specified in the Insurance Agreement) from the
date such amounts became due until paid in
full. Any such reimbursement of the Series
Enhancer will be made in accordance with the
priorities set forth in the Indenture and the
Series 2006-1 Supplement. See "Description of
the 2006-1 Notes and the Indenture--Series
Enhancement " and "Description of the Policy"
herein.
CLOSING DATE.................. On or about April 11, 2006.
PAYMENT DATES................. The 20th day of each month or, if such day is
not a Business Day, the next Business Day, may
be referred to as a "Payment Date." For
purposes of payments on the Series 2006-1
Notes, the first Payment Date will be May 22,
2006.
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INTEREST PAYMENTS ON THE
SERIES 2006-1 NOTES........... Interest will accrue on the Series 2006-1 Notes
during each Interest Accrual Period and be due
and payable on each Payment Date in an amount
equal to the Series 2006-1 Note Interest
Payment. Such Series 2006-1 Note Interest
Payment shall be payable on each Payment Date
from amounts on deposit in the Series 2006-1
Series Account in accordance with "-- Flow of
Funds" and "-- Distributions from the Series
2006-1 Series Account." To the extent that the
amount of interest which is due and payable on
any Payment Date is not paid in full on such
date, such shortfall, together with interest
thereon at the Default Rate, shall be due and
payable on the immediately succeeding Payment
Date.
PRINCIPAL PAYMENTS ON THE
SERIES 2006-1 NOTES........... On each Payment Date, the Issuer will, to the
extent that funds are available for such
purpose in accordance with "-- Flow of Funds"
and "-- Distributions from the Series 2006-1
Series Account," pay the principal balance of
the Series 2006-1 Notes in an amount equal to
the Minimum Principal Payment Amount for the
Series 2006-1 Notes and the Scheduled Principal
Payment Amount for the Series 2006-1 Notes;
provided that if an Early Amortization Event is
then continuing or an Event of Default is then
continuing but the Series 2006-1 Notes have not
been accelerated in accordance with the
provisions of the Indenture, the Minimum
Principal Payment Amount, the Scheduled
Principal Payment Amount and the then unpaid
Aggregate Series 2006-1 Note Principal Balance
shall be payable in full to the extent that
funds are available for such purpose in
accordance with "-- Flow of Funds" and "--
Distributions from the Series 2006-1 Series
Account." See "Description of the Series 2006-1
Notes and the Indenture -- Allocation of Funds
among Series and Classes." The unpaid principal
amount of each Series 2006-1 Note together with
all unpaid interest (including all Default
Fees), fees, expenses, costs and other amounts
payable by the Issuer to the Series 2006-1
Noteholders, the Indenture Trustee and the
Series Enhancer pursuant to the terms of the
Indenture and the Series 2006-1 Supplement,
shall be due and payable in full on the earlier
to occur of (x) the date on which an Event of
Default shall occur and the Series 2006-1 Notes
have been accelerated in accordance with the
provisions of the Indenture and (y) the Series
2006-1 Legal Final Maturity Date.
The "Minimum Principal Payment Amount" for the
Series 2006-1 Notes on each Payment Date is
equal to the excess, if any, of (x) the then
Aggregate Series 2006-1 Note Principal Balance
over (y) the Minimum Targeted Principal Balance
for the Series 2006-1 Notes for such Payment
Date.
The "Minimum Targeted Principal Balance" for
the Series 2006-1 Notes for each Payment Date
is set forth in Annex C hereto. The Minimum
Targeted Principal Balance for the Series
2006-1 Notes will be based on approximately a
15-year level amortization schedule.
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The "Scheduled Principal Payment Amount" for
the Series 2006-1 Notes on each Payment Date is
equal to the excess, if any, of (x) the then
Aggregate Series 2006-1 Note Principal Balance
(after giving effect to the portion of the
Minimum Principal Payment Amount for the Series
2006-1 Notes actually paid on such Payment
Date), over (y) the Scheduled Targeted
Principal Balance for the Series 2006-1 Notes
for such Payment Date.
The "Scheduled Targeted Principal Balance" for
the Series 2006-1 Notes for each Payment Date
is set forth in Annex D. The Scheduled Targeted
Principal Balance for the Series 2006-1 Notes
will be based on approximately a 10-year level
amortization schedule. Payment of the Scheduled
Principal Payment Amount for the Series 2006-1
Notes on each Payment Date is subordinated to
payment in full on such Payment Date of all
Minimum Principal Payment Amounts for the
Series 2006-1 Notes and all other Additional
Series.
The Expected Final Maturity Date for the Series
2006-1 Notes is the Series 2006-1 Expected
Final Maturity Date set forth on the front
cover of this Preliminary Offering Memorandum.
The Legal Final Maturity Date for the Series
2006-1 Notes is the Series 2006-1 Legal Final
Maturity Date set forth on the front cover of
this Preliminary Offering Memorandum.
The unpaid principal balance of, and accrued
interest on, the Series 2006-1 Notes will be
due and payable on the Series 2006-1 Legal
Final Maturity Date.
Subject to the limitations set forth below, the
Issuer will have the option to prepay on any
Payment Date all, or a portion of, the
Aggregate Series 2006-1 Note Principal Balance
of the Series 2006-1 Notes in a minimum amount
of $100,000 (each such Payment Date, an
"Optional Termination Date"). Any such
prepayment of all, or a portion of, the
Aggregate Series 2006-1 Note Principal Balance
must also include accrued interest to the date
of prepayment on the principal balance being
prepaid. The Issuer will agree not to make
voluntary prepayments on the Series 2006-1
Notes prior to the Payment Date in April 2008;
provided that this shall not restrict
repayments of principal on the Series 2006-1
Notes contemplated under "Description of the
Series 2006-1 Notes and the Indenture -- Flow
of Funds" or any prepayment contemplated under
"-- The Temporary Loss Account." In addition,
the Issuer must pay (i) any prepayment fees
payable in accordance with the terms of the
Premium Letter and (ii) any termination,
notional reduction, breakage or other fees or
costs assessed by any Hedge Counterparty.
ASSET BASE.................... As of any date of determination, the "Asset
Base" shall be an amount equal to the sum of
(a) the product of (i) the Advance Rate times
(ii) the sum of (A) the Aggregate Net Book
Value, plus (B) up to the Receivables Threshold
of receivables resulting from the sale or other
disposition of one or more Eligible Containers
that were either owned by the Issuer or subject
to a
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Finance Lease for which the Issuer is the
lessor, so long as such receivables were not
outstanding for more than 60 days (measured
from the issue date of such receivables), plus
(b) the amount on deposit in the Restricted
Cash Account, such amount to be determined
after giving effect to all withdrawals from and
deposits to the Restricted Cash Account on such
date, plus (c) the amount on deposit in the
Temporary Loss Account, such amount to be
determined after giving effect to all
withdrawals from and deposits to the Temporary
Loss Account on such date. See "-- Flow of
Funds" below.
REQUISITE GLOBAL MAJORITY..... A "Requisite Global Majority" shall exist with
respect to any action proposed to be taken
pursuant to the terms of the Indenture or any
Supplement if (a) the Control Party or Control
Parties representing more than fifty percent
(50%) of the sum of the Existing Commitments of
all Series of Outstanding Notes shall approve
or direct such proposed action (in making such
a determination, each Control Party shall be
deemed to have voted the entire Existing
Commitment of the related Series in favor of,
or in opposition to, such proposed action, as
the case may be) and (b) unless Control Parties
representing more than sixty-six and two-thirds
percent (66 2/3%) of the sum of the Existing
Commitments of all Series shall have approved
or directed such proposed action (in making
such a determination, each Control Party shall
be deemed to have voted the entire Existing
Commitment of the related Series in favor of,
or in opposition to, such proposed action, as
the case may be), each Series Enhancer which is
then a Control Party for any Series of
Outstanding Notes shall have also approved or
directed such proposed action. See "Description
of the Series 2006-1 Notes and the Indenture."
HEDGING....................... Pursuant to the terms of the Indenture, on the
Restatement Effective Date and within thirty
(30) days after the end of each calendar
quarter thereafter, the Issuer will maintain
one or more Interest Rate Hedge Agreements with
an aggregate notional balance equal to or
exceeding the sum of (i) seventy percent (70%)
of the aggregate Net Book Values of those
Eligible Containers that are, as of the end of
such calendar quarter (or, prior to thirty (30)
days after the end of the first calendar
quarter following the Restatement Effective
Date, as of the Restatement Effective Date),
subject to an unexpired Lease that requires the
lessee to maintain specific containers on-hire
for the duration of such Lease and (ii) without
duplication of the Leases referred to in clause
(i), one hundred percent (100%) of the
aggregate Net Book Values of those Eligible
Containers that are, as of the end of such
calendar quarter (or, prior to thirty (30) days
after the end of the first calendar quarter
following the Restatement Effective Date, as of
the Restatement Effective Date), subject to a
Finance Lease. All such Interest Rate Hedge
Agreements shall have an aggregate projected
amortization schedule as set forth in the
Indenture. See "Description of the Series
2006-1 Notes and the Indenture -- Hedging
Requirements" herein.
COLLECTIONS AND DEPOSITS BY
TAL........................... At the times and in the amounts specified in
the Management Agreement, TAL will cause to be
transferred from the Concentration Account to
the Trust Account (or, for certain
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amounts in certain instances, to the Temporary
Loss Account) amounts representing the
Estimated Net Operating Income with respect to
the Managed Containers. As long as no Manager
Default is then continuing for a period in
excess of 30 days, TAL may deduct its
Management Fee from such deposit. See
"Description of the Management Agreement --
Management Compensation" herein.
TRANSACTION ACCOUNTS.......... The Issuer has established:
(1) A "Trust Account," into which Estimated Net
Operating Income will be deposited and certain
other amounts specified in the Transaction
Documents will be deposited. See "Description
of the Series 2006-1 Notes and the Indenture --
The Trust Account" herein. As long as no
Manager Default shall have occurred and been
continuing for a period in excess of thirty
(30) days, TAL will be entitled to offset its
Management Fee prior to the transfer of funds
to the Trust Account in accordance with the
terms of the Management Agreement. See
"Description of the Management Agreement --
Management Compensation" herein.
(2) A "Restricted Cash Account," into which
funds have been, and from time to time will be,
deposited in an amount equal to the Restricted
Cash Amount as described in "-- Flow of Funds"
herein.
(3) A "Temporary Loss Account," into which
proceeds of Casualty Losses and certain sales
of Collateral will be deposited from time to
time as described under "Description of the
Series 2006-1 Notes and the Indenture --
Temporary Loss Account" herein.
(4) "Series Accounts," for the benefit of
holders of each Series of Outstanding Notes and
each related Series Enhancer for such Series.
See "Description of the Series 2006-1 Notes and
the Indenture -- Restricted Cash Account and
Series Accounts" herein.
Such accounts will be held by the Indenture
Trustee in the name of the Issuer and will be
pledged to the Indenture Trustee for the
benefit of holders of each Series of
Outstanding Notes, including the Series 2006-1
Noteholders, each Hedge Counterparty and each
Series Enhancer.
WAREHOUSE NOTES............... The Issuer has previously issued its Series
2005-1 Notes (which are a Series of Warehouse
Notes), which provide for a maximum commitment
of future funding of up to $875,000,000. Upon
the issuance of the Series 2006-1 Notes, the
maximum commitment of the Series 2005-1 Notes
will be reduced to $300,000,000. Such maximum
commitment may thereafter be increased or
reduced from time to time subject to the terms
of the Series 2005-1 Supplement. The aggregate
amount of indebtedness evidenced by the
Warehouse Notes is expected to fluctuate from
time to time, subject to such maximum
commitment. Interest on the Warehouse Notes
will be payable on each Payment Date. Such
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interest will be calculated based on the actual
unpaid principal balance of the Warehouse Notes
during each Interest Accrual Period at a
variable rate of interest. Payments of
principal and interest on the Warehouse Notes
will be made pursuant to the methodology
described in "Description of the Series 2006-1
Notes and the Indenture -- Allocation of Funds
among Series and Classes" herein. For purposes
of determining certain payment priorities in
terms of distributions, the Warehouse Notes
will be deemed to have an Issuance Date equal
to its Conversion Date.
The principal balance of the Series 2005-1
Notes shall be payable on each Payment Date
from amounts on deposit in the Series Account
for the Series 2005-1 Notes in an amount equal
to (i) so long as no Early Amortization Event
is continuing, the "Minimum Principal Payment
Amount," the "Scheduled Principal Payment
Amount" and the allocable portion of the
Supplemental Principal Payment Amount (if any)
for such Series 2005-1 Notes for such Payment
Date, to the extent that funds are available
for such purpose in accordance with the
provisions of the Series 2005-1 Supplement, or
(ii) if an Early Amortization Event is then
continuing (or an Event of Default has occurred
but the Series 2005-1 Notes have not been
accelerated in accordance with the terms of the
Indenture), the then unpaid principal balance
of such Series 2005-1 Notes shall be payable in
full to the extent that funds are available for
such purposes in accordance with the provisions
of the Series 2005-1 Supplement. Payment of the
Supplemental Principal Payment Amount for the
Series 2005-1 Notes on each Payment Date is
subordinated to payment in full on such Payment
Date of the Minimum Principal Payment Amount
and the Scheduled Principal Payment Amount for
the Series 2005-1 Notes, the Series 2006-1
Notes and any other Notes then Outstanding. The
unpaid principal amount of each Series 2005-1
Note, together with all unpaid interest
(including all Default Fees), fees (including
all commitment fees), expenses, costs and other
amounts payable by the Issuer to the Series
2005-1 Noteholders, the Series Enhancer for the
2005-1 Notes and the Indenture Trustee pursuant
to the terms of the Indenture and the Series
2005-1 Supplement, shall be due and payable in
full on the earlier to occur of (x) the date on
which an Event of Default shall occur and the
Series 2005-1 Notes have been accelerated in
accordance with the terms of the Indenture and
(y) the Legal Final Maturity Date for the
Series 2005-1 Notes. See Annex E hereto for a
summary of some terms of the Series 2005-1
Notes.
ISSUANCE OF ADDITIONAL
SERIES........................ The Issuer may from time to time issue one or
more Additional Series, as long as (i) each
Rating Agency that has issued a rating with
respect to any Series of Outstanding Notes
shall have confirmed, in writing, that the
then-current rating(s) on such existing Series
(including "shadow" ratings) will not be
downgraded or withdrawn as a result of the
issuance of such Additional Series, (ii) the
Issuer shall have delivered to the Indenture
Trustee an officer's certificate stating that
no Early Amortization Event or Event of Default
has occurred and is then continuing (or would
result from the issuance of such Additional
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Series) and (iii) certain other conditions set
forth in the Indenture are met. Each Additional
Series will be issued pursuant to a Supplement
to the Indenture. See "Description of the
Series 2006-1 Notes and the Indenture --
Issuance of Additional Series of Notes" herein.
FLOW OF FUNDS................. On each Payment Date, the Indenture Trustee,
based on the information contained in the
Manager Report, is required to make specified
payments from the Available Distribution Amount
then on deposit in the Trust Account. The
calculation and relative priorities of such
specified payments will vary depending on
whether an Early Amortization Event or Event of
Default has occurred and is continuing on such
Payment Date and whether the Notes have been
accelerated or not. The alternative payment
priorities for each such Payment Date are set
forth below:
A. If neither an Early Amortization Event nor
an Event of Default is then continuing,
the Available Distribution Amount then on
deposit in the Trust Account shall be
distributed in the following priority:
(1) Indenture Trustee's Fees (not to
exceed a specified annual maximum
amount);
(2) Administrative Agent Fees;
(3) Any Excess Deposits due to the
Manager, any Management Fees due and
payable and any arrearages thereof,
in each case to the extent not
withheld by the Manager;
(4) Reimbursement to the Manager for any
Manager Advances;
(5) Issuer Expenses (not to exceed a
specified annual maximum amount);
(6) Premium payments owing to any Series
Enhancer;
(7) Pro rata, (a) Priority Payments
(including reimbursements and
interest thereon payable to any
Series Enhancer) for each Series of
Outstanding Notes on a pro rata
basis, based on the amounts of
Priority Payments then due and (b)
scheduled payments due (excluding any
termination payments) under any Hedge
Agreement;
(8) To the Restricted Cash Account to the
extent required to restore amounts on
deposit therein to the Restricted
Cash Amount for such Payment Date;
(9) Minimum Principal Payment Amounts for
each Series of Outstanding Notes;
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(10) Scheduled Principal Payment Amounts
for each Series of Outstanding Notes;
(11) Supplemental Principal Payment
Amount, if any;
(12) Pro rata, (a) any unpaid amounts due
to each Hedge Counterparty (including
termination payments but excluding
(i) any payments made pursuant to
clause (7) above and (ii) termination
payments resulting from the breach of
the applicable Hedge Agreement by
such Hedge Counterparty), (b) any
interest payments on the Notes (not
paid pursuant to clause (7) above)
and any Indemnity Amounts and other
amounts then due and payable to the
Noteholders and each Series Enhancer
and (c) any Indenture Trustee's Fees
due and unpaid (after giving effect
to clause (1) above);
(13) Pro rata, any unpaid amounts then due
and payable to the Hedge
Counterparties;
(14) Pro rata, to the Issuer and the
Manager, the amount of any indemnity
payments payable to the officers,
directors and/or managers of the
Issuer and the Manager required to be
made by the Issuer and Manager,
respectively, subject to certain
restrictions specified in the
Indenture; and
(15) Any remaining Available Distribution
Amount to the Issuer.
For more detail regarding the foregoing, see
"Description of the Series 2006-1 Notes and the
Indenture -- Flow of Funds -- Flow of Funds
Prior to an Early Amortization Event and an
Event of Default."
B. If an Early Amortization Event but no
Event of Default is then continuing (or an
Event of Default has occurred but the
Notes have not been accelerated in
accordance with the Indenture), the
Available Distribution Amount then on
deposit in the Trust Account shall be
distributed in the following priority:
(1) Indenture Trustee's Fees (not to
exceed a specified annual maximum
amount);
(2) Administrative Agent Fees;
(3) Any Excess Deposits due to the
Manager, any Management Fees, and any
arrearages thereof, in each case to
the extent not withheld by the
Manager;
(4) Reimbursement to the Manager for any
Manager Advances;
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(5) Issuer Expenses (not to exceed a
specified annual maximum amount);
(6) Premium payments owing to any Series
Enhancer;
(7) Pro rata, (a) Priority Payments
(including reimbursements and
interest thereon payable to any
Series Enhancer) for each Series of
Outstanding Notes on a pro rata
basis, based on the amounts of
Priority Payments then due and (b)
scheduled payments (excluding any
termination payments) due under any
Hedge Agreement;
(8) Restricted Cash Account to the extent
required to restore amounts on
deposit therein to the Restricted
Cash Amount for such Payment Date;
(9) Minimum Principal Payment Amounts for
each Series of Outstanding Notes;
(10) Scheduled Principal Payment Amounts
for each Series of Outstanding Notes;
(11) For each Series of Outstanding Notes,
all remaining Available Distribution
Amount until all Notes are paid in
full (pro rata based on the then
unpaid principal balances);
(12) Pro rata, (a) any unpaid amounts due
to each Hedge Counterparty (including
termination payments but excluding
(i) any payments made pursuant to
clause (7) above and (ii) termination
payments resulting from the breach of
the applicable Hedge Agreement by
such Hedge Counterparty), (b) any
Indenture Trustee's Fees due and
unpaid (after giving effect to clause
(1) above) and (c) amounts then due
for (i) increased costs, funding
costs, breakage costs, taxes, other
indemnification payments and any
other unpaid Reimbursement Amount
owing to any Series Enhancer
allocated pro rata based on the
amounts due for the applicable Series
of Notes then outstanding, and (ii)
any Default Fee or any other amounts
due and owing to the Noteholders,
plus indemnity payments, increased
costs and taxes allocated pro rata
based on the amounts due for the
applicable Series of Notes then
outstanding;
(13) Pro rata, any unpaid payments then
due and payable to the Hedge
Counterparties;
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(14) Pro rata, indemnity payments payable
to the officers, directors and/or
managers of the Issuer and any
officer or director indemnity
payments required to be made by the
Manager (subject to certain
restrictions specified in the
Indenture); and
(15) Any remaining Available Distribution
Amount to the Issuer.
For more detail regarding the foregoing, see
"Description of the Series 2006-1 Notes and the
Indenture -- Flow of Funds -- Flow of Funds
After an Early Amortization Event or an Event
of Default and Prior to an Acceleration of the
Notes."
See "Description of the Series 2006-1 Notes and
the Indenture -- Allocation of Funds among
Series and Classes" herein for a description of
the payment priorities among various Series.
C. If the Notes of all Series have been
declared due and payable following an
Event of Default and such declaration and
its consequences have not been rescinded
or annulled, all amounts collected by the
Indenture Trustee, including the amounts
then on deposit in the Trust Account,
shall be distributed in the following
priority:
(1) Indenture Trustee's Fees (not to
exceed a specified annual maximum
amount) plus any enforcement costs
incurred by the Indenture Trustee;
(2) Administrative Agent Fees;
(3) Any Excess Deposits due to the
Manager, any Management Fees, and any
arrearages thereof, in each case to
the extent not withheld by the
Manager;
(4) Reimbursement to the Manager for any
Manager Advances;
(5) Issuer Expenses (not to exceed a
specified annual maximum amount);
(6) Premium payments owing to any Series
Enhancer;
(7) Pro rata, (a) Priority Payments for
each Series of Outstanding Notes on a
pro rata basis, based on the amounts
of Priority Payments then due and (b)
scheduled payments (excluding any
termination payments) due under any
Hedge Agreement;
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(8) Pro rata, (a) to each Series of
Outstanding Notes, the then unpaid
principal balance of such Series (pro
rata based on the unpaid principal
balances at the time such Event of
Default first occurs) and (b) any
unpaid amounts (excluding termination
payments resulting from a Hedge
Counterparty's breach) due under any
Hedge Agreement (on a pro rata
basis);
(9) Pro rata, to each Series of
Outstanding Notes and the related
Series Enhancer, all other amounts
then due and payable, including
Default Fees, increased costs, taxes
and indemnity payments;
(10) Any unpaid amounts due under any
Hedge Agreement not paid above (on a
pro rata basis);
(11) Any Indenture Trustee's Fees due and
unpaid (after giving effect to clause
(1) above);
(12) Unpaid indemnity payments payable to
the officers, directors and/or
managers of the Issuer required to be
made by the Issuer;
(13) Unpaid officer and director indemnity
payments required to be made by the
Manager; and
(14) Any remaining monies to the Issuer.
For more detail regarding the foregoing, see
"Description of the Series 2006-1 Notes and the
Indenture -- Flow of Funds -- Flow of Funds
After an Acceleration of the Notes Following an
Event of Default."
See "-- Distributions from the Series 2006-1
Series Account."
DISTRIBUTIONS FROM THE SERIES
2006-1 SERIES ACCOUNT......... On each Payment Date and on each other date on
which any payment is to be made with respect to
the Series 2006-1 Notes, the Indenture Trustee
shall distribute funds then on deposit in the
Series 2006-1 Series Account as set forth
below.
(A) If neither an Early Amortization Event nor
an Event of Default shall have occurred
and be continuing:
(1) To each Holder of a Series 2006-1
Note on the immediately preceding
record date, on a pro rata basis, an
amount equal to its Series 2006-1
Note Interest Payment (exclusive of
Default Fees) for such Payment Date;
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(2) To the Series Enhancer, an amount
equal to any Repayment Amounts owing
in respect of any Series 2006-1 Note
Interest Payments paid by the Series
Enhancer;
(3) To each Holder of a Series 2006-1
Note on the immediately preceding
record date, an amount equal to its
pro rata portion of the Minimum
Principal Payment Amount then due and
payable to the Holders of the Series
2006-1 Notes on such Payment Date;
(4) To each Holder of a Series 2006-1
Note on the immediately preceding
record date, an amount equal to its
pro rata portion of the Scheduled
Principal Payment Amount then due and
payable to the Holders of the Series
2006-1 Notes on such Payment Date;
(5) To the Series Enhancer, an amount
equal to all Repayment Amounts in
respect of the Series 2006-1 Notes
not paid pursuant to clause (2) above
which are then due and payable
pursuant to the Insurance Agreement;
(6) To the Series Enhancer, an amount
equal to all Indemnified Liabilities
in respect of the Series 2006-1 Notes
then due and payable to the Series
Enhancer pursuant to the Series
2006-1 Transaction Documents;
(7) To each Series 2006-1 Noteholder on
the immediately preceding record
date, on a pro rata basis, an amount
equal to Default Fees (if any) then
due and payable pursuant to the
Series 2006-1 Transaction Documents;
and
(8) After application of the amounts
required to be paid pursuant to the
Indenture, to the Issuer or its
assigns, any remaining amounts then
on deposit in the Series 2006-1
Series Account.
(B) If an Early Amortization Event shall have
occurred and be continuing with respect to
any Series but no Event of Default shall
have occurred and be continuing (or an
Event of Default has occurred but the
Notes have not been accelerated in
accordance with the Indenture):
(1) To each Holder of a Series 2006-1
Note on the immediately preceding
record date, on a pro rata basis, an
amount equal to its Series 2006-1
Note Interest Payment (exclusive of
Default Fees) for such Payment Date;
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(2) To the Series Enhancer, an amount
equal to any Repayment Amounts owing
in respect of any Series 2006-1 Note
Interest Payments paid by the Series
Enhancer;
(3) To each Holder of a Series 2006-1
Note on the immediately preceding
record date, an amount equal to its
pro rata portion of the Minimum
Principal Payment Amount then due and
payable to the Holders of the Series
2006-1 Notes on such Payment Date;
(4) To each Holder of a Series 2006-1
Note on the immediately preceding
record date, an amount equal to its
pro rata portion of the Scheduled
Principal Payment Amount then due and
payable to the Holders of the Series
2006-1 Notes on such Payment Date;
(5) To each Holder of a Series 2006-1
Note on the immediately preceding
record date, an amount equal to its
pro rata portion of the then
Aggregate Series 2006-1 Note
Principal Balance until the Aggregate
Series 2006-1 Note Principal Balance
has been reduced to zero;
(6) To the Series Enhancer, an amount
equal to all Repayment Amounts in
respect of the Series 2006-1 Notes
not paid pursuant to clause (2) above
which are then due and payable
pursuant to the Insurance Agreement;
(7) To the Series Enhancer and each
Holder of a Series 2006-1 Note on the
immediately preceding record date,
pro rata (based on respective amounts
due), an amount equal to (i) in the
case of the Series Enhancer, all
Indemnified Liabilities in respect of
the Series 2006-1 Notes then due and
payable to the Series Enhancer
pursuant to the Series 2006-1
Transaction Documents, and (ii) in
the case of the Series 2006-1
Noteholders, all Default Fees then
due and payable by the Issuer to the
Series 2006-1 Noteholders pursuant to
the Series 2006-1 Transaction
Documents; and
(8) After application of the amounts
required to be paid pursuant to the
Indenture, to the Issuer or its
assigns, any remaining amounts then
on deposit in the Series 2006-1
Series Account.
(C) If an Event of Default shall have occurred
and be continuing and the Notes of any
Series have been declared due and payable
(and such declaration and its consequences
have not been rescinded or annulled):
(1) To each Holder of a Series 2006-1
Note on the immediately preceding
record date, on a pro rata basis, an
amount equal to its Series 2006-1
Note
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14
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Interest Payment (exclusive of
Default Fees) then due and payable
for such Payment Date to the Holders
of the Series 2006-1 Notes;
(2) To the Series Enhancer, an amount
equal to any Repayment Amounts owing
in respect of any Series 2006-1 Note
Interest Payments paid by the Series
Enhancer;
(3) To each Holder of a Series 2006-1
Note on the immediately preceding
record date, on a pro rata basis, an
amount equal to the Aggregate Series
2006-1 Note Principal Balance until
the Aggregate Series 2006-1 Note
Principal Balance is reduced to zero;
(4) To the Series Enhancer, an amount
equal to all Repayment Amounts in
respect of the Series 2006-1 Notes
not paid pursuant to clause (2) above
which are then due and payable
pursuant to the Insurance Agreement;
(5) To the Series Enhancer and each
Holder of a Series 2006-1 Note on the
immediately preceding record date,
pro rata (based on respective amounts
due), an amount equal to (i) in the
case of the Series Enhancer all
Indemnified Liabilities in respect of
the Series 2006-1 Notes then due and
payable to the Series Enhancer
pursuant to the Series 2006-1
Transaction Documents, and (ii) in
the case of the Series 2006-1
Noteholders, on a pro rata basis, all
Default Fees then due and payable by
the Issuer to the Series 2006-1
Noteholders pursuant to the Series
2006-1 Transaction Documents; and
(6) After application of the amounts
required to be paid pursuant to the
Indenture, to the Issuer or its
assigns, any remaining amounts then
on deposit in the Series 2006-1
Series Account.
EARLY AMORTIZATION EVENTS..... The existence of any one of the following
events or conditions constitutes an "Early
Amortization Event:"
(1) The occurrence of (i) an Event of
Default as described in "-- Events of
Default" herein or (ii) a breach by
the Seller of any of its obligations
under the Contribution and Sale
Agreement or any other Transaction
Document to which it is a party,
which breach materially and adversely
affects the interests of any
Noteholder or Series Enhancer (if
such Series Enhancer is then the
Control Party for a Series of
Outstanding Notes or shall have made
an unreimbursed payment on its
Policy) and which continues, if
curable, for sixty (60) days after
the occurrence of such breach;
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15
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(2) The occurrence and continuance of a
Manager Default, as described in
"Description of the Management
Agreement -- Manager Default";
(3) If on any Payment Date the Aggregate
Note Principal Balance exceeds the
Asset Base, and such condition
remains unremedied for a period of 30
days;
(4) If as of any Payment Date, the Asset
Base is less than $400,000,000;
(5) As of any Payment Date, the Issuer
EBIT to Issuer Cash Interest Expense
Ratio shall be less than 1.1 to 1.0;
(6) As of any Payment Date, the Weighted
Average Age of the Eligible
Containers is greater than 8.5 years;
and
(7) The occurrence of any other event or
condition specified as an Early
Amortization Event in a Supplement
for any Series.
EVENTS OF DEFAULT............. The existence of any one of the following
events constitutes an "Event of Default:"
(1) Default in (i) the payment of
interest when due and payable on any
Series of Notes (not cured within 3
Business Days) or (ii) the payment at
the Legal Final Maturity Date of a
Series of Notes of the then unpaid
principal balance of such Series of
Notes;
(2) Default in payment of (i) any
Indenture Trustee's Fees then due and
payable or (ii) a premium payment or
other amounts owing to any Series
Enhancer, and the continuation of
such default contemplated by clause
(i) or clause (ii) of this clause (2)
for more than 5 Business Days after
the amounts in such clause (i) or
clause (ii) shall have become due and
payable;
(3) Default in the payment of other
amounts not dealt with in clauses (1)
or (2) above owing to the Noteholders
of any Series and the continuation of
such default for more than 30 days
after the same shall have become due
and payable;
(4) Default in the observation or
performance of certain covenants of
the Issuer regarding bankruptcy
petition, consolidation, merger and
sale of assets, or creation of
subsidiaries which breach materially
and adversely affects the interests
of any Noteholder or any Series
Enhancer (if such Series Enhancer is
then the Control Party for a Series
of Outstanding Notes or shall have
made an unreimbursed payment on its
Policy);
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16
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(5) Default in the observation or
performance of certain covenants of
the Issuer regarding disposition of
collateral, tax claims, release of
collateral, non-consolidation,
creation of liens, other debt and
liabilities, certain other
agreements, compliance with
organizational documents or permitted
investments which continues
unremedied for 20 days after notice
is delivered and which breach
materially and adversely affects the
interests of any Noteholder or any
Series Enhancer (if such Series
Enhancer is then the Control Party
for a Series of Outstanding Notes or
shall have made an unreimbursed
payment on its Policy);
(6) Default in any material respect in
the observation or performance of
certain covenants of the Issuer
regarding notices of an Event of
Default, an Early Amortization Event,
an unmatured Event of Default or an
unmatured Early Amortization Event,
which default continues unremedied
for three (3) Business Days;
(7) Default in the observation or
performance of certain covenants of
the Issuer regarding maintenance of
office, restrictions on amending its
charter documents, limit on capital
expenditures and use of proceeds of
Notes which continues unremedied for
30 days after notice is delivered and
which breach materially and adversely
affects the interests of any
Noteholder or any Series Enhancer (if
such Series Enhancer is then the
Control Party for a Series of
Outstanding Notes or shall have made
an unreimbursed payment on its
Policy);
(8) Default in any material respect in
the observation or performance of
certain covenants of the Issuer
regarding delivery of an Asset Base
Certificate and rating agency notices
and certain covenants not to amend
documents except in accordance with
their terms, which, if curable,
continues unremedied for thirty (30)
days after notice is delivered;
(9) Default in any material respect in
the observation or performance of
certain covenants to deliver
financial statements and reports
which continues unremedied for thirty
(30) days after notice is delivered;
provided, however, that (x) if the
reason for such default is primarily
attributable to changes in accounting
principles or interpretations or the
application of the same, (y) such
changes are not related to the assets
of the Issuer and (z) certain Manager
Defaults do not then exist, then such
default shall not constitute an Event
of Default unless such failure
materially and adversely affects the
interests of any Noteholder or any
Series Enhancer (if such Series
Enhancer is then the Control Party
for a Series of Outstanding Notes or
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17
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shall have made an unreimbursed
payment on its Policy);
(10) Default in the performance, or
breach, in any material respect, of
(i) any covenant of the Issuer not
covered above which materially and
adversely affects the interests of
any Noteholder or any Series Enhancer
(if such Series Enhancer is then the
Control Party for a Series of
Outstanding Notes or shall have made
an unreimbursed payment on its
Policy) which remains unremedied for
a period of 60 days (or up to a
maximum of 120 days in certain
circumstances) after notice is
delivered; or (ii) any representation
or warranty of the Issuer made in any
Transaction Document, which shall
prove to be inaccurate in any respect
which materially and adversely
affects the interests of any
Noteholder or any Series Enhancer (if
such Series Enhancer is then the
Control Party for a Series of
Outstanding Notes or shall have made
an unreimbursed payment on its
Policy) and remains unremedied for a
period of 60 days (or up to a maximum
of 120 days in certain circumstances)
after notice is delivered;
(11) Involuntary bankruptcy of the Issuer
(not dismissed within 60 days);
(12) Voluntary bankruptcy of the Issuer;
(13) The Aggregate Note Principal Balance
exceeds the sum of (A) the Aggregate
Net Book Value, plus (B) the balance
on deposit in the Restricted Cash
Account, plus (C) the balance on
deposit in the Temporary Loss
Account, plus (D) up to the
Receivables Threshold, the unpaid
balance of any receivables resulting
from the sale or other disposition of
one or more Eligible Containers that
were either owned by the Issuer or
subject to a Finance Lease for which
the Issuer is the lessor, so long as
such receivables are not then
outstanding for more than sixty (60)
days;
(14) Occurrence of a contribution failure
with respect to a Plan maintained by
the Issuer or an ERISA affiliate of
the Issuer which contribution failure
is sufficient to give rise to a lien
under ERISA;
(15) The Indenture Trustee fails to have a
first priority perfected security
interest in a material portion of the
Collateral (other than as a result of
Permitted Encumbrances) and such
condition continues for fifteen (15)
days without being cured or waived by
each Control Party unless such
failure to have a first priority
perfected security interest is due to
any act or omission of the Indenture
Trustee or the Noteholders;
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18
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(16) The Issuer is required to register as
an "investment company" under the
Investment Company Act of 1940, as
amended;
(17) The rendering against the Issuer of a
final, non-appealable judgment for
the payment of money in excess of
$1,000,000 to the extent not covered
by insurance or paid which judgment
continues for a period of at least 60
consecutive days; or
(18) All of the following shall have
occurred: a Manager Default shall
have occurred and be continuing, a
termination notice shall have been
delivered to the Manager and a
replacement manager shall not have
been retained within 90 days, if on
such date or any date thereafter
there exists an Asset Base
Deficiency, or 120 days if an Asset
Base Deficiency does not exist.
For more detail regarding the definition of
Event of Default, see "Description of the
Series 2006-1 Notes and the Indenture --Events
of Default."
The occurrence of an Event of Default with
respect to one Series of Notes, except to the
extent waived by the related Control Party for
such Series of Notes, shall constitute an Event
of Default with respect to all other Series of
Notes then Outstanding unless the related
Supplement with respect to each such Series of
Notes shall specifically provide to the
contrary.
MANAGEMENT.................... TAL is responsible for managing and
administering the Managed Containers and the
Related Assets. In performing this function,
TAL is required to exercise substantially the
same degree of skill and care with which TAL
services, leases and manages containers held
for its own account and consistent with the
reasonable commercial practices of a prudent
container lessor engaged in the administration,
leasing and servicing of shipping containers.
See "Description of the Management Agreement --
General" herein.
Under certain limited circumstances, TAL may
resign or be removed by the Issuer and the
Requisite Global Majority, in which event a
third party will be appointed as successor
manager See "Description of the Management
Agreement -- Resignation of TAL," "Description
of the Management Agreement -- Rights Upon a
Manager Default" and "Risk Factors -- Risks
Related to Reliance on TAL."
MANAGEMENT FEE................ TAL will be entitled to receive the Management
Fee. For any Payment Date, the "Management Fee"
will equal an amount equal to the sum of (i)
twelve percent (12%) of Net Operating Income
for the preceding Collection Period (other than
Container Revenues on Finance Leases), (ii)
five percent (5%) of Container Revenues on
Finance Leases for the preceding Collection
Period and (iii) the sum of all Disposition
Fees for the preceding Collection Period.
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19
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As long as no Manager Default shall have
occurred and been continuing for a period in
excess of thirty (30) days, TAL will be
entitled to offset a pro rata portion of the
Management Fee prior to the transfer of funds
to the Trust Account in accordance with the
terms of the Management Agreement. See
"Description of the Management Agreement --
Management Compensation" herein.
MANAGER ADVANCES.............. TAL may advance funds to the Trust Account
provided that (i) such advance is deemed by TAL
to be recoverable and (ii) the aggregate amount
of such advances outstanding at any time does
not exceed an amount equal to the lesser of (a)
50% of the accounts receivable of the Issuer
then outstanding and (b) the aggregate amount
of anticipated shortfalls on the next Payment
Date in certain payments. See "Description of
the Management Agreement -- Manager Advances."
CERTAIN LEGAL ASPECTS OF THE
TRANSFERRED ASSETS............ Under the Contribution and Sale Agreement, TAL
has warranted that the transfer by TAL to the
Issuer of the applicable Transferred Assets is
a valid transfer and assignment of such
Transferred Assets. Presently, there is no
internationally recognized system of
recordation or filing to evidence the Issuer's
title to the Managed Containers and/or the
Indenture Trustee's Lien thereon. Each of the
Seller and the Issuer has covenanted and agreed
to comply with any such internationally
recognized system of recordation at the time
any such system is adopted.
TAL has warranted that, if the transfer by TAL
to the Issuer is deemed a grant to the Issuer
of a security interest in the Transferred
Assets, the Issuer, pursuant to the
Contribution and Sale Agreement, will have a
valid security interest therein. TAL is
required to take such action as is necessary to
perfect the Issuer's interest therein. In
addition, the Issuer and TAL have filed and
will file certain financing statements in
connection with (i) the transfer of the
Transferred Assets by TAL to the Issuer and
(ii) the pledge of Collateral by the Issuer to
the Indenture Trustee. See "Risk Factors ----
Risks Related to the Series 2006-1 Notes --
Perfection and Priority of the Indenture
Trustee's Interest in the Managed Containers
and Proceeds Thereof."
On or prior to the last Business Day of each
week, TAL will deposit into the Trust Account
(or, for certain amounts in certain instances,
to the Temporary Loss Account) amounts
representing the Estimated Net Operating Income
with respect to the Managed Containers for the
preceding week. As long as no Manager Default
shall have occurred and been continuing for a
period in excess of thirty (30) days, TAL may
deduct a pro rata portion of its Management Fee
from such deposit in accordance with the terms
of the Management Agreement. The realization of
any amounts not deposited into the Trust
Account which are in the possession of TAL on
the date on which TAL commences a bankruptcy or
insolvency proceeding and any additional funds
deposited into the Concentration Account
thereafter may be subject to loss or delay. See
"-- Risks Related to Reliance on TAL --
Processing of Collections by TAL" herein.
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20
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REACQUISITION OF TRANSFERRED
ASSETS FOR CERTAIN BREACHES OF
REPRESENTATIONS AND
WARRANTIES.................... Under the Contribution and Sale Agreement, TAL
is obligated to reacquire any applicable
Transferred Asset and to deposit the Warranty
Purchase Amount in the Trust Account (or
provide a substitute Eligible Container) if a
breach of a representation or warranty is made
by TAL with respect to such Transferred Asset
and such breach materially and adversely
affects the interests of the Issuer or its
successors and assigns and such breach has not
been waived or cured within 30 days of the
earlier of discovery or receipt of written
notice of such breach. See "-- Repurchase or
Substitution of Non-Conforming Transferred
Assets" herein.
TAX STATUS.................... Upon the issuance of the Series 2006-1 Notes,
Mayer Brown Rowe & Maw LLP, special federal
income tax counsel to the Issuer, will deliver
its opinion generally to the effect that for
United States federal income tax purposes, the
Series 2006-1 Notes will be treated as debt and
the Issuer will not be treated as an
association (or publicly traded partnership)
taxable as a corporation. Each holder of a
Series 2006-1 Note, by the acceptance of such
Note or a beneficial interest therein, will be
deemed to have agreed to treat the Series
2006-1 Notes as indebtedness for United States
federal, state, and local income and franchise
tax purposes. See "Certain United States
Federal Income Tax Consequences" herein
regarding the foregoing and additional
information concerning the application of
federal income tax laws.
CERTAIN ERISA CONSIDERATIONS.. The Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and Section 4975 of
the Internal Revenue Code of 1986 (the "Code")
place certain restrictions on those pension and
other employee benefit plans to which they
apply. Pursuant to a regulation issued by the
U.S. Department of Labor defining "plan
assets," if the Series 2006-1 Notes are
considered to be indebtedness under applicable
local law without substantial equity features,
the assets of the Issuer will not be considered
assets of any plan holding the Series 2006-1
Notes, thereby generally avoiding potential
application of the prohibited transaction rules
under ERISA and the Code to transactions
entered into by the Issuer. However, regardless
of whether the Series 2006-1 Notes constitute
an equity interest in the Issuer, the
prohibited transaction rules would be
applicable to a plan's purchase and holding of
the Series 2006-1 Notes. Certain exemptions
from the prohibited transaction rules could be
applicable, however, with respect to a plan's
acquisition and holding of the Series 2006-1
Notes. Accordingly, the Series 2006-1 Notes may
be acquired by plans subject to ERISA or the
Code, subject to certain restrictions. Before
purchasing any of the 2006-1 Notes, fiduciaries
of such plans should determine whether an
investment in the 2006-1 Notes is appropriate
under ERISA. Each purchaser and transferee of a
2006-1 Note will be deemed to make certain
representations and warranties described in
"Certain ERISA Considerations" below.
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21
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RISK FACTORS.................. For a discussion of certain factors that should
be considered by prospective investors in the
Series 2006-1 Notes, see "Risk Factors" herein.
SELLING RESTRICTIONS.......... The Series 2006-1 Notes have not been and will
not be registered under the Securities Act or
any state securities or "blue sky" laws.
The Initial Purchasers may arrange for the
offer and sale of the Series 2006-1 Notes (i)
outside of the United States within the meaning
of, and in compliance with, Regulation S under
the Securities Act or (ii) within the United
States (a) to Qualified Institutional Buyers
pursuant to Rule 144A or (b) to Institutional
Accredited Investors within the meaning of
paragraphs (1), (2), (3) or (7) of Rule 501(a)
under the Securities Act.
The offer and sale of the Series 2006-1 Notes
are subject to certain other restrictions on
transfer. See "Restrictions on Transfers and
Notice to Investors" herein.
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22
RISK FACTORS
In addition to the other information contained in this Preliminary
Offering Memorandum, prospective purchasers of the Series 2006-1 Notes should
read and carefully consider the matters set forth below before making an
investment in the Series 2006-1 Notes. Such matters and other risks may result
in a delay or reduction in payments to the Series 2006-1 Noteholders.
RISKS RELATING TO THE CASH FLOWS
Failure of Actual Experience to Match the Structuring Assumptions. In
structuring the transaction and determining the Minimum Principal Payment
Amounts and Scheduled Principal Payment Amounts for the Series 2006-1 Notes, the
Issuer and its advisors derived the expected amount and timing of repayment of
the Series 2006-1 Notes described in this Preliminary Offering Memorandum based
upon various assumptions that are set forth in "Structuring Assumptions" herein.
Such assumptions, estimates and projections are based upon the limited amount of
historical data described therein and on assumptions and estimates that, while
presented with numerical specificity and considered reasonable by the Issuer,
when taken as a whole, are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond the
control of the Issuer or are based upon specific assumptions with respect to
future business conditions that are subject to change. Moreover, no independent
expert has reviewed the projections. Projections are necessarily speculative in
nature, and some or all of the assumptions on which the projections are based
may not materialize or may vary significantly from actual results. Accordingly,
the assumptions may not correspond to actual experience and payments of
principal on the Series 2006-1 Notes may occur later or earlier (in certain
limited circumstances) than assumed. If the Series 2006-1 Notes are repaid
faster than expected, an investor in the Series 2006-1 Notes may be unable to
reinvest principal received on the Series 2006-1 Notes at a yield that is equal
to the yield on the Series 2006-1 Notes. If an investor in the Series 2006-1
Notes acquires a Series 2006-1 Note at a premium, repayment of principal at a
rate that is faster than the rate anticipated will result in a lower than
anticipated yield. If the Series 2006-1 Notes are repaid later than expected, an
investor in the Series 2006-1 Notes will be unable to use the principal amount
of that investment at the time expected, and the investor may miss opportunities
to reinvest the money in other investments. Also, if an investor in the Series
2006-1 Notes acquires such Notes at a discount, the repayment of principal of
the Series 2006-1 Notes later than anticipated will result in lower than
anticipated yield. Numerous factors may result in the Series 2006-1 Notes being
repaid faster or slower than expected.
Cash Flow from the Managed Containers is Not Fully within the Issuer's
Control. The cash flow from the Managed Containers, principally Lease rentals
and proceeds from the sale of Managed Containers, is affected significantly by
the ability of TAL to collect payments under Leases and to replace cash flows
from terminating Leases by re-leasing or selling Managed Containers on favorable
terms. All of these factors are subject to external economic conditions and the
performance by lessees and service providers that are not fully within the
control of the Issuer, TAL or their respective affiliates.
Exposure to Interest Rate Risk. Interest rate exposure arises to the
extent that the Issuer's floating rate obligations under the Series 2006-1 Notes
do not correlate to the fixed rate of rental payments under the Leases of the
Managed Containers for different periods and the timing of those payments.
Although the Issuer may hedge that exposure as described in "Description of the
Series 2006-1 Notes and the Indenture -- Hedging Requirements," no assurance can
be given that the Issuer would be effective in implementing its hedging goals or
that the criteria for hedging would be sufficient to hedge all related risks.
BUSINESS AND INDUSTRY RISKS
General. Container leasing demand is affected by numerous market
factors as well as external political and economic events and a decrease in the
volume of world trade and other operating factors may adversely affect the
container leasing business.
23
Demand for containers depends largely on the rate of world trade and
economic growth. Cyclical recessions can negatively affect lessors' operating
results because during economic downturns or periods of reduced trade, shipping
lines tend to lease fewer containers, or lease containers only at reduced rates,
and tend to rely more on their own fleets to satisfy a greater percentage of
their requirements. Thus, a decrease in the volume of world trade may adversely
affect the Managed Containers' utilization and lease rates and lead to reduced
revenue, reduced capital investment, increased operating expenses (such as
storage and positioning) and reduced financial performance.
Other general factors affecting demand for leased containers,
container utilization and per diem rental rates include the available supply and
prices of new and used containers, including the market acceptance of new
container types and over-buying by competitors and customers, changes in the
operating efficiency of customers, economic conditions and competitive pressures
in the shipping industry, including fluctuations in ship charter and freight
rates and expansion, containership fleet over-capacity or under-capacity,
consolidation or withdrawal of individual customers in that industry, shifting
trends and patterns of cargo traffic, acts of God such as droughts, storms, or
other natural disasters, flu or other pandemics that result in economic
disruptions, the availability and terms of equipment financing, fluctuations in
interest rates and foreign currency values, import/export tariffs and
restrictions, customs procedures, foreign exchange controls and other
governmental regulations and political or economic factors that are inherently
unpredictable and may be beyond TAL's and the Issuer's control. Any of the
aforementioned external factors may have a material adverse effect on the
business relating to the Managed Containers.
Equipment prices and lease rates may decrease.
Lease rates depend on the type and length of the lease, the type and
age of the equipment, competition, and other factors. Container lease rates also
move with the fluctuations in prices for new containers. Because steel is the
major component used in the construction of new containers, the price for new
containers, as well as prevailing container lease rates, are both highly
correlated with the price of steel. No assurance can be given as to whether the
price of steel will increase or decrease.
In addition, leasing rates can be negatively impacted by the entrance
of new leasing companies, overproduction of new containers by factories and
over-buying by shipping lines and leasing competitors, and other factors. In the
event that the container shipping industry were to be characterized by
over-capacity in the future, or if available supply of containers were to
increase significantly as a result of, among other factors, new companies
entering the business of leasing and selling containers, both utilization and
lease rates can be expected to decrease, thereby adversely affecting the
revenues generated by the container leasing business.
Sustained Asian economic instability could reduce demand for leasing.
A number of the shipping lines to which the Managed Containers are
leased are entities domiciled in Asian countries. In addition, many of TAL's and
the Issuer's customers are substantially dependent upon shipments of goods
exported from Asia. From time to time, there have been economic disruptions,
financial turmoil and political instability in Asia and other regions. If these
events were to occur in the future, they would adversely affect these customers
and lead to a reduced demand for leasing of the Managed Containers or otherwise
adversely affect the business relating to the Managed Containers.
Customers may decide to lease fewer containers.
TAL and the Issuer, like other suppliers of leased containers, are
dependent upon decisions by shipping lines to lease rather than buy their
equipment. Should shipping lines decide to buy a larger percentage of the
containers they operate, the Managed Containers' utilization rate would
decrease, resulting in decreased leasing revenue, increased storage costs and
increased positioning costs. Most of the factors affecting the decisions of
customers are outside the control of TAL and the Issuer.
24
TAL and the Issuer face extensive competition in the container leasing industry.
Either or both of TAL and the Issuer may be unable to compete
favorably in the highly competitive container leasing and sales business. TAL
competes with approximately 10 other major leasing companies, many smaller
lessors, manufacturers of container equipment, companies offering finance leases
as distinct from operating leases, promoters of container ownership and leasing
as a tax shelter investment, shipping lines, which sometimes lease their excess
container stocks, and suppliers of alternative types of equipment for freight
transport. Some of these competitors may have greater financial resources and
access to capital than either or both of TAL and the Issuer have. Additionally,
some of these competitors may have large, underutilized inventories of
containers, which could lead to significant downward pressure on lease rates and
margins.
Competition among container leasing companies depends upon many
factors, including, among others, lease rates, lease terms (including lease
duration, drop-off restrictions and repair provisions), customer service, and
the location, availability, quality and individual characteristics of equipment.
New entrants into the leasing business have been attracted by the high rate of
containerized trade growth in recent years, and new entrants may be less
disciplined than TAL and the Issuer are in pricing and structuring leases. As a
result, the entry of new market participants together with the already highly
competitive nature of the industry, may undermine the ability of TAL and/or the
Issuer to maintain a high level of container utilization or achieve their
respective growth plans.
The age of the Managed Containers may become a competitive disadvantage.
As of December 31, 2005, the Weighted Average Age of the Managed
Containers was 6.4 years. TAL and the Issuer believe that the average age of
some of their competitors' container fleets is lower than the average age of the
Managed Containers, and customers generally have a preference for newer
containers. Historically, TAL has been successful marketing older equipment by
positioning older containers to areas where demand is very strong, offering
incentives for customers to extend containers on lease, and providing greater
drop-off location flexibility for containers approaching sale age. However,
TAL's and the Issuer's marketing strategies for older containers may not
continue to be successful, particularly if demand for containers in general
becomes weaker. If the Weighted Average Age of the Eligible Containers is
greater than 8.5 years as of any Payment Date, an Early Amortization Event will
occur. However, there can be no assurance that this provision will be adequate
to protect Noteholders in this situation.
Lessee defaults may adversely affect financial condition and results of
operations and cash flow by decreasing revenues and increasing storage,
positioning, collection and recovery expenses.
The Managed Containers are leased to numerous customers. Rent and
other compensation, as well as indemnification for damage to or loss of
containers, is payable under the Leases by the end users. Inherent in the nature
of the Leases is the risk that once the Lease is consummated, TAL and the Issuer
may not receive, or may experience delay in realizing, all of the compensation
and other amounts to be paid in respect of the Managed Containers. A delay or
diminution in amounts received under the Leases could adversely affect the
business and the financial prospects of the Managed Containers.
The cash flow from the Managed Containers, principally rental payments
under Leases of Managed Containers and proceeds from the sale of owned
containers, is affected significantly by the ability to collect payments under
Leases for the use of the containers and the ability to replace cash flows from
terminating Leases by re-leasing or selling containers on favorable terms. All
of these factors are subject to external economic conditions and the performance
by lessees and service providers that will not fully be within the control of
TAL and the Issuer.
When lessees or sublessees of containers default, the Manager may fail
to recover all of the Managed Containers leased or sub-leased by such parties,
and the containers the Manager does recover may be returned in locations where
the Manager will not be able to efficiently re-lease or sell them. The Manager
may have to reposition these containers to other places where it can re-lease or
sell them, which could be expensive depending on the locations and distances
involved. As a result, the Issuer may lose lease revenues and incur additional
operating expenses in repossessing and storing the equipment. Currently no
insurance is maintained to cover such defaults. While in recent years defaults
by lessees, as measured by TAL's historical experience and reflected on
applicable financial statements as an allowance for doubtful accounts, have not
been material as a percentage of the revenue,
25
future defaults may nevertheless be material and any such future defaults could
have a material adverse effect on the business condition and the financial
prospects of the Managed Containers.
The Issuer is dependent upon continued demand from its large customers.
Large customers account for a significant portion of the Issuer's
revenues. The loss, default or significant reduction of orders from any of the
large customers of TAL and the Issuer, and especially the single largest
customer, could have a material adverse effect on the business, financial
condition and future prospects related to the Managed Containers. The
Transaction Documents contain concentration limits on the aggregate Net Book
Value of Eligible Containers that can be leased to any single lessee, and the
top three lessees. However, there can be no assurance that such limitations will
be adequate to protect the Noteholders.
Gains and losses associated with container sales may fluctuate and adversely
affect operating results.
Although revenue from the Managed Containers primarily depends upon
equipment leasing, profitability is also affected by the residual values of the
Managed Containers upon the expiration of their leases because, in the ordinary
course of business, TAL, on behalf of the Issuer, will sell certain containers
when such containers are returned to TAL. The volatility of the residual values
of such containers may be significant. These values, which can vary
substantially, depend upon, among other factors, worldwide steel prices,
applicable maintenance standards, return locations, refurbishment needs,
comparable new equipment costs, used equipment availability, inflation rates,
market conditions, materials and labor costs and equipment obsolescence. Most of
these factors are outside of the control of TAL and the Issuer. Operating
leases, which represent the predominant form of lease for the Managed
Containers, are subject to greater residual value risk than finance leases.
Containers are typically sold if it is in the best interest of the
owner to do so after taking into consideration the book value, remaining useful
life, repair condition, suitability for leasing or other uses and the prevailing
local sales price for containers. As these considerations vary, gains or losses
on sale of equipment will also fluctuate and may be significant if TAL and/or
the Issuer sells large quantities of containers.
Changes in market price, availability or transportation costs of containers in
China could adversely affect TAL's ability to maintain the supply of containers.
China is currently the largest container producing nation in the
world, and TAL currently purchases substantially all of its dry and special
containers from two manufacturers based in China and substantially all of its
refrigerated containers from three manufacturers based in China. In the event
that it were to become more expensive for TAL to procure containers in China or
to transport these containers at a low cost from China to the locations where
they are needed by the customers, because of further consolidation among
container suppliers, increased tariffs imposed by the United States or other
governments or for any other reason, TAL would have to seek alternative sources
of supply. TAL may not be able to make alternative arrangements quickly enough
to meet equipment needs, and the alternative arrangements may increase costs.
TAL's business strategies entail risk and it may not be able to realize its
plans with regard to these strategies.
In order to grow the business, TAL expects to employ various
strategies, including consummating strategic acquisitions and investing in the
Container Fleet. Unanticipated issues may arise in the implementation of these
contemplated strategies, which could impair TAL's ability to expand the business
related to the Managed Containers as expected. For example:
o favorable conditions in the container leasing market, including
the rate of world trade and economic growth, could decline;
o equipment prices and container lease rates could decline as a
result of a variety of factors, including a decline in worldwide
steel prices;
26
o the financial condition of third party container depot operators
and other business partners may deteriorate;
o customers could decide to buy rather than lease a larger
percentage of the containers they operate; and
o TAL may not be able to execute strategic acquisitions or to
integrate such acquired assets successfully into the business.
Any of the above risks could adversely affect the financial position and results
of operations related to the Managed Containers. Furthermore, the execution of
TAL's plans could result in greater losses than historically experienced and
could have a material adverse effect on the business related to the Managed
Containers.
Costs may be incurred in connection with relocation of leased containers.
When lessees return containers to locations where supply exceeds
demand, TAL will often reposition such containers to higher demand areas. Any
such repositioning expense with respect to the Managed Containers will be paid
as a Direct Operating Expense, and will reduce the Net Operating Income received
by the Issuer. Positioning expenses vary depending on geographic location,
distance, freight rates and other factors, and may not be fully covered by
drop-off charges collected from the last lessees of the containers or pick-up
charges paid by the new lessees. In addition, demand may not be as great as
anticipated after positioning has occurred, which may result in containers
remaining idle. Although TAL will seek to limit the number of containers that
can be returned and impose surcharges on containers returned to areas where
demand for such containers is not expected to be strong, future market
conditions may not enable TAL to continue such practices. In addition, there is
no assurance that TAL can accurately anticipate which port locations will be
characterized by weak or strong demand in the future, and current contracts will
not provide much protection against positioning costs if ports that TAL expects
to be strong demand ports turn out to be surplus container ports at the time
leases expire.
Manufacturers of containers may be unwilling or unable to honor manufacturer
warranties covering defects in containers.
Warranties have been obtained from the manufacturers of the Managed
Containers. When defects in the Managed Containers occur, TAL will work with the
manufacturers to identify and rectify the problem. For example, cracks in rails
in certain containers manufactured in two factories in China in 2003 and 2004
have currently been identified. To date, the manufacturer has agreed to be
responsible for the repair of these containers. However, there is no assurance
that the manufacturer will continue to honor its warranty obligations or that
manufacturers will be willing or able to honor such warranty obligations in the
future. If defects are discovered in the Managed Containers that are not covered
by manufacturer warranties, TAL could be required to expend significant amounts
of money to repair these containers, which would reduce the amounts of Net
Operating Income received by the Issuer, and/or the useful life of such
containers could be shortened and their value reduced.
TAL will rely on information technology systems to conduct the business related
to the Managed Containers. If these systems fail to adequately perform these
functions, or if there is an interruption in their operation, the business and
financial results related to the Managed Containers could be adversely affected.
The efficient operation of the business related to the Managed
Containers is highly dependent on two of TAL's information technology systems:
the equipment tracking system and the "Tradex(R)" customer interface system. For
example, these systems allow customers to place pick-up and drop-off orders on
the internet, view current inventory and check contractual terms in effect with
respect to any given container lease agreement. TAL correspondingly relies on
such information systems to track transactions, such as repairs and changes to
book value, and movements associated with each of the Managed Containers. TAL
uses the information provided by these systems in its day-to-day business
decisions in order to effectively manage the lease portfolio and improve
customer service. The failure of these systems to perform as TAL anticipates
could disrupt the business related to the Managed Containers and results of
operation and cause TAL's relationships with customers to suffer. In addition,
these information technology systems are vulnerable to damage or interruption
from circumstances beyond TAL's
27
control, including fire, natural disasters, power loss and computer systems
failures and viruses. Any such interruption could have a material adverse effect
on the business related to the Managed Containers.
A number of key personnel are critical to the success of the business.
Most of TAL's senior executives and other management-level employees
have been with TAL for over ten years and have significant industry experience.
TAL relies on this knowledge and experience in its strategic planning and in its
day-to-day business operations. TAL's success depends in large part upon its
ability to retain its senior management, the loss of one or more of whom could
have a material adverse effect on the business related to the Managed
Containers. TAL's success also depends on its ability to retain its experienced
sales force and technical personnel as well as recruiting new skilled sales,
marketing and technical personnel. Competition for these persons in the industry
is intense and TAL may not be able to successfully recruit, train or retain
qualified personnel. If TAL fails to retain and recruit the necessary personnel,
the business related to the Managed Containers and TAL's ability to obtain new
customers and provide acceptable levels of customer service could suffer.
The international nature of the container industry exposes the Managed
Containers to numerous risks.
TAL's ability to enforce the end users' obligations under the Leases
for use of the Managed Containers will be subject to applicable law in the
jurisdiction in which enforcement is sought. As the Managed Containers are
predominantly located on international waterways, it is not possible to predict,
with any degree of certainty, the jurisdictions in which enforcement proceedings
may be commenced. For example, repossession from defaulting lessees may be
difficult and more expensive in jurisdictions whose laws do not confer the same
security interests and rights to creditors and lessors as those in the United
States and in jurisdictions where recovery of a container from the defaulting
lessee is more cumbersome. As a result, the relative success and expedience of
enforcement proceedings with respect to the Managed Containers in various
jurisdictions also cannot be predicted.
The Managed Containers are also subject to risks inherent in
conducting business across national boundaries, any one of which could adversely
impact the business related to the Managed Containers. These risks include:
o regional or local economic downturns;
o changes in governmental policy or regulation;
o restrictions on the transfer of funds into or out of the country;
o import and export duties and quotas;
o domestic and foreign customs and tariffs;
o international incidents;
o military outbreaks;
o government instability;
o nationalization of foreign assets;
o government protectionism;
o compliance with export controls, including those of the U.S.
Department of Commerce;
o compliance with import procedures and controls, including those
of the U.S. Department of Homeland Security;
28
o potentially negative consequences from changes in tax laws;
o higher interest rates;
o requirements relating to withholding taxes;
o labor or other disruptions at key ports; and
o difficulty in staffing and managing widespread operations.
Any one or more of these factors could impair current or future international
operations related to the Managed Containers and, as a result, harm the business
related to the Managed Containers.
TAL and the Issuer are subject to the Foreign Corrupt Practices Act and the
regulations issued by the Office of Foreign Assets Control, and a determination
that either of them violated either of these laws may affect the business and
operations related to the Managed Containers adversely.
TAL and the Issuer are subject to the regulations imposed by the
Foreign Corrupt Practices Act ("FCPA") and the Office of Foreign Assets Control
("OFAC") of the U.S. Department of the Treasury. The FCPA generally prohibits
U.S. companies and their intermediaries from making improper payments to foreign
officials for the purpose of obtaining or keeping business. OFAC administers and
enforces economic and trade sanctions based on U.S. foreign policy and national
security goals against targeted foreign countries, terrorists, international
narcotics traffickers, and those engaged in activities related to the
proliferation of weapons of mass destruction. To facilitate compliance, OFAC
maintains lists of Persons and countries with whom U.S. Persons are prohibited
from dealing to the extent provided in the applicable rules and regulations.
Any determination that TAL or the Issuer has violated either the FCPA
or OFAC regulations could have a material adverse effect on the business related
to the Managed Containers.
The lack of an international title registry for containers increases the risk of
ownership disputes.
There is no internationally recognized system of recordation or filing
to evidence title to the Managed Containers. The lack of a title recordation
system with respect to these containers could result in disputes with creditors
of prior owners of these containers, or creditors of the end users.
Costs may be incurred in connection with new security regulations.
The Issuer and TAL may be subject to regulations promulgated in
various countries, including the United States, seeking to protect the integrity
of international commerce and prevent the use of containers for international
terrorism or other illicit activities. For example, the Container Safety
Initiative, the Customs-Trade Partnership Against Terrorism and Operation Safe
Commerce are among the programs administered by the U.S. Department of Homeland
Security that are designed to enhance security for cargo moving throughout the
international transportation system by identifying existing vulnerabilities in
the supply chain and developing improved methods for ensuring the security of
containerized cargo entering and leaving the United States. Moreover, the
International Convention for Safe Containers, 1972 (CSC), as amended, adopted by
the International Maritime Organization, applies to new and existing containers
and seeks to maintain a high level of safety of human life in the transport and
handling of containers by providing uniform international safety regulations. As
these regulations develop and change, the Issuer may incur increased compliance
costs due to the acquisition of new, compliant containers and/or the adaptation
of existing containers to meet any new requirements imposed by such regulations.
Additionally, certain companies are currently developing or may in the future
develop products designed to enhance the security of containers transported in
international commerce. Regardless of the existence of current or future
government regulations mandating the safety standards of intermodal shipping
containers, competitors may adopt such products or customers may require that
such products be adopted in the conduct of the container leasing business. In
responding to such market pressures, the Issuer may incur increased costs, which
could have a material adverse effect on the financial condition and results of
operations related to the Managed Containers.
29
Terrorist attacks could negatively impact operations and profitability and may
expose the Issuer to liability.
Terrorist attacks may negatively affect operations of TAL and the
Issuer. Such attacks have contributed to economic instability in the United
States and elsewhere, and further acts of terrorism, violence or war could
similarly affect world trade and the industries in which TAL, the Issuer and the
customers operate. In addition, terrorist attacks or hostilities may directly
impact ports the Managed Containers come in and out of, depots, TAL's physical
facilities or those of its suppliers or customers and could impact sales and its
supply chain. A severe disruption to the worldwide ports system and flow of
goods could result in a reduction in the level of international trade and lower
demand for the Managed Containers. The consequences of any terrorist attacks or
hostilities are unpredictable, and each of TAL and the Issuer may not be able to
foresee events that could have an adverse effect on operations related to the
Managed Containers.
It is also possible that one of the Managed Containers could be
involved in a terrorist attack. Although lease agreements related to the Managed
Containers require the lessees to provide indemnity against all damages arising
out of the use of these containers, and TAL (for its own account and on behalf
of the Issuer) carries insurance for the Managed Containers to potentially
offset any costs in the event that the customer indemnifications prove to be
insufficient, the Issuer may not be fully protected from liability arising from
a terrorist attack which utilizes one of the Managed Containers.
Environmental liability may adversely affect the business and financial
situation related to the Managed Containers.
The Issuer is subject to federal, state, local and foreign laws and
regulations relating to the protection of the environment, including those
governing the discharge of pollutants to air and water, the management and
disposal of hazardous substances and wastes and the cleanup of contaminated
sites. The Issuer could incur substantial costs, including cleanup costs, fines
and third-party claims for property damage and personal injury, as a result of
violations of or liabilities under environmental laws and regulations in
connection with current or historical operations. Under some environmental laws
in the United States and certain other countries, the owner of a leased
container may be liable for environmental damage, cleanup or other costs in the
event of a spill or discharge of material from a container without regard to the
owner's fault. While TAL (for its own account and on behalf of the Issuer)
maintains certain insurance relating to both on-hire and off-hire containers and
require lessees to obtain similar insurance and to provide indemnity against
certain losses, such insurance and indemnities may not cover or be sufficient to
protect the Issuer against losses arising from environmental damage.
Many countries, including the United States, restrict, prohibit or
otherwise regulate the use of chlorofluorocarbon compounds (CFCs) due to their
ozone depleting and global warming effects. CFCs have historically been used in
the manufacture and operation of older refrigerated containers, including
certain Managed Containers. Regulation of CFCs or other refrigerants may become
stricter in the future. Market pressure or government regulation of refrigerants
and synthetic insulation materials may require refrigerated containers using
non-conforming substances to be retrofitted with non-CFC refrigerants at
substantial cost to the Issuer. The replacement refrigerant used in the new
refrigerated Managed Containers also may become subject to similar market
pressures or governmental regulation. In addition, refrigerated containers that
are not retrofitted may command lower prices in the market for used containers.
Certain liens may arise on the Managed Containers.
Depot operators, repairmen and transporters may come into possession
of the Managed Containers from time to time and have sums due to them from the
lessees or sublessees of these containers or, in certain instances, from TAL or
the Issuer. In the case of the Managed Containers, any such charges not paid by
the lessees or sublessees will be paid as a Direct Operating Expense, and will
reduce the Net Operating Income received by the Issuer. In the event of
nonpayment of those charges, TAL may be delayed in, or entirely barred from,
repossessing these containers, or be required to make payments or incur expenses
on behalf of the Issuer to discharge such liens on these containers.
30
Fluctuations in foreign exchange rates could reduce profitability.
The majority of the Issuer's revenues and costs are billed in U.S.
dollars. Most of the non-U.S. dollar transactions are individually of small
amounts and in various denominations and thus are not suitable for
cost-effective hedging. The Issuer's operations and used container sales in
locations outside of the U.S. have some exposure to foreign currency
fluctuations, and trade growth and the direction of trade flows can be
influenced by large changes in relative currency values. Adverse or large
exchange rate fluctuations may negatively affect the results of the Issuer's
operations and financial condition.
Increases in the cost of or the lack of availability of insurance could increase
the Issuer's risk exposure and reduce its profitability.
The lessees of Managed Containers and depots where Managed Containers
are stored when off-lease are required to maintain all risks physical damage
insurance and comprehensive general liability insurance and to indemnify TAL and
its assigns against loss. However, such insurance and indemnification may not
fully protect the Issuer. The cost of such insurance may increase or become
prohibitively expensive, or such insurance may become unavailable.
TAL maintains director and officer liability insurance. The
Sarbanes-Oxley Act of 2002 and rules and regulations of the New York Stock
Exchange may make obtaining such insurance more difficult and expensive, and TAL
may have to incur substantial costs to maintain increased levels of coverage, or
such coverage may become unavailable.
Geographic concentration may result in greater losses to the container industry
or the Managed Containers than those generally present for other industries or
similar asset-backed securities without such concentration.
A region's economic condition and market may be adversely affected by
a variety of events, including natural disasters or acts of God, such as
earthquakes, hurricanes, floods, and eruptions, civil disturbances, such as
riots, and acts of war, such as terrorist attacks. The economic impact of these
events may also be felt in areas beyond the region immediately affected by the
disaster or disturbance. Geographic concentration may result in greater losses
to the container industry or the Managed Containers than those generally present
for other industries or similar asset-backed securities without such
concentration.
In the event that vicarious liability attributed to the Issuer as owner of a
Managed Container is imposed, the investors in the Series 2006-1 Notes could
incur a loss on their investment.
Although the Issuer owns the Managed Containers, all Managed
Containers will be operated by the related lessees and their respective
invitees. Most of the Leases contain provisions requiring the lessees to
maintain at least $1,000,000 in liability coverage. State and foreign laws
differ as to whether anyone suffering injury to person or property involving a
container may bring an action against the owner of such container merely by
virtue of that ownership. To the extent that applicable state or foreign law
permits such an action, the Issuer and the Managed Containers may be subject to
liability to an injured party. In addition to the liability coverage provided by
a particular lessee pursuant to the related Lease, TAL (for its own account and
on behalf of the Issuer) maintains a supplemental commercial general liability
insurance policy covering TAL's Container Fleet. Notwithstanding the foregoing,
in the event that vicarious liability attributed to the Issuer as owner of a
Managed Container was imposed, and the coverage provided by the insurance
policies (i) were insufficient to cover such vicarious liability with respect to
a Managed Container, (ii) has lapsed or has not been maintained in full force
and effect, or (iii) does not provide for the Issuer to receive the benefits of
such insurance, the investors in the Series 2006-1 Notes could incur a loss on
their investment.
31
OTHER RISKS RELATED TO THE MANAGER
TAL has a substantial amount of debt outstanding on a consolidated basis and
will have significant debt service obligations which could adversely affect
TAL's financial condition or TAL's ability to fulfill TAL's obligations and make
it more difficult for TAL to fund TAL's operations.
TAL has a significant amount of debt outstanding on a consolidated
basis.
Such substantial debt could have important consequences for TAL,
including the following:
o require TAL to dedicate a substantial portion of its cash flow
from operations to make payments on such debt, thereby reducing
funds available for operations, future business opportunities and
other purposes;
o limit TAL's flexibility in planning for, or reacting to, changes
in TAL's business and the industry in which TAL operates;
o make it more difficult for TAL to satisfy its obligations with
respect to its debt obligations, and any failure to comply with
such obligations, including financial and other restrictive
covenants, could result in an event of default under the
agreements governing such indebtedness, which could lead to,
among other things, an acceleration of TAL's indebtedness or
foreclosure on the assets securing TAL's indebtedness and which
could have a material adverse effect on TAL's business or
prospects;
o limit TAL's ability to borrow additional funds, or to sell assets
to raise funds, if needed, for working capital, capital
expenditures, acquisitions or other purposes;
o increase TAL's vulnerability to general adverse economic and
industry conditions, including changes in interest rates; and
o place TAL at a competitive disadvantage compared to competitors
which have less debt.
TAL may not generate sufficient revenues to service and repay its debt
and have sufficient funds left over to achieve or sustain profitability in its
operations, meet its working capital and capital expenditure needs or compete
successfully in its markets.
Despite TAL's substantial leverage, TAL and its affiliates may be able to incur
additional indebtedness. This could further exacerbate the risks described
above.
TAL and its affiliates may be able to incur substantial additional
indebtedness in the future. To the extent that new indebtedness is added to the
current debt levels of TAL and its affiliates, the risks described above would
increase.
TAL will require a significant amount of cash to service and repay TAL's
outstanding indebtedness and TAL's ability to generate cash depends on many
factors beyond TAL's control.
TAL's ability to make payments on and repay TAL's indebtedness and to
fund planned capital expenditures will depend on TAL's ability to generate cash
in the future.
No assurance can be given that:
o TAL's business will generate sufficient cash flow from operations
to service and repay TAL's debt and to fund working capital and
planned capital expenditures;
o future borrowings will be available under TAL's current or future
credit facilities in an amount sufficient to enable TAL to repay
its debt; or
32
o TAL will be able to refinance any of TAL's debt on commercially
reasonable terms or at all.
Financial, business, economic and other factors, many of which TAL
cannot control, will affect TAL's ability to generate cash in the future and to
make these payments.
If TAL cannot generate sufficient cash from TAL's operations to meet
TAL's debt service and repayment obligations, TAL may need to reduce or delay
capital expenditures, the development of TAL's business generally and any
acquisitions. In addition, TAL may need to refinance TAL's debt, obtain
additional financing or sell assets, which TAL may not be able to do on
commercially reasonable terms or at all.
TAL's senior secured credit facility imposes significant operating and financial
restrictions, which may prevent TAL from pursuing certain business opportunities
and taking certain actions.
TAL's senior secured credit facility imposes, and the terms of any
future indebtedness may impose, significant operating, financial and other
restrictions on TAL and its affiliates.
These restrictions could adversely affect TAL's ability to finance
TAL's future operations or capital needs and pursue available business
opportunities. A breach of any of these restrictions could result in a default
in respect of the related indebtedness. If a default occurs, the relevant
lenders could elect to declare the indebtedness, together with accrued interest
and fees, to be immediately due and payable and proceed against any collateral
securing that indebtedness; such collateral includes substantially all of TAL's
material container assets.
RISKS RELATED TO RELIANCE ON TAL
Reliance on TAL. The Issuer expects that it will acquire Containers
only from TAL. The Issuer will rely solely upon TAL with respect to
substantially all aspects of the management and administration of the Managed
Containers, including inventory management and billing and collection of rental
payments. If TAL fails to adequately perform its contractual obligations and the
Issuer is not able to recover damages for inadequate performance, this failure
could adversely affect the Issuer's ability to make the principal and interest
payments on the Series 2006-1 Notes. See "-- Other Risks Related to the Manager"
above. See also "-- Termination of TAL and Absence of Replacement Manager"
herein.
Termination of TAL and Absence of Replacement Manager. Under the terms
of the Management Agreement, TAL has covenanted not to resign as Manager except
in certain limited circumstances. See "Description of the Management Agreement
- -- Resignation of TAL" herein. In addition, the Management Agreement sets forth
certain events and conditions, the occurrence of which would permit the
Indenture Trustee, acting at the direction of the Requisite Global Majority, to
terminate TAL as manager. See "Description of the Management Agreement --
Manager Default."
No back-up manager has been designated to serve as TAL's replacement
in the event that TAL is removed or is otherwise unable to fulfill its
obligations as the Manager. The ability of the Issuer to engage a replacement
manager will depend on a number of factors, including the number of participants
in the container leasing industry and the container leasing market in general at
such time, and may require payment of additional fees and expenses to any such
replacement manager. There can be no assurance that a suitable replacement
manager will be found, or found in a timely manner, or engaged on terms that
would not have a material adverse effect on the Issuer's ability to make timely
interest and principal payments on the Series 2006-1 Notes.
If TAL were to become a debtor in a bankruptcy case, there can be no
assurance as to the timing or likelihood of replacing TAL as the Manager.
Processing of Collections by TAL. TAL has instructed the lessees to
remit rental and other payments due under a Lease to a Concentration Account
established in the name of TAL. On or before the last Business Day of each
calendar week, and subject to the terms of the Management Agreement and the
Indenture, TAL will transfer funds in an amount equal to the Estimated Net
Operating Income from such account to the Trust Account. See "Description of the
Management Agreement -- Deposits to the Trust Account." If bankruptcy or
reorganization
33
proceedings were commenced by or against TAL, those funds held by TAL and not
yet deposited in the Trust Account and any additional funds deposited into the
Concentration Account subsequent to the commencement of insolvency proceedings
may be subject to an automatic stay, which may result in a delay in the payment
of principal and interest payments on the Series 2006-1 Notes.
Potential Conflicts of Interest. TAL, in addition to acting as the
Manager with respect to the Managed Containers, also is and will be engaged in
the leasing of its own containers and those of affiliates. Pursuant to the terms
of the Management Agreement, TAL has agreed to perform the container management
and lease administration services with respect to the Managed Containers with
substantially the same degree of skill and care it uses for the rest of its
Container Fleet and to operate all of its Container Fleet without knowingly
discriminating based on the ownership thereof. Nevertheless, TAL may from time
to time have conflicts of interest in performing its obligations to the Issuer
and the other entities to which it provides container management and lease
administration services as well as in managing and administering Containers
owned by TAL. See "Description of the Management Agreement -- General."
Limitation of Obligations of TAL. The duties and obligations of TAL
will be limited to those expressly set forth in the Management Agreement, and
TAL will not have any fiduciary or other implied duties or obligations to any
Person, including any holder of the Series 2006-1 Notes.
Absence of Independent Third Party Monitoring of TAL. There is no
independent third party monitoring the performance of TAL in managing the
Managed Containers with respect to, among other things, conflicts of interest,
expenses incurred by TAL and paid by the Issuer prior to making payments on the
Series 2006-1 Notes, the reasonableness of Leases entered into by TAL on the
Issuer's behalf, or compliance by TAL with its obligations under the Management
Agreement.
Absence of Separate Legal Representation for the Issuer. TAL and the
Issuer will share common legal counsel. Accordingly, the absence of separate
legal representation for the Issuer may result in the terms of the Contribution
and Sale Agreement and/or the Management Agreement being disproportionately
favorable to the Seller or TAL, as the case may be.
Split Leases. Typically, the containers leased by a customer include
containers financed by lenders to TAL and containers owned by TAL in addition to
the Managed Containers owned by the Issuer and managed by TAL. Lessees are
billed and pay rent on all containers leased under a Lease, without separately
identifying or segregating rent for the Managed Containers from those for other
containers in TAL's Container Fleet. The revenue from all Leases is swept by TAL
into a single account. To the extent attributable to the containers financed by
a particular lender, such lender, including the Indenture Trustee, holds a
security interest in the Lease, the Lease revenues, and the account into which
the revenues are swept. On or before the Closing Date, Fortis Capital Corp., as
agent for certain of TAL's existing lenders, and the Indenture Trustee will
enter into an agreement acknowledging and governing their respective rights in
their respective collateral. See "Description of the Series 2006-1 Notes and the
Indenture -- Intercreditor Agreement" herein.
If TAL were to become insolvent or suffer a material impairment to its
operations resulting in a default under one or more of TAL's secured facilities,
creditors under such facilities could seek to enforce their rights against the
respective collateral pledged to their facilities, which may include Leases of
Managed Containers, the other containers in TAL's Container Fleet, and the
associated revenues. In addition, the Managed Containers, Leases of Managed
Containers and associated revenues could be subject to competing claims from
such creditors of TAL. If such circumstances arose, TAL or such other secured
creditors may seek a judicial order dividing the collateral among the secured
creditors (including the Indenture Trustee). Such a proceeding could prevent TAL
from accessing the Managed Containers, Leases of Managed Containers and
associated revenues and/or delay the exercise of remedies afforded to the
Indenture Trustee under the Indenture, and could have a material adverse impact
on the Issuer's ability to meet its obligations under the Series 2006-1 Notes.
RISKS RELATED TO THE SERIES 2006-1 NOTES
Limited Obligations. The Series 2006-1 Notes will represent the right
to receive payments of principal and interest in the amounts and at the times
described herein and will not be guaranteed or insured (other than under the
34
Policy) by any other Person. Except for the Policy or any recourse for breach of
contract or express indemnities included in the Transaction Documents, rental
and sales proceeds realized on the Managed Containers will be the sole source of
payment on the Series 2006-1 Notes, and there will be no recourse to TAL, the
Indenture Trustee, or any other Person if such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Series 2006-1
Notes.
Limited Liquidity. There currently is no public market for the Series
2006-1 Notes and there is no assurance that one will develop. The Initial
Purchasers may, but are not obligated to, make a market in the Series 2006-1
Notes. There is no assurance that any such market will be created or, if so
created, will continue. If no public market develops, the Series 2006-1
Noteholders may not be able to liquidate their investment in the Series 2006-1
Notes before the Series 2006-1 Legal Final Maturity Date. See "Plan of
Distribution" herein.
Ratings of the Notes. The Series 2006-1 Notes, taking into
consideration the Policy, will be rated "AAA" by Standard & Poor's and "Aaa" by
Moody's on the Closing Date. The ratings of the Series 2006-1 Notes are not a
recommendation to purchase, hold or sell the Series 2006-1 Notes, inasmuch as
such ratings do not comment as to market price or suitability for a particular
investor. There is no assurance that the ratings of the Series 2006-1 Notes will
not be lowered or withdrawn entirely by either Standard & Poor's or Moody's if,
in its judgment, circumstances in the future so warrant. There can be no
assurance that another rating agency would not rate the Series 2006-1 Notes at a
rating lower than the equivalent of the ratings obtained from Standard & Poor's
and Moody's. Although the ratings of the Series 2006-1 Notes address the
respective likelihood of the ultimate payment of principal and timely payment of
interest on the Series 2006-1 Notes, such ratings do not address the likelihood
that the outstanding principal amount of such Series 2006-1 Notes will be paid
on any particular date specified in this Preliminary Offering Memorandum for the
payment of such principal.
Restrictions on Transfers of the Series 2006-1 Notes. The Indenture
provides for restrictions on the initial purchase and subsequent transfer of the
Series 2006-1 Notes, which are described in "Restrictions on Transfers and
Notice to Investors" and in "Certain ERISA Considerations" herein. These
restrictions may limit a Series 2006-1 Noteholder's ability to sell or transfer
the Notes purchased by it.
Control by Holders of Outstanding Notes and Series Enhancer. Subject
to certain exceptions, a certain percentage of the holders of Outstanding Notes
of each Series may take certain actions, or direct certain actions to be taken,
under the Indenture or the related Supplement with respect to that Series. Under
certain circumstances, the consent or approval of a specified portion of the
aggregate unpaid principal balance of the Outstanding Notes of each Series
(i.e., the Requisite Global Majority) will be required to direct certain
actions, including requiring the appointment of a successor manager following a
Manager Default and amending the Indenture under certain circumstances. The
ability to direct such actions shall reside with the relevant Series Enhancer as
long as such Series Enhancer has not defaulted under the relevant Enhancement
Agreement. There can be no assurance that the holders of the Notes will be able
to cause or direct actions to be taken if the investors in one or more other
Series (or one or more Series Enhancers) disagree with such proposed actions.
With respect to the Series 2006-1 Notes, the Series Enhancer will, subject to
certain limited exceptions, have the ability to vote the interests of the Series
2006-1 Noteholders with respect to any such matters.
Issuance of Additional Series. The Issuer may from time to time issue
Additional Series. There can be no assurance that the terms of any Additional
Series will not have an adverse impact on the timing or amount of payments
received by the Series 2006-1 Noteholders or on the ability of the Series 2006-1
Noteholders to take certain actions with respect to the Issuer or TAL, or under
the Transaction Documents.
Impact of Decline in Series Enhancer's Financial Condition. The "AAA"
and "Aaa" ratings of the Series 2006-1 Notes by S&P and Moody's at the Closing
Date will be based primarily on the existence of the Series Enhancer's guarantee
of the payment of interest and principal on the Series 2006-1 Notes in
accordance with (and subject to the terms of) the Policy. Any decline in the
financial condition of the Series Enhancer or the insolvency of the Series
Enhancer may result in the downgrade of the ratings of the Series 2006-1 Notes
and may impair the ability of the Series 2006-1 Enhancer to make required
payments pursuant to the Policy. In the event of an insolvency of the Series
2006-1 Enhancer, under state insurance insolvency proceedings, the claim of the
Indenture Trustee for amounts payable by the Series Enhancer on the Policy would
be an unsecured claim and it is possible that the Indenture Trustee would be
unable to recover all of such amounts from the Series Enhancer.
35
Effect of Rating Downgrade of Series Enhancer. The rating of the
Series 2006-1 Notes by a Rating Agency may be lowered following the initial
issuance thereof as a result of the downgrading or withdrawal of the rating of
the claims-paying ability of the Series Enhancer. See "Description of the 2006-1
Notes and the Indenture -- Series Enhancement " and "Description of the Policy."
Limits on Coverage of the Policy. The Policy guarantees payments of
Insured Amounts, which do not include Default Fees. The Policy does not cover
any payments of principal prior to the Series 2006-1 Legal Final Maturity Date,
nor does the Policy guarantee to the Series 2006-1 Noteholders any particular
rate of principal payment. In addition, the Policy does not cover shortfalls, if
any, attributable to the liability of the Seller, the Issuer, the Series 2006-1
Noteholders, the Indenture Trustee or any other agent for withholding taxes, if
any (including interest and penalties in respect of any liability for
withholding taxes). The Policy also does not cover the failure of the Indenture
Trustee to make any payment required under the Indenture or any other
Transaction Document to the Series 2006-1 Noteholders. In the event that
payments on the Series 2006-1 Notes are accelerated, such accelerated payments
will not be covered by the Series Enhancer under the Policy unless the Series
Enhancer elects to make such accelerated payments in accordance with the terms
of the Policy. If the Series 2006-1 Notes are accelerated and the Policy is not
accelerated, principal on the Series 2006-1 Notes may not be paid until the
Series 2006-1 Legal Final Maturity Date.
Payment of Premium. The Premium payable to the Series Enhancer will be
nonrefundable without regard to whether the Series Enhancer makes any payment
under the Policy, and will be payable to the Series Enhancer even if the Series
Enhancer defaults in its obligation to make payments under the Policy.
Insolvency and Bankruptcy Matters. If TAL were to become a debtor in a
bankruptcy case, a creditor or trustee-in-bankruptcy of TAL or TAL, as a debtor
in possession, could request a bankruptcy court to (i) recharacterize the
transfer of the Transferred Assets from TAL to the Issuer as a financing by TAL,
rather than as a "true sale," or (ii) order that TAL be substantively
consolidated with the Issuer. If a bankruptcy court were to rule in favor of any
such motion, delays in and/or reductions in the amount of payments on the Series
2006-1 Notes could occur.
Perfection and Priority of the Indenture Trustee's Interest in the
Managed Containers and Proceeds Thereof. In accordance with the terms of the
Contribution and Sale Agreement, a Uniform Commercial Code filing has been made
in Delaware to perfect the security interest of the Indenture Trustee in the
rights of the Issuer in the Managed Containers and their proceeds. However,
there is no internationally recognized convention governing the enforcement of
security interests in mobile equipment such as the Managed Containers. As
individual Managed Containers may be located from time to time in various
jurisdictions throughout the world, no assurance can be given that the relative
priority of the Indenture Trustee's interest against other parties will be
recognized in the jurisdictions in which the Managed Containers are located.
OTHER RISKS
Pursuant to a pledge agreement (the "Pledge Agreement") among TAL,
TOCC, TOL and Fortis Capital Corp., as collateral agent for the benefit of
certain creditors of TAL, TOCC and TOL (the "Collateral Agent"), TAL has granted
a security interest, in all of its ownership interest in the Issuer (the "TAL
SPV Interest"), to the Collateral Agent. Upon the occurrence of certain
circumstances, the Collateral Agent may exercise various rights with respect to
the TAL SPV Interest, including without limitation exercising voting rights in
respect of the TAL SPV Interest and selling the TAL SPV Interest. The Issuer
expects that any party holding voting or other rights with respect to the TAL
SPV Interest will have interests that may conflict with those of the
Noteholders.
In order to mitigate certain risks associated with such pledge of the
TAL SPV Interest, the Collateral Agent and the Indenture Trustee have entered
into an intercreditor agreement (the "Securitization Intercreditor Agreement")
pursuant to which the Collateral Agent agreed that it would not, without the
prior written consent of the Indenture Trustee, (i) vote the TAL SPV Interest
with respect to any matters inconsistent with the terms of the Transaction
Documents, (ii) contest the validity or enforceability or perfection of
transfers of containers to the Issuer, or (iii) institute insolvency proceedings
against the Issuer.
36
CONTAINERIZATION
OVERVIEW
According to statistics published in The Drewry Annual Container
Market Review and Forecast 2005/2006, the container shipping industry was
expected to be an approximately $181.0 billion industry in 2005, as measured by
the annual gross revenues of shipping lines. Containers provide a secure and
cost-effective method of transporting raw materials, component parts and
finished goods which can be used in multiple modes of transport. By making it
possible to move cargo from a point of origin to a final destination without
repeated unpacking and repacking, containers reduce freight and labor costs. In
addition, automated handling of containers permits faster loading and unloading
of vessels, more efficient utilization of transportation containers and reduced
transit time. The protection provided by sealed containers also reduces cargo
damage and the loss and theft of goods during shipment.
Intermodal containers are designed to meet a number of criteria
outlined by the International Standards Organization ("ISO"). The standard
criteria include the size of the container and the gross weight rating of the
container. This standardization ensures that containers can be used by the
widest possible number of transporters and facilitates container and vessel
sharing by shipping lines. Containers are generally usable for 10-15 years in
the shipping business and then they are often sold for use in the domestic
storage market.
The industry measures capacity with respect to containers in
twenty-foot equivalent units or "TEUs," whereby a 20-foot long container is
equivalent to one TEU, while a 40-foot long container is equivalent to two TEUs.
The industry also uses cost-equivalent units or "CEUs" to measure container
capacity. CEUs are calculated using the cost relationships of the various
container types. For example, a 20-foot standard dry freight container is
equivalent to one CEU while a 40-foot standard dry freight container is
equivalent to approximately 1.6 CEUs. A CEU may also be referred to as an "asset
TEU" or a "financial TEU."
A standard dry freight container or "dry container" is essentially a
steel-constructed box with a set of doors on one end. Dry freight containers
come in lengths of 20', 40' or 45'. They are 8' wide, and either 8'6" or 9'6"
tall (containers which are 9'6" tall are also referred to as "high cube"). In
addition to standard dry freight containers, the world fleet also consists of
various types of specialized containers, including refrigerated containers (also
known as "reefers"). The table below sets forth the major types of container
equipment.
EQUIPMENT TYPE SIZES PRIMARY USE
- ----------------------- ------------------------------------------ -------------------------------------------------
Standard Dry Freight 20 and 40 foot standard Transport of all types of dry freight (e.g.,
40 and 45 foot high cube electronics, appliances, clothes, toys, etc.)
- ------------------------------------------------------------------------------------------------------------------------
Refrigerated 20 and 40 foot standard, 40 foot high cube Transport of temperature sensitive products (e.g.
fresh and frozen, perishable goods)
- ------------------------------------------------------------------------------------------------------------------------
Open Top 20 and 40 foot Transport of irregularly shaped or sized items
which may need specialized loading (i.e. from
above)
- ------------------------------------------------------------------------------------------------------------------------
Flatrack 20 and 40 foot Transport of irregularly shaped or sized items
- ------------------------------------------------------------------------------------------------------------------------
Tank 20 and 40 foot Transport of liquids and/or chemicals
- ------------------------------------------------------------------------------------------------------------------------
Domestic Intermodal and 20, 40, 45, 48, and 53 foot Transport across land
European Swapbodies
Dry freight containers are the least expensive type of intermodal
container and are used to carry most types of freight. According to
Containerisation International Market Analysis - World Container Census 2005
("Containerisation International"), dry freight containers accounted for
approximately 88.6% of all maritime TEU at mid-2004. However, since dry freight
containers are less expensive than refrigerated or special containers they
represent only 61% of the world container fleet by CEU. Refrigerated containers
include an integrated cooling machine and an insulated container, and typically
are used to carry perishable cargo such as fresh and frozen produce.
Refrigerated containers comprised 6.3% of all maritime TEU and 26.5% of all
maritime CEU at mid-2004 according to Containerisation International.
37
According to Clarkson Research Studies ("Clarkson"), worldwide
containerized cargo volume grew in every year from 1980 through 2004, attaining
a compound annual growth rate (CAGR) of 10.0% during that period. Furthermore,
Clarkson projects that loaded container liftings, which is a measure of volume
in the industry, is expected to increase by 10.1% in both 2005 and 2006. TAL
believes that this projected growth is due to several factors, including the
shift in global manufacturing capacity to lower labor cost areas such as China
and India, the continued integration of developing high growth economies into
global trade patterns, the continued conversion of cargo from bulk shipping to
containers and the growing liberalization and integration of world trade.
ANNUAL LOADED CONTAINER LIFTINGS 1980-2004
SOURCE: CLARKSON RESEARCH STUDIES, MARCH 2006
[GRAPHIC OMITTED]
Current trends in containerized shipbuilding also support expectations
for increased container demand. According to Clarkson, as of March 2006, the
current orderbook for containerships represents approximately 4.2 million TEU of
vessel capacity, or approximately 51.4% of the existing containership fleet,
with a significant portion of the orders concentrated on the larger (4,000 TEU
or greater) ships. Given that most shipping lines utilize approximately two TEU
of containers for each TEU of vessel capacity, TAL believes that near-term
container demand should remain strong.
CONTAINER LEASING MARKET
The container leasing industry developed in the early 1960's in
conjunction with the early development of containerization. According to
Containerisation International, container lessors' ownership was approximately
8.6 million TEU or 45.9% of the total worldwide container fleet of 18.8 million
TEU as of mid-2004. Since 1985, the percentage of owned versus leased containers
utilized by shipping lines has been fairly stable, ranging from a low of 43% to
a high of 48% according to Containerisation International. Shipping lines
utilize container leases in addition to direct purchase of containers for both
operational and financial reasons. The benefits of container leases include:
o Operating flexibility. The timing, location and daily volume of
cargo movements for a shipping line are often unpredictable.
Leasing containers helps the shipping lines manage this
uncertainty and
38
minimize the requirement to maintain large inventory buffers by
allowing them to pick-up leased containers on short notice.
o Fleet size and mix flexibility. Container leases allow shipping
lines to rapidly adjust the size of their fleets and the mix of
units they operate as their trade volumes change due to
seasonality, market changes or changes in company strategies.
o Alternative Source of Financing. Container leases provide an
additional source of equipment financing to help shipping lines
manage the high level of investment required to maintain pace
with the rapid growth of the asset-intensive container shipping
industry.
Container leasing rates are typically a function of, among other
things, new container prices (which are heavily influenced by steel prices),
interest rates, leasing company infrastructure costs and the container supply
and demand balance at a particular time and location. From 1980 to 2000,
container leasing rates generally decreased due to a trend toward lower new
container prices, a reduction in U.S. dollar interest rates and a decrease in
leasing company infrastructure costs as a result of improved information
systems. With the exception of the expansion in leasing rates between mid-2004
to mid-2005 that was facilitated by a substantial increase in container prices,
leasing rates have been fairly stable since 2000. Since mid-2005, spot leasing
rates have returned to levels consistent with the 2000 to mid-2004 period.
NEW BUILD COST AND ANNUALIZED RENTAL PER DIEM FOR DRY FREIGHT CONTAINERS
1980-2004
SOURCE: CONTAINERISATION INTERNATIONAL MARKET ANALYSIS: CONTAINER LEASING MARKET
2005
ANNUALIZED PER DIEM ANNUALIZED ANNUALIZED REVENUE
NEWBUILD EX- RATE PER UTILIZED UTILIZATION GENERATED PER ASSET TEU
FACTORY COST ASSET TEU* (USD) RATE (% ) (USD)
(USD) LTL(1) MLA(2) LTL(1) MLA(2) LTL(1) MLA(2)
- --------------------------------------------------------------------------------------
1980 2,400 1.95 2.45 97 85 692.3 762.2
1981 2,200 1.85 2.30 97 80 655.0 671.6
1982 2,000 1.70 2.10 96 75 595.7 574.9
1983 1,750 1.55 2.00 95 65 538.9 475.8
1984 1,800 1.65 2.05 96 70 579.7 525.2
1985 1,850 1.60 2.00 96 70 560.6 511.0
1986 1,700 1.40 1.75 95 70 485.5 447.1
1987 1,800 1.25 1.55 95 75 433.4 424.3
1988 2,400 1.40 1.70 96 85 491.9 528.9
1989 2,900 1.50 1.90 98 90 536.6 624.2
1990 2,700 1.55 1.95 98 85 554.4 605.0
1991 2,700 1.55 1.95 98 85 554.4 605.0
1992 2,350 1.45 1.80 97 80 514.8 527.0
1993 2,200 1.30 1.65 95 75 450.8 451.7
1994 2,300 1.20 1.63 97 81 424.9 481.9
1995 2,400 1.20 1.65 97 77 424.9 463.7
1996 2,100 1.15 1.40 96 72 404.1 368.9
1997 1,850 1.08 1.25 97 73 382.4 333.1
1998 1,700 1.00 1.23 96 68 350.4 305.3
1999 1,400 0.84 1.17 96 64 294.3 273.3
2000 1,500 0.76 1.15 97 69 269.8 290.4
2001 1,450 0.70 1.10 95 57 242.7 228.9
2002 1,350 0.65 0.85 97 67 230.1 207.9
2003 1,400 0.63 0.84 97 77 223.1 236.1
2004 1,900 0.67 0.85 98 84 240.3 261.3
2005 2,200
(1) Long Term Lease,
(2) Master Lease Agreement
While international containerized trade has grown rapidly and been
consistently positive for the last twenty-five years, the shipping business has
been characterized by cyclical swings due to lengthy periods of excess
39
or scarce vessel capacity. TAL believes that these sustained periods of vessel
supply/demand imbalances are mainly caused by the multi-year ordering and
production cycle associated with the manufacture of new vessels, which requires
shipping lines to estimate market growth many years into the future. Container
leasing companies are partially insulated from the impacts of such shipping
cycles due to the large percentage of containers on long-term leases and the
relatively short production time associated with the manufacture of new
containers. Lead-times for new container orders are typically only a few months
(compared to the multi-year ordering and production cycle for new vessels), so
the rate of new container ordering can be quickly adjusted to reflect unexpected
market changes.
Container lessors compete in a variety of ways, including pricing,
lease flexibility, supply reliability and customer service. It is common for the
shipping lines to utilize several container lessors to meet their container
needs. The chart below sets forth the major competitors in the container leasing
industry in terms of TEU and financial TEU as of mid-2004.
40
TOP RANKING CONTAINER LEASING COMPANIES AND THEIR OPERATING FLEETS AT MID-2004
SOURCE: CONTAINERISATION INTERNATIONAL MARKET ANALYSIS: CONTAINER LEASING MARKET
2005
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
BY FINANCIAL TEU
TAL Florens Interpool CAI-Cont Capital Cronos Gateway Triton Textainer
International GE SeaCo Group Group Applications Inc. Lease Group Container Intl. Other Container Unit Group
- ------------- -------- ------- --------- ----------------- ------- ------ --------------- ----- -------------- ---------
11% 11% 10% 10% 6% 5% 5% 3% 14% 13% 12%
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
BY TEU
TAL Florens Interpool CAI-Cont Capital Cronos Gateway Triton Textainer
International GE SeaCo Group Group Applications Inc. Lease Group Container Intl. Other Container Unit Group
- ------------- -------- ------- --------- ----------------- ------- ------ --------------- ----- -------------- ---------
11% 11% 9% 9% 6% 5% 5% 3% 14% 15% 12%
THE ISSUER
The Issuer was formed in July 2005. The Issuer is owned by TAL.
Pursuant to the limited liability company agreement of the Issuer, its purposes
and activities are limited to (i) the issuance and sale of membership interests,
on the terms and conditions set forth therein; (ii) acquiring (through purchase
or otherwise) from TAL or any of its subsidiaries or affiliates, holding,
selling, financing, refinancing, transferring and pledging containers, leases,
and related rights, documents, property, assets, and interests (such containers,
leases, and related rights, documents, property, assets and interests may be
referred to collectively as the "Designated Assets"); (iii) entering into any
agreement providing for the acquisition, sale, financing, refinancing, hedging,
management, servicing, pledge or transfer of the Designated Assets or interests
in the Designated Assets in accordance with the terms of the Transaction
Documents; (iv) retaining or reacquiring an interest or interests in the
Designated Assets in accordance with the terms of the Transaction Documents; (v)
lending or otherwise investing proceeds from the Designated Assets and any other
income; (vi) executing and delivering the Transaction Documents, and performing
its obligations under the Transaction Documents; and (vii) any purposes and
activities necessary, convenient or incidental to the conduct, promotion or
attainment of the business purposes and activities of the Issuer as set forth in
clauses (i) through (vi) above.
Under the limited liability company agreement of the Issuer, TAL, in
its capacity as the initial equity member, is required to cause the Issuer at
all times to have at least one Independent Manager. Such limited liability
company agreement provides that the unanimous written consent of the managers of
the Issuer and at least one Independent Manager is required for the filing of
any voluntary petition in bankruptcy or any amendment to certain provisions of
such limited liability company agreement including, without limitation, the
provisions relating to the Issuer's purposes and activities described in the
preceding paragraph.
41
THE MANAGER
TAL International Container Corporation, a Delaware corporation ("TAL"
or, in its capacity as such, the "Manager"), is one of the world's largest and
oldest lessors of intermodal freight containers. As shown in the chart below,
TAL is a wholly-owned subsidiary of TAL International Group, Inc., and the
Issuer is a wholly-owned subsidiary of TAL.
---------------------------------------
TAL INTERNATIONAL GROUP, INC.
---------------------------------------
|
---------------------------------------
TAL INTERNATIONAL CONTAINER CORPORATION
---------------------------------------
|
---------------------------------------
TAL ADVANTAGE I LLC
---------------------------------------
TAL believes that it is the world's third largest independent lessor
of intermodal containers as measured by fleet size, with approximately 11%
market share of the world's leased container fleet. TAL offers leasing services
through 19 offices in 12 countries and approximately 194 third party container
depot facilities in 42 countries as of December 31, 2005.
42
TAL'S LEASING OPERATIONS
LEASING TERMS
Most of the Issuer's revenues are derived from leasing the Containers
to TAL's core shipping line customers. The vast majority of these container
leases are structured as operating leases and the remainder are finance leases.
Regardless of lease type, TAL seeks to exceed its targeted return on the
container investments over the life cycle of each container by managing
container utilization, lease rates, drop-off restrictions and the used container
sale process.
Operating Leases. Operating leases are structured to allow customers
flexibility to pick-up containers on short notice and to drop-off containers
prior to the end of their useful life. Because of this flexibility, most
containers will go through several pick-up and drop-off cycles. TAL's operating
lease contracts specify a per diem rate for each container on-hire, where and
when such containers can be returned, how the customer will be charged for
damage and the charge for lost or destroyed containers, among other things. TAL
categorizes its operating leases as either long-term leases or service leases.
"Long-term leases" require customers to maintain specific containers on-hire for
the duration of the lease and typically have terms of three to eight years.
"Service leases" allow the pick-up and drop-off of containers during the lease
term (providing lessees with a greater level of operational flexibility).
Long-term Leases: Long-term lease terms typically range from three to
eight years with an average term of approximately five years at lease inception.
The long-term leases require customers to maintain all units on-hire for the
duration of the lease term, and they provide the lessor with predictable
recurring cash flow. As of December 31, 2005, 59% of the Container Fleet
(measured by unit) was on-hire under long-term leases with an average remaining
duration of 31 months, assuming no leases are renewed. TAL believes that many of
its long-term lease customers will renew leases for containers that are less
than sale age at the expiration of the lease. TAL estimates that over the last
three years, its lease renewal rate has been approximately 70% in such cases. In
addition, the Containers typically remain on-hire at the contractual per diem
rate for an additional six to twelve months beyond the end of the contractual
lease term due to the logistical requirements of the customers having to return
containers to specific drop-off locations.
Some of TAL's long-term leases give the customers Early Termination
Options (ETOs). If exercised, ETOs allow customers to return containers prior to
the expiration of the long-term lease. However, if an ETO is exercised, the
customer is required to pay a penalty per diem rate that is applied
retroactively to the beginning of the lease. As a result of this retroactive
penalty, ETOs have historically rarely been exercised.
Service Leases: Service leases allow the customers to pick-up and
drop-off containers during the term of the lease, subject to contractual
limitations. Service leases provide the customer with a higher level of
flexibility than long-term leases and, as a result, typically carry a higher per
diem rate. The terms of TAL's service leases range from twelve months to five
years, though because containers can be returned during the term of a service
lease and since service leases are generally renewed or modified and extended
upon expiration, lease term does not dictate expected on-hire time for the
Containers on service leases. As of December 31, 2005, approximately 26% of the
Container Fleet (measured by unit) was on-hire under service leases and these
containers have been on-hire for an average of 44 months.
Finance Leases. Finance leases provide TAL's customers with an
alternative method to finance their container acquisitions. Finance leases
typically have lease terms ranging from five to ten years. Finance leases are
generally structured for specific quantities of containers (usually new
containers), generally require the customer to keep the containers on-hire for
their remaining useful life, and provide the customer with a purchase option at
the end of the lease term. Shipping lines generally consider finance leases a
financing product for their owned containers, and the daily cost of a finance
lease is typically less than the daily cost of an operating lease. Finance
leases are reflected as "Net investment in direct finance leases" on TAL's
balance sheet. As of December 31, 2005, approximately 5% of the Container Fleet
(measured by unit) was on-hire under finance leases.
Lease Documentation. In general, TAL's lease agreements consist of two
basic elements, a master lease agreement and a lease addendum. Lease addenda
contain the business terms (including daily rate, term duration and drop-off
schedule, among other things) for specific leasing transactions, while master
lease agreements outline the
43
general rights and obligations of the lessor and lessee under all of the lease
addenda covered by the master lease agreement. For most customers, TAL has a
small number of master lease agreements (often one) and a large number of lease
addenda.
TAL has a standard master lease agreement form for its customers. Some
lessees request that TAL use their agreement form or negotiate modifications to
TAL's standard form. The master lease agreements require the lessees to pay
rentals, depot charges, taxes and other charges when due, to maintain the
containers in good condition and repair, to return the containers in good
condition in accordance with the return condition set forth in the master lease
agreement, to use the containers in compliance with all laws, and to pay TAL for
the value of the container as determined by TAL if the container is lost or
destroyed. The default clause gives TAL certain legal remedies in the event that
the lessee is in breach of the lease.
The master lease agreements contain an exclusion of warranties clause
and require lessees to defend and to provide indemnity in most instances against
third-party claims arising out of the lessee's use, operation, possession or
lease of the containers.
INSURANCE
Lessees are required to maintain all risks physical damage insurance,
comprehensive general liability insurance and to provide indemnity against loss.
TAL also maintains its own off-hire physical damage insurance to cover
Containers when they are not on-hire to lessees and third-party liability
insurance for both on-hire and off-hire containers.
RE-LEASING/RE-SALES
Since TAL's operating leases allow customers to return containers, TAL
typically is required to place containers on several leases during their useful
lives. Initial lease transactions for new containers can usually be generated
with a limited sales and customer service infrastructure because initial leases
for new containers typically cover large volumes of units and are fairly
standardized transactions. Used containers, on the other hand, are typically
leased out in small transactions and are structured to accommodate pick-ups and
returns in a variety of locations. As a result, to maintain high utilization of
older equipment, leasing companies benefit from having a large number of
customers and maintaining a high level of operating contact with these
customers. TAL believes that its extensive global presence and long-standing
customer relationships provide an advantage in leasing older equipment relative
to many of its competitors.
TAL's in-house used container sales group, Trader(R), has a worldwide
team of over 35 container sales specialists that manage the sale process for
used containers. Trader(R) also manages the used container sale process for a
number of TAL's customers and buys and sells used containers opportunistically.
Trader(R) has sold over 50,000 used containers in each of the last five years on
behalf of TAL and third parties, and TAL believes that it is the world's largest
seller of used containers. The sale age of TAL's used containers typically
average between 11 and 13 years. Trader(R) generally sells to domestic storage
companies, freight forwarders (who often use the containers for one-way trips
into less developed countries) and other purchasers of used containers.
44
PURCHASING/MANUFACTURING
TAL has long standing relationships with all of its major suppliers.
TAL purchases most of its containers from suppliers located in China. There are
two large manufacturers of dry and special containers and three large
manufacturers of refrigerated containers in China. Three companies are active in
the manufacturing of refrigeration units for refrigerated containers in China.
TAL operations staff reviews the designs for TAL's containers and periodically
audits the production facilities of TAL's suppliers. In addition, TAL uses its
Asian operations group and third party inspectors to visit factories when TAL
containers are being produced to provide an extra layer of quality control.
Nevertheless, defects in TAL containers do sometimes occur. TAL works with the
manufacturers to correct these defects, and TAL manufacturers have in the past
generally honored their warranty obligations in such cases.
MAINTENANCE
TAL repair standards and processes are generally managed in accordance
with standards and procedures specified by the Institute of International
Container Lessors, or the IICL. The IICL establishes and documents the
acceptable interchange condition for leased containers. At the time that
containers are returned by lessees to one of TAL's approved depot facilities,
the depot routinely arranges inspection of the containers to assess the repairs
required to return the containers to acceptable IICL condition. This inspection
process also splits the damage into two components, customer damage and normal
wear and tear. Items typically designated as customer damage include dents in
the container and debris left in the container, while items such as rust are
typically designated as normal wear and tear. Inspection reports and repairs are
routinely audited by employees and/or third party surveyors to ensure adherence
to TAL and IICL standards.
Leases are generally structured so that the lessee is responsible for
the customer damage portion of the repair costs, and customers are billed for
damages at the time containers are returned. TAL sometimes offers customers a
container repair service program whereby TAL, for an additional payment by the
lessee (in the form of a higher per-diem rate or flat fee at off-hire), assumes
financial responsibility for all or a portion of the cost of repairs upon return
of the containers (but not for total loss of containers), up to a pre-negotiated
amount.
Most of the depot agreements follow a standard form and generally
provide that the depot will be liable for loss or damage of containers and, in
the event of loss or damage, will pay TAL the previously agreed loss value of
the applicable containers. The agreements require the depots to maintain
insurance against container loss or damage and TAL carries insurance to cover
the risk that the depot's insurance proves insufficient.
COMPETITION
TAL competes with approximately 10 other major container leasing
companies, many smaller lessors, manufacturers of containers, companies offering
finance leases as distinct from operating leases, promoters of container
ownership and leasing as a tax shelter investment, shipping lines, which
sometimes lease their excess container stock, and suppliers of alternative types
of containers for freight transport. It is also common for the shipping lines
that are TAL's customers to utilize several leasing companies to meet their
container needs.
TAL's competitors compete with TAL in many ways, including pricing,
lease flexibility, supply reliability and customer service. While TAL is forced
to compete aggressively on price, TAL emphasizes its supply reliability and high
level of customer service to its customers. TAL invests heavily in ensuring
adequate container availability in high demand locations, dedicates large
portions of its organization to building customer relationships, maintains close
day-to-day coordination with customers' operating staffs and has developed
powerful and user-friendly systems that allow TAL customers to transact with TAL
through the internet.
CUSTOMERS AND MARKETING
TAL's global sales and customer service force is responsible for
developing and maintaining relationships with senior operations staff at its
shipping line customers, negotiating lease contracts and maintaining day-to-day
coordination with its customers.
45
As of December 31, 2005, TAL's global sales and customer service group consisted
of approximately 51 people, with 11 in North and South America, 22 in Asia, 14
in Europe and 4 in Australia. TAL's pricing and credit decisions are controlled
by its senior headquarters located in Purchase, NY. In addition, TAL has 36 and
5 staff members dedicated to its Trader(R) and its Greyslot(R) groups,
respectively.
CREDIT CONTROLS
Over the last five years, TAL's write offs of customer receivables
have averaged 0.20% of its average total assets over such period, and TAL
believes that its receivables and days outstanding are low for the container
leasing industry. TAL attributes this credit performance to several
factors--some of which are specific to TAL, and some of which are attributable
to the industry generally.
Until recently, TAL was owned by a large finance company, and it has
established credit processes and a credit culture that reflect this history. TAL
monitors its customers' performance and its lease exposures on an ongoing basis,
and its credit management processes are aided by the long payment experience it
has with most of its customers, its network of relationships in the shipping
industry that provide current information about its customers' market
reputations, its focus on collections and a sales compensation structure that
does not provide incentives based on container volumes. Credit criteria may
include, but are not limited to, customer payment history, customer financial
position and performance (e.g., net worth, leverage, profitability), trade
routes, country of domicile, social and political climate, and the type of, and
location of, containers that are to be supplied.
Industry factors providing credit protection include the strong growth
in the container industry, TAL's high recovery rate for containers in default
situations and the re-marketability of its Container Fleet. The strong growth in
the container industry helps minimize the risk of customer defaults since the
core assets of a poorly performing shipping line, its ships and containers, are
generally needed to meet the demand for world containerized trade. As a result,
poorly performing shipping lines are often acquired by others. In addition, the
law in several major port locations is highly favorable to creditors and many of
TAL's large customers call on ports that will allow TAL to arrest, or seize, the
customers' ships or bunkers, or repossess the containers if the customer is in
default under TAL's container leases. TAL has historically recovered
approximately 90% of containers (measured in units) that were the subject of
defaulted contracts and it is able to re-market these repossessed containers
through its worldwide sales infrastructure. However, TAL typically incurs
operating expenses such as repairs and positioning when containers are recovered
after a customer default.
INFORMATION SYSTEMS
TAL has a proprietary, fully integrated container fleet management
system. The system tracks all of TAL's containers individually by container
number, provides design specifications for the containers, tracks on-hire and
off-hire transactions, matches each on-hire container to a lease contract and
each off-hire container to a depot contract, maintains the major terms for each
lease contract, calculates the monthly bill for each customer and tracks and
bills for container repairs. The system is electronic data interchange ("EDI")
capable, which means it can receive and process container activity transactions,
such as billing, dispatch advice and delivery confirmations, electronically with
TAL customers that are EDI capable. TAL's system allows its business partners to
conduct business with TAL through the Internet. It allows customers to check
container inventories, review design specifications, request clearances for
returning containers, request bookings for container pick-ups and review and
approve repair bills.
MANAGEMENT PROFILES
BRIAN M. SONDEY is Chief Executive Officer and President and has served as a
director of TAL since November, 2004. Mr. Sondey joined TAL's former parent,
Transamerica Corporation, in April 1996 as Director of Corporate Development. He
then joined TAL in November 1998 as Senior Vice President of Business
Development. In September 1999, Mr. Sondey became President of TAL. Prior to his
work with Transamerica Corporation and TAL, Mr. Sondey worked as a Management
Consultant at the Boston Consulting Group and as a Mergers & Acquisitions
Associate at J.P. Morgan. Mr. Sondey holds an MBA from The Stanford Graduate
School of Business and a BA degree in Economics from Amherst College.
46
CHAND KHAN is Vice President and Chief Financial Officer. Mr. Khan joined TAL in
1984. He is responsible for overseeing accounting, compliance, reporting and
administrative departments. Prior to joining TAL, Mr. Khan was employed for 8
years at Container Transport International. Mr. Khan holds an MBA from St.
John's University and a BA from Bernard Baruch College.
JOHN BURNS is Vice President of Business Development. Mr. Burns joined TAL's
former parent, Transamerica Corporation, in April 1996 as Director of Internal
Audit and subsequently transferred to TAL in April 1998 as Controller and later
Vice President and Chief Financial Officer. Prior to joining Transamerica
Corporation, Mr. Burns spent 10 years with Ernst & Young LLP in their financial
audit practice. Mr. Burns holds a BA in Finance from the University of St.
Thomas, St. Paul, Minnesota and is a certified public accountant.
MARC PEARLIN is Vice President, General Counsel and Secretary. Mr. Pearlin is
responsible for overseeing all legal matters. Mr. Pearlin joined TAL in October
1986 as an Associate General Counsel, and has held positions as Secretary and
Assistant General Counsel. Mr. Pearlin holds a Juris Doctor degree from the
University of Connecticut School of Law and a BA in Economics and Spanish from
Trinity College, Hartford, Connecticut.
FREDERICO BAPTISTA is Vice President, Asia Pacific. Mr. Baptista is responsible
for managing operations and marketing for the Asia and Pacific area. Mr.
Baptista joined TAL in 1973 as a clerk in its Hong Kong office. While at TAL,
Mr. Baptista has held positions as General Manager, Far East (based in Hong
Kong), Director, Singapore (based in Singapore) and Director, Procurement (based
in Purchase, New York). Mr. Baptista graduated from St. Francis Xavier College
and later received a Diploma in Executive Finance from the Institute of Cost and
Executive Accountants.
ADRIAN DUNNER is Vice President, Fleet Operations, North and South America and
Australia and Trader(R) Division. Mr. Dunner is responsible for managing fleet
operations, TAL's North and South America and Australia regions as well as the
worldwide sales efforts in the container aftermarket. Mr. Dunner joined TAL in
1988 as Manager, Marketing, and has held positions as General Manager, US East
Coast, and Marketing Manager located at various times in Cranford, NJ; Savannah,
GA; and Jacksonville, FL. Prior to his employment with TAL, Mr. Dunner worked as
a Sales Representative for Container Transport International and as a Trade
Specialist at the Center for International Trade. Mr. Dunner received a BS
degree in Finance/Economics from Spring Hill University, and an MBA in Business
from Jacksonville University.
THE INDENTURE TRUSTEE
GENERAL
U.S. Bank National Association is the Indenture Trustee under the
Indenture. The Indenture Trustee has its Corporate Trust Office at the address
set forth under "Summary -- Indenture Trustee."
Under the Indenture, the Indenture Trustee may resign and be
discharged at any time by written notice thereof to the Issuer, TAL, the
Administrative Agent, each related Series Enhancer and the Series 2006-1
Noteholders, in which event the Issuer, at the direction and subject to the
consent of the Requisite Global Majority, shall promptly appoint a successor
Indenture Trustee. If at any time the Indenture Trustee ceases to be eligible in
accordance with the provisions of the Indenture and fails to resign after
written request therefor by the Issuer, at the direction of the Requisite Global
Majority, or if at any time the Indenture Trustee becomes incapable of acting,
or is adjudged a bankrupt or insolvent, or a receiver of the Indenture Trustee
or of its property is appointed, or any public officer takes charge or control
of the Indenture Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, then the Issuer, at the direction
of the Requisite Global Majority, shall remove the Indenture Trustee and appoint
a successor Indenture Trustee by written instrument, in duplicate, one copy of
which instrument shall be delivered to the Indenture Trustee so removed and one
copy to the successor Indenture Trustee. Any resignation or removal of the
Indenture Trustee and appointment of a successor trustee will not become
effective until acceptance of the appointment by the successor Indenture
Trustee.
47
DUTIES AND IMMUNITIES OF THE INDENTURE TRUSTEE
The Indenture Trustee, prior to the occurrence of an Event of Default
or after the cure or waiver of any Event of Default that may have occurred,
undertakes to perform such duties and only such duties as are specifically set
forth in the Indenture and the related Supplement to the Indenture. If an Event
of Default has occurred and is continuing, the Indenture Trustee, at the written
direction of the Requisite Global Majority, shall exercise such rights and
powers vested in it by the Indenture and the related Supplement to the
Indenture, and use the same degree of care and skill in its exercise as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.
The Indenture Trustee makes no representations as to the validity or
sufficiency of the Transaction Documents, the Notes, the Collateral or any
resolutions, certificates, statements, opinions, reports, documents, orders or
other instruments furnished to the Indenture Trustee.
In addition, the Indenture Trustee shall have no responsibility or
liability for, or with respect to, the existence or validity of any Collateral,
the perfection of any security interest, the maintenance of or the taking of any
action to maintain such perfection, the validity of the assignment of any
portion of the Collateral to the Indenture Trustee or any intervening
assignment, the compliance by TAL with any covenant or the breach by TAL of any
warranty or representation made, in any Transaction Document or the accuracy of
such warranty or representation, any investment of money in the Trust Account,
the Restricted Cash Account, the Temporary Loss Account or any Series Account or
any loss resulting therefrom (provided that such investments are made in
accordance with the provisions of the Indenture), or the acts or omissions of
TAL taken in the name of the Indenture Trustee.
The Indenture Trustee will be entitled to receive, pursuant to the
priority of payments set forth in the Indenture and otherwise, (a) (i)
reasonable compensation for its services as Indenture Trustee and (ii)
reimbursement for its reasonable expenses in its capacity as Indenture Trustee
and (b) indemnification for loss, liability or expense incurred without
negligence or willful misconduct on its part, arising out of performance of its
duties.
THE SERIES ENHANCER
THE SERIES ENHANCER HAS SUPPLIED THE FOLLOWING INFORMATION FOR INCLUSION IN THIS
PRELIMINARY OFFERING MEMORANDUM. NO REPRESENTATION IS MADE BY THE ISSUER, TAL OR
THE INITIAL PURCHASERS AS TO THE ACCURACY AND COMPLETENESS OF THIS INFORMATION.
The Series Enhancer is a New York stock insurance corporation that
writes financial guaranty insurance in respect of public finance and structured
finance obligations and other financial obligations, including credit default
swaps. The Series Enhancer is licensed to engage in the financial guaranty
insurance business in all 50 states, the District of Columbia, the Commonwealth
of Puerto Rico, the U.S. Virgin Islands and the United Kingdom.
The Series Enhancer is a direct, wholly owned subsidiary of FGIC
Corporation, a Delaware corporation. At December 31, 2005, the principal owners
of FGIC Corporation and the approximate percentage of its outstanding common
stock owned by each were as follows: The PMI Group, Inc. - 42%; affiliates of
the Blackstone Group L.P. - 23%; and affiliates of the Cypress Group L.L.C. -
23%. Neither FGIC Corporation nor any of its stockholders or affiliates is
obligated to pay any debts of the Series Enhancer or any claims under any
insurance policy, including the Policy, issued by the Series Enhancer.
The Series Enhancer is subject to the insurance laws and regulations
of the State of New York, where the Series Enhancer is domiciled, including New
York's comprehensive financial guaranty insurance law. That law, among other
things, limits the business of each financial guaranty insurer to financial
guaranty insurance (and related lines); requires that each financial guaranty
insurer maintain a minimum surplus to policyholders; establishes limits on the
aggregate net amount of exposure that may be retained in respect of a particular
issuer or revenue source (known as single risk limits) and on the aggregate net
amount of exposure that may be retained in respect of particular types of risk
as compared to the policyholders' surplus (known as aggregate risk limits); and
establishes contingency, loss and unearned premium reserve requirements. In
addition, the Series Enhancer is also subject to the applicable insurance laws
and regulations of all other jurisdictions in which it is licensed to transact
insurance
48
business. The insurance laws and regulations, as well as the level of
supervisory authority that may be exercised by the various insurance regulators,
vary by jurisdiction.
The following table sets forth the capitalization of the Series
Enhancer and subsidiaries as of December 31, 2005 and December 31, 2004, on the
basis of U.S. generally accepted accounting principles ("GAAP").
FINANCIAL GUARANTY INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------ -----------------
Unearned Premiums $1,201 $1,043
Other Liabilities 140 121
------ ------
Total Liabilities 1,341 1,164
------ ------
Stockholder's Equity
Common Stock 15 15
Additional Paid-in Capital 1,895 1,883
Accumulated Other Comprehensive
(Loss) (14) 15
Income, net of tax
Retained Earnings 471 265
------ ------
Total Stockholder's Equity 2,367 2,178
------ ------
Total Liabilities and
Stockholder's Equity $3,708 $3,342
====== ======
The audited consolidated financial statements of the Series Enhancer and
subsidiaries as of December 31, 2005 and 2004 and for the years ended December
31, 2005 and 2004, and for the periods from December 18, 2003 through December
31, 2003 and from January 1, 2003 through December 17, 2003, are included as
Annex F to this Preliminary Offering Memorandum. Any statement contained herein
under the heading "The Series Enhancer" or in such Annex F shall be modified or
superseded to the extent required by any statement in any supplement to, or any
subsequent recirculation of, this Preliminary Offering Memorandum.
THE NEW YORK STATE INSURANCE DEPARTMENT RECOGNIZES ONLY STATUTORY
ACCOUNTING PRACTICES ("SAP") FOR DETERMINING AND REPORTING THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF AN INSURANCE COMPANY, FOR DETERMINING ITS
SOLVENCY UNDER THE NEW YORK INSURANCE LAW, AND FOR DETERMINING WHETHER ITS
FINANCIAL CONDITION WARRANTS THE PAYMENT OF A DIVIDEND TO ITS STOCKHOLDERS.
ALTHOUGH THE SERIES ENHANCER PREPARES BOTH GAAP AND SAP FINANCIAL STATEMENTS, NO
CONSIDERATION IS GIVEN BY THE NEW YORK STATE INSURANCE DEPARTMENT TO FINANCIAL
STATEMENTS PREPARED IN ACCORDANCE WITH GAAP IN MAKING SUCH DETERMINATIONS. A
DISCUSSION OF THE PRINCIPAL DIFFERENCES BETWEEN SAP AND GAAP IS CONTAINED IN THE
NOTES TO THE SERIES ENHANCER'S SAP FINANCIAL STATEMENTS.
49
Copies of the Series Enhancer's most recently published GAAP and SAP
financial statements are available upon request to: Financial Guaranty Insurance
Company, 125 Park Avenue, New York, NY 10017, Attention: Corporate
Communications Department. The Series Enhancer's telephone number is (212)
312-3000.
NEITHER THE SERIES ENHANCER NOR ANY OF ITS AFFILIATES ACCEPTS ANY
RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF, NOR HAVE THEY PARTICIPATED
IN THE PREPARATION OF, THIS PRELIMINARY OFFERING MEMORANDUM OR ANY INFORMATION
OR DISCLOSURE THAT IS PROVIDED TO POTENTIAL PURCHASERS OF THE SERIES 2006-1
NOTES, OR OMITTED FROM SUCH DISCLOSURE, OTHER THAN WITH RESPECT TO THE ACCURACY
OF INFORMATION REGARDING THE SERIES ENHANCER AND THE POLICY SET FORTH UNDER THE
HEADING "THE SERIES ENHANCER" AND "DESCRIPTION OF THE POLICY" HEREIN. IN
ADDITION, THE SERIES ENHANCER MAKES NO REPRESENTATION REGARDING THE SERIES
2006-1 NOTES OR THE ADVISABILITY OF INVESTING IN THE SERIES 2006-1 NOTES.
THE SERIES ENHANCER'S CREDIT RATINGS
The financial strength of the Series Enhancer is rated "AAA" by
Standard & Poor's, a Division of The McGraw-Hill Companies, Inc., "Aaa" by
Moody's Investors Service, Inc. and "AAA" by Fitch Ratings. Each rating of the
Series Enhancer should be evaluated independently. The ratings reflect the
respective ratings agencies' current assessments of the insurance financial
strength of the Series Enhancer. Any further explanation of any rating may be
obtained only from the applicable rating agency. These ratings are not
recommendations to buy, sell or hold the Series 2006-1 Notes, and are subject to
revision or withdrawal at any time by the rating agencies. Any downward revision
or withdrawal of any of the above ratings may have an adverse effect on the
market price of the Series 2006-1 Notes. The Series Enhancer does not guarantee
the market price or investment value of the Series 2006-1 Notes nor does it
guarantee that the ratings on the Series 2006-1 Notes will not be revised or
withdrawn.
DESCRIPTION OF THE POLICY
The Series Enhancer, in consideration of its receipt of the Premium and subject
to the terms of the Policy, will unconditionally and irrevocably agree to pay
each Insured Amount to the Indenture Trustee, as trustee for the Series 2006-1
Noteholders, to the extent set forth in the Indenture and the Series 2006-1
Supplement. "Insured Amount" means, (a) with respect to any Payment Date, (i)
the Guaranteed Interest Distribution Amount for such Payment Date, plus (ii) if
such Payment Date is the Series 2006-1 Legal Final Maturity Date, the Guaranteed
Principal Distribution Amount for such Payment Date, and (b) any Preference
Amount (as defined below) to be paid pursuant to the terms of the Policy.
The Series Enhancer will pay an Insured Amount (other than a Preference Amount)
with respect to the Series 2006-1 Notes out of its own funds by 12:00 noon (New
York City Time) in immediately available funds to the Indenture Trustee on the
later of (i) the second Business Day following the day on which the Series
Enhancer shall have received Notice that an Insured Amount is due in respect of
the Series 2006-1 Notes and (ii) the Payment Date on which the Insured Amount is
payable to the Series 2006-1 Noteholders pursuant to the Indenture and the
Series 2006-1 Supplement, for disbursement to the Series 2006-1 Noteholders in
the same manner as other payments with respect to the Series 2006-1 Notes are
required to be made. Any Notice received by the Series Enhancer after 12:00 noon
New York City time on a given Business Day or on any day that is not a Business
Day shall be deemed to have been received by the Series Enhancer on the next
succeeding Business Day.
Upon the payment of any Insured Amount, the Series Enhancer will be fully
subrogated to the rights of the Series 2006-1 Noteholders to receive the amount
so paid. The Series Enhancer's obligations with respect to the Series 2006-1
Notes under the Policy with respect to each Payment Date will be discharged to
the extent funds consisting of the related Insured Amount are received by the
Indenture Trustee on behalf of the Series 2006-1 Noteholders for payment to such
Series 2006-1 Noteholders, as provided in the Indenture and the Policy, whether
or not such funds are properly applied by the Indenture Trustee.
If any portion or all of any amount that is insured under the Policy that was
previously distributed to a Series 2006-1 Noteholder is recoverable and
recovered from such Series 2006-1 Noteholder as a voidable preference by a
trustee in bankruptcy pursuant to the U.S. Bankruptcy Code, pursuant to a final
non-appealable order of a court exercising
50
proper jurisdiction in an insolvency proceeding (a "Final Order") (such
recovered amount, a "Preference Amount"), the Series Enhancer will pay an amount
equal to such Preference Amount by 12:00 noon on the second Business Day
following receipt by the Series Enhancer of (w) a certified copy of the Final
Order, (x) an opinion of counsel satisfactory to the Series Enhancer that such
order is a Final Order, (y) an assignment, in form reasonably satisfactory to
the Series Enhancer, irrevocably assigning to the Series Enhancer all rights and
claims of the Indenture Trustee and/or such Series 2006-1 Noteholder relating to
or arising under such Preference Amount and appointing the Series Enhancer as
the agent of the Indenture Trustee and/or such Series 2006-1 Noteholder in
respect of such Preference Amount, including without limitation in any legal
proceeding related to such Preference Amount, and (z) a Notice appropriately
completed and executed by the Indenture Trustee or such Series 2006-1
Noteholder, as the case may be. Such payment will be made to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Final
Order and not to the Indenture Trustee or Series 2006-1 Noteholder directly
(unless the Indenture Trustee or such Series 2006-1 Noteholder has previously
paid such amount to such receiver, conservator, debtor-in-possession or trustee
in bankruptcy named in such Final Order in which case payment shall be made to
the Indenture Trustee for distribution to the Series 2006-1 Noteholder upon
proof of such payment reasonably satisfactory to the Series Enhancer).
Notwithstanding the foregoing, in no event will the Series Enhancer be (i)
required to make any payment under the Policy in respect of any Preference
Amount to the extent such Preference Amount is comprised of amounts previously
paid by the Series Enhancer under the Policy, or (ii) obligated to make any
payment in respect of any Preference Amount, which payment represents a payment
of the principal amount of any Series 2006-1 Notes, prior to the time the Series
Enhancer otherwise would have been required to make a payment in respect of such
principal, in which case the Series Enhancer will pay the balance of the
Preference Amount when such amount otherwise would have been required.
Any of the documents required under clauses (w) through (z) of the immediately
preceding paragraph that are received by the Series Enhancer after 12:00 noon
New York City time on a given Business Day or on any day that is not a Business
Day will be deemed to have been received by the Series Enhancer on the next
succeeding Business Day. If any notice received by the Series Enhancer is not in
proper form or is otherwise insufficient for the purpose of making a claim under
the Policy, it will be deemed not to have been received by the Series Enhancer,
and the Series Enhancer will promptly so advise the Indenture Trustee, and the
Indenture Trustee may submit an amended notice. All payments made by the Series
Enhancer under the Policy in respect of Preference Amounts will be made with the
Series Enhancer's own funds.
The Policy is non-cancelable for any reason, including nonpayment of any
Premium. The Premium on the Policy is not refundable for any reason, including
the payment of any Series 2006-1 Notes prior to their respective maturities. The
Policy will expire and terminate without any action on the part of the Series
Enhancer or any other Person on the date that is the later of (i) the date that
is one year and one day following the date on which the Series 2006-1 Notes
shall have been paid in full and (ii) if any insolvency proceeding in which the
Issuer is the debtor has been commenced on or prior to the date specified in
clause (i) above, the 30th day after the entry of a final, non-appealable order
in resolution or settlement of such proceeding.
The Policy does not cover any payments of principal prior to the Series 2006-1
Legal Final Maturity Date, nor does the Policy guarantee to the Series 2006-1
Noteholders any particular rate of principal payment. In addition, the Policy
does not cover shortfalls, if any, attributable to the liability of the Seller,
the Issuer, the Series 2006-1 Noteholders, the Indenture Trustee or any other
agent for withholding taxes, if any (including interest and penalties in respect
of any liability for withholding taxes). The Policy also does not cover the
failure of the Indenture Trustee or any other agent to make any payment required
under the Indenture or any other Transaction Document to the Series 2006-1
Noteholders. Premium shall be due and payable monthly as provided in the Premium
Letter, the Indenture and the Series 2006-1 Supplement.
As used in the Policy, "Notice" means a written notice in the form specified by
the Policy by registered or certified mail or telephonic notice, subsequently
confirmed by written notice delivered via telecopy, telex or hand delivery from
the Indenture Trustee to the Series Enhancer specifying the information set
forth therein.
In the event that payments under any Series 2006-1 Note are accelerated, the
Series Enhancer will not be obligated to make any payment of principal or
interest on such Series 2006-1 Note on an accelerated basis, unless such
acceleration of payment by the Series Enhancer is at the sole option of the
Series Enhancer.
51
The Policy is subject to and shall be governed by the laws of the State of New
York, without giving effect to conflict of laws principles thereof. The Policy
provides that the proper venue for any action or proceeding on the Policy shall
be the County of New York, State of New York.
THE INSURANCE PROVIDED BY THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
52
USE OF PROCEEDS
The Issuer will apply the net proceeds from the sale of the Series
2006-1 Notes (i) to pay a portion of the then unpaid principal balance of, and
accrued interest on, the Warehouse Notes, (ii) to pay costs, fees and expenses
of the issuance of the Series 2006-1 Notes, (iii) to purchase containers from
TAL and (iv) for other general business purposes. Fortis Capital Corp., an
affiliate of Fortis Securities LLC, and the Co-Managers are each currently
holders of the Warehouse Notes and will receive a portion of the principal
payments on the Warehouse Notes.
53
DESCRIPTION OF THE COLLATERAL
Under the terms of the Indenture and in order to secure the Issuer's
obligations under the Indenture and all other Transaction Documents, the Issuer
has granted to the Indenture Trustee for the benefit of all holders of all
Outstanding Notes, each related Series Enhancer and any hedge counterparties, a
security interest in all of the Issuer's right, title and interest in and to the
Collateral.
The primary source of funds for payment on the Notes will be the
Collections, which TAL will deposit into the Trust Account after making certain
deductions permitted under the Indenture or the Management Agreement. See
"Description of the Management Agreement -- Deposits to the Trust Account." The
Outstanding Notes of each Series shall be equally and ratably entitled to the
benefits of the security interest created by the Indenture.
MANAGED CONTAINERS
Pursuant to the terms of the Contribution and Sale Agreement, the
Issuer first acquired the Managed Containers from TAL in August 2005, has from
time to time, purchased additional containers from TAL, and expects, in the
future, to purchase additional Managed Containers from TAL in accordance with
the terms of the Contribution and Sale Agreement. See "Description of the
Contribution and Sale Agreement."
The Managed Containers are primarily composed of dry cargo, special
and refrigerated containers.
LEASES
Under the terms of the Management Agreement, TAL has agreed to act as
the agent of the Issuer for purposes of identifying lessees, negotiating the
terms and conditions of Lease Agreements for the Managed Containers and
administering and enforcing the terms of such Lease Agreements. See "Description
of the Management Agreement" herein. For a description of the various types of
Lease Agreements, see "TAL's Leasing Operations -- Leasing Terms."
54
TAL'S FLEET PROFILE AND STATISTICS
FLEET OVERVIEW AND CURRENT FLEET PROFILE
As of December 31, 2005, TAL operated approximately one million TEU of
containers. The Container Fleet operated by TAL consists of three types of
containers: dry containers, refrigerated containers and special containers as
well as chassis. The containers that TAL operates and makes available for lease
are either owned by TAL, leased-in from third-parties, or owned by third-parties
and managed by TAL. The table below summarizes the composition of TAL's fleet
(including containers transferred to the Issuer as described herein and included
in the Collateral) by the type of unit:
TAL Fleet as of December 31, 2005
Drys Specials Refrigerated Chassis Total
- -------------------------------------------------------------------------------------
TAL fleet (owned and managed) 533,613 43,437 35,651 1,210 613,911
- -------------------------------------------------------------------------------------
All references herein to TAL's fleet, the TAL fleet, the total fleet,
TAL's total fleet or the total TAL fleet are to the Container Fleet.
TAL operates its business through 19 worldwide offices located in 12
different countries as of December 31, 2005. TAL's operations include a global
sales force, a global container operations group, a container resale group, and
a logistics services group. TAL's headquarters are located in Purchase, New
York.
Since dry containers are less expensive than refrigerated or special
containers they represent a larger share of total containers when measured on
unit count or TEU basis, but a much smaller portion when measured by CEU. A
breakdown of the total TAL fleet by major equipment category as of December 31,
2005 follows:
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
TAL FLEET PROFILE @ 12/31/05
TEU*
Total TEU:
988,295
Dry Containers Special Containers Refrigerated Containers Chassis
- -------------- ------------------ ----------------------- -------
854,460 68,472 63,093 2,270
86.5% 6.9% 6.4% 0.2%
*Includes Trader
TAL FLEET PROFILE @ 12/31/05
CEU*
Total CEU:
1,167,815
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Dry Containers Special Containers Refrigerated Containers Chassis
- -------------- ------------------ ----------------------- -------
740,543 88,520 333,912 4,840
63.4% 7.6% 28.6% 0.4%
*Includes Trader
55
The vast majority of TAL containers leases are structured as operating
leases (either long-term or service leases), though TAL also provides customers
with finance leases. A breakdown of the total TAL fleet by lease type as of
December 31, 2005 follows:
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
TAL FLEET PROFILE @ 12/31/05
LEASE TYPE (BY UNIT)
Long-Term Lease Service Total off-hire Finance Lease
- --------------- ------- -------------- -------------
59.0% 25.6% 10.8% 4.6%
TAL concentrates on leasing containers on a long-term basis. TAL has
increased the percentage of its containers under long-term leases and finance
leases from 31% at December 31, 1995 to 64% as of December 31, 2005. The table
below shows TAL's long-term and finance leases (measure by related units)
included in TAL's total fleet for the period 1995 to 2005. The table further
depicts the term and finance lease percentage of TAL's total fleet and the usage
of these lease type agreements within the TAL fleet over the last ten years,
through December 31, 2005.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL]
LONG TERM AND FINANCE LEASES AS A PERCENT OF TOTAL FLEET AT END OF YEAR
Long-Term and Finance Total Fleet Long-Term and Finance Lease
Year Lease (in Units) (in Units) as a % of Total Units
- ---- ---------------- ---------- ---------------------
1995 197,582 643,772 31%
1996 262,883 820,693 32%
1997 276,146 797,950 35%
1998 298,606 736,586 41%
1999 340,927 732,362 47%
2000 344,723 721,465 48%
2001 340,669 701,332 49%
2002 375,051 674,081 56%
2003 388,862 637,134 61%
2004 411,239 626,569 66%
2005 390,625 613,911 64%
56
TAL's fleet increased rapidly in the early and mid-1990s due to
aggressive investment in equipment and the completion of two consolidating
acquisitions. TAL's fleet declined slowly from the late 1990s through 2004 due
to a decrease in investment that occurred while TAL was under prior ownership.
The trend of the TAL fleet by major equipment category, as measured in
both units and CEU, between 1990 and 2005 is shown below:
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL]
TAL FLEET TREND UNITS
Year Dry Containers Special Containers Refrigerated Containers Chassis
- ---- -------------- ------------------ ----------------------- -------
1990 202,830 3,762 8,576 -
1991 210,881 3,999 10,056 -
1992 230,184 5,233 12,521 -
1993 255,597 6,562 15,320 -
1994 600,714 12,310 17,532 -
1995 609,203 12,250 22,319 -
1996 714,673 68,101 37,919 -
1997 692,153 67,248 38,549 -
1998 632,845 64,324 39,417 -
1999 628,391 63,041 40,930 -
2000 621,307 61,388 38,770 -
2001 605,309 58,677 37,346 -
2002 581,885 56,356 35,840 -
2003 548,401 52,903 35,830 -
2004 543,827 46,824 35,918 -
2005 533,613 43,437 35,651 1,210
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL]
TAL FLEET TREND CEU
Year Dry Containers Special Containers Refrigerated Containers Chassis
- ---- -------------- ------------------ ----------------------- -------
1990 251,848 6,115 76,769 -
1991 264,279 6,469 89,685 -
1992 292,538 8,786 111,669 -
1993 328,077 11,774 136,316 -
1994 761,109 21,776 157,612 -
1995 777,834 22,038 201,988 -
1996 921,474 132,321 346,816 -
1997 896,037 131,407 351,226 -
1998 826,094 126,425 359,430 -
1999 823,651 124,337 373,344 -
2000 822,578 121,206 354,929 -
2001 809,150 116,085 344,046 -
2002 786,363 111,701 332,466 -
2003 745,605 104,788 332,423 -
2004 751,037 93,956 334,871 -
2005 740,715 88,520 333,912 4,840
57
The table below illustrates the remaining term to maturity, measured in TEU, as
of December 31, 2005 for long-term leases in TAL's total fleet (long-term leases
account for 59% of TAL's total fleet by units):
YEARS TO MATURITY TOTAL DRY TOTAL SPECIAL TOTAL REFRIGERATED TOTAL FLEET
- ---------------------------------------------------------------------------------------
Less than 1 Year........ 26.2% 12.8% 28.0% 25.7%
1 - 2 Years............. 13.9% 9.7% 21.8% 14.3%
2 - 3 Years............. 20.5% 14.0% 13.6% 19.8%
3 - 4 Years............. 19.6% 49.0% 12.2% 20.4%
4 - 5 Years............. 9.6% 9.8% 14.2% 9.9%
Greater Than 5 Years.... 10.1% 4.8% 10.3% 9.9%
- ---------------------------------------------------------------------------------------
TOTAL* 100.0% 100.0% 100.0% 100.0%
- ---------------------------------------------------------------------------------------
* PERCENTAGES IN THE ABOVE TABLE MAY NOT SUM TO 100.0% DUE TO ROUNDING.
Due to TAL's strong lease portfolio, customer relationships, marketing
ability and operating infrastructure, TAL has been able to achieve high
utilization for all ages of equipment in TAL's total fleet as shown in the
following chart:
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL]
TAL FLEET UTILIZATION BY VINTAGE YEAR AS OF DECEMBER 31, 2005
Year Dry Containers Refrigerated Containers
- ---- -------------- -----------------------
1992 89% 93%
1993 88% 89%
1994 92% 87%
1995 93% 88%
1996 90% 91%
1997 90% 88%
1998 87% 91%
1999 82% 96%
2000 87% 96%
2001 100% 99%
2002 98% 100%
2003 98% 100%
2004 97% 100%
58
A/R AND BAD DEBT EXPENSE SUMMARY
The following table outlines TAL's accounts receivable aging and
(reversal)/provision for doubtful accounts as of, and for each of the five years
ended, December 31, 2005 (all dollar amounts in the following table are in
thousands of dollars):
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2002 2003 2004 2005
------------------------------------------------------------------------------------------------
CONSOLIDATED AGED
Current $ 28,030 $ 20,298 $ 16,335 $ 21,473 $ 18,464
31-60 Days 23,438 17,801 16,117 11,413 9,191
61-90 Days 6,999 4,646 4,175 1,132 3,937
91-120 Days 1,410 926 349 296 (269)
121+ Days 6,649 3,279 2,649 926 1,235
----------------------------------------------------
TOTAL A/R PER BALANCE SHEET $ 66,526 $ 46,950 $ 39,625 $ 35,240 $ 32,558
====================================================
(REVERSAL) PROVISION FOR DOUBTFUL ACCOUNTS (1,785) (322) (33) 525 559
----------------------------------------------------
GROSS LEASE REVENUE $326,421 $303,786 $301,352 $290,935 $339,455
----------------------------------------------------
% OF PROVISION TO GROSS LEASE REVENUE (0.5%) (0.1%) 0.0% 0.2% 0.2%
----------------------------------------------------
DAYS RECEIVABLES 74.4 56.4 48.0 44.3 35.0
- -------------------------------------------------------------------------------------------------
RECOVERY HISTORY
TAL has historically recovered approximately 90% of its containers,
measured in units, that were subject of defaulted contracts. The table below
includes the current status of past significant defaults as of December 31,
2005:
- ------------------------------------------------------------------------------------------
BEGINNING UNRECOVERED RECOVERED RECOVERY
DEFAULT YEAR CUSTOMER UNITS UNITS UNITS %
- ------------------------------------------------------------------------------------------
1996 CROATIA LINE 2,452 316 2,136 87.1%
1998 U.B. LINER SERVICES 2,000 102 1,898 94.9%
1998 SOUTH PACIFIC SHIPPING 1,843 26 1,817 98.6%
1998 NANTAI LINE 1,685 45 1,640 97.3%
1999 NEPTUNIA 1,522 45 1,477 97.0%
1999 CONSOLIDATED MARINE 1,466 217 1,249 85.2%
1999 POLCONTAINERS & POL 1,061 110 951 89.6%
2000 NPR 2,245 8 2,237 99.6%
2005 PM&O LINE 800 122 678 84.8%
----------------------------------------------
TOTAL SIGNIFICANT DEFAULTS 15,074 991 14,083 93.4%
- ------------------------------------------------------------------------------------------
59
ISSUER'S FLEET PROFILE AND STATISTICS
ISSUER FLEET PROFILE
A breakdown of the fleet of containers owned by the Issuer by major
equipment category and lease type as of December 31, 2005 follows:
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
ISSUER FLEET PROFILE @ 12/31/05
TEU
Total TEU:
603,298
Dry Containers Special Containers Refrigerated Containers
- -------------- ------------------ -----------------------
526,556 23,094 53,648
87.3% 3.8% 8.9%
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
ISSUER FLEET PROFILE @ 12/31/05
ORIGINAL EQUIPMENT COST
$ MM
Total OEC:
$1,416.3
Dry Containers Special Containers Refrigerated Containers
- -------------- ------------------ -----------------------
$837.8 $64.0 $514.5
59.2% 4.5% 36.3%
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
ISSUER FLEET PROFILE @ 12/31/05
LEASE TYPE (BY UNIT)
Long-Term Lease Service Lease Total Off-Hire Finance Lease
- --------------- ------------- -------------- -------------
63.4% 21.3% 10.1% 5.2%
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
ISSUER FLEET PROFILE @ 12/31/05
CEU
Total CEU:
765,334
Dry Containers Special Containers Refrigerated Containers
- -------------- ------------------ -----------------------
452,039 33,118 280,177
59.1% 4.3% 36.6%
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
ISSUER FLEET PROFILE @ 12/31/05
NET BOOK VALUE
$ MM
Total NBV:
$844.8
Dry Containers Special Containers Refrigerated Containers
- -------------- ------------------ -----------------------
$528.1 $32.9 $283.8
62.5% 3.9% 33.6%
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
ISSUER FLEET PROFILE @ 12/31/05
AVERAGE AGE
Dry Special Refrigerated Total
- --- ------- ------------ -----
6.1 8.9 6.6 6.4
60
LESSEE PROFILE
As described under the "Description of the Contribution and Sale
Agreement" section, TAL will represent and warrant that each transfer of
containers to the Issuer will comply with certain eligibility criteria and that
after such transfers the Issuer portfolio will comply with the Concentration
Limits. Certain of these Concentration Limits set general limitations with
respect to the total number of containers (measured by Net Book Value) leased to
(a) any single lessee at 5% (except as otherwise noted below) and (b) any three
lessees at 50% (provided that this limitation is waived for any two lessees who
engage in any transaction (whether through merger, consolidation, stock sale,
asset sale or otherwise) pursuant to which a lessee shall become the owner of,
or interest holder in, any other lessee's leasehold interests in one or more
Eligible Containers). The following table details the individual lessee
concentration limits referred to in clause 8(A) of the definition of
Concentration Limits in Appendix A hereto:
LESSEE CONCENTRATION LIMIT
- -------------------------------------------------------------
A.P. MOLLER - MAERSK 25%
APL CO. PTE. LTD. 20%
CHINA NAVIGATION CO. LTD. 5%
CHINA OCEAN SHIPPING (GROUP) COMPANY. 10%
CHINA SHIPPING CONTAINER LINES CO., LTD 10%
CMA-CGM S.A. 15%
EVERGREEN MARINE CORP. (TAIWAN) LTD. 10%
HAMBURG SUEDAMERIKANISCHE DAMPFSCHIFF- 10%
HANJIN SHIPPING CO. LTD 10%
HAPAG-LLOYD CONTAINER LINIE GMBH 20%
HORIZON LINES LLC 5%
KAWASAKI KISEN KAISHA, LTD. 5%
MEDITERRANEAN SHIPPING CO S.A. 15%
MITSUI O.S.K. LINES, LTD. 10%
NIPPON YUSEN KABUSHIKI KAISHA 12%
ORIENT OVERSEAS CONTAINER LINE LTD. 5%
SAMUDERA SHIPPING LINE LTD. 5%
SINOTRANS CONTAINER LINES CO., LTD. 10%
UNITED ARAB SHIPPING CO. 5%
WESTWOOD SHIPPING LINES INC. 5%
YANG MING MARINE TRANSPORT CORPORATION 5%
ZIM ISRAEL NAVIGATION CO LTD 5%
- -------------------------------------------------------------
61
ISSUER TERM LEASE TERM TO MATURITY
The table below illustrates the remaining term to maturity, measured
in TEU, as of December 31, 2005 for the Issuer's long-term leases (term leases
account for 63% of the Managed Containers by TEU):
YEARS TO MATURITY TOTAL DRY TOTAL SPECIAL TOTAL REFRIGERATED TOTAL FLEET
- --------------------------------------------------------------------------------------
Less than 1 Year ...... 27.6% 13.4% 25.4% 27.1%
1 - 2 Years ........... 11.5% 8.9% 23.8% 12.5%
2 - 3 Years ........... 21.3% 20.8% 12.6% 20.5%
3 - 4 Years ........... 17.4% 32.1% 13.2% 17.4%
4 - 5 Years ........... 8.9% 16.5% 13.2% 9.4%
Greater Than 5 Years .. 13.4% 8.3% 11.7% 13.1%
- --------------------------------------------------------------------------------------
TOTAL* 100.0% 100.0% 100.0% 100.0%
======================================================================================
* Percentages in the above table may not sum to 100.0% due to rounding.
The table below illustrates the term lease remaining term to lease
maturity by vintage year for the Issuer's dry and refrigerated fleets as of
December 31, 2005. Dry and refrigerated units account for 96% of the Issuer's
fleet by units as of December 31, 2005.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
LONG-TERM LEASE MONTHS TO MATURITY BY VINTAGE YEAR
Dry Containers Refrigerated Containers
-------------- -----------------------
1994 24 15
1995 24 25
1996 30 13
1997 35 16
1998 13 15
1999 33 14
2000 7 20
2001 13 29
2002 24 25
2003 36 48
2004 60 56
2005 52 57
Dry 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005**
- --------------- ------ ------ ------ ------ ---- ------ ------ ------ ------ ------ ------ ------
Long-Term Units 14,998 41,902 24,164 6,333 261 9,295 15,010 12,645 12,839 18,653 35,198 14,236
Total Units* 22,145 63,058 44,595 11,102 452 15,826 19,033 12,899 14,102 23,441 36,612 31,194
Long-Term % 68% 66% 54% 57% 58% 59% 79% 98% 91% 80% 96% 46%
Refrigerated 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005**
- --------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------
Long-Term Units 443 3,180 2,247 258 1,288 1,184 1,022 1,463 2,349 2,592 1,379 1,156
Total Units* 1,422 5,221 4,425 593 2,047 2,091 1,261 1,612 2,359 2,592 1,380 1,737
Long-Term % 31% 61% 51% 44% 63% 57% 81% 91% 100% 100% 100% 67%
* Does not include finance leases
** 2005 low long-term lease % of total fleet due to timing of delivered
containers being put on long-term lease.
62
DESCRIPTION OF THE MANAGEMENT AGREEMENT
The following summary describes certain provisions of the Management
Agreement, does not purport to be complete and is subject to, and qualified in
its entirety by, reference to such agreement.
GENERAL
TAL is responsible for managing the Managed Containers as set forth in
the Management Agreement. Among other duties, TAL or any sub-manager is
responsible for:
(1) performing its duties under the Management Agreement, exercising
substantially the same degree of skill and care with which it
services, leases and manages containers held for its own account
and consistent with the reasonable commercial practices of a
prudent container lessor engaged in the administration, leasing
and servicing of shipping containers (the "Servicing Standard").
The Manager will not knowingly discriminate in favor of or
against the Managed Containers in connection with the management
and operation of the Container Fleet;
(2) leasing the Managed Containers as agent of the Issuer. Without
prejudice to the rights and title of the Issuer with respect to
the Managed Containers, TAL may arrange for the leasing of the
Managed Containers pursuant to Lease Agreements that are in its
own name as principal, and not as agent of the Issuer; provided,
however, that it is understood and agreed that the Manager is
acting thereunder solely as agent of the Issuer. TAL has sole
discretion to determine to whom to lease, sell, or otherwise
dispose of, the Managed Containers, to determine the per diem
rates and other charges to be paid and all other terms and
conditions of the Lease Agreements. TAL invoices and collects
from lessees all rental payments and other amounts due under and
pursuant to the Lease Agreements relating to the Managed
Containers;
(3) operating and leasing the Managed Containers as part of the
Container Fleet, performing all managerial and administrative
functions and providing or arranging for the provision of all
services and documentation of any nature TAL considers necessary
or desirable for such operation and leasing. TAL will, in
compliance with the Servicing Standard, take all actions it deems
appropriate to ensure compliance by the lessees with the terms of
any Lease Agreement, including the exercise of the rights of the
lessor thereunder;
(4) keeping (or causing the related lessee to keep) each Managed
Container in good repair and working order in a manner consistent
with past practices and in accordance with TAL's maintenance and
repair standards for the Container Fleet;
(5) instituting and prosecuting claims against the manufacturers and
sellers of the Managed Containers as TAL may consider advisable
for breach of warranty, any defect in condition, design,
operation or fitness or any other nonconformity with the terms of
manufacture;
(6) in a manner consistent with TAL's normal procedures and the
Servicing Standard, (i) effecting and maintaining with
financially sound and reputable companies general liability
insurance, insuring the Issuer and the Indenture Trustee (for the
benefit of the Noteholders) against liability for personal injury
and property damage liability, caused by, or relating to, the
Managed Containers then off-lease, with such levels of coverage
and deductibles that are consistent with the levels in effect as
of the Initial Closing Date, and (ii) having a standard form of
lease agreement that requires each lessee to maintain (1)
physical damage insurance in an amount not less than the
stipulated loss value agreed to by the lessee of the Managed
Containers on lease to it, and (2) comprehensive general
liability insurance, including contractual liability, against
claims for bodily injury or death and property damage;
(7) maintaining the Concentration Account and causing Estimated Net
Operating Income to be transferred from the Concentration Account
to the Trust Account (or, for certain amounts in
63
certain instances, to the Temporary Loss Account) (see "--
Deposits to the Trust Account" below);
(8) maintaining such books and records (including computer records)
with respect to the Managed Containers as TAL maintains for the
Container Fleet and the leasing thereof; and
(9) ensuring that each Managed Container shall carry its container
identification number and other marking as may be required for
its operation in marine and intermodal shipping.
TERM OF MANAGEMENT
TAL is, and shall continue to serve as, the Manager with respect to
each Managed Container until the earlier to occur of (i) the date on which all
Outstanding Obligations have been repaid, or (ii) the removal or resignation of
TAL as Manager in accordance with the provisions of the Management Agreement.
CREDIT FUNCTION AND MODIFICATION OF LEASES
TAL will follow the Credit and Collection Policy with respect to the
leasing of the Managed Containers. In accordance with the Credit and Collection
Policy, TAL may, in its sole discretion, (i) determine and approve the
creditworthiness of any lessee (however, TAL makes no representation and
warranty as to the solvency or financial stability of any lessee), (ii)
determine that any amount due from any lessee is not collectible, (iii)
institute and prosecute legal proceedings against a lessee as permitted by
applicable law, (iv) terminate or cancel any Lease, (v) recover possession of
Managed Containers from any lessee, (vi) settle, compromise or release any
proceeding or claim against a lessee in the name of TAL or, if appropriate, in
the name of the Issuer, or (vii) reinstate any Lease.
MANAGEMENT COMPENSATION
As compensation to TAL for the performance of its services, TAL is
entitled to receive the Management Fee. Subject to the terms and conditions of
the Indenture, the Management Fee is payable to TAL (to the extent not
previously withheld in accordance with the terms of the Management Agreement)
from amounts on deposit in the Trust Account to the extent monies are available
for the payment thereof. As long as no Manager Default has occurred and is
continuing for a period in excess of 30 days, TAL is entitled to withhold a pro
rata portion of the Management Fee from amounts otherwise required to be
transferred or deposited into the Trust Account in accordance with the terms of
the Transaction Documents. Upon any resignation or termination of TAL in
accordance with the terms of the Management Agreement and the other Transaction
Documents, TAL would not be entitled to receive any Management Fee accruing on
or after the effective date of such termination or resignation. See "-- Flow of
Funds" herein.
DEPOSITS TO THE TRUST ACCOUNT
On or before the last Business Day in New York of each calendar week,
the Manager will cause to be transferred from the Concentration Account to the
Trust Account an amount equal to the excess (if any) of (x) the sum of (A) the
Manager's good faith estimate of the Container Revenues for the Managed
Containers received during the immediately preceding calendar week (excluding
any customer advance payments, such advance payments to be included in the
distribution for the month earned) and (B) the Manager's good faith estimate of
the Sales Proceeds and Casualty Proceeds received during the immediately
preceding calendar week, over (y) the Manager's good faith estimate of Direct
Operating Expenses for the Managed Containers accrued during the immediately
preceding calendar week (the excess of (x) over (y), the "Estimated Net
Operating Income"), provided, however, that the amounts set forth under
"Description of the 2006-1 Notes and the Indenture -- The Temporary Loss
Account" shall be deposited into the Temporary Loss Account pursuant to
"Description of the 2006-1 Notes and the Indenture -- The Temporary Loss
Account."
On or before each Determination Date, the Manager will determine the
excess (if any) of (x) the aggregate amount of Container Revenues, Sales
Proceeds and Casualty Proceeds for the Managed Containers actually received
during the immediately preceding Collection Period over (y) the aggregate amount
of Direct Operating Expenses
64
accrued during such Collection Period and to be paid in the current or a
subsequent Collection Period (the excess of (x) over (y), the "Actual Net
Operating Income"). If the Actual Net Operating Income for such Collection
Period exceeds the Estimated Net Operating Income for such Collection Period,
then the Manager will cause to be transferred from the Concentration Account to
the Trust Account on such Determination Date funds in an amount equal to such
excess. However, if the Estimated Net Operating Income for such Collection
Period exceeds the Actual Net Operating Income for such Collection Period, then
the Manager shall indicate so on that month's Manager Report and the amount of
such excess (such excess, the "Excess Deposit") will be distributed to the
Manager on the immediately succeeding Payment Date. See "-- The Trust Account"
herein.
As long as no Manager Default has occurred and is continuing for a
period in excess of 30 days, TAL is entitled to withhold a pro rata portion of
the Management Fee from amounts otherwise required to be transferred or
deposited into the Trust Account in accordance with the terms of the Transaction
Documents.
MANAGER ADVANCES
The Manager may, at its option, remit to the Trust Account by 1:00
p.m. New York time on the Business Day prior to a Payment Date, an amount (a
"Manager Advance") equal to the lesser of (a) 50% of the accounts receivable of
the Issuer then outstanding, and (b) any anticipated shortfalls on the next
Payment Date in payments for those items in (i) paragraphs (1) through (12) in
"Description of the Series 2006-1 Notes and the Indenture -- Flow of Funds --
Flow of Funds Prior to an Early Amortization Event and an Event of Default" or
(ii) paragraphs (1) through (11) in "Description of the Series 2006-1 Notes and
the Indenture -- Flow of Funds -- Flow of Funds After an Early Amortization
Event or an Event of Default and Prior to an Acceleration of the Notes";
provided, however, that any such Manager Advances shall only be used to make
such payments, and not to make any other payments. Notwithstanding the
foregoing, the Manager will not make a Manager Advance unless it reasonably
believes that such Manager Advance shall be reimbursed in full on the next
Payment Date from the Available Distribution Amount (excluding any Manager
Advance) pursuant to the priority of payments set forth herein. Manager Advances
are reimbursed in accordance with the priority of payments set forth under
"Description of the Series 2006-1 Notes and the Indenture -- Flow of Funds."
RESIGNATION OF TAL
TAL may not resign from its obligations and duties as manager under
the Management Agreement, except (i) with the prior written consent of the
Issuer and the Requisite Global Majority or (ii) upon a determination by TAL,
evidenced by an Opinion of Counsel to such effect in form and substance
reasonably satisfactory to the Issuer and the Requisite Global Majority, that
the performance of its duties under the Management Agreement is no longer
permissible under applicable law, but in either case, to the extent consistent
with applicable laws, not until a replacement manager has assumed its
responsibilities in accordance with the terms of the Management Agreement and
the other Transaction Documents.
COVENANTS OF TAL
The Management Agreement contains certain covenants of TAL, including:
(1) TAL shall not change the location at which the Issuer's books and
records are maintained unless (i) TAL shall have given the
Indenture Trustee, the Administrative Agent and each Series
Enhancer at least thirty (30) days' prior written notice thereof
and (ii) TAL shall cause to be filed any necessary registration
of charges or documents of similar import necessary to continue
the Indenture Trustee's security interest in the Collateral;
(2) except for the Lien created pursuant to the Contribution and Sale
Agreement and Permitted Encumbrances: (a) TAL agrees not to
create, incur, or grant, directly or indirectly, any lien,
security interest, pledge or hypothecation of any kind on or
concerning (i) its rights under the Management Agreement or (ii)
the Managed Containers or any interest therein; and (b) TAL shall
promptly take, or cause to be taken, such action as may be
necessary to discharge any such lien arising by, through or under
TAL;
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(3) TAL will comply with the terms and provisions of the UNIDROIT
Convention on International Interests in Mobile Equipment or any
other internationally recognized system for recording interests
in or liens against shipping containers at the time that such
convention is adopted for containers;
(4) TAL will comply in all material respects with the Credit and
Collection Policy in regard to the origination of, and amendments
and modifications to, Leases of Managed Containers and will not
amend the Credit and Collection Policy in any respect which would
materially and adversely affect the Noteholders without the prior
written consent of the Requisite Global Majority in each
instance;
(5) TAL shall, upon reasonable prior notice, allow the Indenture
Trustee, the Administrative Agent, each Hedge Counterparty and
each Series Enhancer to inspect, under guidance of officers of
TAL, TAL's facilities during normal business hours; provided,
however, that unless an Event of Default or a Manager Default
shall have occurred and then be continuing, the Indenture
Trustee, the Administrative Agent, the Interest Rate Hedge
Counterparties and the Series Enhancers may request, in the
aggregate, only one inspection during any twelve-month period;
and
(6) without the prior written consent of the Indenture Trustee,
acting at the direction of the Requisite Global Majority, TAL
agrees that it will not grant to any Person, or permit any Person
to obtain, a Lien (other than items listed in clauses (i), (ii),
(iii), (iv) or (v) of the definition of "Permitted Encumbrances"
(as determined as though the Container Management System were
deemed "Collateral" for the purposes of the definition of
"Permitted Encumbrance")) over the Container Management System.
MANAGER DEFAULT
The occurrence of any of the following events or conditions
constitutes a "Manager Default":
(1) the Manager shall fail to make any deposits of Container
Revenues, Sales Proceeds, Casualty Proceeds or any other amounts
due and payable under the Management Agreement to the Trust
Account within three (3) Business Days after the date such
deposit is due; provided, that if such Container Revenues, Sales
Proceeds, Casualty Proceeds or other amounts are on deposit in
the Concentration Account (or a related post office box or
lockbox), failure of the bank holding the Concentration Account
to comply with the instructions of the Manager (or to comply with
the terms of any intercreditor agreement) shall not constitute a
Manager Default;
(2) the Manager shall fail (A) to deliver when due any Asset Base
Certificate or Manager Report required to be delivered to the
Indenture Trustee pursuant to the terms of the Management
Agreement and such failure shall continue unremedied for three
(3) Business Days or (B) in any material respect to perform the
covenant to deliver financial statements and such failure shall
continue unremedied for thirty (30) days after the date on which
there has been given to the Manager by the Indenture Trustee, any
Series Enhancer or any Noteholder a written notice specifying
such default or breach and requiring it to be remedied; provided,
however, that (x) if the reason for such failure is primarily
attributable to changes in accounting principles or
interpretations or the application of the same, (y) such changes
are not related to the assets of the Issuer and (z) no Manager
Default then exists under clauses (9) through (12) below, then
such failure shall not constitute a Manager Default under this
clause (2)(B) unless such failure materially and adversely
affects the interests of any Noteholder or any Series Enhancer
(if such Series Enhancer is then the Control Party for a Series
of Outstanding Notes or shall have made an unreimbursed payment
on its Policy);
(3) the Manager shall fail to (A) deliver any report required to be
delivered to the Indenture Trustee pursuant to the terms of the
Management Agreement or of any other Transaction Document (except
for the reports specified in clause (2) above) and such failure
shall continue unremedied for thirty (30) days, or (B) perform or
observe, or cause to be performed or observed, in any
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material respect any other covenant or agreement contained in the
Management Agreement or in any other Transaction Document
(including in its capacity as Seller) (which is not otherwise
addressed in the definition of Manager Default), which failure
materially and adversely affects the interests of the Noteholders
or (if it is then the Control Party for a Series of Outstanding
Notes or shall have made an unreimbursed payment on its Policy)
any Series Enhancer and such failure, if capable of remedy, shall
continue unremedied for a period of thirty (30) days after the
date on which the Manager has received written notice specifying
such failure from the Issuer, the Indenture Trustee, any
Noteholder, the Administrative Agent, any Series Enhancer or any
other Person;
(4) any representation or warranty made by the Manager in the
Management Agreement or any other Transaction Document (including
in its capacity as Seller), or in any certificate, report or
financial statement delivered by it pursuant to the Management
Agreement or pursuant to any other Transaction Document proves to
have been untrue in any material respect when made, such breach
materially and adversely affects the interests of the Noteholders
or (if it is then the Control Party for a Series of Outstanding
Notes or shall have made an unreimbursed payment on its Policy)
any Series Enhancer and such breach, if capable of remedy, shall
continue unremedied for a period of thirty (30) days after the
date on which the Manager has received written notice specifying
such failure from the Issuer, the Indenture Trustee, any
Noteholder, the Administrative Agent, any Series Enhancer or any
other Person;
(5) TAL ceases to be engaged in the container leasing business;
(6) the Manager shall commence a voluntary case concerning itself
under the Bankruptcy Code; or an involuntary case is commenced
against the Manager or any of its subsidiaries and the petition
is not controverted within 10 days, or is not dismissed within 60
days, after commencement of the case; or a custodian (as defined
in the Bankruptcy Code) is appointed for, or takes charge of, all
or substantially all of the property of the Manager; or the
Manager commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect relating to the Manager and
such proceeding remains undismissed for a period of 60 days; or
the Manager is adjudicated insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is
entered; or the Manager suffers any appointment of any custodian
or the like for it or any substantial part of its property to
continue undischarged or unstayed for a period of 60 days; or the
Manager makes a general assignment for the benefit of creditors;
or any action is taken by the Manager for the purpose of
effecting any of the foregoing;
(7) except as permitted by the Management Agreement, the Manager
assigns or attempts to assign its interest under the Management
Agreement;
(8) a Change of Control shall have occurred with respect to the
Manager;
(9) the Leverage Ratio of TAL Group as of the last day of any fiscal
quarter shall be in excess of 4.75 to 1.00;
(10) as of the last day of each fiscal quarter, commencing with the
fiscal quarter ending on December 31, 2005, the Consolidated EBIT
to Consolidated Cash Interest Expense Ratio is less than 1.10 to
1.00;
(11) as of the last day of each fiscal quarter, commencing with the
fiscal quarter ending on March 31, 2006, the Consolidated
Tangible Net Worth of TAL Group is less than the sum of (i) three
hundred twenty-one million three hundred fifty-one thousand three
hundred and twenty-six dollars ($321,351,326), plus (ii) an
amount equal to fifty percent (50%) of the cumulative sum of the
aggregate net income (or loss) of TAL Group and its consolidated
subsidiaries on a consolidated basis, determined in accordance
with GAAP for the period commencing on January 1, 2006 and
terminating on such date of determination; and
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(12) TAL Group, TOCC, TAL or TOL or certain of their affiliates fail
to make any payment when due (beyond the applicable grace or cure
period with respect thereto, if any) or defaults in the
observance or performance (beyond the applicable grace or cure
period with respect thereto, if any) of any payment obligation,
or any other agreement or covenant with respect to the
Indebtedness that, individually or in the aggregate for all such
Persons, exceeds Twenty Million Dollars ($20,000,000) and the
holder(s) of such Indebtedness has accelerated such Indebtedness.
RIGHTS UPON A MANAGER DEFAULT
If a Manager Default shall have occurred and be continuing, and any
Notes are then outstanding, the Indenture Trustee, acting at the direction of
the Requisite Global Majority and in the Requisite Global Majority's discretion,
shall have the right (upon written notice to TAL, the Issuer and the Rating
Agencies), in addition to any other rights or remedies that the Issuer or its
assignee may have under any applicable law or in equity, (i) to terminate the
Management Agreement, (ii) to take control of the Managed Containers wherever
located, subject to the rights of lessees under Lease Agreements to which any of
the Managed Containers shall at the time be subject or to appoint a replacement
Manager to manage the Managed Containers, and (iii) to appoint an independent
auditor of national reputation and mutually acceptable to the Issuer and the
Requisite Global Majority to verify that all prior Manager Reports and Asset
Base Certificates prepared by the Manager are in accordance with the Management
Agreement. Notwithstanding such termination, until TAL is notified of the
appointment of a replacement manager and the replacement manager has assumed
such responsibility, TAL shall continue to manage the Managed Containers and the
Issuer's business, and deposit into the Trust Account all Container Revenues,
Sales Proceeds, Casualty Proceeds and other amounts, and submit all reports due
under the Management Agreement, and perform all other services required under
the Management Agreement, all in accordance with the Management Agreement.
INDEMNIFICATION BY TAL AND THE ISSUER
Pursuant to the Management Agreement, TAL, in its capacity as the
Manager, has agreed to defend, indemnify and hold harmless the Issuer, the
Indenture Trustee (for the benefit of the Noteholders), any Series Enhancer, any
Hedge Counterparty, the Purchasers (as such term is defined in the applicable
Note Purchase Agreement), the Administrative Agent, and certain other Persons
referred to in the Management Agreement and their respective officers,
directors, employees and agents against any and all liabilities, losses,
damages, penalties, costs and expenses that may be incurred or suffered by such
indemnified party (except to the extent caused by the gross negligence or
willful misconduct on part of the indemnified party) as a result of claims,
actions, suits or judgments asserted or imposed against an indemnified party and
arising out of (i) an action or inaction by the Manager that is contrary to the
Servicing Standard or otherwise in violation of the terms of the Management
Agreement; (ii) any breach of or any inaccuracy in any representation or
warranty made by TAL in the Management Agreement or in any certificate delivered
by TAL pursuant to the Management Agreement; (iii) any breach of or failure by
TAL to perform any covenant or obligation of TAL set out or contemplated in the
Management Agreement; (iv) personal injury or property damage claim arising out
of or in connection with the negligence of the Manager; or (v) any defense,
setoff or counterclaim arising out of any negligence of the Manager or any acts
or omissions of the Manager related to the performance under the Management
Agreement of its duties with respect to the Managed Containers; provided
however, that the foregoing indemnity shall in no way be deemed to impose on TAL
any obligation to reimburse an indemnified party for: (A) losses arising from
the financial inability of the related obligor on a Lease Agreement to make the
payments due thereunder or because the Leases otherwise are uncollectible, or
(B) losses arising from the failure of the remarketing proceeds of the Managed
Containers to achieve historical or projected levels for reasons other than
TAL's failure to comply with the terms of the Management Agreement. These
indemnification obligations of TAL survive the resignation or removal of TAL as
the Manager and each indemnified party, the payment of the Notes, the
Outstanding Obligations and the termination of the Management Agreement or the
Indenture.
The Issuer, at its own expense, shall defend, indemnify and hold TAL
harmless from and against any and all claims, actions, damages, losses,
liabilities, costs and expenses (including reasonable legal fees) incurred by or
asserted against TAL, to the extent resulting or arising from the Manager's
performance of its obligations under the Management Agreement or from the
Issuer's failure to comply with or perform its obligations under the Management
Agreement, except for claims that arise out of TAL's willful misconduct, gross
negligence, or failure to comply with, or perform its obligations under, the
Management Agreement. Any such indemnity payments shall
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be payable in accordance with the priority of payments set forth herein under
"Description of the Series 2006-1 Notes and the Indenture -- Flow of Funds" and
in the Indenture.
AMENDMENTS
TAL and the Issuer may not agree to amend or modify the Management
Agreement without the consent of the Administrative Agent and the Requisite
Global Majority, and, under certain circumstances, with the consent of each
Series Enhancer adversely affected thereby.
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DESCRIPTION OF THE CONTRIBUTION AND SALE AGREEMENT
The following summary describes certain provisions of the Contribution
and Sale Agreement, does not purport to be complete and is subject to, and
qualified in its entirety by, reference to such agreement.
GENERAL
Pursuant to the Contribution and Sale Agreement, TAL transferred and
from time to time may transfer to the Issuer certain Containers and the Related
Assets. The Issuer has pledged its rights under the Contribution and Sale
Agreement to the Indenture Trustee pursuant to the Indenture.
The "Related Assets" include, with respect to any Transferred
Container, all of the following: (i) all Casualty Proceeds, Sales Proceeds and
Container Revenues accrued as to the related Transfer Date, (ii) all right,
title and interest in and to, but none of the obligations under, any agreement
with the manufacturer of such Transferred Container or any third party with
respect to such Container, and all amendments, additions and supplements
hereafter made with respect to such Container, (iii) all right, title and
interest in and to any Lease Agreement to which such Transferred Container is
subject (to the extent, but only to the extent that such Lease Agreement relates
to such container), including, without limitation, TAL's interest under all
amendments, additions and supplements thereto, (iv) all other security interests
or Liens and property subject thereto from time to time purporting to secure
payment of the Lease Agreements to the extent attributable to such Transferred
Container, (v) all letters of credit, guarantees, Supporting Obligations (within
the meaning of the UCC) and other agreements or arrangements of whatever
character from time to time supporting or securing payment of any Lease
Agreement, to the extent attributable to such Container, (vi) any insurance
proceeds received with respect to such Container, (vii) all books and records
relating to such Container, (viii) all payments, proceeds and income of the
foregoing or related thereto, (ix) any agreement with the manufacturer of such
Container, and all amendments, additions and supplements made with respect to
such Container (to the extent, only to the extent, relating to such Container),
and (x) all rights under the UCC financing statements or documents of similar
import evidencing a security interest in favor of TAL with respect to such
Container (including any such financing statement filed pursuant to the terms of
the Contribution and Sale Agreement) (the Related Assets and the Transferred
Containers, collectively the "Transferred Assets").
ADDITIONAL TRANSFERRED ASSETS
Pursuant to the Contribution and Sale Agreement, TAL may sell,
transfer and convey to the Issuer, additional Transferred Assets (all of which
will individually and when considered with all other Managed Containers comply
with the Concentration Limits and the other Container Representations and
Warranties) for consideration equal to the sum of (x) the sum of the Net Book
Values (determined as of the last day of the month preceding such Transfer Date)
of such additional Containers and (y) the sum of the Fair Market Values of the
Related Assets.
ALTERNATIVE CHARACTERIZATION OF SALES
TAL and the Issuer state in the Contribution and Sale Agreement their
intention that all transfers of Transferred Assets pursuant thereto constitutes
"true sales" or "true contributions" by TAL to the Issuer that are absolute and
irrevocable and that provide the Issuer with the full benefits of ownership of
the Transferred Assets, and neither TAL nor the Issuer intend the transactions
contemplated thereunder to be, or for any purpose to be characterized as, loans
from the Issuer to TAL. However, the Contribution and Sale Agreement further
states that, in the event that, notwithstanding the intention of the parties,
any such Transferred Assets are considered to be property of TAL's bankruptcy
estate, then (x) the Contribution and Sale Agreement shall constitute a security
agreement, and (y) the conveyances of Transferred Assets provided for therein
shall be a grant by TAL to the Issuer of a valid security interest in all of
TAL's right, title and interest in and to the Transferred Assets, which security
interest has been assigned to the Indenture Trustee.
In furtherance of the foregoing, in connection with the transfer by
TAL on any Transfer Date, TAL agrees to record and file, at its own expense,
appropriate UCC financing statements (and/or amendments to previously filed
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UCC financing statements) to the extent necessary pursuant to applicable law to
perfect the ownership interest of the Issuer.
REPRESENTATIONS AND WARRANTIES OF TAL
TAL makes certain representations and warranties in the Contribution
and Sale Agreement with respect to the Transferred Assets, which representations
and warranties survive the transfer of the Transferred Assets, including:
(1) Immediately prior to the transfer of any Transferred Asset to the
Issuer pursuant to the terms of the Contribution and Sale
Agreement, TAL had good and marketable title to such Transferred
Asset, free and clear of all Liens, except (i) Permitted
Encumbrances and (ii) a manufacturer's or vendor's lien for the
unpaid purchase price of such Transferred Asset so long as such
unpaid purchase price is paid within two Business Days following
the later of the acquisition of such Transferred Asset by the
Issuer or the inclusion of such Transferred Asset in the Asset
Base; TAL has not authorized the filing of, and is not aware of,
any financing statements against TAL that include a description
of collateral covering the Transferred Assets other than any
financing statement or document of similar import (i) in favor of
the Issuer pursuant to the Contribution and Sale Agreement or
(ii) that has been terminated. TAL is not aware of any judgment
or tax lien filings against TAL;
(2) The assignment of rights with respect to each Lease Agreement (to
the extent related to a Transferred Container) and of all
scheduled lease payments to become due thereunder (which relate
to a Transferred Container) pursuant to the Contribution and Sale
Agreement does not violate the terms of the applicable Lease
Agreement and such assignment by TAL is permitted without the
consent of any Person other than consents which will have been
obtained on or before the related Transfer Date;
(3) Immediately after each of the transfers and conveyances to the
Issuer as contemplated in the Contribution and Sale Agreement,
all necessary action will have been taken by TAL to validly
transfer and convey to the Issuer all right, title and interest
of TAL in and to the Transferred Containers and the Related
Assets;
(4) As of the related Transfer Date for a Container, such Container
is an Eligible Container;
(5) All Lease Agreements related to Transferred Containers were
originated in the ordinary course of business of TAL's business
and in accordance with the Credit and Collection Policy as in
effect on such origination date;
(6) Each Lease included in the Related Assets being transferred to
the Issuer on the applicable Transfer Date represents the
genuine, legal, valid and binding payment obligation in writing
of the related lessee, enforceable in accordance with its terms,
except only as such enforcement may be limited by bankruptcy,
insolvency or similar laws affecting the enforcement of
creditors' rights generally;
(7) No right of rescission, setoff, counterclaim or defense exists or
has been asserted in writing or threatened in writing with
respect to any Lease included in the Related Assets being
transferred to the Issuer on the applicable Transfer Date; the
exercise of any right under any such Lease will not render such
Lease unenforceable in whole or in part or subject to any such
right of rescission, setoff, counterclaim or defense;
(8) The servicing of each Lease included in the Related Assets and
the collection practices relating thereto have been lawful and in
accordance with the standards set forth in the Credit and
Collection Policy;
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(9) One of the following: (A) with respect to any Container
originally acquired by TAL subsequent to the Initial Closing
Date, the vendor's or manufacturer's invoice price of such
Container was representative of the market price of containers of
similar specifications with such vendor or manufacturer on the
date on which TAL placed the order for such Container with the
vendor or manufacturer thereof; or (B) with respect to any
Container not covered by clause (A), the purchase price allocated
to such Container by TAL was reflective of the market value (as
determined by appraisal) of such class of Container on the
Initial Closing Date;
(10) In the event that, contrary to the intention of the parties to
the Contribution and Sale Agreement, the transfer of the
Transferred Assets pursuant to the terms of the Contribution and
Sale Agreement is held not to constitute a "true sale" or a "true
contribution", the Contribution and Sale Agreement creates a
valid and continuing security interest (as defined in the UCC) in
the Transferred Assets in favor of the Issuer, which security
interest is prior to all other Liens other than Permitted
Encumbrances, and is enforceable as such against creditors of and
purchasers from TAL;
(11) As of the Transfer Date for a Transferred Container: (x) such
Transferred Container constitutes "goods" within the meaning of
the applicable UCC; (y) the related Lease constitutes "tangible
chattel paper" within the meaning of the UCC; and (z) the lease
receivables under such Lease constitute "accounts" or "proceeds"
of such Lease within the meaning of the UCC;
(12) TAL has caused the filing of all appropriate financing statements
or documents of similar import in the proper filing office in the
appropriate jurisdictions under applicable law in order to
perfect the Issuer's ownership interest in the Transferred
Assets. All financing statements filed or to be filed against TAL
in favor of the Issuer in connection with the Contribution and
Sale Agreement contain a statement to the following effect: "A
purchase of or any other security interest in any collateral
described in this financing statement will violate the rights of
the Issuer and the Indenture Trustee (as the pledgee of the
Issuer)"; and
(13) Aside from any original counterparts of such Lease included in
such Transferred Assets in the possession of the lessee, the only
other original counterpart(s) of such Lease is in the possession
of TAL or an affiliate of TAL. Such Lease (to the extent that
such Lease relates to the Transferred Containers) does not have
any marks or notations indicating that such Lease (to the extent
that such Lease relates to the Transferred Containers) has been
pledged, assigned or otherwise conveyed to any Person.
REPURCHASE OR SUBSTITUTION OF NON-CONFORMING TRANSFERRED ASSETS
Upon discovery by TAL or the Issuer (or any of their respective
successors or permitted assigns) of a breach of any of the Container
Representations and Warranties made by TAL on the related Transfer Date, the
party (including any such successor or permitted assign) discovering such breach
is required to give prompt written notice to the other party (and the Issuer is
required to give prompt notice thereof to each of the Indenture Trustee and the
Administrative Agent). If the Issuer (or its successors or permitted assigns)
reasonably determines that such breach materially and adversely affects the
interests of the Issuer or its successors and permitted assigns, then, unless
the breach shall have been cured, or waived by the Issuer, within thirty (30)
days after the receipt by TAL of written notice of such breach from the Issuer
(or its successors and permitted assigns), TAL shall, on or prior to such
thirtieth (30th) day, repurchase the applicable Container (and all Related
Assets with respect thereto) by paying the Warranty Purchase Amount to the
Issuer for deposit into the Trust Account and, upon deposit of such payment in
the Trust Account, such repurchase shall occur automatically without further
action by any Person. TAL will have the right (exercisable solely at its option)
at any time to transfer to the Issuer one or more Substitute Containers in
substitution for one or more Transferred Containers and Related Assets (such
Transferred Containers and Related Assets, collectively, a "Predecessor
Container") if (i) the Predecessor Container is required to be repurchased
pursuant to Contribution and Sale Agreement, (ii) after giving effect to such
substitution, no Asset Base Deficiency shall exist, (iii) the Substitute
Container, when considered with all other Eligible Containers, will satisfy the
Concentration Limits, and (iv) the ownership of such containers by the Issuer
will not result in an Early
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Amortization Event. If more than one Substitute Container is being transferred
on any date, the criteria set forth in clause (ii) above shall be determined on
an aggregate basis.
INDEMNIFICATION
The Contribution and Sale Agreement requires TAL to indemnify and hold
harmless the Issuer, its successors and assigns and their respective officers,
directors, employees and agents against any and all liabilities, losses,
damages, penalties, costs and expenses (including reasonable and documented
out-of-pocket costs of defense and legal fees (of one counsel), but excluding
(A) any special, consequential or punitive damages and (B) any damages on the
basis of lost profits) that may be incurred or suffered by such indemnified
party (except to the extent caused by the gross negligence, bad faith or willful
misconduct of the indemnified party) as a result of (i) a breach by TAL of any
of its covenants and agreements set forth in the Contribution and Sale
Agreement; (ii) any representation or warranty of TAL proven to have been false
or misleading in any material respect when made or deemed made in the
Contribution and Sale Agreement; (iii) any information certified in any
certificate or document delivered by TAL pursuant to the Contribution and Sale
Agreement not being true in any material respect as of the date of such
certificate or document (or, if earlier, the date set forth in such certificate
or document); (iv) any personal injury or property damage claim or action
arising out of or in connection with any of the Transferred Assets in connection
with any act or omission prior to the related Transfer Date; (v) any defense,
setoff or counterclaim arising out of any acts or omissions of TAL with respect
to any Transferred Assets transferred on or before the related Transfer Date; or
(vi) any attempt by any Person to void, rescind or set aside any transfer of
TAL's right, title and interest in the Transferred Assets to the Issuer as
provided in the Contribution and Sale Agreement under statutory provisions or
common law or equitable action, including any provision of the Bankruptcy Code
or other insolvency law, provided that the foregoing indemnity does not (and
shall not be deemed to) create recourse to TAL for the creditworthiness of any
lessee or, for avoidance of doubt, for losses due to a lessee's failure to make
payments under a Lease or for the uncollectibility of the Leases. The
indemnification obligations of TAL under the Contribution and Sale Agreement
survive the termination of the Contribution and Sale Agreement.
AMENDMENTS
The Contribution and Sale Agreement may be amended from time to time
by the Issuer and TAL only with the prior written consent of the Indenture
Trustee, acting at the direction of the Requisite Global Majority, and, under
certain circumstances, with the consent of each Series Enhancer adversely
affected thereby.
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DESCRIPTION OF THE SERIES 2006-1 NOTES AND THE INDENTURE
The Series 2006-1 Notes will be issued pursuant to the Series 2006-1
Supplement to the Indenture entered into by and between the Issuer and the
Indenture Trustee. The following summary describes certain provisions of the
Series 2006-1 Notes, the Indenture and the Series 2006-1 Supplement. This
summary does not purport to be complete and is subject to, and qualified in its
entirety by, reference to such agreements.
DESCRIPTION OF THE 2006-1 NOTES
Form of Series 2006-1 Notes
Except for the Series 2006-1 Notes acquired by an Institutional
Accredited Investor, the Series 2006-1 Notes will be represented by global
certificates in fully registered form without coupons, deposited on the date of
issuance of such Notes with DTC or its custodian and registered in the name of
DTC's nominee Cede & Co. or such other name as may be requested by an authorized
representative of DTC. The Series 2006-1 Notes sold to an Institutional
Accredited Investor will be issued in physical, certificated form. The Series
2006-1 Notes will be subject to certain restrictions on transfer set forth
herein. See "Restrictions on Transfers and Notice to Investors."
Rule 144A Notes
Series 2006-1 Notes sold in reliance on Rule 144A will be represented
by a single permanent global note in fully registered form, without coupons,
which will be deposited with DTC or its custodian, the Indenture Trustee or an
agent of the Indenture Trustee and registered in the name of DTC's nominee Cede
& Co. or such other name as may be requested by an authorized representative of
DTC. Series 2006-1 Notes evidenced by Rule 144A Notes will be subject to certain
restrictions on transfer set forth herein and in the Series 2006-1 Supplement
and will bear the legend regarding such restrictions described herein.
Regulation S Notes
Series 2006-1 Notes offered and sold outside the United States in
reliance on Regulation S will be represented by a single temporary global note
in fully registered form, without interest coupons, which will be deposited with
the Indenture Trustee or an agent of the Indenture Trustee and registered in the
name of DTC's nominee Cede & Co. or such other name as may be requested by an
authorized representative of DTC. Not earlier than the (i) 40th day after the
later of (a) the Closing Date or (b) the completion of the distribution of the
Series 2006-1 Notes, or (ii) the date on which the requisite certifications are
due to, and provided to, the Indenture Trustee (the later of clauses (i) or (ii)
is referred to as the "Distribution Compliance Date"), holders of beneficial
interests in each Temporary Regulation S Note may transfer such interests to a
single, permanent global note (a "Permanent Regulation S Note;" together with
the Regulation S Temporary Global Notes and the Rule 144A Notes, the "Global
Notes"). Beneficial interests in each Temporary Regulation S Note may be held
only through Euroclear or Clearstream; provided, however, that such interests
may be exchanged for interests in a Rule 144A Note or a Permanent Regulation S
Note in accordance with the certification requirements described below under "--
Distribution Compliance." Each Permanent Regulation S Note will be deposited
with the Indenture Trustee and registered in the name of Cede & Co., as nominee
of DTC.
A beneficial owner of an interest in a Temporary Regulation S Note may
receive payments in respect of the Temporary Regulation S Note only after
delivery to Euroclear or Clearstream, as the case may be, and upon delivery by
Euroclear or Clearstream, as the case may be, to the Indenture Trustee and Note
Registrar of required written certifications. The delivery by a beneficial owner
of the certification referred to above shall constitute such beneficial owner's
irrevocable instruction to Euroclear or Clearstream, as the case may be, to
arrange for the transfer of the beneficial owner's interest in the Temporary
Regulation S Note for a beneficial interest in the Permanent Regulation S Note
after the Distribution Compliance Date in accordance with the paragraph below.
After (i) the Distribution Compliance Date, and (ii) receipt by the
Indenture Trustee and Note Registrar of written instructions from Euroclear or
Clearstream, as the case may be, directing the Indenture Trustee and Note
Registrar to credit or cause to be credited to either Euroclear's or
Clearstream's depositary's account, as the case
74
may be, a beneficial interest in the Permanent Regulation S Note in a principal
amount not greater than that of the beneficial interest in the Temporary
Regulation S Note, the Indenture Trustee and Note Registrar shall instruct DTC
to reduce the principal amount of the Temporary Regulation S Note and increase
the principal amount of the Permanent Regulation S Note, by the principal amount
of the beneficial interest in the Temporary Regulation S Note to be so
transferred, and to credit or cause to be credited to the account of Euroclear,
Clearstream or persons who have accounts with DTC ("DTC Participants"), as the
case may be, a beneficial interest in the Permanent Regulation S Note having a
principal amount equal to the reduction in the principal amount of the Temporary
Regulation S Note.
Upon return of the entire principal amount of the Temporary Regulation
S Note to the Indenture Trustee in exchange for beneficial interests in the
Permanent Regulation S Note, the Indenture Trustee shall cancel the Temporary
Regulation S Note by perforation and shall forthwith destroy it.
No interest in the Regulation S Global Notes may be held by or
transferred to a United States Person except as described below.
Distribution Compliance
If the Series 2006-1 Noteholder of a beneficial interest in an
Permanent Regulation S Note deposited with DTC wishes at any time to exchange
its interest in the Permanent Regulation S Note for an interest in the Rule 144A
Note, or to transfer its interest in the Permanent Regulation S Note to a person
who wishes to take delivery thereof in the form of an interest in the Rule 144A
Note, the Series 2006-1 Noteholder may, subject to the rules and procedures of
Euroclear, Clearstream or DTC, as the case may be, give directions for the
Indenture Trustee and Note Registrar to exchange or cause the exchange, or
transfer or cause the transfer, of the interest for an equivalent beneficial
interest in the Rule 144A Note. Upon receipt by the Indenture Trustee and Note
Registrar of instructions from Euroclear or Clearstream (based on instructions
from depositaries for Euroclear and Clearstream) or DTC, as the case may be,
directing the Indenture Trustee and Note Registrar to credit or cause to be
credited a beneficial interest in the Rule 144A Note equal to the beneficial
interest in the Permanent Regulation S Note to be exchanged or transferred (such
instructions to contain information regarding the DTC Participant account to be
credited with the increase, and, with respect to an exchange or transfer of an
interest in the Permanent Regulation S Note, information regarding the DTC
Participant's account to be debited with the decrease), the Indenture Trustee
and Note Registrar shall instruct DTC to reduce the Permanent Regulation S Note
by the aggregate principal amount of the beneficial interest in the Permanent
Regulation S Note to be exchanged or transferred, and the Indenture Trustee
shall instruct DTC, concurrently with the reduction, to increase the principal
amount of the Rule 144A Note by the aggregate principal amount of the beneficial
interest in the Permanent Regulation S Note to be so exchanged or transferred,
and to credit or cause to be credited to the account of the person specified in
the instructions a beneficial interest in the Rule 144A Note equal to the
reduction in the principal amount of the Permanent Regulation S Note.
If a Series 2006-1 Noteholder holding a beneficial interest in the
Rule 144A Note wishes at any time to exchange its interest in the Rule 144A Note
for an interest in a Permanent Regulation S Note, or to transfer its interest in
the Rule 144A Note to a person who wishes to take delivery thereof in the form
of an interest in the Permanent Regulation S Note, the Series 2006-1 Noteholder
may, subject to the rules and procedures of DTC, give directions for the
Indenture Trustee and Note Registrar to exchange or cause the exchange or
transfer or cause the transfer of the interest for an equivalent beneficial
interest in the Permanent Regulation S Note. Upon receipt by the Indenture
Trustee and Note Registrar of (a) instructions given in accordance with DTC's
procedures from a DTC Participant directing the Indenture Trustee and Note
Registrar to credit or cause to be credited a beneficial interest in the
Permanent Regulation S Note in an amount equal to the beneficial interest in the
Rule 144A Note to be exchanged or transferred, (b) a written order given in
accordance with DTC's procedures containing information regarding the account of
the depositaries for Euroclear or Clearstream or another clearing agency
participant, as the case may be, to be credited with the increase and the name
of the account, and (c) required written certificates, given by the Series
2006-1 Noteholder and the proposed transferee of the interest, the Indenture
Trustee and Note Registrar shall instruct DTC to reduce the Rule 144A Note by
the aggregate principal amount of the beneficial interest in the Rule 144A Note
to be so exchanged or transferred and the Indenture Trustee and Note Registrar
shall instruct DTC, concurrently with the reduction, to increase the principal
amount of the Permanent Regulation S Note by the aggregate principal amount of
the beneficial interest in the Rule 144A Note to be so exchanged or transferred,
75
and to credit or cause to be credited to the account of the person specified in
the instructions a beneficial interest in the Permanent Regulation S Note equal
to the reduction in the principal amount of the Rule 144A Note.
Notwithstanding anything to the contrary herein, an Initial Purchaser
may transfer beneficial interests in the Temporary Regulation S Note held by it
for interests in the Rule 144A Note only after delivery by such Initial
Purchaser of instructions to DTC for the transfer. Upon receipt of such
instructions, the Indenture Trustee and Note Registrar shall instruct DTC to
reduce the principal amount of the Temporary Regulation S Note to be so
transferred and shall instruct DTC to increase the principal amount of the Rule
144A Note and credit or cause to be credited to the account of such Initial
Purchaser a beneficial interest in the Rule 144A Note having a principal amount
equal to the amount by which the principal amount of the Temporary Regulation S
Note was reduced upon the transfer pursuant to the instructions provided in the
first sentence of this paragraph.
Global Notes and Definitive Notes may be exchanged or transferred for
one another only in accordance with such procedures that are substantially
consistent with the provisions of the three immediately preceding paragraphs
(including the certification requirements intended to ensure that the exchanges
or transfers comply with Rule 144 or Regulation S, as the case may be) and as
may be from time to time adopted by the Indenture Trustee.
Book-Entry Registration
Upon the issuance of the Series 2006-1 Notes, DTC or its custodian
will credit, on its book-entry registration and transfer system, the respective
principal amounts of the individual beneficial interests represented by such
Global Notes to the accounts of persons who have accounts with DTC. Ownership of
beneficial interests in a Global Note will be limited to DTC Participants or
persons who hold interests through DTC Participants. Ownership of beneficial
interests in the Global Notes will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC (with respect
to interests of DTC Participants) and the records of DTC Participants (with
respect to interests of persons other than DTC Participants). Owners of
beneficial interest will not receive written confirmation from DTC of their
purchase.
To facilitate subsequent transfers, all Series 2006-1 Notes deposited
by DTC Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. or such other name as may be requested an authorized
representative of DTC. The deposit of Series 2006-1 Notes with DTC and their
registration in the name of Cede & Co. or such other nominee do not effect any
change in beneficial ownership. DTC has no knowledge of the actual owners of
beneficial interest of the Series 2006-1 Notes; DTC's records reflect only the
identity of the DTC Participant to whose accounts such Series 2006-1 Notes are
credited, which may or may not be the owners of beneficial interest. The DTC
Participants and indirect participants will remain responsible for keeping
account of their holdings on behalf of their customers.
As long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or Series 2006-1 Noteholder represented by such Global Note for all
purposes under the Indenture, the Series 2006-1 Supplement and the Series 2006-1
Notes. Unless (a) DTC notifies the Issuer that it is unwilling or unable to
continue as depository for a Global Note, (b) the Issuer elects to terminate the
book-entry system for the Series 2006-1 Notes, or (c) a Manager Default has
occurred and the Control Party certifies that continuation of a book-entry
system through DTC (or its successor) is no longer in the best interests of the
Series 2006-1 Noteholders, owners of beneficial interests in the Global Note
will not be entitled to have any portion of such Global Note registered in their
names, will not receive or be entitled to receive physical delivery of Series
2006-1 Notes in definitive form and will not be considered to be the owners or
Series 2006-1 Noteholders under the Indenture, the Series 2006-1 Supplement or
the Series 2006-1 Notes. Owners of beneficial interest are, however, expected to
receive written confirmation providing details of the transaction, as well as
periodic statements of their holdings, from the direct or indirect participants
through which the owners of beneficial interest entered into the transaction. In
addition, no beneficial owner of an interest in a Global Note will be able to
transfer that interest except in accordance with DTC's applicable procedures (in
addition to those under the Series 2006-1 Supplement and, if applicable, those
of Clearstream and Euroclear).
Investors may hold their interest in a Regulation S Global Note
through Clearstream or Euroclear, if they are participants in such systems, or
indirectly through organizations that are participants in such systems. After
the Distribution Compliance Date, investors also may hold such interests through
organizations other than Clearstream
76
and Euroclear that are DTC Participants. Clearstream and Euroclear will hold
interests in a Regulation S Global Note on behalf of their participants through
customers' securities accounts in their respective names on the books of their
respective depositaries, which in turn will hold such interests in a Regulation
S Global Note in customers' accounts in the depositaries' names on the books of
DTC. Citibank, N.A. will initially act as depositary for Clearstream and
Euroclear Bank S.A./N.V. will initially act as depositary for Euroclear.
Investors may hold their interests in a Rule 144A Note directly through DTC, if
they are DTC Participants, or indirectly through DTC Participants.
Beneficial owners of an interest in a Global Note may experience some
delay in their receipt of principal and interest distributions since such
distributions will be forwarded to DTC and DTC will then forward such
distributions to the DTC Participants, which in turn will forward them to their
participants and so on until the beneficial owners receive such payments.
Neither the Indenture Trustee nor the Issuer will have any responsibility for or
liability in connection with such process once the payments have been sent to
DTC. Neither the Issuer nor the Indenture Trustee will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the Global Notes or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Subject to compliance with the transfer restrictions applicable to the
Series 2006-1 Notes described above, cross-market transfers between DTC, on the
one hand, and directly or indirectly through Clearstream or Euroclear
participants, on the other hand, will be effected through DTC in accordance with
DTC rules on behalf of Clearstream or Euroclear, as the case may be, by its
respective depositary; however, such cross-market transactions will require
delivery of instructions to Clearstream or Euroclear, as the case may be, by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (Brussels time). Clearstream or Euroclear, as
the case may be, will, if the transaction meets its settlement requirements,
deliver instructions to its respective depositary to take action to effect final
settlement on its behalf by delivering or receiving interests in the applicable
Regulation S Global Note in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Clearstream participants and Euroclear participants may not deliver instructions
directly to the depositaries for Clearstream or Euroclear.
Because of time zone differences, the securities account of a
Clearstream or Euroclear participant purchasing an interest in a Global Note
from a DTC Participant will be credited during the securities settlement
processing day (which must be a business day for Clearstream or Euroclear, as
the case may be) immediately following the DTC settlement date, and such credit
of any transactions in interests in a Global Note settled in Clearstream or
Euroclear as a result of sales of interests in a Global Note by or through a
Clearstream or Euroclear participant to a DTC Participant will be received with
value on the DTC settlement date, but will be available in the relevant
Clearstream or Euroclear cash account only as of the Business Day following such
settlement in DTC.
All payments of principal and interest will be made by the Issuer in
immediately available funds or the equivalent, as long as DTC continues to make
its Same-Day Funds Settlement System available to the Issuer.
Secondary trading in long-term certificates and debentures of
corporate issuers generally is settled in clearinghouse or next day funds. In
contrast, the Series 2006-1 Notes will trade in DTC's Same-Day Funds Settlement
System, and, therefore, any trading activity in the Series 2006-1 Notes will be
required by DTC to settle in immediately available funds. No assurance can be
given as to the effect, if any, of settlement in immediately available funds on
trading activity in the Series 2006-1 Notes.
Redemption proceeds, distributions, and dividend payments on the
Series 2006-1 Notes will be made to Cede & Co., or such other nominee as may be
requested by an authorized representative of DTC. DTC's practice is to credit
DTC Participants' accounts, upon DTC's receipt of funds and corresponding detail
information from the Issuer or the Administrative Agent on a Payment Date in
accordance with their respective holdings shown on DTC's records. Payments by
DTC Participants to owners of beneficial interests will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such DTC Participant and not of DTC or its
nominee, the Administrative Agent, or the Issuer, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
redemption proceeds, distributions, and dividend payments to Cede & Co., or such
other nominee as may be requested by an authorized representative of DTC, is the
responsibility of the Issuer or the
77
Administrative Agent. Disbursement of such payments to DTC Participants will be
the responsibility of DTC Participants and indirect participants. Conveyance of
notices and other communications by DTC to DTC Participants, by DTC Participants
to indirect participants, and by DTC Participants and indirect participants to
owners of beneficial interest will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Redemption notices shall be sent to DTC. If less than all of the
Notes are being redeemed, DTC's practice is to determine by lot the amount of
the interest of each DTC Participant to be redeemed.
Transfers between DTC Participants will be effected in accordance with
DTC's rules and will be settled in same-day funds. The laws of some states
require that certain persons take physical delivery of securities in definitive
form. Consequently, the ability to transfer beneficial interests in a Global
Note to such persons may be limited. As DTC can only act on behalf of DTC
Participants, who in turn act on behalf of indirect participants and certain
banks, the ability of a person having a beneficial interest in a Global Note to
pledge such interest to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interest, may be affected
by the lack of a physical certificate of such interest.
DTC has advised the Issuer that DTC will take any action permitted to
be taken by a Series 2006-1 Noteholder (including the presentation of the Series
2006-1 Notes for exchange as described below) only at the direction of one or
more DTC Participants to whose DTC account interests in the Global Notes are
credited, and only in respect of such portion of the aggregate principal amount
of the Series 2006-1 Notes as to which each such direct participant has given
such direction. However, if there is a Manager Default and the Control Party of
the Series 2006-1 Notes advises the Indenture Trustee and DTC, through DTC
Participants, in writing that continuation of a book-entry system through DTC
(or a successor) is no longer in the best interests of such holders of the
Series 2006-1 Notes, the Global Notes will be surrendered by DTC to the
Indenture Trustee, without charge and the Indenture Trustee will authenticate
and deliver definitive certificates in exchange for such Global Notes. The
definitive certificates shall be registered in such names as DTC shall direct in
writing and will not be issuable in bearer form. The Definitive Notes, if
representing interests in the Series 2006-1 Notes, will bear a legend as set
forth in this Preliminary Offering Memorandum and in the Indenture.
DTC may discontinue providing its services as security depository with
respect to the Global Notes at any time by giving reasonable notice to the
issues or the Administrative Agent. Under such circumstances, in the event that
a successor securities depository is not obtained, the Global Notes are required
to be printed and delivered.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the UCC and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the post-trade settlement of sales and other
securities transactions among participants through electronic computerized
book-entry transfers and pledges between the accounts of its participants,
thereby eliminating the need for physical movement of certificates. Direct
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Indirect access to the
DTC system is available to others such as banks, brokers, dealers, trust
companies and clearing corporations that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly.
Neither DTC nor Cede & Co. (or any other DTC nominee) will consent or
vote with respect to the Series 2006-1 Notes unless authorized by a DTC
Participant in accordance with DTC's procedures. Under its usual procedures, DTC
mails an omnibus proxy to the Issuer as soon as possible after the record date
(identified in a listing attached to the omnibus proxy). The omnibus proxy
assigns Cede & Co.'s consenting or voting rights to those DTC Participants to
whose accounts the Series 2006-1 Notes are credited on the record date
(identified in a listing attached to the omnibus proxy).
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of interests in each Global Note
among participants of DTC, Clearstream and Euroclear, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Issuer, the Indenture
Trustee or the Initial Purchasers will have any responsibility for the
performance
78
by DTC, Clearstream or Euroclear, or their respective participants or indirect
participants, of their respective obligations under the rules and procedures
governing their operations.
The information in this section concerning DTC and DTC's book entry
system has been obtained from sources that the Issuer believes to be reliable,
but the Issuer takes no responsibility for the accuracy thereof.
DIAGRAM OF PAYMENT PRIORITIES FOR THE NOTES PRIOR TO AN EVENT OF DEFAULT OR
EARLY AMORTIZATION EVENT
If neither an Early Amortization Event nor an Event of Default is then
continuing, the Available Distribution Amount then on deposit in the Trust
Account shall be distributed to the following persons and in the following
priority:
------------------------------------------------------
1 Indenture Trustee Fees
------------------------------------------------------
|
------------------------------------------------------
2 Administrative Agent Fees
------------------------------------------------------
|
------------------------------------------------------
3 Management Fees and Excess Deposits in Trust Account
------------------------------------------------------
|
------------------------------------------------------
4 Reimbursement of Unpaid Manager Advances
------------------------------------------------------
|
------------------------------------------------------
5 Issuer's Expenses
------------------------------------------------------
|
------------------------------------------------------
6 Series Enhancer Premiums
------------------------------------------------------
|
------------------------------------------------------
7 Priority Payments and Hedge Payments
------------------------------------------------------
|
------------------------------------------------------
8 Restricted Cash Amount
------------------------------------------------------
|
------------------------------------------------------
9 Minimum Principal Payment Amount
------------------------------------------------------
|
------------------------------------------------------
10 Scheduled Principal Payment Amount
------------------------------------------------------
|
------------------------------------------------------
11 Supplemental Principal Payment Amount
------------------------------------------------------
|
------------------------------------------------------
12 On a pro rata basis, (a) Other Hedge Payments
and Termination Payments (except Termination
Payments caused by Hedge Counterparty's breach)
and (b) other Noteholder and Series Enhancer
interest and indemnity amounts and Excess
Indenture Trustee Fees
------------------------------------------------------
|
------------------------------------------------------
13 On a pro rata basis, unpaid Hedge Payments
------------------------------------------------------
|
------------------------------------------------------
14 Indemnity Payments to Officers and Directors
------------------------------------------------------
|
------------------------------------------------------
15 Excess Cash Distributed to Issuer
------------------------------------------------------
For a more detailed description, see "-- Flow of Funds" below.
INTEREST PAYMENTS ON THE SERIES 2006-1 NOTES
Interest will be due and payable on each Series 2006-1 Note on each
Payment Date in an amount equal to the Series 2006-1 Note Interest Payment. See
"Summary -- Interest Payments on the Series 2006-1 Notes" and"Description of the
Series 2006-1 Notes and the Indenture -- Flow of Funds."
PRINCIPAL PAYMENTS ON THE SERIES 2006-1 NOTES
On each Payment Date, the Issuer will, to the extent the Available
Distribution Amount is sufficient and in accordance with the payment priorities
set forth in the Indenture, pay the principal balance of the Series 2006-1 Notes
in an amount equal to the Minimum Principal Payment Amount for the Series 2006-1
Notes and the Scheduled Principal Payment Amount for the Series 2006-1 Notes.
See "Summary -- Principal Payments on the Series 2006-1 Notes" and "Description
of the Series 2006-1 Notes and the Indenture -- Flow of Funds."
SERIES ENHANCEMENT
The Series 2006-1 Notes will be insured by the Policy pursuant to the
terms set forth therein. All amounts received under the Policy shall be used
solely for the payment when due to the Series 2006-1 Noteholders of the Insured
Amounts.
On each Determination Date, the Indenture Trustee will determine, with
respect to the immediately following Payment Date, based solely on the
information contained in the Manager Report, whether there exists a
79
Deficiency Amount. If there exists a Deficiency Amount which is an Insured
Amount under the Policy with respect to a Payment Date, the Indenture Trustee
will complete a notice in the form attached to the Policy and submit such claim
for such Insured Amount to the Series Enhancer in accordance with the terms of
the Policy on the Determination Date preceding such Payment Date. Any payment
made by the Series Enhancer under the Policy shall be applied solely to the
payment of principal or interest (other than Default Fees) on the Series 2006-1
Notes subject to the terms of the Policy.
The Indenture Trustee will (i) receive Insured Amounts as attorney in
fact of each of the Series 2006-1 Noteholders and (ii) disburse such Insured
Amounts directly to the Series 2006-1 Noteholders. The Issuer will agree for the
benefit of the Series Enhancer (and each Series 2006-1 Noteholder, by acceptance
of its Series 2006-1 Notes, will be deemed to have agreed) that, without
limiting any other rights of the Series Enhancer, to the extent the Series
Enhancer pays, or causes to be paid, Insured Amounts, either directly or
indirectly (as by paying through distribution to the Indenture Trustee), to the
Series 2006-1 Noteholders, the Series Enhancer will be entitled to receive the
related Reimbursement Amount as described under "Summary -- Distributions from
the Series 2006-1 Series Account" in lieu of the Series 2006-1 Noteholders and
will be subrogated to their payment rights thereunder.
Any payment with respect to the principal of or interest on the Series
2006-1 Notes which is made with monies received pursuant to the terms of the
Policy shall not be considered payment by the Issuer of the Series 2006-1 Notes,
shall not discharge the Issuer in respect of its obligation to make such
payment, and shall not result in the payment of, or the provision for the
payment of, the principal of or interest on, the Series 2006-1 Notes for
purposes of the Series 2006-1 Supplement or of the Indenture; provided, however,
that notwithstanding any failure of the Issuer to pay any such amounts, to the
extent such payment is made with monies received pursuant to the terms of the
Policy, the Series 2006-1 Noteholders may not institute any proceeding with
respect to the Series 2006-1 Supplement or any other Transaction Document, or
exercise any other remedy thereunder without the prior written consent of the
Series Enhancer. The Issuer and the Indenture Trustee will acknowledge that,
without the need for any further action on the part of the Series Enhancer, the
Issuer, the Indenture Trustee or the Note Registrar, (i) to the extent the
Series Enhancer makes payments, directly or indirectly, on account of principal
of, or interest on, the Series 2006-1 Notes to the Series 2006-1 Noteholders,
the Series Enhancer will be fully subrogated to the rights of such Series 2006-1
Noteholders to receive such principal and interest (including Default Fees) from
the Issuer, and (ii) the Series Enhancer shall be paid such principal and
interest in its capacity as partial subrogee of the Series 2006-1 Noteholders,
but only from the sources and in the manner provided in the Series 2006-1
Supplement for the payment of such principal and interest.
As long as no Series Enhancer Default shall have occurred and is
continuing, the Series Enhancer will have the right of prior approval of
amendments, waivers or supplements to the Series 2006-1 Transaction Documents
available to the Series 2006-1 Noteholders thereunder and of the exercise of any
option, vote, right, power or the like available to the Series 2006-1
Noteholders thereunder. Nothing contained in this paragraph shall vitiate the
right of a Series 2006-1 Noteholder to consent to any amendment of the type set
forth in Section 1002(a) of the Indenture.
In the event that a Preference Amount is payable under the Policy, the
Indenture Trustee will so notify the Series Enhancer, will comply with the
provisions of the Policy to obtain payment by the Series Enhancer of such
Preference Amount at the earliest possible date, and will, at the time it
provides notice to the Series Enhancer, notify the Series 2006-1 Noteholders by
mail that, in the event that any Series 2006-1 Noteholder's payment is so
recoverable, the Indenture Trustee on behalf of such Series 2006-1 Noteholder
will be entitled to payment thereof pursuant to the terms of the Policy.
Without limiting any rights of the Series Enhancer under the Policy or
any other Series 2006-1 Transaction Document, and without modifying or otherwise
affecting any terms or conditions of the Policy, each Series 2006-1 Noteholder,
by its purchase of the Series 2006-1 Notes, and the Indenture Trustee will agree
that, the Series Enhancer (so long as no Series Enhancer Default exists) may at
any time during the continuation of any proceeding relating to a Preference
Amount direct all matters relating to such Preference Amount, including, without
limitation, (i) the direction of any appeal of any order relating to any
Preference Amount and (ii) the posting of any surety, supersedeas or performance
bond pending any such appeal. In addition, and without limitation of the
foregoing, the Series Enhancer will be subrogated to the rights of the Indenture
Trustee and each such Series 2006-1 Noteholder, in the conduct of any proceeding
with respect to any such Preference Amount, including, without limitation, all
rights
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of any party to an adversary proceeding action with respect to any order issued
in connection with any such Preference Amount. Insured Amounts paid by the
Series Enhancer to the Indenture Trustee will be received by the Indenture
Trustee, as agent to the Series 2006-1 Noteholders. The Indenture Trustee, as
agent to the Series 2006-1 Noteholders, will acknowledge and affirm in the
Series 2006-1 Supplement that the Series Enhancer will be fully subrogated to
the rights of the Series 2006-1 Noteholders to any monies paid or payable in
respect of the Series 2006-1 Notes to the extent of any payment made by the
Series Enhancer pursuant to the terms of the Policy, and any interest (including
Repayment Amounts consisting of interest on any Repayment Amount) due thereon.
Notwithstanding the foregoing, in the event that payments on the
Series 2006-1 Notes are accelerated, such accelerated payments will not be
covered by the Series Enhancer under the Policy, unless the Series Enhancer
shall elect to make such accelerated payments in accordance with and subject to
the terms of the Policy.
The Indenture Trustee will be entitled to enforce on behalf of the
Series 2006-1 Noteholders the obligations of the Series Enhancer under the
Policy. The Series 2006-1 Noteholders are not entitled to make any claims under
the Policy or institute proceedings directly against the Series Enhancer.
VOLUNTARY PRINCIPAL PREPAYMENTS
So long as no Early Amortization Event is then continuing, the Issuer
may, from time to time, make an optional Prepayment of principal of the Notes of
a Series at the times, in the amounts and subject to the conditions and
limitations set forth in the Supplement for the Series of Notes to be prepaid.
In the event that the Issuer makes a Prepayment of less than all of the
aggregate unpaid principal balance of any Series of Term Notes in accordance
with the provisions of the Indenture, then the Issuer will promptly thereafter
recalculate the Minimum Principal Payment Amount and Scheduled Principal Payment
Amount for each future Payment Date such that, after giving effect to such
adjustment, the Minimum Principal Payment Amounts and Scheduled Principal
Payment Amounts for all subsequent Payment Dates for such Series of Term Notes
shall be reduced by an amount equal to the quotient of (i) the aggregate amount
of the Prepayment actually received by the Noteholders of such Series divided by
(ii) the number of remaining Payment Dates to and including, (A) the Legal Final
Maturity Date (with respect to the Minimum Principal Payment Amount) or (B) the
Expected Final Maturity Date (with respect to the Scheduled Principal Payment
Amount), for such Series of Notes. See "Summary -- Principal Payments on the
Series 2006-1 Notes" for a description of principal Prepayments on the Series
2006-1 Notes. The Issuer will agree not to make voluntary Prepayments on the
Series 2006-1 Notes prior to the Payment Date in April 2008; provided that this
shall not restrict repayments of principal on the Series 2006-1 Notes
contemplated under "Description of the Series 2006-1 Notes and the Indenture --
Flow of Funds."
VOTING RIGHTS
Subject to certain exceptions, the Series Enhancer (or, if a Series
Enhancer Default is continuing, Holders of Series 2006-1 Notes representing in
aggregate more than 50% of the Aggregate 2006-1 Note Principal Balance) may take
certain actions, or direct certain actions to be taken, under the Series 2006-1
Supplement. However, under certain circumstances, the consent or approval of the
Control Party or Control Parties representing more than a specified percentage
of the Existing Commitments of all Series of Outstanding Notes (i.e., the
Requisite Global Majority) will be required to direct certain actions, including
requiring the appointment of a successor manager following a Manager Default and
amending the Indenture under certain circumstances. See "Summary - Requisite
Global Majority" for a summary of the procedures to determine the Requisite
Global Majority.
THE TRUST ACCOUNT
In accordance with the Indenture, the Issuer has established and
maintains a Trust Account at the Corporate Trust Office in trust for the
Indenture Trustee, for the benefit of the Holders of all Outstanding Notes, each
Hedge Counterparty and each related Series Enhancer. The Issuer shall cause TAL
to deposit into the Trust Account all amounts representing Estimated Net
Operating Income in respect of any Managed Container (at the times and in the
amounts specified in the Management Agreement), Manager Advances, all amounts
received by the Issuer pursuant to the terms of any Hedge Agreements, and other
payments specified to be deposited therein pursuant to the Indenture and the
other Transaction Documents. As long as no Manager Default shall have occurred
and been
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continuing for a period in excess of thirty (30) days, TAL may deduct a pro rata
portion of the Management Fee from each such deposit in accordance with the
terms of the Management Agreement.
RESTRICTED CASH ACCOUNT AND SERIES ACCOUNTS
The Issuer has established and maintains at the Corporate Trust Office
of the Indenture Trustee, in the name of the Issuer, a Restricted Cash Account,
which Restricted Cash Account has been pledged to the Indenture Trustee for the
benefit of the Holders of Outstanding Notes of each Series and each related
Series Enhancer for such Series. On the Issuance Date for the Series 2006-1
Notes, the Issuer will have deposited, or have caused to be deposited, the
Restricted Cash Amount in the Restricted Cash Account and additional amounts
will be deposited in the Restricted Cash Account in accordance with the
Indenture. Any and all monies on deposit in the Restricted Cash Account shall be
invested in Eligible Investments in accordance with the Indenture and shall be
distributed in accordance with the Indenture.
On each Payment Date, the Indenture Trustee shall, in accordance with
the Manager Report (or, in the absence of any Manager Report, in accordance with
written instructions from the Administrative Agent), deposit in the Trust
Account for distribution in accordance with "Description of the Series 2006-1
Notes and the Indenture -- Flow of Funds" the excess, if any, of (i) the amounts
then on deposit in the Restricted Cash Account (after giving effect to any
withdrawals therefrom on such Payment Date), over (ii) an amount equal to the
Restricted Cash Amount for such Payment Date. On the Legal Final Maturity Date
for the Series with the latest Legal Final Maturity Date, any remaining funds in
the Restricted Cash Account will be deposited in the Trust Account and, subject
to the limitations set forth in the relevant Supplement, distributed in
accordance with "Description of the Series 2006-1 Notes and the Indenture --
Flow of Funds."
The Issuer has established and maintains with the Indenture Trustee,
in the name of the Issuer, for each Series, a Series Account at the Corporate
Trust Office for the benefit of the Holders of Outstanding Notes of each Series
and each related Series Enhancer for such Series. On each Determination Date,
the Indenture Trustee will, in accordance with the Manager Report (or, in the
absence of any Manager Report, in accordance with written instructions from the
Administrative Agent), withdraw from the Restricted Cash Account and deposit
into the Series Account for each Series an amount equal to the Deficiency Amount
(determined after giving effect to all other deposits to the Series Account for
such Series (other than funds transferred from the Restricted Cash Account)) on
or prior to such Determination Date. Such amounts transferred to the Series
Account pursuant to the Indenture and the related Supplement may only be used to
pay amounts specified in the definition of "Permitted Payment Date Withdrawals."
If such amount on deposit in the Restricted Cash Account on a Determination Date
is not sufficient to pay in full the aggregate Permitted Payment Date
Withdrawals, then the amount of funds then available in the Restricted Cash
Account will be allocated among the various Series on a pro rata basis in
proportion to the amount of their respective Permitted Payment Date Withdrawals.
TEMPORARY LOSS ACCOUNT
The Issuer shall establish on or prior to the Restatement Effective
Date, and shall maintain so long as any Outstanding Obligation remains unpaid,
the Temporary Loss Account in the name of the Issuer with separate sub-accounts
for proceeds of Casualty Losses and for proceeds of sales of Collateral pursuant
to the Indenture, which account shall be held by the Indenture Trustee for the
benefit of the Noteholders of all Series of Notes and each Series Enhancer
pursuant to the terms of the Indenture and the related Supplements. Any and all
monies remitted by the Issuer to the Temporary Loss Account, together with any
Eligible Investments in which such monies are or will be invested or reinvested,
shall be held in the Temporary Loss Account. Upon receipt by the Issuer of
proceeds of Casualty Losses or such sales of Collateral, in each case giving
rise to any Temporary Loss Amount, the Issuer shall deposit, or cause to be
deposited, the Temporary Loss Amount into the Temporary Loss Account. Any and
all monies remitted by the Indenture Trustee to the Temporary Loss Account shall
be invested in Eligible Investments in accordance with the Indenture and shall
be disbursed in accordance with "Description of the Series 2006-1 Notes and the
Indenture -- Flow of Funds."
Without limiting the investment of such funds in Eligible Investments
discussed above under "-- Temporary Loss Account," all funds on deposit in the
Temporary Loss Account shall be held or applied as follows:
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(i) if an Early Amortization Event or an Event of Default has occurred
and is continuing on any Payment Date, deposited into the Trust Account and
applied in accordance with "Description of the Series 2006-1 Notes and the
Indenture -- Flow of Funds After an Early Amortization Event or an Event of
Default and Prior to an Acceleration of the Notes" or "-- Flow of Funds After an
Acceleration of the Notes Following an Event of Default," as applicable;
(ii) if no Early Amortization Event or Event of Default has occurred
on the date of such application, then, at the sole discretion of the Issuer,
funds on deposit in the Temporary Loss Account may be applied (A) as long as no
event or condition has occurred that with the giving of notice or the passage of
time or both, would constitute either an Early Amortization Event or Event of
Default, to purchase Containers in accordance with the Contribution and Sale
Agreement that upon transfer to the Issuer will be Eligible Containers, or (B)
to make prepayments of Outstanding Obligations on any Series of Notes;
(iii) investment earnings of funds on deposit in the Temporary Loss
Account shall be deposited into the Trust Account and applied in accordance with
"Description of the Series 2006-1 Notes and the Indenture -- Flow of Funds;" and
(iv) in all other circumstances, funds on deposit in the Temporary
Loss Account will remain in the Temporary Loss Account.
Other than in accordance with the provisions of clauses (i) through
(iv) above, amounts on deposit in the Temporary Loss Account will not be
available to pay Outstanding Obligations prior to the Legal Final Maturity Date
for the Series with the latest Legal Final Maturity Date. In the event that
funds on deposit in the Temporary Loss Account are applied to the repayment of
Outstanding Obligations on any Series of Notes in accordance with the provisions
of clause (ii)(B) above, then all future Minimum Targeted Principal Balances and
Scheduled Targeted Principal Balances will be adjusted in an equal amount such
that any remaining principal on the date of such prepayment will be payable on a
straight-line basis to the Legal Final Maturity Date and the Expected Final
Maturity Date, respectively, of such Series.
On the Legal Final Maturity Date for the Series with the latest Legal
Final Maturity Date, any remaining funds in the Temporary Loss Account shall be
deposited in the Trust Account and distributed in accordance with "Description
of the Series 2006-1 Notes and the Indenture -- Flow of Funds."
INVESTMENT OF MONEY HELD IN ACCOUNTS
The Indenture Trustee will, at the direction of the Issuer, invest
amounts in the Trust Account, the Restricted Cash Account, the Temporary Loss
Account and any Series Account in Eligible Investments that shall mature or
shall be payable on demand not later than the Business Day immediately preceding
the next succeeding Payment Date. Any earnings from such investments will be
retained in the respective account to be distributed in accordance with the
terms of the Indenture or any related Supplement. The Indenture Trustee shall
not be liable or responsible for losses on any investments made by it pursuant
to the terms of the Indenture.
FLOW OF FUNDS
On each Determination Date, the Issuer will cause TAL, pursuant to the
Management Agreement, to prepare and deliver to the Indenture Trustee all
calculations and allocations required by the Manager Report. On each Payment
Date, the Indenture Trustee, based on the Manager Report, will distribute funds
in an amount equal to the Available Distribution Amount in accordance with the
order of priority set forth below. In the absence of any Manager Report, the
Indenture Trustee will distribute all funds available for distribution in
accordance with written instructions from the Administrative Agent (with a copy
to the Issuer, each Series Enhancer and each Hedge Counterparty) and will hold
until delivery of such Manager Report (i) any funds otherwise payable due to the
Issuer and (ii) any other amounts which the Administrative Agent is unable to
ascertain or allocate to a specific payment priority set forth herein.
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FLOW OF FUNDS PRIOR TO AN EARLY AMORTIZATION EVENT AND AN EVENT OF
DEFAULT
If neither an Early Amortization Event nor an Event of Default is then
continuing, the Available Distribution Amount then on deposit in the Trust
Account shall be distributed to the following persons and in the following
priority:
(1) To the Indenture Trustee, all the Indenture Trustee's Fees then due and
payable for all Series then Outstanding (subject to the per annum dollar
limitation in the Indenture);
(2) To the Administrative Agent, the Administrative Agent Fees then due and
payable;
(3) To the Manager, an amount equal to the sum of: (i) the Management Fee
then due and payable, (ii) the amount of any Management Fee Arrearage, and
(iii) any Excess Deposit then due and payable, but in each case only to the
extent not previously withheld by the Manager in accordance with the terms
of the Transaction Documents;
(4) To the Manager, reimbursement for any Manager Advances;
(5) To the Persons entitled thereto: (i) any auditing, accounting and
related fees then due and payable which are classified as an Issuer Expense
and (ii) any other Issuer Expenses then due and payable, so long as the
aggregate amount paid pursuant to this clause (5) in any calendar year
would not exceed one million dollars ($1,000,000);
(6) To each Series Enhancer, pro rata based on the amount of Premiums then
due and payable, the amount of any Premium then due and payable pursuant to
the terms of each applicable Enhancement Agreement;
(7) To each of the following on a pro rata basis: (i) to each Series
Account for each Series of Notes then Outstanding, an amount equal to the
Priority Payments for each such Series and (ii) to each Hedge Counterparty,
the amount of any scheduled payments (but excluding termination payments)
then due and payable pursuant to the terms of any Hedge Agreement then in
effect, provided that if sufficient funds do not exist to pay in full all
such Priority Payments, such amounts shall be allocated among all Series of
Notes in the same proportion as the ratio of (x) the Priority Payments of a
particular Series of Notes then Outstanding on such Payment Date to (y) the
sum of the Priority Payments for all Series of Notes then Outstanding on
such Payment Date;
(8) To the Restricted Cash Account, an amount sufficient so that the total
amount on deposit therein, is equal to the Restricted Cash Amount for such
Payment Date;
(9) To each Series Account for each Series of Notes then Outstanding, all
Minimum Principal Payment Amounts for each such Series;
(10) To each Series Account for each Series of Notes then Outstanding, all
Scheduled Principal Payment Amounts for each such Series;
(11) To each Series Account for each Series of Notes then Outstanding, an
amount equal to the Supplemental Principal Payment Amounts for each Series
(subject to the terms of the Indenture);
(12) To each of the following on a pro rata basis: (i) to each Hedge
Counterparty, the amount of any unpaid payments then due and payable
(including termination payments but excluding (x) any payments made
pursuant to clause (7) above and (y) termination payments resulting from
the breach of the applicable Hedge Agreement by such Hedge Counterparty)
pursuant to the terms of any Hedge Agreement then in effect, (ii) to the
Noteholders and any Series Enhancer, any interest payments on the Notes not
paid pursuant to clause (7) above and any Indemnity Amounts or other
amounts then due and payable to the Noteholders and each Series Enhancer
and (iii) to the Indenture Trustee, any Indenture Trustee's Fees then due
and payable, after giving effect to the payment made pursuant to clause (1)
above but not subject to the per annum dollar limitation in the Indenture;
(13) To each Hedge Counterparty, on a pro rata basis, the amount of any
unpaid payments then due and payable (including termination payments
resulting from the breach of the applicable Hedge
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Counterparty but excluding any payments made pursuant to clause (7) or (12)
above) pursuant to the terms any Hedge Agreement then in effect;
(14) To each of the following on a pro rata basis: (i) to the Issuer, the
amount of any indemnity payments payable to the officers, directors and/or
managers of the Issuer required to be made by the Issuer, and (ii) to the
Manager, the amount of any officer and director indemnity payments required
to be made by the Manager; and
(15) To the Issuer, any remaining Available Distribution Amount which may
be used by the Issuer for any purpose, including, without limitation,
general corporate purposes, the distribution of dividends, repayment of
debt, paying fees and expenses or any other purpose in the sole discretion
of the Issuer.
See "-- Allocation of Funds among Series and Classes" for a description of the
payment priorities among various Series.
FLOW OF FUNDS AFTER AN EARLY AMORTIZATION EVENT OR AN EVENT OF
DEFAULT AND PRIOR TO AN ACCELERATION OF THE NOTES
If an Early Amortization Event but no Event of Default is then
continuing (or an Event of Default has occurred but the Notes have not been
accelerated in accordance with the Indenture), the Available Distribution Amount
then on deposit in the Trust Account shall be distributed to the following
persons and in the following priority:
(1) To the Indenture Trustee, all the Indenture Trustee's Fees then due and
payable for all Series then Outstanding (subject to the per annum dollar
limitation in the Indenture);
(2) To the Administrative Agent, the Administrative Agent Fees then due and
payable;
(3) To the Manager, an amount equal to the sum of: (i) the Management Fee
then due and payable, (ii) the amount of any Management Fee Arrearage, and
(iii) any Excess Deposit then due and payable, but in each case only to the
extent not previously withheld by the Manager in accordance with the terms
of the Transaction Documents;
(4) To the Manager, reimbursement for any Manager Advances;
(5) To the Persons entitled thereto: (i) any auditing, accounting and
related fees then due and payable which are classified as an Issuer Expense
and (ii) any other Issuer Expenses, so long as the aggregate amount paid
pursuant to this clause (5) in any calendar year would not exceed one
million dollars ($1,000,000);
(6) To each Series Enhancer, pro rata based on the amount of Premiums then
due and payable, the amount of any Premium then due and payable pursuant to
the terms of each applicable Enhancement Agreement;
(7) To each of the following on a pro rata basis: (i) to each Series
Account for each Series of Notes then Outstanding, an amount equal to the
Priority Payments (including reimbursements and interest thereon payable to
any related Series Enhancer) for each such Series and (ii) to each Hedge
Counterparty, the amount of any scheduled payments (but excluding
termination payments) then due and payable pursuant to the terms of any
Hedge Agreement then in effect; provided that if sufficient funds do not
exist to pay in full all such Priority Payments, such amounts shall be
allocated among all Series of Notes in the same proportion as the ratio of
(x) the Priority Payments of a particular Series of Notes then Outstanding
on such Payment Date to (y) the sum of the Priority Payments for all Series
of Notes then outstanding on such Payment Date;
(8) To the Restricted Cash Account, an amount sufficient so that the total
amount on deposit therein is equal to the Restricted Cash Amount for such
Payment Date;
(9) To each Series Account for each Series of Notes then Outstanding, all
Minimum Principal Payment Amounts for each such Series;
(10) To each Series Account for each Series of Notes then Outstanding, all
Scheduled Principal Payment Amounts for each such Series;
85
(11) To each Series of Notes then Outstanding, pro rata based on unpaid
principal amounts, all remaining Available Distribution Amount until all
Series of Notes have been paid in full;
(12) To each of the following on a pro rata basis: (i) to each Hedge
Counterparty, on a pro rata basis, the amount of any other unpaid amounts
owing by the Issuer (including termination payments but excluding (x) any
payments made pursuant to clause (7) above and (y) termination payments
resulting from the breach of the applicable Hedge Agreement by such Hedge
Counterparty) then due and payable pursuant to the terms of any Hedge
Agreement then in effect, (ii) to the Indenture Trustee, any Indenture
Trustee's Fees then due and payable, after giving effect to the payment
made pursuant to clause (1) above but not subject to the per annum dollar
limitation in the Indenture, and (iii) to each Series Account, the
following amounts: (A) for each Series of Notes then Outstanding, an amount
equal to any increased costs, funding costs, breakage costs, taxes, other
indemnification payments and any other unpaid Reimbursement Amount then due
and owing to the related Series Enhancer pursuant to the terms of the
related Enhancement Agreement and the Transaction Documents for such Series
pro rata based on such amounts due for such Series of Notes then
Outstanding and (B) an amount equal to any Default Fee or any other amounts
then due and owing to the Noteholders pursuant to the terms of the related
Supplement, plus indemnity payments, increased costs and taxes pro rata
based on such amounts due for such Series of Notes then Outstanding;
(13) To each Hedge Counterparty, on a pro rata basis, the amount of any
unpaid payments then due and payable (including termination payments
resulting from the breach of the applicable Hedge Agreement by such Hedge
Counterparty but excluding any payments made pursuant to clause (7) or (12)
above) pursuant to the terms of any Hedge Agreement then in effect;
(14) To each of the following on a pro rata basis: (i) to the Issuer, the
amount of any indemnity payments payable to the officers, directors and/or
managers of the Issuer required to be made by the Issuer and (ii) to the
Manager, the amount of any officer or director indemnity payments required
to be made by the Manager; and
(15) To the Issuer, any remaining Available Distribution Amount which may
be used by the Issuer for any purpose, including, without limitation,
general corporate purposes, the distribution of dividends, repayment of
debt, paying fees and expenses or any other purpose in the sole discretion
of the Issuer.
See "-- Allocation of Funds among Series and Classes" herein for a description
of the payment priorities among various Series.
FLOW OF FUNDS AFTER AN ACCELERATION OF THE NOTES FOLLOWING AN EVENT OF
DEFAULT
If the Notes of all Series have been declared due and payable
following an Event of Default and such declaration and its consequences have not
been rescinded or annulled, all amounts collected by the Indenture Trustee,
including the amounts then on deposit in the Trust Account, shall be distributed
to the following persons and in the following priority:
(1) To the Indenture Trustee, all the Indenture Trustee's Fees then due and
payable for all Series then Outstanding subject to the per annum dollar
limitation in Indenture, plus any costs incurred by the Indenture Trustee
in enforcing any of the rights of the Indenture Trustee or the Noteholders
under the Indenture or under any of the other Transaction Documents;
(2) To the Administrative Agent, the Administrative Agent Fees then due and
payable;
(3) To the Manager, an amount equal to the sum of: (i) the Management Fee
then due and payable, (ii) the amount of any Management Fee Arrearage, and
(iii) any Excess Deposit then due and payable, but in each case only to the
extent not previously withheld by the Manager in accordance with the terms
of the Transaction Documents;
(4) To the Manager, the reimbursement for any Manager Advances;
(5) To the Persons entitled thereto: (i) auditing, accounting and related
fees then due and payable which are classified as an Issuer Expense, and
(ii) any other Issuer Expenses, so long as the aggregate amount paid
pursuant to this clause (5) in any calendar year would not exceed one
million dollars ($1,000,000);
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(6) To each Series Enhancer, on a pro rata basis, based on the amount of
Premiums then due and payable, the amount of any Premium then due and
payable pursuant to the terms of each applicable Enhancement Agreement;
(7) To each of the following on a pro rata basis: (i) to each Series
Account for each Series of Notes then Outstanding, on a pro rata basis, an
amount equal to the Priority Payments for each such Series and (ii) to each
Hedge Counterparty, the amount of any scheduled payments (but excluding
termination payments) then due and payable pursuant to the terms of any
Hedge Agreement then in effect. If sufficient funds do not exist to pay in
full all such Priority Payments, such amounts shall be allocated among all
Series of Notes in the same proportion as the ratio of (x) the Priority
Payments of a particular Series of Notes then Outstanding on such Payment
Date to (y) the sum of the Priority Payments for all Series of Notes then
Outstanding at such Payment Date;
(8) To pay each of the amounts set forth in clause (i) and (ii) on a pro
rata and a pari passu basis (based on amounts then due): (i) to each Series
Account, the then unpaid principal balance of the related Notes (pro rata
based on the amounts unpaid on the date on which such Event of Default
first occurs) (including Reimbursement Amounts payable in respect thereof
to the Series Enhancer), and (ii) to each Hedge Counterparty, the remaining
amounts (excluding termination payments resulting from the breach of the
applicable Hedge Agreement by such Hedge Counterparty) then due and payable
under the related Hedge Agreement (on a pro rata basis), until such amounts
are paid in full;
(9) To the Series Account for each Series of Notes then Outstanding, on a
pro rata basis, an amount equal to all other amounts then due and payable
to the Noteholders of such Series and the related Series Enhancer, if any,
including, without limitation, Default Fees, increased costs, taxes and
indemnity payments identified in the related Supplement;
(10) To each Hedge Counterparty, on a pro rata basis, all remaining amounts
then due and owing (after giving effect to the amounts paid pursuant to
clauses (7) and (8) above);
(11) To the Indenture Trustee, any Indenture Trustee's Fees then due and
payable, after giving effect to the payment made pursuant to clause (1)
above but not subject to the per annum dollar limitation in the Indenture;
(12) To the Issuer, the amount of any indemnity payments payable to the
officers, directors and/or managers of the Issuer required to be made by
the Issuer;
(13) To the Manager, the amount of any officer and director indemnity
payments required to be made by the Manager; and
(14) To the Issuer, any remaining monies which may, any provision in the
Transaction Documents to the contrary notwithstanding, be used by the
Issuer for any purpose, including, without limitation, general corporate
purposes, the distribution of dividends, repayment of debt, paying fees and
expenses or any other purpose in the sole discretion of the Issuer.
The Noteholders of each Series shall have the right to receive, to the
extent necessary to make the required payments with respect to the Notes of such
Series at the times and in the amounts specified in the related Supplement, (i)
the portion of Collections allocable to Noteholders of such Series pursuant to
the Indenture and the relevant Supplement, (ii) funds on deposit in the Trust
Account (subject to the priorities set forth herein) and the Restricted Cash
Account, and (iii) funds on deposit in any Series Account for such Series or
payable with respect to any Series Enhancement for such Series. The Policy
constitutes a Series Enhancement with respect to the Notes.
DISTRIBUTIONS FROM THE SERIES 2006-1 SERIES ACCOUNT
On each Payment Date and on each other date on which any payment is to be made
with respect to the Series 2006-1 Notes, the Indenture Trustee shall distribute
funds then on deposit in the Series 2006-1 Series Account as described under
"Summary -- Distributions from the Series 2006-1 Series Account."
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ALLOCATION OF FUNDS AMONG SERIES AND CLASSES
If on any Payment Date described in "Description of the Series 2006-1
Notes and the Indenture -- Flow of Funds -- Flow of Funds Prior to an Early
Amortization Event and an Event of Default," there are not sufficient funds to
pay, in full, the Minimum Principal Payment Amounts and/or Scheduled Principal
Payment Amounts owing to all Series of Notes then Outstanding, as the case may
be, then, subject to the priority of payments set forth in "Description of the
Series 2006-1 Notes and the Indenture -- Flow of Funds -- Flow of Funds Prior to
an Early Amortization Event and an Event of Default," any such principal
payments having the same payment priority will be paid, in full, to the Series
first issued (based on their respective dates of issuance or Conversion Dates,
as applicable) in chronological order based on their respective dates of
issuance or Conversion Dates, as applicable. For purposes of this section only,
any Series which was originally designated as a Warehouse Note and is
subsequently considered to be a Series of Term Notes due to the occurrence of
the Conversion Date for such Series will be deemed to have an Issuance Date
equivalent to its Conversion Date. If two or more Series of the Notes were
issued on the same date or have the same Conversion Date, then principal
payments having the same payment priority will be allocated among each such
Series, on a pro rata basis, based on the principal payments then due with
respect to such Series. If on any Payment Date described in "Description of the
Series 2006-1 Notes and the Indenture -- Flow of Funds -- Flow of Funds After an
Early Amortization Event or an Event of Default and Prior to an Acceleration of
the Notes," there are not sufficient funds to pay, in full, the Minimum
Principal Payment Amounts owing to all Series of Notes then Outstanding, then
amounts available for payment of Minimum Principal Payment Amounts pursuant to
the priority of payments set forth in "Description of the Series 2006-1 Notes
and the Indenture -- Flow of Funds -- Flow of Funds After an Early Amortization
Event or an Event of Default and Prior to an Acceleration of the Notes" will be
allocated among all Series of Notes for which Minimum Principal Payment Amounts
are owing on such Payment Date on a pro rata basis, calculated based on the
amount of the Minimum Principal Payment Amounts then owing to each such Series.
If on any Payment Date described in "Description of the Series 2006-1 Notes and
the Indenture -- Flow of Funds -- Flow of Funds After an Early Amortization
Event or an Event of Default and Prior to an Acceleration of the Notes," there
are not sufficient funds to pay, in full, all Scheduled Principal Payment
Amounts owing to all Series of Notes then Outstanding, then amounts available
for the payment of Scheduled Principal Payment Amounts pursuant to the priority
of payments set forth in "Description of the Series 2006-1 Notes and the
Indenture -- Flow of Funds -- Flow of Funds After an Early Amortization Event or
an Event of Default and Prior to an Acceleration of the Notes" will be allocated
among all Series of Notes for which Scheduled Principal Payment Amounts are
owing on such Payment Date on a pro rata basis, calculated based on the amount
of the Scheduled Principal Payment Amounts then owing to each such Series.
If any Series has more than one Class of Outstanding Notes, then the
Available Distribution Amount shall be calculated without regard to the payment
priorities of the Classes of Notes within such Series. Once the Available
Distribution Amount has been allocated to each Series, then the portion of the
Available Distribution Amount allocable to such Series shall be paid to each
Class of Noteholders of such Series in accordance with the priority of payments
set forth in the related Supplement.
Interest and other Priority Payments owing in respect of different
Series will be allocated pro rata as described in "-- Flow of Funds" above.
EARLY AMORTIZATION EVENTS
The existence of any one of the following events constitutes an "Early
Amortization Event:"
(1) the occurrence of (i) an Event of Default, or (ii) a breach by the
Seller of any of its obligations under the Contribution and Sale Agreement
or any other Transaction Document to which it is a party, which breach
materially and adversely affects the interests of any Noteholder or Series
Enhancer (if such Series Enhancer is then the Control Party for a Series of
Outstanding Notes or shall have made an unreimbursed payment on its Policy)
and which continues, if curable, for sixty (60) days after the occurrence
of such breach;
(2) a Manager Default shall have occurred and then be continuing;
(3) if on any Payment Date, the Aggregate Note Principal Balance exceeds
the Asset Base, and such condition
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remains unremedied for a period of thirty (30) days;
(4) if as of any Payment Date, the Asset Base is less than $400,000,000;
(5) as of any Payment Date, the Issuer EBIT to Issuer Cash Interest Expense
Ratio shall be less than 1.1 to 1.0;
(6) as of any Payment Date, the Weighted Average Age of the Eligible
Containers shall be greater than eight and one-half (8.5) years; and
(7) the occurrence of any other event or condition specified as an Early
Amortization Event in a Supplement for any Series of Outstanding Notes.
If the Early Amortization Event described in clause (5) or (6) in the
definition of Early Amortization Event has occurred, such condition shall be
deemed cured if it does not exist on any subsequent Payment Date. Except as set
forth in the immediately preceding sentence, if an Early Amortization Event
exists on any Payment Date, then such Early Amortization Event shall be deemed
to continue until the Business Day on which the Requisite Global Majority
waives, in writing, such Early Amortization Event.
CERTAIN COVENANTS OF THE ISSUER
The Indenture contains, without limitation, the following covenants of
the Issuer:
(1) The Issuer will from time to time execute (if applicable) and
deliver all financing statements, all amendments thereto and continuation
statements, instruments of further assurance and other instruments, and will,
upon the reasonable request of the Manager, the Indenture Trustee, the
Administrative Agent, any Hedge Counterparty or any Series Enhancer, take such
other action necessary or advisable to:
(a) maintain or preserve the Lien of the Indenture (and the
priority thereof) including executing and filing such
documents as may be required under any international
convention for the perfection of interests in Managed
Containers that may be adopted subsequent to the date of the
Indenture;
(b) perfect, publish notice of, and protect the validity of the
security interest in the Collateral created pursuant to the
Indenture;
(c) enforce any of the items of the Collateral;
(d) preserve and defend its right, title and interest to the
Collateral and the rights of the Indenture Trustee in such
Collateral against the claims of all Persons (other than the
Noteholders or any Person claiming through the Noteholders);
and
(e) pay any and all taxes levied or assessed upon all or any
part of the Collateral, except such as are contested in good
faith and by appropriate proceedings or where the failure to
effect such payment is not adverse in any material respect
to the Noteholders.
(2) The Issuer will not, without the prior written consent of the
Requisite Global Majority:
(a) at any time sell, transfer, exchange or otherwise dispose of
any of the Collateral, except as follows:
(i) in connection with a sale, conveyance or transfer
pursuant to the provisions of the Indenture; or
(ii) in connection with a substitution or repurchase of
Managed Containers as permitted or required in
accordance with the terms of the Contribution and Sale
Agreement; or
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(iii) sales of Managed Containers (including any such sales
resulting from the sell/repair decision of the Manager)
to unaffiliated third parties, and to the extent that
such sales are on terms and conditions that would be
obtained in an ordinary course, arms-length
transaction, to affiliates regardless of the sales
proceeds realized from such sales so long as an Asset
Base Deficiency is not then continuing or would result
from such sale of Managed Containers after giving
effect to the application of the proceeds of such
sales; provided, however, that if an Early Amortization
Event has occurred and is continuing or would result
from any such sale (after giving effect to the
application of the proceeds thereof), no such sale may
be made to an affiliate under this clause (iii) unless
the net proceeds from such sale are greater than or
equal to the Adjusted Net Book Value of the Containers
being sold; or
(iv) if an Asset Base Deficiency is then continuing or would
result from such sale of Managed Containers after
giving effect to the application of the proceeds of
such sales, sales of Managed Containers (including any
such sales resulting from the sell/repair decision of
the Manager) regardless of the sales proceeds realized
from such sales so long as (A) any sales to affiliates
made pursuant to this clause (iv) are made on terms and
conditions that would be obtained in an ordinary
course, arms-length transaction and the net proceeds
from any such sale are greater than or equal to the
Adjusted Book Value of the Managed Containers being
sold and (B) the aggregate sum of the Net Book Values
of all Managed Containers that were sold pursuant to
this clause (iv) during such Collection Period and the
three (3) immediately preceding Collection Periods for
proceeds which are less than the respective Adjusted
Net Book Values of such Managed Containers as of the
date of sale does not exceed an amount equal to the
product of (x) five percent (5%), times (y) an amount
equal to a quotient, (A) the numerator of which is
equal to the sum of the aggregate Net Book Value of all
Managed Containers as of the last day of each of the
four (4) immediately preceding Collection Periods, and
(B) the denominator of which is equal to four (4);
(v) any other sales of Managed Containers not covered by
the preceding clauses provided that each such sale
shall be specifically approved by (A) the Requisite
Global Majority and (B) the managers of the Issuer in
accordance with the provisions of the Issuer's limited
liability company agreement; or
(vi) in connection with a Casualty Loss.
(b) claim any credit on, make any deduction from the principal,
premium, if any, or interest payable in respect of the Notes
(other than amounts properly withheld from such payments
under any applicable law) or assert any claim against any
present or former Noteholder by reason of the payment of any
taxes levied or assessed upon any of the Collateral; or
(c) release any item from the Collateral, except as permitted
pursuant to the terms of a Transaction Document.
(3) Other customary covenants including, without limitation, payment
of principal and interest, maintenance of office, maintenance of existence,
maintenance of books and records, payment of taxes and deliveries of financial
statements, compliance certificates and reports, and notices of Events of
Default, Early Amortization Events and material adverse changes, as well as
customary negative covenants regarding limitations on business, consolidation
and merger and commencement of bankruptcy proceedings.
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EVENTS OF DEFAULT
The existence of any one of the following events constitutes an "Event of
Default:"
(1) the occurrence of the events set forth in clause (A), (B) or (C) at the
times set forth therein;
(A) default in (x) the payment on any Payment Date of any interest payment
then due and payable on any Series of Notes and the continuation of such
default for more than three (3) Business Days, or (y) the payment on the
Legal Final Maturity Date of any Series of Notes of the then unpaid
principal balance of such Series of Notes;
(B) default in the payment of (x) any Indenture Trustee's Fees then due and
payable or (y) a Premium or other amounts due and owing to any Series
Enhancer, and the continuation of such default contemplated by clause (x)
or clause (y) of this clause (B) for more than five (5) Business Days after
the amounts in such clause (x) or clause (y) shall have become due and
payable in accordance with the terms of such Notes, the Indenture and the
related Supplement;
(C) default in the payment of other amounts not dealt with in clause (A) or
(B) above owing to the Noteholders of any Series and the continuation of
such default for more than thirty (30) days after the same shall have
become due and payable in accordance with the terms of such Notes, the
Indenture and the related Supplement;
(2) default in the observation or performance of certain covenants of the
Issuer regarding bankruptcy petition, consolidation, merger and sale of
assets, or creation of subsidiaries which breach materially and adversely
affects the interests of any Noteholder or Series Enhancer (if such Series
Enhancer is then the Control Party for a Series of Outstanding Notes or
shall have made an unreimbursed payment on its Policy);
(3) the occurrence of the events set forth in clause (A) or (B) at the times
set forth therein:
(A) default in the observation or performance of certain covenants of the
Issuer regarding disposition of collateral, tax claims, release of
collateral, non-consolidation, creation of liens, other debt and
liabilities, certain other agreements, compliance with organizational
documents or permitted investments which breach materially and adversely
affects the interests of any Noteholder or Series Enhancer (if such Series
Enhancer is then the Control Party for a Series of Outstanding Notes or
shall have made an unreimbursed payment on its Policy), and, if curable,
continues unremedied for twenty (20) days after the date on which there has
been given to the Issuer, by the Indenture Trustee, any Series Enhancer or
any Noteholder, a written notice specifying such default or breach and
requiring it to be remedied;
(B) default in any material respect in the observation or performance of
certain covenants of the Issuer regarding notices of an Event of Default,
an Early Amortization Event, an unmatured Event of Default or an unmatured
Early Amortization Event, which default continues for three (3) Business
Days;
(4) the occurrence of the events set forth in clause (A), (B) or (C) at the
times set forth therein:
(A) default in the observation or performance of certain covenants of the
Issuer regarding maintenance of office, restrictions on amending its
charter documents, limit on capital expenditures or use of proceeds of
Notes which breach materially and adversely affects the interests of any
Noteholder or Series Enhancer (if such Series Enhancer is then the Control
Party for a Series of Outstanding Notes or shall have made an unreimbursed
payment on its Policy), and, if curable, continues for thirty (30) days
after the date on which there has been given to the Issuer, by the
Indenture Trustee, any Series Enhancer or any Noteholder, a written notice
specifying such default or breach and requiring it to be remedied;
(B) default in any material respect in the observation or performance of
certain covenants of the Issuer regarding delivery of an Asset Base
Certificate and rating agency notices (subject to certain restrictions as
set forth in the Indenture), and certain covenants not to amend documents
except in compliance with their terms, and, if curable, which continues for
thirty (30) days after the date on which there has been given to the
Issuer, by the Indenture Trustee, any Series Enhancer or any Noteholder, a
written notice specifying such default or breach and requiring it to be
remedied;
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(C) default in any material respect in the observation or performance of
any covenant of the Issuer to deliver financial statements and reports set
forth in Section 625 of the Indenture and the continuation of such default
for thirty (30) days after the date on which there has been given to the
Issuer, by the Indenture Trustee, any Series Enhancer or any Noteholder, a
written notice specifying such default or breach and requiring it to be
remedied; provided, however, that (x) if the reason for such default is
primarily attributable to changes in accounting principles or
interpretations or the application of the same, (y) such changes are not
related to the assets of the Issuer and (z) no Manager Default then exists
under Sections 9.1.9 through 9.1.12 of the Management Agreement, then such
default shall not constitute an Event of Default under this clause (C)
unless such failure materially and adversely affects the interests of any
Noteholder or any Series Enhancer (if such Series Enhancer is then the
Control Party for a Series of Outstanding Notes or shall have made an
unreimbursed payment on its Policy;
(5) default in the performance, or breach, in any material respect, of (a) any
covenant of the Issuer in the Indenture or any other Transaction Document
(other than a covenant or agreement a breach of which or default in the
performance of which is specifically dealt with elsewhere in clauses (1),
(2), (3) or (4) above) which materially and adversely affects the interests
of any Noteholder or any Series Enhancer (if such Series Enhancer is then
the Control Party for a Series of Outstanding Notes or shall have made an
unreimbursed payment on its Policy) and which, if curable, continues for
sixty (60) days after the date on which there has been given to the Issuer,
by the Indenture Trustee, or to the Issuer or the Seller and the Indenture
Trustee by any Series Enhancer or any Noteholders, a written notice
specifying such default or breach and requiring it to be remedied,
provided, however, that if the Issuer is diligently attempting to effect
such cure at the end of such sixty (60) day period, the Issuer will be
entitled to an additional sixty (60) day period in which to complete such
cure; or (b) any representation or warranty of the Issuer made in any of
the Transaction Documents or in any certificate or other writing delivered
pursuant thereto or in connection herewith with respect to or affecting any
Outstanding Notes shall prove to be inaccurate in any respect which
materially and adversely affects the interests of any Noteholder or any
Series Enhancer (if such Series Enhancer is then the Control Party for a
Series of Outstanding Notes or shall have made an unreimbursed payment on
its Policy) as of the time when the same shall have been made, and such
inaccuracy, if curable, continues for sixty (60) days after the date on
which there has been given to the Issuer by the Indenture Trustee, or to
the Issuer and the Indenture Trustee by any Series Enhancer or any
Noteholders, a written notice specifying such inaccuracy and requiring it
to be remedied, provided, however, that if such inaccuracy is capable of
cure and the Issuer is diligently attempting to effect such cure at the end
of such sixty (60) day period, the Issuer shall be entitled to an
additional sixty (60) day period in which to complete such cure;
(6) an involuntary case is commenced under the Bankruptcy Code against the
Issuer and the petition is not controverted within 10 days, or is not
dismissed within 60 days, after commencement of the case, or a decree or
order for relief by a court having jurisdiction in respect of the Issuer is
entered appointing a receiver, liquidator, assignee, custodian, trustee, or
sequestrator (or other similar official) for the Issuer or for any
substantial part of its properties, or ordering the winding up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of sixty (60) consecutive days;
(7) the commencement by the Issuer of a voluntary case under any applicable
Insolvency Law, or other similar law now or hereafter in effect, or the
consent by the Issuer to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee or sequestrator (or
other similar official) of the Issuer, or any substantial part of its
properties, or the making by the Issuer of any general assignment for the
benefit of creditors, or the failure by the Issuer generally to pay its
debts as they become due, or the taking of corporate action by the Issuer
in furtherance of any such action;
(8) as of any date of determination, the Aggregate Note Principal Balance shall
exceed the sum of (A) the Aggregate Net Book Value, plus (B) the balance on
deposit in the Restricted Cash Account, plus (C) the balance on deposit in
the Temporary Loss Account, plus (D) up to the Receivables Threshold, the
unpaid balance of any receivables resulting from the sale or other
disposition of one or more Eligible Containers that were either owned by
the Issuer or subject to a Finance Lease for which the Issuer is the
lessor, so long as such receivables are not then outstanding for more than
sixty (60) days (measured from the issue date of such receivables);
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(9) the occurrence of a contribution failure with respect to a Plan maintained
by Issuer or an ERISA Affiliate of the Issuer, which contribution failure
is sufficient to give rise to a lien under Section 302(f) of ERISA;
(10) the Indenture Trustee shall fail to have a first priority perfected
security interest under the laws of the United States in any material
portion of the Collateral (other than as a result of a Permitted
Encumbrance) and such condition continues for fifteen (15) days without
being cured or waived by each Control Party unless such failure to have a
first priority perfected security interest is due to any act or omission of
the Indenture Trustee or the Noteholders;
(11) the Issuer is required to register as an investment company under the
Investment Company Act of 1940, as amended;
(12) the rendering against the Issuer of a final, non-appealable judgment,
decree or order for the payment of money in excess of One Million Dollars
($1,000,000), (to the extent not paid when due or covered by a reputable
and solvent insurance company, with any portion of such judgment, decree or
order not so paid or not so covered, as applicable, to be included in the
determination of the dollar amount specified in this clause (12)) which
judgment, decree or order results in a claim that would entitle the
claimholder to petition for the involuntary bankruptcy of the Issuer under
the Bankruptcy Code, and the continuance of such judgment, decree or order
for a period of 60 consecutive days; or
(13) all of the following shall have occurred: (A) a Manager Default shall have
occurred and be continuing, (B) the Requisite Global Majority shall have
delivered the Manager Termination Notice to the Manager in accordance with
the terms of the Management Agreement and (C) a replacement Manager has not
assumed the duties of the terminated Manager within the earlier of (i)
ninety (90) days, if on such 90th day or any day thereafter there exists an
Asset Base Deficiency, or (ii) one hundred twenty (120) days at all times
not covered by clause (i); in each case measured from the date of such
Manager Termination Notice.
The occurrence of an Event of Default with respect to one Series of
Notes, except to the extent waived by the related Control Party for such Series
of Notes, shall constitute an Event of Default with respect to all other Series
of Notes then Outstanding unless the related Supplement with respect to each
such Series of Notes shall specifically provide to the contrary.
REMEDIES UPON EVENT OF DEFAULT
Upon the occurrence of an Event of Default of the type described in
paragraph (6) or (7) of the definition thereof, the unpaid principal balance of,
and accrued interest on, all Series of Notes, together with all other amounts
then due and owing to the Noteholders, each Series Enhancer and each Hedge
Counterparty, will become immediately due and payable without further action by
any Person. Except as set forth in the immediately preceding sentence, if an
Event of Default occurs and is continuing, then and in every such case the
Indenture Trustee shall at the direction of the Requisite Global Majority
declare the principal of and accrued interest on all Notes of all Series then
Outstanding to be due and payable immediately, by a notice in writing to the
Issuer and to the Indenture Trustee given by the Requisite Global Majority, and
upon any such declaration such principal and accrued interest shall become
immediately due and payable.
If an Event of Default occurs and is continuing, the Indenture
Trustee, by such officer or agent as it may appoint, shall notify each
Noteholder, each Hedge Counterparty, the Administrative Agent, each Series
Enhancer and the applicable Rating Agencies, if any, of such Event of Default.
So long as an Event of Default is continuing or at any time after a declaration
of acceleration has been made, the Indenture Trustee shall if instructed by the
Requisite Global Majority:
(1) institute any Proceedings, in its own name and as trustee of an
express trust, for the collection of all amounts then due and payable on the
Notes of all Series under the Indenture or the related Supplement with respect
thereto, whether by declaration or otherwise, enforce any judgment obtained, and
collect from the Collateral and any other assets of the Issuer any monies
adjudged due;
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(2) subject to the quiet enjoyment rights of any lessee of a Managed
Container, sell (including any sale made in accordance with the Indenture), hold
or lease the Collateral or any portion thereof or rights or interest therein, at
one or more public or private transactions conducted in any manner permitted by
law;
(3) institute any Proceedings from time to time for the complete or
partial foreclosure of the Lien created by the Indenture with respect to the
Collateral;
(4) institute such other appropriate Proceedings to protect and
enforce any other rights, whether for the specific enforcement of any covenant
or agreement in the Indenture or in aid of the exercise of any power granted in
the Indenture, or to enforce any other proper remedy;
(5) exercise any remedies of a secured party under the Uniform
Commercial Code or any applicable law and take any other appropriate action to
protect and enforce the rights and remedies of the Indenture Trustee or the
Series 2006-1 Noteholders under the Indenture; and
(6) appoint a receiver or a manager over the Issuer or its assets.
If the Notes of all Series have been declared due and payable
following an Event of Default and such declaration and its consequences have not
been rescinded or annulled, any money collected by the Indenture Trustee
pursuant to the Indenture or otherwise, and any other monies that may then be
held or thereafter received by the Indenture Trustee as security for such Notes
and the obligations secured by the Indenture, shall be applied to the extent
permitted by law in the order and at the date or dates fixed by the Indenture
Trustee as set forth in "-- Allocation of Funds among Series and Classes" and
"Description of the Series 2006-1 Notes and the Indenture -- Flow of Funds --
Flow of Funds After an Acceleration of the Notes Following an Event of Default "
herein.
Notwithstanding anything to the contrary herein, if a Series Enhancer
is the Control Party for a Series of Outstanding Notes, then the Noteholders of
such Series may not institute any Proceeding with respect to the Indenture, or
for the appointment of a receiver or trustee for the Issuer, or for any other
reason without the prior written consent of such Series Enhancer.
HEDGING REQUIREMENTS
As described under "Summary -- Hedging," the Issuer is required,
pursuant to the terms of the Indenture, to maintain one or more Interest Rate
Hedge Agreements. Such requirement shall be referred to as the "Hedging
Requirement."
If the Issuer, or TAL, on behalf of the Issuer, fails to comply with
the Hedging Requirement, the Requisite Global Majority will have the right, in
its sole discretion and at the expense of the Issuer if necessary (as determined
in the sole discretion of the Requisite Global Majority), to direct the
Indenture Trustee, to enter into or maintain one or more Interest Rate Hedge
Agreements selected by the Requisite Global Majority (in its sole discretion) on
behalf of the Issuer such that, after giving effect to such action, the Issuer
will be in compliance with the Hedging Requirement. In the event the Requisite
Global Majority determines to direct the Indenture Trustee to enter into or
maintain an Interest Rate Hedge Agreement on the Issuer's behalf, the Requisite
Global Majority shall promptly send a copy of any such agreement to the Issuer
and may provide the Indenture Trustee and Manager on behalf of the Issuer with a
written direction to deposit in the Trust Account certain amounts to reimburse
the Requisite Global Majority or a third party for the costs of such Interest
Rate Hedge Agreement.
If at any time while the Notes are Outstanding an Interest Rate Hedge
Counterparty ceases to be an Eligible Interest Rate Hedge Counterparty, the
Issuer shall within sixty (60) days after it obtains knowledge of such event,
either (i) replace the non-conforming Interest Rate Hedge Counterparty with an
Eligible Interest Rate Hedge Counterparty or (ii) require the non-conforming
Interest Rate Hedge Counterparty to deliver a letter of credit or provide
alternative credit support in order to support its obligations under the
Interest Rate Hedge Agreement, as Issuer and such non-conforming Interest Rate
Hedge Counterparty may agree, subject to the consent of the Requisite Global
Majority and the prior written confirmation that the Rating Agency Condition has
been satisfied.
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REPORTS TO SERIES 2006-1 NOTEHOLDERS
The Indenture Trustee is required to furnish to each Holder of
Outstanding Notes, the Administrative Agent, the Depositary, any Hedge
Counterparty, and each Series Enhancer, a copy of all reports, financial
statements and notices received by the Indenture Trustee pursuant to the
Contribution and Sale Agreement, the Indenture (including any Supplements issued
pursuant thereto), the Management Agreement, the Administration Agreement or a
Note Purchase Agreement by posting copies thereof on its password-protected
website (www.usbank.com/abs) and to notify the Administrative Agent, each
Noteholder, each Hedge Counterparty, and each Series Enhancer by e-mail when
such notices or reports are available; provided that any reports, financial
statements and notices received by the Indenture Trustee pursuant to a
Supplement or a Note Purchase Agreement shall be delivered by the Indenture
Trustee only to the Noteholders and the Series Enhancer of the related Series.
SUPPLEMENTAL INDENTURES
Supplemental Indentures Not Creating a New Series Without Consent of
Holders
Without the consent of any Noteholder and based on an officer's
certificate of the Issuer to the effect that such Supplement is for one of the
purposes set forth in clauses (1) through (7) below, the Issuer and the
Indenture Trustee, at any time and from time to time, may, with the consent of
each Series Enhancer if it is then the Control Party, and each affected Hedge
Counterparty (provided that the consent of a Hedge Counterparty shall be
required only if such proposed amendment would materially and adversely affect
the rights, duties or immunities of such Hedge Counterparty under the Indenture
or otherwise), enter into one or more Supplements to the Indenture for any of
the following purposes:
(1) to add to the covenants of the Issuer in the Indenture for the
benefit of the Noteholders of all Series of Notes then Outstanding or of any
Series Enhancer, or to surrender any right or power conferred upon the Issuer in
the Indenture;
(2) to cure any ambiguity, correct or supplement any provision in the
Indenture that may be inconsistent with any other provision in the Indenture, or
to make any other provisions with respect to matters or questions arising under
the Indenture;
(3) to correct or amplify the description of any property at any time
subject to the Lien of the Indenture, or better to assure, convey and confirm
unto the Indenture Trustee any property subject or required to be subject to the
Lien of the Indenture, or to subject additional property to the Lien of the
Indenture;
(4) to add to the conditions, limitations and restrictions on the
authorized amount, terms and purposes of issue, authentication and delivery of
the Notes, as set forth in the Indenture, or additional conditions, limitations
and restrictions thereafter to be observed by the Issuer;
(5) to convey, transfer, assign, mortgage or pledge any additional
property to or with the Indenture Trustee;
(6) to evidence the succession of the Indenture Trustee pursuant to
the Indenture; or
(7) to add any additional Events of Default or Early Amortization
Events.
Supplemental Indentures Not Creating a New Series with Consent of
Holders
If the provisions described above under "-- Supplemental Indentures
Not Creating a New Series Without Consent of Holders" do not apply to a
Supplement, then with the consent of the Requisite Global Majority and each
Hedge Counterparty (provided that, in the case of each Hedge Counterparty, the
consent of such Hedge Counterparty shall be required only if such proposed
amendments would materially and adversely affect the Hedge Counterparty's
rights, duties or immunities under the Indenture or otherwise), the Issuer and
the Indenture Trustee may enter into a Supplement to the Indenture for the
purpose of adding any provisions to or changing in any manner
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or eliminating any of the provisions of the Indenture or of modifying in any
manner the rights of the Noteholders under the Indenture; provided, however,
that no such Supplement shall, without the consent of the Noteholder of each
Note adversely affected thereby and the Series Enhancer for a Series if such
Series Enhancer is adversely affected thereby (but only if such Series Enhancer
is then the Control Party for such Series or shall have made an unreimbursed
payment on its Policy):
(1) reduce the principal amount of any Note, the rate of interest
thereon, amend the relative priority of any such payments as described in "--
Flow of Funds" herein (other than to increase the priority thereof) or increase
the amount of any applicable dollar limitations on amounts having a higher
payment priority to such payments as described in "-- Flow of Funds" herein or
otherwise change such payments, in each case, if in a manner adverse to such
Noteholder, or change the date on which or the amount of which, or the place of
payment where, or the coin or currency in which, any Note or the interest
thereon shall be paid, or impair the right to institute suit for the enforcement
of any such payment on or after the Legal Final Maturity Date thereof;
(2) reduce the percentage of Outstanding Notes or Existing Commitments
required for (a) the consent of any Supplement to the Indenture, (b) the consent
required for any waiver of compliance with certain provisions of the Indenture
or certain Events of Default under the Indenture and their consequences as
provided for in the Indenture or (c) the consent required to waive any payment
default on the Notes;
(3) modify any provision of the Indenture or any Supplement which
specifies that such provision cannot be modified or waived without the consent
of the Noteholder affected thereby;
(4) in a manner adverse to such Noteholder, modify or alter the
definition of the terms "Outstanding," "Requisite Global Majority", "Asset
Base", "Existing Commitment", "Initial Commitment", "Advance Rate", or
"Aggregate Net Book Value" in the Indenture or any of the terms used in or
necessary to interpret such terms;
(5) impair or adversely affect the Collateral in any material respect
as a whole, except as otherwise permitted in the Indenture;
(6) modify or alter the provisions of the Indenture relating to
mandatory prepayments; or
(7) permit the creation of any Lien ranking prior to or on a parity
with the Lien of the Indenture with respect to any part of the Collateral or
terminate the Lien of the Indenture on any property at any time subject thereto
or deprive in any material respect the Noteholder of the security afforded by
the Lien of the Indenture, except as otherwise permitted in the Indenture;
provided, further, that no such Supplement shall, without the consent
of each Series Enhancer adversely affected thereby, (i) reduce the amount
payable to such Series Enhancer, (ii) amend the relative priority of any such
payment as described in "-- Flow of Funds" herein (other than to increase the
priority thereof) or increase the amount of any applicable dollar limitations on
amounts having a higher payment priority to such payments as described in "--
Flow of Funds" herein or otherwise change such payments in a manner adverse to
such Series Enhancer, (iii) change the date on which or the amount of which, or
the place or payment where, or the coin or currency in which, such amount is
paid to such Series Enhancer, (iv) increase or accelerate such Series Enhancer's
payment obligations under its Policy or otherwise materially and adversely
affect the rights, interests or obligations of such Series Enhancer under the
Indenture or the other Transaction Documents, or (v) modify provisions of any
Transaction Document relating to requirements that the consent of such Series
Enhancer be obtained.
Prior to the execution of any Supplement by the Issuer and the
Indenture Trustee, the Issuer shall provide a written notice to each Rating
Agency, the Administrative Agent and any Hedge Counterparty setting forth in
general terms the substance of any such Supplement.
INTERCREDITOR AGREEMENT
TAL will, and the Indenture Trustee and certain other parties that
have financed and hold a Lien on containers and Leases relating to the Container
Fleet or the Managed Containers may, enter into an intercreditor
96
agreement (the "Intercreditor Agreement") governing their respective rights in
such containers, Leases and proceeds relating to such containers, including
rental payments under such leases. In the Intercreditor Agreement, TAL will
agree (i) to maintain the Concentration Account, and (ii) subject to the terms
of the Intercreditor Agreement, to direct all lessees to remit all payments
under Leases to collection accounts that are swept to the Concentration Account
on a periodic basis. Each party to the Intercreditor Agreement will (i)
explicitly acknowledge the rights of each other party in the collateral financed
by such other party, and (ii) agree to cooperate with other parties in the
proper distribution of revenue.
ISSUANCE OF ADDITIONAL SERIES OF NOTES
The Issuer may from time to time direct the Indenture Trustee in
writing to execute and authenticate one or more Series of Notes (each, a
"Series") pursuant to a Supplement which will specify the principal terms of
such Series. The terms of such Supplement may modify or amend the terms of the
Indenture solely as applied to such Series, and, with the consent of the
Requisite Global Majority, may amend the Indenture as applicable to such other
Series, in accordance with the terms of the Indenture. The obligation of the
Indenture Trustee to authenticate, execute and deliver the Notes of such Series
and to execute and deliver the related Supplement is subject to the satisfaction
of the following conditions:
(1) on or before the Issuance Date of such Series, the Issuer shall
have given the Indenture Trustee, the Manager, the Administrative Agent, each
Rating Agency (and, if such Series is to be registered pursuant to the
Securities Act, all Rating Agencies that have rated any prior Series), each
Hedge Counterparty and each Series Enhancer notice of the Series and the
Issuance Date;
(2) the Issuer shall have delivered to the Indenture Trustee the
related Supplement executed by the Issuer;
(3) the Issuer shall have delivered to the Indenture Trustee any
related Enhancement Agreement executed by each of the parties thereto and each
Series Enhancer under such Enhancement Agreement shall have acknowledged in
writing the terms of the Administration Agreement;
(4) the Rating Agency Condition shall have been satisfied with respect
to the Series;
(5) the Issuer shall have delivered to the Indenture Trustee, each
Rating Agency, each Hedge Counterparty, each Series Enhancer (provided that
unless such Series Enhancer is then the Control Party for a Series, although the
Issuer shall deliver a copy of such Opinion of Counsel to such Series Enhancer,
such Series Enhancer shall not have any rights to approve the contents thereof)
and, if required, any Noteholder, any opinions of counsel required by the
related Supplement, including without limitation with respect to true sale,
enforceability, non-consolidation and security interest perfection issues;
(6) no Early Amortization Event or Event of Default has occurred and
is then continuing (or would result from the issuance of such additional Series)
and that the issuance of such additional Series would not result in an Early
Amortization Event or Event of Default and the Issuer shall have delivered to
the Indenture Trustee an officer's certificate stating the same;
(7) such other conditions as shall be specified in the related
Supplement; and
(8) the Issuer shall have delivered to the Indenture Trustee an
officer's certificate that all of the conditions specified in clauses (1)
through (7) have been satisfied.
97
DESCRIPTION OF THE ADMINISTRATION AGREEMENT
The following summary describes certain provisions of the
Administration Agreement, does not purport to be complete and is subject to, and
qualified in its entirety by, reference to such agreement.
GENERAL
Under the Administration Agreement, the Issuer has appointed Fortis
Capital Corp., as the Administrative Agent to provide certain services for the
benefit of the Holders of Outstanding Notes, each Series Enhancer and each Hedge
Counterparty.
DUTIES OF THE ADMINISTRATIVE AGENT
The duties of the Administrative Agent are limited solely to those
expressly set forth in the Administration Agreement and include the following:
(1) Upon receipt of the Manager Termination Notice, the Administrative
Agent shall seek to appoint a replacement Manager acceptable to the Requisite
Global Majority;
(2) If TAL has not delivered the Manager Report to the Indenture
Trustee and the Administrative Agent on or prior to the Determination Date, the
Administrative Agent, at the request of the Indenture Trustee, shall perform the
duties required of the Administrative Agent pursuant to the terms of the
Indenture (to the extent that all information necessary to perform such
calculations and allocations is then available to the Administrative Agent);
(3) To provide a written direction to the Indenture Trustee to release
the security interest in the Collateral pursuant to the terms of the Indenture;
(4) Upon receipt of a notice of the resignation or removal of the
Indenture Trustee pursuant to the terms of the Indenture, the Administrative
Agent will use reasonable efforts to assist the Issuer in locating a successor
Indenture Trustee that is eligible, in accordance with the terms of the
Indenture, to be the Indenture Trustee;
(5) The Administrative Agent will forward, promptly upon receipt
thereof, a copy of any amendment to or waiver of the Management Agreement to
each Noteholder or its designee; and
(6) The Administrative Agent will forward, promptly upon receipt
thereof, a copy of any notice of default or breach of representations or
warranties, or any other failure by the Issuer, the Manager, or the Seller to
comply with the terms of the Transaction Documents, to each Noteholder or its
designee.
COMPENSATION OF ADMINISTRATIVE AGENT
As compensation for the performance of the Administrative Agent's
obligations under the Administration Agreement, the Issuer has agreed to pay the
Administrative Agent on the date specified in the Administration Agreement an
annualized fee set forth in the Administration Agreement. In addition, the
Administrative Agent is entitled to be reimbursed in accordance with the
Indenture for its expenses incurred in taking any action required by the
Administration Agreement.
TERM AND REMOVAL OF ADMINISTRATIVE AGENT
The Administration Agreement shall continue in effect until the
earlier of (x) the date of the removal or resignation of the Administrative
Agent in accordance with the terms of the Administration Agreement and (y) the
Outstanding Obligations are paid in full. The Administrative Agent may resign
its duties by providing the Issuer, TAL, the Indenture Trustee and each related
Series Enhancer with at least 60 days' prior written notice.
98
The Indenture Trustee, acting at the written direction of the
Requisite Global Majority, may remove the Administrative Agent immediately upon
written notice of termination to the Administrative Agent (with a copy to each
of the Issuer and TAL) if any of the following events shall occur: (i) the
Administrative Agent defaults in any material respect in the performance of any
of its duties under the Administration Agreement, which failure continues
unremedied for a period of 15 days after the receipt by the Administrative Agent
of written notice thereof specifying with reasonable detail the default, (ii) a
court having jurisdiction in the premises enters a decree or order for relief,
and such decree or order shall not have been vacated within 60 days, in respect
of the Administrative Agent in any involuntary case under any applicable
bankruptcy, insolvency or other similar law in effect or appoint a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official for
the Administrative Agent or any substantial part of its property or order the
winding-up or liquidation of its affairs, or (iii) the Administrative Agent
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law in effect, consents to the entry of an order for relief in an
involuntary case under any such law, consents to the appointment of a receiver,
liquidator, assignee, trustee, custodian, sequestrator or similar official for
the Administrative Agent or any substantial part of its property, consents to
the taking of possession by any such official of any substantial part of its
property, makes any general assignment for the benefit of creditors, or fails
generally to pay its debts as they become due.
99
STRUCTURING ASSUMPTIONS
The following discussion summarizes certain of the key assumptions
(the "Structuring Assumptions") used by the Issuer to develop the cash flow
model from which the Minimum Targeted Principal Balances and Scheduled Targeted
Principal Balances for the Series 2006-1 Notes have been derived. The
Structuring Assumptions are based on a complex set of detailed modeling
assumptions developed for each type of Container based on TAL's historical
experience and other considerations deemed relevant by the Issuer. The summary
below does not purport to describe the many variables in detail, but rather is
intended only to provide an overview of the resulting key assumptions used to
develop the amortization schedules. On the basis of the Structuring Assumptions,
the Issuer believes that the resulting net cash flow as set forth in Annex B,
computed by deducting the aggregate assumed expenses from the aggregate assumed
gross revenues (including sales proceeds), should be sufficient to pay when
scheduled all interest payments and payments of Minimum Principal Payment
Amounts and Scheduled Principal Payment Amounts on the Series 2006-1 Notes. See
"Risk Factors" herein. All references in the Structuring Assumptions to
"Containers" are references to Managed Containers.
Any projections, forecasts or estimates and other "forward-looking"
statements reflected in or by the Structuring Assumptions are inherently subject
to significant business and economic uncertainties and contingencies beyond the
control of the Issuer. While the Issuer believes the Structuring Assumptions are
reasonable based on TAL's current level of operations, the Structuring
Assumptions do not purport to represent a complete set of factors that may
affect the amount of net cash flow of the Issuer and are not intended to be a
forecast of the amount of net cash flow to the Issuer. Furthermore, actual
results will vary from the Structuring Assumptions, because there can be no
assurance that the future results of TAL's fleet will be comparable to its
historical experience, and the amount of such variations may be material. Some
of the factors that could cause results to differ materially include changes in
interest rates, markets, financial or legal uncertainties, casualty occurrences,
and differences in rental rates and utilization rates. See "-- Risks Relating to
the Cash Flows" and "-- Business and Industry Risks" herein.
Also set forth below are a sensitivity analysis and stress scenarios
intended to illustrate certain, but not all, payment sensitivities of the Series
2006-1 Notes to certain, but not all, market and economic stresses. These tables
have been developed by fixing certain Structuring Assumptions and by varying
other Structuring Assumptions and certain other factors that will affect the
Issuer's revenues and expenses. More severe stresses may lead to payments on the
Series 2006-1 Notes being delayed or decreased, or in certain cases, to an Event
of Default.
The Issuer does not intend to update or revise the assumptions
contained herein to reflect changes occurring after the date of this Preliminary
Offering Memorandum.
REVENUE ASSUMPTIONS
General
(1) Containers subject to long-term and service leases are grouped by
container type and by the calendar year of manufacture. Containers subject to
long-term and service leases that were or are to be acquired in a given calendar
year are assumed to be purchased on June 30 of the year in which they were
manufactured. Containers subject to Finance Leases are assumed to conform with
the terms of their respective contracts.
(2) The average useful life of each Container that is not subject to a
Finance Lease is assumed to be 12 years from the assumed date of manufacture.
Containers subject to Finance Leases have a useful life equal to the term of
their respective contracts.
(3) Each Container subject to a long-term or service lease is
depreciated on a daily basis over its useful life to an amount equal to 32% of
Original Equipment Cost for dry Containers and an amount equal to 20% of
Original Equipment Cost for refrigerated Containers.
(4) Containers subject to long-term and service leases that are
grouped by container type and by the calendar year of manufacture are assumed to
be disposed of evenly during the 12th calendar year following such year of
manufacture. Gross proceeds received by TAL upon the disposal of the Container
will equal its Net Book Value
100
as of its assumed disposition date. Containers subject to Finance Leases will be
disposed of according to the terms of their respective contracts.
(5) All future payments in respect of the Leases are assumed to be
received by TAL on a timely basis when due.
(6) The One-Month LIBOR is assumed to increase from an initial value
of 4.80% to a maximum of 6.80% over 180 months in a straight-line fashion.
(7) Funds on deposit in the Trust Account, the Restricted Cash
Account, the Temporary Loss Account and each Series Account are assumed to earn
interest at One-Month LIBOR minus 50 basis points per annum.
(8) The Closing Date is assumed to be April 11, 2006.
(9) Payments on the Series 2006-1 Notes are to be made on the 20th
calendar day of each month, commencing on May 20, 2006.
(10) At the Closing Date and at all times thereafter, it is assumed
that new Containers of a type similar to the composition of the fleet profile of
the Issuer are purchased such that the Series 2005-1 Notes will at all times be
funded up to the maximum commitment amount of $300,000,000 from the Closing
Date.
Lease Rates
The aggregate average monthly lease rate for each Container type
subject to long-term or service lease agreements is assumed to be the same as
the lease rates experienced for the Issuer's fleet as of December 31, 2005.
Lease rates for Containers subject to Finance Leases are assumed to follow the
terms of their respective contracts.
Lease Renewals
Containers subject to long-term leases are renewed as either a
long-term lease or as a service lease at the following dates after its assumed
date of acquisition: 5.5 years, 8.5 years and 10.5 years. At 5.5 years and 8.5
years after the assumed date of acquisition, 70% of Containers are assumed to be
renewed as long-term leases and 30% as service leases. At 10.5 years after the
assumed date of acquisition, 25% of Containers are assumed to be renewed as
long-term leases and 75% are assumed to be renewed as service leases. Containers
subject to service leases as of December 31, 2005 are assumed to be service
leases for their entire useful life. No lease renewals are assumed for
Containers subject to Finance Leases.
Utilization
(1) Utilization rates for each type of Container subject to a service
lease is assumed to be equal to the average utilization rate experienced for the
Issuer's fleet as of December 31, 2005. The weighted average utilization rate
(weighted by CEU) initially equals 68.0% for Containers subject to service
leases. Containers subject to long-term leases or Finance Leases are assumed to
have a 100% utilization rate.
(2) As of December 31, 2005, approximately 63.4% of the Managed
Containers, based on units, are assumed to be subject to long-term lease
agreements.
(3) As of December 31, 2005, approximately 21.3% of the Managed
Containers, based on units, are assumed to be subject to service lease
agreements.
(4) As of December 31, 2005, approximately 5.2% of the Managed
Containers, based on units, are assumed to be subject to finance lease
agreements.
101
Fees and Ancillary Lease Revenue
In addition to per diem revenues, TAL also generates several other
sources of revenue from its lessees. These additional revenues include repair
charges, handling charges, and drop-off fees among other things. This fee and
ancillary lease revenue is assumed to be equal to 4.1% of gross revenue for
Containers subject to long-term lease agreements and it is assumed to be equal
to 11.1% of gross revenue for Containers subject to service lease agreements.
INTEREST, EXPENSES, AND OTHER ASSUMPTIONS
Interest
The Series 2006-1 Notes are issued in an initial amount of $680
million with a coupon of One-Month LIBOR plus a margin and payments are made in
accordance with the order of priorities set forth under "Summary -- Flow of
Funds" herein.
The Series 2005-1 Notes are at all times outstanding in the principal
amount of $300 million and bear interest at the rate specified in the Supplement
for the Series 2005-1 Notes.
Expenses
(1) Non-storage operating expenses, primarily repair, repositioning
and handling expenses, are assumed to be an amount equal to 14.2% of gross lease
revenue for Containers subject to service leases and 4.7% of gross lease revenue
for Containers subject to long-term leases.
(2) The daily storage rate for each container type and genset is
assumed to be equal to the storage rate experienced by the Manager. Storage
expenses are calculated as the product of the average number of off-hire
containers in the related period times the applicable daily storage rate.
(3) Issuer Expenses are assumed to be $500,000 each year and are
assumed to remain constant throughout the life of the transaction.
Fees
(1) The Management Fee payable on each Payment Date for the prior
Collection Period is assumed to be an amount equal to the sum of (i) 12.0% of
Net Operating Income for the preceding Collection Period (other than Container
Revenues on Finance Leases), (ii) 5.0% of Container Revenues on Finance Leases
for the preceding Collection Period and (iii) the sum of all Disposition Fees
for the preceding Collection Period.
(2) Disposition Fees payable to the Manager are assumed to be equal to
5% of Sales Proceeds.
(3) Series Enhancer Fees payable on each Payment Date are assumed to
be the amount of the Premium.
(4) Indenture Trustee Fees are assumed to be $100,000 per year and are
assumed to remain constant throughout the life of the transaction.
(5) Administrative Agent Fees payable are assumed to be $100,000 per
year and are assumed to remain constant throughout the life of the transaction.
Credit Losses
Credit losses are assumed to be equal to 0.10% of gross revenue.
102
Hedging
It is assumed that the Issuer makes and receives interest rate swap
and cap payments in accordance with their hedging agreements as set forth under
"Description of the Series 2006-1 Notes and the Indenture - Hedging
Requirements."
Early Amortization Events
For purposes of the matters discussed herein, Early Amortization
Events as a result of the Asset Base being less than $400,000,000 as of any
Payment Date or the Weighted Average Age of Eligible Containers exceeding 8.5
years as of any Payment Date have not been considered.
PRINCIPAL PAYMENTS UNDER THE STRUCTURING ASSUMPTIONS
The table below shows, for each Payment Date presented, the percentage
of the initial unpaid principal balance of all Series 2006-1 Notes expected to
be Outstanding on such Payment Date based on the Structuring Assumptions. It is
highly unlikely that the Structuring Assumptions will correspond to actual
outcomes. Therefore, principal payments on the Series 2006-1 Notes may occur
earlier or later than as set forth in the table. Prior to the Series 2006-1
Legal Final Maturity Date, the failure of the Issuer to make principal payments
on any Payment Date because funds are not available therefor in accordance with
the order of priorities described under "-- Flow of Funds" will not constitute
an Event of Default.
PERCENT OF INITIAL PRINCIPAL BALANCE OF THE SERIES 2006-1 NOTES BASED ON THE
STRUCTURING ASSUMPTIONS (1)
Payment Date Percent of
Occurring In: Initial Principal Balance
- ------------------------------------- -------------------------
At Closing 100%
4/20/2007 90%
4/20/2008 80%
4/20/2009 70%
4/20/2010 60%
4/20/2011 50%
4/20/2012 40%
4/20/2013 30%
4/20/2014 20%
4/20/2015 10%
4/20/2016 0%
Weighted Average Life (years) 5.1
Series 2006-1 Expected Final Maturity 10.0
(1) See Annexes B, C, and D hereto for further data regarding net cash flows,
Minimum Targeted Principal Balances, and Scheduled Targeted Principal
Balances, respectively.
103
The following three sections titled "Sensitivity Analysis," "Stress
Scenario," and "Recessionary Stress Scenario" assume that the Warehouse Notes
are funded up to their maximum commitment of $300,000,000 from the Closing Date.
SENSITIVITY ANALYSIS
The following table shows the effect on the assumed net cash flow and
Weighted Average Life and expected final maturity of the Series 2006-1 Notes
when selected factors underlying the Structuring Assumptions are varied
throughout the transaction as indicated under the "Stress" column (in each case
holding other Structuring Assumptions constant).
Resulting Cashflow as a
Percent of Structuring Weighted Average Expected Final
Variable Stress Assumptions (Base Case) Life (years) Maturity
- ----------------------------------------------------------------------------------------------------------------------
Utilization (Service Lease A permanent 35% decrease 88.8% 5.1 10.0
Fleet) beginning year three
Utilization (Service Lease A permanent 35% increase 111.2% 5.1 10.0
Fleet) beginning year three
Per Diem Rates (Service Lease A permanent 30% decrease 91.0% 5.1 10.0
Fleet) beginning year three
Per Diem Rates (Service Lease A permanent 30% increase 109.0% 5.1 10.0
Fleet) beginning year three
Total Operating Expenses A permanent 25% increase 97.9% 5.1 10.0
Percent of Adjusted 70% 90.6% 5.1 10.0
NBV When Sold
Credit Losses 0.40% of revenue 99.7% 5.1 10.0
104
STRESS SCENARIO
The following set of stress factors is presented for illustrative
purposes only as an example of the combined effect on the cash flow model and
the principal repayment of the Series 2006-1 Notes of a number of stress factors
that could occur concurrently. Other combinations of stress factors could result
in greater volatility of principal repayment, and expanding the above stresses
would result in a still greater reduction in net cash flow and higher volatility
of principal repayment.
Variable Stress
- ---------------------------------------------------------------
Utilization (Service Lease Fleet) A permanent 10% decrease
Per Diem Rates (Service Lease Fleet) A permanent 10% decrease
Total Operating Expenses A permanent 15% increase
Percent of Adjusted NBV When Sold 90%
Credit Losses 0.20% of revenue
When applying all of the above stresses simultaneously, the resulting
net cash flow is 89.0% of the cash flow under the Structuring Assumptions. There
is no effect on the Weighted Average Life or the expected final maturity of the
Notes. Actual experience will likely differ from that assumed and, therefore,
the actual expected final maturity and Weighted Average Life of the Notes will
likely differ as well.
RECESSIONARY STRESS SCENARIO
Historically, the container industry has experienced cyclical swings
in both utilization and per diem rates. Gross revenue would likely decline in
the event of a decrease in either or both of these variables. The effect of such
a scenario on the expected final maturity and Weighted Average Life of the Notes
is depicted below.
Year 2 3 4 5 6 7 8 9 10 11 12 13 14 15
- ------------------------------------------------------------------------------------------
Utilization Declines
(Service Lease Fleet) 10% 25% 25% 10% 0% 0% 10% 20% 20% 10% 0% 0% 10% 20%
Per Diem Rate
Declines (Service
Lease Fleet) 0% 10% 25% 25% 10% 0% 0% 10% 20% 20% 10% 0% 0% 10%
Proceeds upon disposal of any Managed Container are assumed to be
80.0% of the Net Book Value of such Managed Container on the date of such
disposition.
When applying the above recessionary stresses, the resulting net cash
flow is 88.1% of the cash flow under the Structuring Assumptions. There is no
effect on the Weighted Average Life or the expected final maturity of the Series
2006-1 Notes. Actual experience will likely differ from that assumed and,
therefore, the actual expected final maturity and Weighted Average Life of the
Series 2006-1 Notes will likely differ as well.
105
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax
consequences of the purchase, ownership and disposition of the Series 2006-1
Notes. This summary is based upon current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), proposed, temporary and final Treasury
regulations thereunder, and published rulings and court decisions currently in
effect. The current tax laws and the current regulations, rulings and court
decisions on which this summary is based may be changed, possibly retroactively,
and subject to differing interpretation.
NOTICE PURSUANT TO IRS CIRCULAR 230
THIS DISCUSSION IS NOT INTENDED OR WRITTEN BY THE ISSUER OR ITS
COUNSEL TO BE USED, AND CANNOT BE USED, BY ANY PERSON FOR THE PURPOSE OF
AVOIDING TAX PENALTIES THAT MAY BE IMPOSED UNDER U.S. TAX LAWS. THIS DISCUSSION
IS PROVIDED TO SUPPORT THE PROMOTION OR MARKETING BY THE ISSUER OF THE SERIES
2006-1 NOTES OFFERED HEREBY. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON THE
TAXPAYER'S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR CONCERNING
THE POTENTIAL TAX CONSEQUENCES OF AN INVESTMENT IN THE SERIES 2006-1 NOTES.
The following summary does not furnish information in the level of
detail or with the attention to an investor's specific tax circumstances that
would be provided by an investor's own tax advisor. For example, it does not
discuss the tax consequences of the purchase, ownership and disposition of the
Series 2006-1 Notes by investors that are subject to special treatment under the
United States federal income tax laws, including banks and thrifts, insurance
companies, regulated investment companies, dealers and traders in securities,
holders that will hold the Series 2006-1 Notes as a position in a "straddle" for
tax purposes or as a part of a "synthetic security" or "conversion transaction"
or other integrated investment comprised of the Series 2006-1 Notes and one or
more other investments, investors whose functional currency is not the U.S.
dollar, partnerships and other pass-through entities and the holders of their
equity. In addition, the discussion regarding the Series 2006-1 Notes is limited
to the United States federal income tax consequences of the initial investors
and not a purchaser in the secondary market and to investors who have purchased
Series 2006-1 Notes and who hold those notes as capital assets within the
meaning of Section 1221 of the Code.
As used herein, "United States Noteholder" means a beneficial owner of
the Series 2006-1 Notes that, for United States federal income tax purposes, is
treated as:
o an individual who is a citizen or resident of the United States,
including an alien individual who is a lawful permanent resident
of the United States or meets the "substantial presence" test
under Section 7701(b) of the Code;
o a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or a
political subdivision thereof;
o an estate, the income of which is subject to United States
federal income tax regardless of its source; or
o a trust, if a United States court can exercise primary
supervision over the administration of the trust and one or more
United States persons can control all substantial trust
decisions, or if the trust was in existence on August 20, 1996,
and has elected to be treated as a United States person.
If a partnership or other entity taxable as a partnership holds the
Series 2006-1 Notes, the tax treatment of a partner will generally depend on the
status of the partner and the activities of the partnership. Such partner should
consult its tax advisor as to the tax consequences of an investment in the
Series 2006-1 Notes.
106
TAX CHARACTERIZATION OF THE ISSUER
Mayer, Brown, Rowe & Maw LLP, special federal income tax counsel to
the Issuer ("Federal Tax Counsel"), is of the opinion that the Issuer will not
be treated as an association (or publicly traded partnership) taxable as a
corporation for United States federal income tax purposes. This opinion is based
on the assumption of compliance by all parties with the terms of the limited
liability agreement of the Issuer, the Transaction Documents, and the
supplements to the Indentures for other outstanding Series of Notes, the
accuracy of certain representations of TAL, and the accuracy of opinions of
counsel as to certain United States federal income tax matters that may be
rendered in the future to the Issuer or the Indenture Trustee pursuant to the
Transaction Documents. An opinion of counsel, however, is not binding on the
Internal Revenue Service (the "IRS") or the courts. As a result, the IRS may
disagree with all or a part of the discussion below. No ruling on any of the
issues discussed below will be sought from the IRS.
TAX CHARACTERIZATION OF THE SERIES 2006-1 NOTES
Treatment of the Series 2006-1 Notes as Indebtedness. Pursuant to the
Indenture, the Series 2006-1 Supplement and the other Transaction Documents, the
Issuer and the Indenture Trustee agree, and the Series 2006-1 Noteholders, by
acceptance of their Series 2006-1 Notes, will agree, to treat such Series 2006-1
Notes as indebtedness for United States federal, state, and local income and
franchise tax purposes. Federal Tax Counsel is of the opinion that the Series
2006-1 Notes will be treated as debt for United States federal income tax
purposes. The discussion below assumes the Series 2006-1 Notes are treated as
debt for United States federal income tax purposes.
TAX CONSEQUENCES TO UNITED STATES NOTEHOLDERS
Interest Income on the Series 2006-1 Notes. Interest on the Series
2006-1 Notes will be taxable as ordinary income for United States federal income
tax purposes when received by a United States Noteholder using the cash method
of accounting or when accrued by a United States Noteholder using the accrual
method of accounting.
Original Issue Discount. It is not anticipated that the Series 2006-1
Notes will be issued with more than a de minimis amount of original issue
discount ("OID") for United States federal income tax purposes. OID on the
Series 2006-1 Notes would be calculated as the excess of all payments on the
Series 2006-1 Notes, other than stated interest, over the "issue price" of the
Series 2006-1 Notes, which is the first price at which a substantial amount of
the Series 2006-1 Notes are sold by the Initial Purchasers to investors. If the
Series 2006-1 Notes are issued with any OID, it will be a de minimis amount if
it is less than 1/4% of the principal amount of the Series 2006-1 Notes
multiplied by their weighted average maturity, as determined under Treasury
regulations. Under the Treasury regulations, a United States Noteholder would
include de minimis OID in income as capital gain on a pro rata basis as
principal payments are made on the relevant note.
Sale or Other Taxable Disposition. If a United States Noteholder sells
or otherwise disposes of a Series 2006-1 Note in a taxable disposition, gain or
loss will be recognized in an amount equal to the difference between the amount
realized on the sale or disposition and the adjusted tax basis of the note. A
United States Noteholder's adjusted tax basis in a note will equal its cost,
increased by any gain previously included in income of the United States
Noteholder with respect to the note and decreased by the amount of principal
payments previously received by the United States Noteholder with respect to the
note. Any gain or loss will be capital gain or loss, except for gain
representing accrued interest. Utilization of capital losses to offset taxable
income is subject to limitation.
TAX CONSEQUENCES TO NON-UNITED STATES NOTEHOLDERS
Non-United States Noteholders. The following information describes the
United States federal income tax treatment of an investor in Series 2006-1 Notes
that is neither a United States Noteholders nor treated as partnership for
United States federal income tax purposes (a "Non-United States Noteholder").
Subject to the discussion of back-up withholding below, payments of
interest to a Non-United States Noteholder generally will not be subject to
United States federal income or withholding tax, provided that such payments are
not effectively connected with a United States trade or business conducted by
the Non-United States Noteholder and such Non-United States Noteholder:
107
o does not directly or indirectly, actually or constructively, own
10% or more of the capital or profits interest of the Issuer or
10% or more of the combined voting power of all classes of stock
of TAL entitled to vote;
o is not a "controlled foreign corporation" with respect to which
either TAL or the Issuer is a "related person" within the meaning
of the Code; and
o either (1) certifies in a statement provided to the Issuer or its
paying agent, under penalties of perjury, that it is not a
"United States person" within the meaning of the Code and
provides its name and address (generally on IRS Form W-8BEN), or
(2) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary
course of its trade or business and holds the Series 2006-1 Notes
on behalf of the Non-United States Noteholder certifies to the
Issuer or its paying agent under penalties of perjury that it, or
the financial institution between it and the Non-United States
Noteholder, has received from the Non-United States Noteholder a
statement, under penalties of perjury, that such Non-United
States Noteholder is not a "United States person", and provides
the Issuer or its paying agent with a copy of such statement. If
Series 2006-1 Notes are owned by non-U.S. partnerships or certain
non-U.S. trusts or held by non-U.S. intermediaries, such
partnerships, trusts and intermediaries may also be required to
comply with certain certification procedures (generally, by
providing the foregoing certifications from the partners,
beneficiaries or other beneficial owners) in order to obtain the
withholding exemption.
If the above conditions are not met, interest paid on a Series 2006-1
Note will be subject to U.S. withholding tax at a rate of 30%, unless the
Non-United States Noteholder is entitled to a reduction in or an exemption from
withholding tax on interest under a tax treaty between the United States and the
Non-United States Noteholder's country of residence. A Non-United States
Noteholder may claim such exemption on a completed IRS Form W-8BEN containing
the Non-United States Noteholder's U.S. taxpayer identification number that is
delivered to the Issuer or its paying agent. In some cases, a Non-United States
Noteholder may instead be permitted to provide documentary evidence of its claim
to an intermediary, or a "qualified" intermediary may already have some or all
of the necessary documentation in its files. A Non-United States Noteholder
generally will also be exempt from U.S. withholding tax on interest if such
interest is effectively connected with a United States trade or business of the
Non-United States Noteholder (as described below) and the Non-United States
Noteholder provides the Issuer with an IRS Form W-8ECI.
A Non-United States Noteholder will generally not be subject to United
States federal income tax or withholding tax on gain recognized on the sale,
exchange, redemption, retirement or other taxable disposition of a Series 2006-1
Note that is not effectively connected with a United States trade or business of
Non-United States Noteholder. However, a Non-United States Noteholder may be
subject to tax on such gain if such Holder is an individual who was present in
the United States for 183 days or more in the taxable year of the disposition
and certain other conditions are met, in which case such Holder may have to pay
a United States federal income tax of 30% (or, if applicable, a lower treaty
rate) on such gain.
If interest or gain from a disposition of the Series 2006-1 Notes is
effectively connected with a Non-United States Noteholder's conduct of a United
States trade or business, and, if an income tax treaty applies, the Non-United
States Noteholder maintains a United States "permanent establishment" to which
the interest or gain is generally attributable, the Non-United States Noteholder
generally will be subject to United States federal income tax on the interest or
gain on a net basis in the same manner as if it were a United States Noteholder.
A Non-U.S. United States Noteholder that is a corporation may also be subject to
a branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments, unless it
qualifies for a lower rate under an applicable income tax treaty.
INFORMATION REPORTING AND BACK-UP WITHHOLDING
Information reporting and backup withholding requirements may apply to
payments of principal and interest on a Series 2006-1 Note and to payments of
proceeds on the sale, exchange or other disposition of a Series 2006-1 Note.
Backup withholding may be imposed (currently at a rate of 28%) on specified
payments if a United
108
States Noteholder fails to furnish its taxpayer identification number (social
security number or employer identification number) or a Non-United States
Noteholder fails to furnish its certificate of foreign status to certify that
the Noteholder is not subject to backup withholding, or in either case to
otherwise comply with all applicable requirements of the backup withholding
rules. Certain Series 2006-1 Noteholders (including, among others, corporations)
are not subject to the backup withholding and information reporting
requirements. United States Noteholders who are required to establish their
exempt status generally must provide IRS Form W-9. Non-United States Noteholders
generally are not subject to U.S. information reporting or backup withholding,
although they may be required to certify to the relevant paying agent as to
their non-U.S. status. Series 2006-1 Noteholders should consult their own tax
advisors regarding the application of the information reporting and backup
withholding rules. Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules generally may be claimed as a credit
against the Series 2006-1 Noteholder's United States federal income tax
liability or eligible for refund, provided that the required information is
furnished to the IRS.
CERTAIN STATE, LOCAL AND OTHER TAX CONSIDERATIONS
Investors should consider, and consult their own tax advisors
regarding, the state, local, foreign and other tax consequences of purchasing,
owning or disposing of a Series 2006-1 Note. State, local and foreign tax laws
may differ substantially from the corresponding U.S. federal tax law, and the
foregoing discussion does not purport to describe any aspect of the tax laws of
any state, local, foreign or other jurisdiction.
The U.S. federal tax consequences set forth above are included for
general information only and may not be applicable depending upon a Series
2006-1 Noteholder's particular tax situation. Prospective purchasers should
consult their tax advisors with respect to the tax consequences to them of the
purchase, ownership and disposition of the Series 2006-1 Notes, including the
tax consequences under state, local, foreign and other tax laws and the possible
effects of changes in U.S. federal or other tax laws.
109
CERTAIN ERISA CONSIDERATIONS
Subject to the following discussion the Series 2006-1 Notes may be
acquired by pension, profit-sharing or other employee benefit plans subject to
ERISA, as well as individual retirement accounts, Keogh plans and other plans
subject to Section 4975 of the Code, as well as any entity whose underlying
assets include plan assets of any of the foregoing (each, a "Benefit Plan").
Section 406 of ERISA and Section 4975 of the Code prohibit an ERISA plan from
engaging in certain transactions with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to a Benefit
Plan. A violation of these "prohibited transaction" rules may result in an
excise tax or other penalties and liabilities under ERISA and the Code for such
persons or the fiduciaries of a Benefit Plan. In addition, Title I of ERISA also
requires fiduciaries of a Benefit Plan subject to ERISA to make investments that
are prudent, diversified and in accordance with the governing plan documents.
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements. However, governmental plans may be
subject to comparable state law restrictions.
Certain transactions involving the Issuer might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Benefit Plan that purchased Series 2006-1 Notes if assets of the Issuer were
deemed to be assets of the Benefit Plan. Under regulations issued by the U.S.
Department of Labor (the "Plan Asset Regulations"), the assets of the Issuer
would be treated as plan assets of a Benefit Plan for purposes of ERISA and the
Code only if the Benefit Plan acquired an "equity interest" in the Issuer and
none of the exceptions contained in the Plan Asset Regulations were applicable.
An equity interest is defined under the Plan Asset Regulations as an interest
other than an instrument which is treated as indebtedness under applicable local
law and which has no substantial equity features. Although there is little
guidance on the subject, assuming the Series 2006-1 Notes constitute debt for
local law purposes, the Issuer believes that, at the time of their issuance, the
Series 2006-1 Notes should not be treated as an equity interest in the Issuer
for purposes of the Plan Asset Regulations. This determination is based in part
upon the traditional debt features of the Series 2006-1 Notes, including the
reasonable expectation of purchasers of Series 2006-1 Notes that the Series
2006-1 Notes will be repaid when due, as well as the absence of conversion
rights, warrants and other typical equity features. The debt treatment of the
Series 2006-1 Notes for ERISA purposes could change if the Issuer incurs losses.
However, without regard to whether the Series 2006-1 Notes are treated
as an equity interest for purposes of the Plan Asset Regulations, the
acquisition, holding or disposition of Series 2006-1 Notes by or on behalf of a
Benefit Plan could be considered to give rise to a prohibited transaction if the
Issuer, the Indenture Trustee or any of their respective affiliates is or
becomes a party in interest or a disqualified person with respect to such
Benefit Plan. Certain exemptions from the prohibited transaction rules could be
applicable to the purchase, holding or disposition of Series 2006-1 Notes by a
Benefit Plan depending on the type and circumstances of the plan fiduciary
making the decision to acquire such Series 2006-1 Notes. Included among these
exemptions are: Prohibited Transaction Class Exemption ("PTCE") 96-23, regarding
transactions effected by "in-house asset managers"; PTCE 95-60, regarding
investments by insurance company general accounts; PTCE 91-38, regarding
investments by bank collective investment funds; PTCE 90-1, regarding
investments by insurance company pooled separate accounts; and PTCE 84-14,
regarding transactions effected by "qualified professional asset managers." Each
purchaser and transferee of a Series 2006-1 Note will be deemed to represent and
warrant that either (i) it is not acquiring the Series 2006-1 Note with the plan
assets of a Benefit Plan or any other plan that is subject to a law that is
similar to Title I of ERISA or Section 4975 of the Code or (ii) the acquisition,
holding and disposition of the Series 2006-1 Note does not give rise to a
non-exempt prohibited transaction under Section 406 of ERISA, Section 4975 of
the Code or any similar applicable law.
A plan fiduciary considering the purchase of Series 2006-1 Notes
should consult its legal advisors regarding whether the assets of the Issuer
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other issues and their potential consequences.
110
RESTRICTIONS ON TRANSFERS AND NOTICE TO INVESTORS
Because of the following restrictions, Series 2006-1 Noteholders are
advised to consult legal counsel prior to any offer, resale, pledge or other
transfer of the Series 2006-1 Notes.
The Series 2006-1 Notes have not been and will not be registered under
the Securities Act or any state securities or "blue sky" laws and may not be
offered or sold except in a transaction that is exempt from or not subject to
the registration requirements of the Securities Act and such other laws.
The Indenture Trustee shall not permit the transfer of any Note unless
such transfer complies with the terms of the legends set forth below and, in the
case of a transfer (i) to an Institutional Accredited Investor (other than a
Qualified Institutional Buyer), the transferee delivers a completed Purchaser
Letter to the Indenture Trustee, or (ii) to a United States Person other than a
Qualified Institutional Buyer or an Institutional Accredited Investor, upon
delivery of an opinion of counsel satisfactory to the Indenture Trustee and the
Issuer, to the effect that the transferee is taking delivery of the Series
2006-1 Notes in a transaction that is otherwise exempt for the registration
requirements of the Securities Act.
Each purchaser (other than the Initial Purchasers) of Series 2006-1
Notes will be deemed to have represented, acknowledged and agreed as follows:
(1) It is (a) a qualified institutional buyer as defined in Rule 144A
("Qualified Institutional Buyer") and is acquiring such Series 2006-1 Notes for
its own institutional account or for the account or accounts of a Qualified
Institutional Buyer, or (b) purchasing the Series 2006-1 Notes in a transaction
exempt from registration under the Securities Act and in compliance with the
Series 2006-1 Supplement and in compliance with the legend set forth in clause
(6) below, or (c) is not a United States Person and is acquiring such Series
2006-1 Notes outside the United States;
(2) It is purchasing one or more Series 2006-1 Notes in an amount of
at least $100,000 (or, if greater, the U.S. dollar equivalent of 50,000 Euros)
and it understands that such Series 2006-1 Notes may be resold, pledged or
otherwise transferred only in an amount of at least $100,000 (or, if greater,
the U.S. dollar equivalent of 50,000 Euros);
(3) It represents and warrants to the Initial Purchasers, the Issuer,
and the Indenture Trustee that either (i) it is not acquiring the Series 2006-1
Note with the plan assets of an "employee benefit plan" as defined in Section
3(3) of ERISA, which is subject to the provisions of Title I of ERISA, a "plan"
described in Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended
(the "Code"), an entity whose underlying assets include "plan assets" of any of
the foregoing by reason of an employee benefit plan's or plan's investment in
such entity or any other plan that is subject to a law that is similar to Title
I of ERISA or Section 4975 of the Code or (ii) the acquisition, holding and
disposition of the Series 2006-1 Note will not give rise to a non-exempt
prohibited transaction under Section 406 of ERISA, Section 4975 of the Code or
any similar applicable law;
(4) It understands that the Series 2006-1 Notes are being transferred
to it in a transaction not involving any public offering in the United States
within the meaning of the Securities Act, and that, if in the future it decides
to resell, pledge or otherwise transfer any Series 2006-1 Notes, such Series
2006-1 Notes may be resold, pledged or transferred only in accordance with
applicable state securities laws and (i) in a transaction meeting the
requirements of Rule 144A, to a person that the transferor reasonably believes
is a Qualified Institutional Buyer that purchases for its own account (or for
the account or accounts of a Qualified Institutional Buyer) and to whom notice
is given that the resale, pledge or transfer is being made in reliance on Rule
144A, (ii) (a) to a person that is an Institutional Accredited Investor, is
taking delivery of such Note in an amount of at least $100,000 (or, if greater,
the U.S. dollar equivalent of 50,000 Euros) and delivers a Purchaser Letter in
the form of Annex A hereto to the Indenture Trustee, or (b) to a person that is
taking delivery of such Note pursuant to a transaction that is otherwise exempt
from the registration requirements of the Securities Act, as confirmed in an
opinion of counsel addressed to the Indenture Trustee and the Issuer, which
counsel and opinion are satisfactory to the Indenture Trustee and the Issuer, or
(iii) in an offshore transaction in accordance with Rule 903 or Rule 904 of
Regulation S;
111
(5) It is not a Competitor; and
(6) It understands that each Series 2006-1 Note shall bear a legend
substantially to the following effect:
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY
PURCHASING THIS NOTE, AGREES THAT SUCH NOTE MAY BE RESOLD, PLEDGED OR
TRANSFERRED ONLY IN ACCORDANCE WITH ANY APPLICABLE STATE SECURITIES
LAWS AND (1) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A
UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THAT THE
TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER THAT
PURCHASES FOR ITS OWN ACCOUNT (OR FOR THE ACCOUNT OR ACCOUNTS OF A
QUALIFIED INSTITUTIONAL BUYER) AND TO WHOM NOTICE IS GIVEN THAT THE
RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE
144A, OR (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 903 OR
RULE 904 OF REGULATION S UNDER THE SECURITIES ACT OR (3) TO A PERSON
(A) THAT IS AN INSTITUTIONAL "ACCREDITED INVESTOR," WITHIN THE MEANING
OF RULE 501(A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE
SECURITIES ACT, IS TAKING DELIVERY OF SUCH NOTE IN AN AMOUNT OF AT
LEAST $100,000 (OR, IF GREATER, THE U.S. DOLLAR EQUIVALENT OF 50,000
EUROS) AND DELIVERS A PURCHASER LETTER TO THE INDENTURE TRUSTEE IN THE
FORM ATTACHED TO THE INDENTURE OR (B) THAT IS TAKING DELIVERY OF SUCH
NOTE PURSUANT TO A TRANSACTION THAT IS OTHERWISE EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, AS CONFIRMED IN AN
OPINION OF COUNSEL ADDRESSED TO THE INDENTURE TRUSTEE AND THE ISSUER,
WHICH COUNSEL AND OPINION ARE SATISFACTORY TO THE ISSUER AND THE
INDENTURE TRUSTEE.
EACH PURCHASER AND TRANSFEREE OF A NOTE WILL BE DEEMED TO REPRESENT
AND WARRANT THAT EITHER (I) IT IS NOT ACQUIRING THE NOTE WITH THE PLAN
ASSETS OF AN "EMPLOYEE BENEFIT PLAN" AS DEFINED IN SECTION 3(3) OF THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"),
WHICH IS SUBJECT TO THE PROVISIONS OF TITLE I OF ERISA, A "PLAN"
DESCRIBED IN SECTION 4975(E)(1) OF THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED (THE "CODE"), AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE
"PLAN ASSETS" OF ANY OF THE FOREGOING BY REASON OF AN EMPLOYEE BENEFIT
PLAN'S OR PLAN'S INVESTMENT IN SUCH ENTITY OR ANY OTHER PLAN THAT IS
SUBJECT TO A LAW THAT IS SIMILAR TO TITLE I OF ERISA OR SECTION 4975
OF THE CODE OR (II) THE ACQUISITION, HOLDING AND DISPOSITION OF THE
NOTE WILL NOT GIVE RISE TO A NON-EXEMPT PROHIBITED TRANSACTION UNDER
SECTION 406 OF ERISA, SECTION 4975 OF THE CODE OR ANY SIMILAR
APPLICABLE LAW.
THIS NOTE IS NOT GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
[FOR GLOBAL NOTES ONLY:
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE
TRANSFEROR OF SUCH NOTE (THE "TRANSFEROR") OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS
MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR THE USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
112
INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.]
[FOR REGULATION S BOOK-ENTRY NOTES ONLY:
EACH INVESTOR PURCHASING THIS NOTE IN RELIANCE UPON REGULATION S OF
THE SECURITIES ACT UNDERSTANDS THAT THE NOTES HAVE NOT AND WILL NOT BE
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), THAT ANY OFFERS, SALES OR DELIVERIES OF THE NOTES
PURCHASED BY IT IN THE UNITED STATES OR TO U.S. PERSONS (AS DEFINED IN
REGULATION S UNDER THE SECURITIES ACT) PRIOR TO THE DATE THAT IS 40
DAYS AFTER THE LATER OF (I) THE COMMENCEMENT OF THE DISTRIBUTION OF
THE NOTES AND (II) THE CLOSING DATE, MAY CONSTITUTE A VIOLATION OF
UNITED STATES LAW, AND THAT DISTRIBUTIONS OF PRINCIPAL AND INTEREST
WILL BE MADE IN RESPECT OF SUCH NOTES ONLY FOLLOWING THE DELIVERY BY
THE HOLDER OF A CERTIFICATION OF NON-U.S. BENEFICIAL OWNERSHIP OR THE
EXCHANGE OF BENEFICIAL INTEREST IN REGULATION S TEMPORARY GLOBAL NOTES
FOR BENEFICIAL INTERESTS IN THE RELATED UNRESTRICTED BOOK ENTRY NOTES
(WHICH IN EACH CASE WILL ITSELF REQUIRE A CERTIFICATION OF NON-U.S.
BENEFICIAL OWNERSHIP), AT THE TIMES AND IN THE MANNER SET FORTH IN THE
INDENTURE.
EACH PURCHASER AND TRANSFEREE OF A NOTE WILL BE DEEMED TO REPRESENT
AND WARRANT THAT EITHER (I) IT IS NOT ACQUIRING THE NOTE WITH THE PLAN
ASSETS OF AN "EMPLOYEE BENEFIT PLAN" AS DEFINED IN SECTION 3(3) OF THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"),
WHICH IS SUBJECT TO THE PROVISIONS OF TITLE I OF ERISA, A "PLAN"
DESCRIBED IN SECTION 4975(E)(1) OF THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED (THE "CODE"), AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE
"PLAN ASSETS" OF ANY OF THE FOREGOING BY REASON OF AN EMPLOYEE BENEFIT
PLAN'S OR PLAN'S INVESTMENT IN SUCH ENTITY OR ANY OTHER PLAN THAT IS
SUBJECT TO A LAW THAT IS SIMILAR TO TITLE I OF ERISA OR SECTION 4975
OF THE CODE OR (II) THE ACQUISITION, HOLDING AND DISPOSITION OF THE
NOTE WILL NOT GIVE RISE TO A NON-EXEMPT PROHIBITED TRANSACTION UNDER
SECTION 406 OF ERISA, SECTION 4975 OF THE CODE OR ANY SIMILAR
APPLICABLE LAW.
THIS NOTE IS NOT GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OF THE UNITED STATES.]
113
CERTAIN LEGAL INVESTMENT CONSIDERATIONS
Institutions whose investment activities are subject to legal
investment laws and regulations or to review by certain regulatory authorities
may be subject to restrictions on investments in the Series 2006-1 Notes. Any
such institution should consult its legal advisors in determining whether and to
what extent there may be restrictions on its ability to invest in the Series
2006-1 Notes. Without limiting the foregoing, any financial institution that is
subject to the jurisdiction of the Comptroller of Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, the National Credit Union
Administration, any state insurance commission, or any other federal or state
agencies with similar authority should review any applicable rules, guidelines
and regulations prior to purchasing the Series 2006-1 Notes. Depository
institutions should review and consider the applicability of the Federal
Financial Institutions Examination Council Supervisory Policy Statement on
Securities Activities, which has been adopted by the respective federal
regulators.
None of the Issuer or the Initial Purchasers make any representation
as to the proper characterization of the Series 2006-1 Notes for legal
investment or other purposes, or as to the ability of particular investors to
purchase the 2006-1 Notes for legal investment or other purposes, or as to the
ability of particular investors to purchase the Notes under applicable
investment restrictions. The uncertainties described above (and any unfavorable
future determinations concerning legal investment or financial institution
regulatory characteristics of the Series 2006-1 Notes) may affect the liquidity
of the Series 2006-1 Notes. Accordingly, all institutions whose activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult their own legal
advisors in determining whether and to what extent the Series 2006-1 Notes are
subject to investment, capital or other restrictions.
PLAN OF DISTRIBUTION
Fortis Securities LLC ("Fortis Securities") and Credit Suisse
Securities (USA) LLC ("Credit Suisse") are the Initial Purchasers of the Series
2006-1 Notes. The Initial Purchasers have, pursuant to the Note Purchase
Agreement for the Series 2006-1 Notes (the "Purchase Agreement"), agreed with
the Issuer to purchase Series 2006-1 Notes offered hereby having an aggregate
principal balance in the amount set forth opposite its name:
Aggregate Principal Balance
Initial Purchaser of Series 2006-1 Notes
- ----------------------------------------------------------------
Fortis Securities LLC $
Credit Suisse Securities (USA) LLC $
Total $
The price paid by the Initial Purchasers for the Series 2006-1 Notes
may be less than those paid by other purchasers of Series 2006-1 Notes. In
addition to the structuring fees paid to it, the Initial Purchasers may be
deemed to receive compensation for the sale of the Series 2006-1 to the extent
that the price(s) paid by them for the Series 2006-1 Notes is less than the
price(s) at which they are sold.
The Purchase Agreement provides that the obligations of the Initial
Purchasers are subject to certain conditions precedent. Pursuant to the Purchase
Agreement, the Issuer has agreed to indemnify the Initial Purchasers against
certain liabilities in connection with the offer and sale of the Series 2006-1
Notes, including liabilities under the Securities Act, and to contribute to
payments that the Initial Purchasers may be required to make in respect thereof.
No subsequent Series 2006-1 Noteholder will have the benefit of such
indemnification or contribution rights. The Issuer has also agreed to reimburse
the Initial Purchasers for certain expenses incurred by the Initial Purchasers
in connection with the offering of the Series 2006-1 Notes.
114
The Series 2006-1 Notes have not been registered under the Securities
Act or any state securities or "blue sky" laws and may not be offered or sold
unless registered under, or offered and sold in certain transactions exempt from
the registration requirements of, the Securities Act and such other laws.
The Issuer has been advised by the Initial Purchasers that: the
Initial Purchasers propose to resell the Series 2006-1 Notes initially (i)
outside the United States to non-United States Persons within the meaning of,
and in compliance with, Regulation S, or (ii) within the United States to (x)
Qualified Institutional Buyers in reliance on Rule 144A under the Securities
Act, or (y) Institutional Accredited Investors (see "Restrictions on Transfers
and Notice to Investors" herein); any offer or sale of Series 2006-1 Notes by
the Initial Purchasers made in reliance on Rule 144A will be made by the Initial
Purchasers or other broker-dealers, including certain affiliates of the Initial
Purchasers that are registered as broker-dealers under the Exchange Act; and the
Initial Purchasers may allow a concession to certain brokers or dealers.
No action has been or will be taken by the Issuer in any jurisdiction
that would permit a public offering of the Series 2006-1 Notes or possession or
the distribution of this Preliminary Offering Memorandum or any amendment or
supplement hereto or any other offering material relating to the Series 2006-1
Notes in any jurisdiction where action for such purpose is required.
The Series 2006-1 Notes will constitute a new class of securities with
no established trading market. The Issuer does not intend to list the Series
2006-1 Notes on any national securities exchange or to seek the admission
thereof for trading on any automated dealer quotation system. The Issuer has
been advised by the Initial Purchasers that, following the completion of the
offering and sale of the Series 2006-1 Notes, the Initial Purchasers currently
intend to make a market in the Series 2006-1 Notes. However, the Initial
Purchasers are not obligated to do so and any market-making activities with
respect to the Series 2006-1 Notes may be discontinued at any time, in the sole
discretion of the Initial Purchasers, without notice. In addition, such
market-making activity will be subject to the limits imposed by the Exchange
Act. Accordingly, no assurance can be given as to the liquidity of, or the
trading market for, the Series 2006-1 Notes.
The Initial Purchasers may engage in over-allotment, syndicate
covering transactions and penalty bids in accordance with Regulation M under the
Exchange Act. Over-allotment involves sales in excess of the offering size,
which creates a short position for an Initial Purchaser. Covering transactions
involve purchases of the Series 2006-1 Notes in the open market after the
distribution has been completed in order to cover short positions. Penalty bids
permit the Initial Purchasers to reclaim a selling concession from a dealer when
the Series 2006-1 Notes originally sold by such dealer are purchased in a
covering transaction to cover short positions. Such stabilizing transactions,
covering transactions and penalty bids may cause the price of the Series 2006-1
Notes to be higher than it would otherwise be in the absence of such
transactions.
The Issuer and the Initial Purchasers extend to each prospective
investor the opportunity, prior to the consummation of the sale of the Series
2006-1 Notes, to ask questions of, and receive answers from, the Issuer and the
Initial Purchasers concerning the Series 2006-1 Notes and the terms and
conditions of this offering and to obtain any additional information it may
consider necessary in making an informed investment decision, to the extent the
Issuer or the Initial Purchasers possess the same.
From time to time, each of Fortis Securities, Credit Suisse and their
affiliates have provided, and may in the future provide, investment banking
services and engage in transactions with TAL, the Issuer and their affiliates
for which they have, and would receive, customary fees, expenses and
indemnities.
An Initial Purchaser or its affiliate currently acts, and may in the
future act, as a Hedge Counterparty with respect to one or more Interest Rate
Hedge Agreements in connection with interest rate management activities of the
Issuer.
Affiliates of the Initial Purchasers may purchase Series 2006-1 Notes
for investment purposes.
Fortis Capital Corp., an affiliate of Fortis Securities, acts as
Administrative Agent on behalf of the Indenture Trustee with respect to various
obligations under the Indenture and the other Transaction Documents for
115
which it receives certain fees and expenses. See "Description of the
Administration Agreement" herein. Fortis Capital Corp. is also a Holder of
certain of the Warehouse Notes and, as described under "Use of Proceeds," will
receive payment of a portion of net proceeds of the sale of Series 2006-1 Notes
in its capacity as a Holder of Warehouse Notes.
CO-MANAGERS
Each of HSH Nordbank AG, WestLB AG, ING Financial Markets LLC, and
BTMU Capital Corporation (each a "Co-Manager" and, collectively, the
"Co-Managers") have been designated by the Issuer as a Co-Manager with respect
to the Series 2006-1 Notes. The Co-Managers or one of their affiliates may
purchase Series 2006-1 Notes for investment purposes. None of the Co-Managers,
except for ING Financial Markets LLC, is a licensed U.S. broker dealer and,
except as purchasers of the Series 2006-1 Notes, no Co-Manager has participated
in the offer, sale and/or distribution of the Series 2006-1 Notes, or effected
transactions in the Series 2006-1 Notes, for the account of others. No
Co-Manager makes any representation or warranty, express or implied, relating to
the accuracy or completeness of the information set forth in this Preliminary
Offering Memorandum or in any other written or oral communication transmitted or
made available to an offeree, and each Co-Manager expressly disclaims any and
all liability based on such information or omissions therefrom.
Each Co-Manager has engaged, and in the future may engage, in
transactions with the Issuer, TAL and their respective affiliates, for which
such Co-Manager will receive customary fees. Finally, a portion of the proceeds
from the sale of the Series 2006-1 Notes will be paid on the Closing Date to
each Co-Manager or one of its affiliates as part of the payment in full of
indebtedness owing by the Issuer to each of them.
Each Co-Manager or one of its affiliates has agreed to purchase from
the Issuer a portion of the Warehouse Notes to be issued on the Closing Date.
Except as purchasers of the Warehouse Notes, no Co-Manager has participated in
the offer, sale and/or distribution of such Notes, or effected transactions of
such Notes for the account of others.
RATINGS OF THE OFFERED NOTES
It is a condition to the issuance of the Series 2006-1 Notes that the
Series 2006-1 Notes, taking into consideration the Policy, are rated "AAA" by
Standard & Poor's and "Aaa" by Moody's. Such ratings are not to be considered a
recommendation to purchase, hold or sell the Series 2006-1 Notes, inasmuch as
such ratings do not comment as to market price or suitability for a particular
investor. There is no assurance that any such rating will continue for any
period of time or that it will not be lowered or withdrawn entirely by the
related Rating Agency if, in its judgment, circumstances so warrant. A revision
or withdrawal of such rating may have an adverse affect on the market price of
the Series 2006-1 Notes. Any such rating of the Series 2006-1 Notes addresses
the likelihood of the timely payment of interest on each Payment Date and the
ultimate payment of principal on the Series 2006-1 Notes by the stated Series
2006-1 Legal Final Maturity Date. The ratings assigned to the Series 2006-1
Notes do not represent any assessment of the likelihood that the principal
prepayments might differ from those originally anticipated or address the
possibility that the Series 2006-1 Noteholders might suffer a lower than
anticipated yield.
The ratings of the Series 2006-1 Notes are based in part on the credit
ratings of the Series Enhancer as well as the terms of the Policy. There is no
assurance that the ratings on the Series 2006-1 Notes will not be lowered or
withdrawn if circumstances so warrant. Further, a security rating is not a
recommendation to buy, sell or hold securities. Each security rating should be
evaluated independently of any other security rating. See "-- Risk Factors --
Risks Related to the Series 2006-1 Notes -- Ratings of the Notes" and "-- Risk
Factors -- Risks Related to the Series 2006-1 Notes -- Effect of Rating
Downgrade of Series Enhancer" herein.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the issuance of the Notes will be
passed upon for the Issuer and TAL by Mayer, Brown, Rowe & Maw LLP, New York,
New York, for the Series Enhancer by an assistant general counsel of Series
Enhancer and for the Initial Purchasers by Thacher Proffitt & Wood LLP, New
York, New York. Mayer, Brown, Rowe & Maw LLP from time to time represents TAL in
connection with other matters.
116
WHERE PROSPECTIVE INVESTORS CAN FIND MORE INFORMATION
TAL's parent company, TAL Group, is subject to the informational
requirements of the Exchange Act. In accordance with the Exchange Act, TAL Group
files annual, quarterly and special reports, proxy statements and other
information with the SEC. These documents and other information can be
inspected, without charge, at the Public Reference Section of the SEC located at
100 F Street, N.E., Washington, D.C. 20549. Prospective investors may call the
SEC at 1-800-SEC-0330 for further information regarding the public reference
room. Prospective investors may also obtain copies of these documents by mail
from the Public Reference Section of the SEC, 100 F Street, N.E., Washington,
D.C. 20549, at prescribed rates. The SEC also maintains a web site at
http://www.sec.gov, which contains reports and other information regarding
registrants that file electronically with the SEC.
THE SERIES 2006-1 NOTES ARE OBLIGATIONS OF THE ISSUER AND ARE NOT
OBLIGATIONS OF TAL, TAL GROUP OR ANY OF THEIR AFFILIATES.
GENERAL INFORMATION
The CUSIP number for the 144A Global Notes is [__________].
The CUSIP number for the Regulation S Global Notes is [___________].
The CUSIP number for the Series 2006-1 Notes issued to Institutional Accredited
Investors is [__________].
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APPENDIX A
INDEX OF TERMS
As used in this Preliminary Offering Memorandum, the following terms
shall have the following meanings.
ACTUAL NET OPERATING INCOME. This term is defined under "Description
of the Management Agreement--Deposits to the Trust Account."
ADDITIONAL SERIES. This term is defined under "Summary -- Issuer."
ADJUSTED NET BOOK VALUE. With respect to any Managed Containers being
sold, an amount equal to (x) the sum of the respective Net Book Values of such
Managed Containers at the time of sale, minus (y) any insurance proceeds,
amounts paid by lessees or other Collections received by the Issuer in respect
of any damage to such Managed Container which was not repaired prior to sale or
in respect of any failure of the lessee to make repairs which were not made
prior to sale.
ADMINISTRATION AGREEMENT. The Amended and Restated Administration
Agreement, dated as of ________, 2006, as amended, modified or supplemented from
time to time in accordance with its terms, entered into by and among the Issuer,
TAL, the Administrative Agent and the Indenture Trustee.
ADMINISTRATIVE AGENT. Fortis Capital Corp., a Connecticut corporation,
and its permitted successors and assigns thereto.
ADMINISTRATIVE AGENT FEES. The fees payable to the Administrative
Agent under the Administration Agreement.
ADVANCE RATE. Eighty-two percent (82%).
AGGREGATE NET BOOK VALUE. As of any date of determination, the sum of
the Net Book Values (such Net Book Values to be measured as of the last day of
the month immediately preceding such date of determination) of all Eligible
Containers.
AGGREGATE NOTE PRINCIPAL BALANCE. As of any date of determination, the
sum of the then unpaid principal balance of all Series of Notes then
Outstanding.
AGGREGATE SERIES 2006-1 NOTE PRINCIPAL BALANCE. As of any date of
determination, an amount equal to the sum of the Series 2006-1 Note Principal
Balances of all Series 2006-1 Notes then Outstanding.
ANCILLARY FEES. All fees paid to and received by TAL under Lease
Agreements for drop-off, pick-up or repositioning charges, handling fees, repair
payments and repair insurance fees that are attributable to the Managed
Containers.
ASSET BASE. This term is defined under "Summary -- Asset Base."
ASSET BASE CERTIFICATE. A certificate with appropriate insertions
setting forth the components of the Asset Base as of the last day of the month
for which such certificate is submitted.
ASSET BASE DEFICIENCY. As of any Payment Date, the condition that
exists if the Aggregate Note Principal Balance (calculated after giving effect
to all payments of Minimum Principal Payment Amounts and Scheduled Principal
Payment Amounts to be paid on such Payment Date) exceeds the Asset Base. If such
term is used in a quantitative context, the amount of the Asset Base Deficiency
shall be equal to the amount of such excess.
AVAILABLE DISTRIBUTION AMOUNT. For any Payment Date, an amount equal
to the sum of (i) all amounts representing the Net Operating Income of the
Eligible Containers received during the related Collection Period, (ii)
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all other amounts received by the Issuer subsequent to the immediately preceding
Payment Date, (iii) all amounts transferred from the Restricted Cash Account in
accordance with the provisions of the Indenture; provided that the amounts
described in this clause (iii) may be used only to make the payments described
in the Indenture, (iv) any earnings on Eligible Investments in the Trust
Account, the Restricted Cash Account, the Temporary Loss Account and any Series
Accounts, (v) all Manager Advances made by the Manager in accordance with the
terms of the Management Agreement subsequent to the immediately preceding
Payment Date, (vi) the net amount received by the Issuer pursuant to any Hedge
Agreement then in effect and (vii) if so directed by the Issuer, amounts,
proceeds and funds contemplated by the Indenture (unless the Issuer directs
otherwise, the amounts and proceeds contemplated by this clause (vii) shall be
applied only in respect of principal on Notes of one or more Series).
BANKRUPTCY CODE. The United States Bankruptcy Reform Act of 1978, as
amended.
BORROWERS. Each of TAL, TOL and TOCC.
BUSINESS DAY. Any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City, London, England, the city in which
the Corporate Trust Office of the Indenture Trustee is located, or the city in
which the headquarters of the Administrative Agent is located, are authorized or
are obligated by law, executive order or governmental decree to be closed.
CALCULATED SALES PERCENTAGE. A fraction, expressed as a percentage,
(a) the numerator of which is the Original Equipment Cost of all Eligible
Containers that have been subject to sales since the first date on which the
most recent Series of Warehouse Notes ceased to be Outstanding and (b) the
denominator of which is the sum of (x) the aggregate Original Equipment Cost of
all Eligible Containers as of the first date on which the most recent Series of
Warehouse Notes ceased to be Outstanding, plus (y) the aggregate Original
Equipment Cost of all Eligible Containers acquired after the first date on which
the most recent Series of Warehouse Notes ceased to be Outstanding which, as of
the date of determination, continue to be Eligible Containers.
CAPITALIZED LEASES. Leases under which a Borrower is the lessee or
obligor, the discounted remaining rental payment obligations under which are
required to be capitalized on the balance sheet of the lessee or obligor in
accordance with GAAP.
CASUALTY LOSS. With respect to any Managed Container as of any date of
determination, any of the following events or conditions:
(1) total loss or destruction thereof;
(2) theft or disappearance thereof without recovery within sixty (60)
days after such theft or disappearance becomes known to the Issuer, the Manager
or any of its affiliates;
(3) damage rendering such Managed Container unfit for normal use and,
in the judgment of the Issuer or the Manager, beyond repair at reasonable cost;
or
(4) any condemnation, seizure, forced sale or other taking of title to
or use of such Managed Container.
CASUALTY PROCEEDS. Any payment to, or on behalf of, the Issuer in
connection with a Casualty Loss.
CEU. The abbreviation used for cost equivalent unit.
CHANGE OF CONTROL. With respect to the Manager, and without the prior
written consent of the Requisite Global Majority, the occurrence of any of the
following events: (A) any "Person or "group" (as such terms are used in Section
13(d) and 14(d) of the Exchange Act), other than TAL Group, becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act)
of more than fifty percent (50%) of the voting stock of the Manager or (B) the
Manager consolidates or mergers with or into another Person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any Person, in any such case, other
A-2
than any such transaction in which (i) the outstanding voting stock of the
Manager is converted into or exchanged for voting stock (other than redeemable
capital stock) of the surviving or transferee company or corporation or (ii) TAL
Group owns, directly or indirectly, not less than a majority of the voting stock
of the surviving or transferee company or corporation immediately after such
transaction.
CHATTEL PAPER. Any lease or other chattel paper, as such term is
defined in the UCC.
CLASS. All Notes having the same rights to payment under the Indenture
and any Supplement.
CLEARSTREAM. Clearstream Banking, Luxembourg, societe anonyme,
formerly known as Cedelbank, societe anonyme.
CLOSING DATE. This term is defined under "Summary -- Closing Date."
CODE. The Internal Revenue Code of 1986, as amended, or any successor
statute thereto.
COLLATERAL. This term is defined under "Summary -- Description of
Collateral."
COLLECTION PERIOD. The period from and including the first day of the
calendar month immediately preceding the calendar month in which a Payment Date
occurs through and including the last day of such calendar month.
COLLECTIONS. With respect to any Collection Period, an amount equal to
the sum of all payments of Estimated Net Operating Income (including any
adjustment payments with respect thereto) actually received by, or on behalf of,
the Issuer with respect to the Managed Containers during such Collection Period,
and, to the extent not included in the foregoing, all Casualty Proceeds, Sales
Proceeds and Warranty Purchase Amounts actually received by the Issuer during
such Collection Period. Collections for any Collection Period shall include any
of the foregoing amounts which are received in any Collection Period but which
are deposited in the Trust Account (within the time required by the terms of the
Indenture) during the immediately succeeding Collection Period; provided,
however, that with respect to any rental or other payments received from a
lessee during a particular Collection Period which relate to a future Collection
Period, such advance payments shall constitute "Collections" in the future
Collection Period to which such amounts relate and shall not constitute
"Collections" in the Collection Period in which such amounts are received.
CO-MANAGER. This term is defined under "Co-Managers."
CONCENTRATION ACCOUNT. A bank account to which lessees are instructed
to make payments in respect of Managed Containers and the other Containers in
the Container Fleet.
CONCENTRATION FINANCE LEASE. Any Lease for a Container that was
purchased directly from the manufacturer and whose initial Lease Agreement
provides the lessee the right or option to purchase the Container at the
expiration of the Lease and whose initial Lease Agreement satisfies the criteria
for classification as a capital lease pursuant to GAAP, including Statement of
Financial Account Standards No. 13, as amended.
CONCENTRATION LIMITS. The following limitations on the types of
Containers eligible to be an Eligible Container (which limitations shall be
applied on each Transfer Date and shall be calculated so as to give effect to
the transfer under consideration), as modified from time to time but only with
prior satisfaction of the Rating Agency Condition (or, if no Series of Notes is
then rated, with the consent of the Administrative Agent):
(1) Maximum Concentration of Dry Freight Special Containers. The sum
of the Net Book Values of all Eligible Containers that are Specialized
Containers (other than refrigerated Containers) shall not exceed fifteen percent
(15%) of the Aggregate Net Book Value;
A-3
(2) Maximum Concentration of Refrigerated Containers. The sum of the
Net Book Values of all Eligible Containers that are refrigerated Containers
(either 20', 40' or 40' high cube) shall not exceed forty percent (40%) of the
Aggregate Net Book Value;
(3) Maximum Concentration of Concentration Finance Leases.
(a) The sum of the Net Book Values of all Eligible Containers
that are subject to a Concentration Finance Lease shall not exceed ten
percent (10%) of the Aggregate Net Book Value;
(b) The sum of the Net Book Values of all Eligible Containers
then on Lease to any single lessee that are subject to a Concentration
Finance Lease shall not exceed five percent (5%) of the Aggregate Net
Book Value;
(4) Maximum Concentration of Non-Monthly Rental Payments. The sum of
the Net Book Values of all Eligible Containers subject to Lease Agreements for
which rentals are payable less frequently than monthly shall not exceed five
percent (5%) of the Aggregate Net Book Value;
(5) Maximum Concentration of Non-U.S. Currency Rentals. The sum of the
Net Book Values of all Eligible Containers subject to Lease Agreements for which
rentals are payable in a currency other than Dollars and which are not the
subject of a Currency Hedge Agreement shall not exceed two percent (2%) of the
Aggregate Net Book Value;
(6) Maximum Concentration of Non-Marine Cargo Users. The sum of the
Net Book Values of all Eligible Containers subject to Lease Agreements under
which the lessee is a Person that is not a marine cargo user shall not exceed
seven percent (7%) of the Aggregate Net Book Value;
(7) Maximum Concentration of any Three Lessees. The sum of the Net
Book Values of all Eligible Containers then on lease to any three lessees shall
not exceed fifty percent (50%) of the then Aggregate Net Book Value; provided,
however, that if two or more lessees shall engage in any transaction (whether
through merger, consolidation, stock sale, asset sale or otherwise) pursuant to
which a lessee shall become the owner of, or interest holder in, any other
lessee's leasehold interests in one or more Eligible Containers and the effect
of such transaction is to cause a breach of the foregoing threshold, then the
foregoing threshold shall on the effective date of such transaction be increased
to an amount equal to the quotient, expressed as a percentage, (x) the numerator
of which shall equal the sum of (A) the sum of the Net Book Values of all
Managed Containers on lease to such transacting lessees immediately prior to
such transaction, and (B) the sum of the Net Book Values of all Managed
Containers then on lease to the two other lessees having the most Managed
Containers then on lease with the Issuer (measured by Net Book Value) and (y)
the denominator of which shall equal the then Aggregate Net Book Value); and
provided further that, if the foregoing limitation has been increased above
fifty percent (50%) by operation of the above proviso, then any additional
Managed Containers subsequently leased to any of such three lessees shall not be
considered Eligible Containers until such time as the sum of the Net Book Values
of all Managed Containers then on lease to such three lessees does not exceed an
amount equal to fifty percent (50%) of the then Aggregate Net Book Value; and
(8) Maximum Concentration for any Single Lessee. The sum of the Net
Book Values of all Eligible Containers then on Lease to any single lessee shall
not exceed an amount equal to (A) with respect to any of the lessees set forth
in a schedule to the Indenture (which schedule, as of the Closing Date, is
described under "Issuer's Fleet Profile and Statistics -- Lessee Profile"), the
percentage of the Aggregate Net Book Value set opposite the name of such lessee
on such schedule, and (B) with respect to any lessee not covered by clause (A),
five percent (5%) of the then Aggregate Net Book Value; provided, however, that
if two or more lessees shall engage in any transaction (whether through merger,
consolidation, stock sale, asset sale or otherwise) pursuant to which a lessee
shall become the owner of, or interest holder in, any other lessee's leasehold
interests in one or more Eligible Containers, the foregoing threshold set forth
in clauses (A) and (B) shall on the effective date of such transaction be
increased with respect to such acquiring or, in the case of a merger, surviving
lessee to equal the greater of (i) the sum of the applicable percentage
limitations for the transacting lessees as set forth in clauses (A) and (B)
above, and (ii) a quotient, expressed as a percentage, (x) the numerator of
which shall equal the sum of the Net Book Values of
A-4
all Managed Containers on Lease to such transacting lessees immediately prior to
such transaction and (y) the denominator of which shall equal the then Aggregate
Net Book Value).
CONSOLIDATED OR CONSOLIDATED. With reference to any term defined
herein, shall mean that term as applied to the accounts of the applicable Person
and its Restricted Subsidiaries (as defined in the Credit Agreement),
consolidated in accordance with GAAP.
CONSOLIDATED CASH INTEREST EXPENSE. With respect to any Person for any
period, the difference of (i) the aggregate Consolidated Interest Expense of
such Person for such period, minus (ii) to the extent included in such aggregate
Consolidated Interest Expense, and to the extent incurred by TAL Group or any of
its Consolidated Subsidiaries, (a) amortization or write off of debt or equity
issuance costs and deferred financing costs, (b) interest expense to the extent
not paid in cash attributable to dividends in respect of all Preferred Equity of
TAL Group and its Consolidated Subsidiaries that is not Disqualified Stock
pursuant to Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity", and (c) any non-cash interest expense related to (1) any interest
expense that has not been paid in cash, (2) accrued interest on Disqualified
Stock to the extent not paid, and (3) any incremental non-cash interest expense
incurred by TAL Group or its Subsidiaries as the result of an accounting change
in accordance with GAAP that occurs after the Initial Closing Date, plus (iii)
without duplication, cash interest payments made in such period (exclusive of
any such cash payment funded with the proceeds of an equity offering or capital
contribution) related to Consolidated Interest Expense that were deducted from
Consolidated Cash Interest Expense in a prior period.
CONSOLIDATED EBIT. For any period, means the sum of Consolidated Net
Income, plus the following, without duplication, to the extent deducted in
calculating such Consolidated Net Income:
(1) all income tax expense of TAL Group and its Consolidated
Subsidiaries, all taxes incurred by TAL Group and its Consolidated Subsidiaries
in respect of the repatriation of income from jurisdictions outside the United
States and all amounts paid by TAL Group and its Consolidated Subsidiaries
pursuant to the terms of any tax sharing or similar agreement;
(2) the Consolidated Interest Expense of TAL Group and its
Consolidated Subsidiaries;
(3) depreciation and amortization charges of TAL Group and its
Consolidated Subsidiaries relating to any increased depreciation or amortization
charges resulting from purchase accounting adjustments or inventory write-ups
with respect to acquisitions or the amortization or write-off of deferred debt
or equity issuance costs;
(4) all other non-cash charges of TAL Group and its Consolidated
Subsidiaries (other than depreciation expense) minus, with respect to any such
non-cash charge occurring on or after the Initial Closing Date that was
previously added in a prior period to calculate Consolidated EBIT and that
represents an accrual of or reserve for cash expenditures in any future period,
any cash payments made during such period;
(5) any non-capitalized costs incurred in connection with financings,
the Acquisition, acquisitions of Containers or Chassis or dispositions
(including financing and refinancing fees and any premium or penalty paid in
connection with redeeming or retiring Indebtedness prior to the stated maturity
thereof pursuant to the agreements governing such Indebtedness);
(6) rental expense paid on or prior to April 30, 2005 with respect to
containers leased by a Borrower from The Union Bank of Switzerland to the extent
that containers related to such expense have been repurchased by the Borrowers
and their Consolidated Subsidiaries;
(7) all non-cash expenses attributable to Incentive Arrangements; and
(8) to the extent that any portion of the Management Fee payable
during such period was accrued and not paid during such period, the aggregate
amount of expenses attributable to all payments or accruals of Management Fee
during such period;
A-5
in each case, for such period and as determined on a consolidated
basis in accordance with GAAP.
CONSOLIDATED EBIT TO CONSOLIDATED CASH INTEREST EXPENSE RATIO. As of
any date of determination, means the ratio of (a) the aggregate amount of
Consolidated EBIT for TAL Group and its Consolidated Subsidiaries for the period
of the most recent four consecutive fiscal quarters ending on or prior to the
date of such determination to (b) Consolidated Cash Interest Expense for TAL
Group and its Consolidated Subsidiaries for such four fiscal quarters.
CONSOLIDATED FUNDED DEBT. As of any date of determination with respect
to a Person, the total amount, without duplication, of: (1) the principal amount
outstanding under all Indebtedness of such Person and such Person's Consolidated
Subsidiaries, (2) all Finance Lease obligations, as lessee, of such Person and
such Person's Consolidated Subsidiaries, and (3) the aggregate of the present
values of future rental payments under any lease of any container which such
Person or any of such Person's Consolidated Subsidiaries is the lessee (i) that
is treated by the lessee as an operating lease rather than a capital lease in
accordance with GAAP, and (ii) in respect of which the lessor retains or obtains
ownership of the property so leased for federal income tax purposes, in the
event, but only in the event, that the aggregate of such present values shall be
in excess of Twenty-Five Million Dollars ($25,000,000).
CONSOLIDATED INTEREST EXPENSE. With respect to any Person for any
period, the aggregate of the interest expense of such Person and its
Consolidated Subsidiaries for such period, on a Consolidated basis, as
determined in accordance with GAAP, and including, without duplication, (a) all
amortization or accretion of original issue discount; (b) the interest component
of payments on Capitalized Leases paid, accrued and/or scheduled to be paid or
accrued by such Person and its Consolidated Subsidiaries during such period; and
(c) net cash costs under all Interest Rate Hedging Agreements (including
amortization of fees).
CONSOLIDATED NET INCOME. For any period, the aggregate net income (or
loss) of TAL Group and its Consolidated Subsidiaries for such period on a
consolidated basis, determined in accordance with GAAP; provided, however, that
there shall not be included in such Consolidated Net Income:
(1) any gain (or loss) realized upon the sale or other disposition of
assets (other than Containers, Chassis and Related Assets) of TAL Group, any
Borrower, any Consolidated Subsidiary or any other Person (including pursuant to
any sale-and-leaseback arrangement) which is not sold or otherwise disposed of
in the ordinary course of business and any gain (or loss) realized upon the sale
or other disposition of any Capital Stock of any Person;
(2) extraordinary gains or losses, as determined in accordance with
GAAP;
(3) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or not
such operations were classified as discontinued);
(4) the cumulative effect of a change in accounting principles, as
determined in accordance with GAAP;
(5) any adjustments, restructuring costs, non-recurring expenses,
non-recurring fees, non-operating expenses, charges or other expenses (including
bonus and retention payments and non-cash compensation charges) (a) made or
incurred in connection with the Acquisition or the financing thereof or (b)
incurred in connection with acquisitions of Containers and/or Chassis;
(6) Systems/Organizational Establishment Expenses; and
(7) any net income (or loss) of any Person (other than TAL Group) if
such Person is not a Restricted Subsidiary of TAL Group; provided, that TAL
Group, or any of its Consolidated Subsidiary's, equity in the net income of any
such Person for such period shall be included in such Consolidated Net Income up
to the aggregate amount of cash actually distributed by such Person during such
period to TAL Group or such Consolidated Subsidiary as a dividend or other
distribution, in each case for such period.
A-6
CONSOLIDATED SUBSIDIARIES. With respect to any Person, each Restricted
Subsidiary of such Person that is required to be consolidated with such Person
in accordance with GAAP.
CONSOLIDATED TANGIBLE NET WORTH. As of any date of determination with
respect to a Person, the excess of: (a) the tangible assets of such Person and
such Person's Consolidated Subsidiaries calculated in accordance with GAAP plus
the aggregate amount of Consolidated Funded Debt of the type specified in clause
(3) of the definition of Consolidated Funded Debt, over (b) all Indebtedness of
such Person and its Consolidated Subsidiaries; provided, however, that (i) in no
event shall there be included in the above calculation any intangible assets
such as patents, trademarks, trade names, copyrights, licenses, goodwill,
organizational costs, amounts relating to covenants not to compete, or any
impact from applications of FASB 133, and (ii) securities included as such
intangible assets shall be taken into account at their current market price or
cost, whichever is lower.
CONTAINER. Any marine and maritime container (including dry cargo
containers, refrigerated containers (including the associated refrigeration
machine), generator sets, gps devices and Specialized Containers) to which any
Person either (i) has good title and that is held for lease or sale or (ii) is
lessor under any Finance Lease.
CONTAINER FLEET. At any time, the fleet of Containers owned or managed
by TAL.
CONTAINER MANAGEMENT SYSTEM. The equipment tracking and billing system
used by the Manager and any upgrade to, or replacement for, such system.
CONTAINER REPRESENTATIONS AND WARRANTIES. Representations of TAL made
in the Contribution and Sale Agreement regarding Transferred Containers,
including representations set forth in "Description of the Contribution and Sale
Agreement -- Representations and Warranties of TAL."
CONTAINER REVENUES. For any Collection Period, all amounts paid to and
received by the Manager which are attributable to the Managed Containers,
including but not limited to (i) per diem rental charges (excluding any
prepayments thereof), Ancillary Fees and all charges paid in respect of the
Managed Containers pursuant to Lease Agreements (including, without duplication,
payments on Finance Leases in respect of Managed Containers) but excluding
Excluded Amounts, (ii) amounts received from the manufacturers or sellers of the
Managed Containers for breach of sale warranties relating thereto or in
settlement of any claims, losses, disputes or proceedings relating to the
Managed Containers, (iii) amounts received from any other Person in settlement
of any claims, losses, disputes or proceedings relating to the Managed
Containers, including insurance proceeds relating thereto, and (iv) any
insurance premiums relating to the Managed Containers which have been refunded
by the insurer. Notwithstanding the foregoing, Container Revenues shall not
include Sales Proceeds or Casualty Proceeds.
CONTRIBUTION AND SALE AGREEMENT. The Amended and Restated Contribution
and Sale Agreement, dated as of _________, 2006, as amended, modified or
supplemented from time to time in accordance with its terms, entered into by TAL
and the Issuer.
CONTROL PARTY. With respect to a Series has the meaning set forth in
the Supplement for such Series. With respect to the Series 2006-1 Notes, so long
as no Series Enhancer Default has occurred and is continuing, the Series
Enhancer for the Series 2006-1 Notes, or if a Series Enhancer Default has
occurred and is continuing, the Majority of Holders of the Series 2006-1 Notes.
CONVERSION DATE. The date of the occurrence of a Conversion Event.
CONVERSION EVENT. With respect to a Series of Warehouse Notes, the
occurrence or existence of any of the following events or conditions: (i) the
expiration of the stated period of time set forth in the definition of
Conversion Date in the related Supplement, unless such period is extended in
accordance with the terms of such Supplement, and (ii) the occurrence of an
Early Amortization Event under any Series of Notes then Outstanding.
CORPORATE TRUST OFFICE. This term shall have the meaning set forth in
"Summary -- Indenture Trustee."
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CREDIT AGREEMENT. That certain Amended and Restated Credit Agreement,
dated as of August 1, 2005, as amended, restated, or otherwise modified in
accordance with its terms, among TAL International Container Corporation (f/k/a
Transamerica Leasing, Inc.), as a borrower, Trans Ocean Ltd., as a borrower,
Trans Ocean Container Corporation, as a borrower, the lenders from time to time
party thereto and Fortis Capital Corp., as administrative agent and collateral
agent thereunder.
CREDIT AND COLLECTION POLICY. The credit and collection policy used by
TAL, as modified by TAL from time to time.
CURRENCY HEDGE AGREEMENT. An agreement between the Issuer and the
Currency Hedge Counterparty named therein, including any schedules and
confirmations prepared and delivered in connection therewith, each in form and
substance acceptable to the Requisite Global Majority and for which the Rating
Agency Condition has been satisfied, with respect to a Lease for which the
related lessee is obligated to make payments denominated in a currency other
than Dollars pursuant to which (i) the Issuer will receive payments from, or
make payments to, the Currency Hedge Counterparty in such currency and (ii)
recourse by the Currency Hedge Counterparty to the Issuer is limited to actual
rental payments received under such Lease.
CURRENCY HEDGE COUNTERPARTY. Any Eligible Currency Hedge Counterparty
or any counterparty to a currency hedging instrument permitted to be entered
into pursuant to the Indenture.
DEFAULT FEE. The incremental interest specified in the related
Supplement payable by the Issuer resulting from the failure of the Issuer to pay
in full any amount due under the Indenture on any Series of Notes Outstanding
when such amount becomes due. With respect to the Series 2006-1 Notes, for any
Payment Date on which interest on overdue amounts is payable in accordance with
the provisions of the Series 2006-1 Supplement, an amount equal to the excess of
(x) the total amount of interest payable on such Payment Date, including the
amount of interest otherwise payable on such Payment Date pursuant to the
provisions of the Series 2006-1 Supplement, over (y) the amount of interest that
would have been payable on such Payment Date if no payment default had occurred.
DEFAULT RATE. The rate of interest specified in the related Supplement
applicable to a Note then earning Default Fee. With respect to the Series 2006-1
Notes, for any date of determination, an interest rate per annum equal to the
sum of (i) One-Month LIBOR plus (ii) two percent (2.0%).
DEFICIENCY AMOUNT. With respect to Series 2006-1, (a) for any Payment
Date other than the Series 2006-1 Legal Final Maturity Date, any shortfall in
the aggregate amount available in the Series 2006-1 Series Account for the
Series 2006-1 Notes or any other amounts available under the Indenture or the
Series 2006-1 Supplement to pay the Series 2006-1 Note Interest Payment due and
payable on all Series 2006-1 Notes on such Payment Date, and (b) on the Series
2006-1 Legal Final Maturity Date, any shortfall in the aggregate amount
available in the Series 2006-1 Series Account or any other amounts available
under the Indenture or the Series 2006-1 Supplement to pay the then Aggregate
Series 2006-1 Note Principal Balance and accrued but unpaid Series 2006-1 Note
Interest Payments.
DEFINITIVE NOTE. A Note issued in definitive form pursuant to the
terms and conditions of the Indenture.
DETERMINATION DATE. The third (3rd) Business Day prior to any Payment
Date.
DIRECT OPERATING EXPENSES. All direct expenses and costs, calculated
on an accrual basis in accordance with GAAP, incurred in connection with the
ownership, use and/or operation of a Managed Container, including but not
limited to: (i) agency costs and expenses; (ii) depot fees, handling, and
storage costs and expenses; (iii) survey, maintenance and repair expenses
(including the actual or estimated cost of repairs to be made pursuant to a
damage protection plan); (iv) repositioning expense; (v) the cost of inspecting,
marking and remarking such Managed Container; (vi) third-party fees for
bankruptcy recovery; (vii) legal fees incurred in connection with enforcing
rights under the leases of such Managed Container or repossessing such Managed
Container; (viii) insurance expense; (ix) federal, state, local and foreign
taxes, levies, duties, charges, assessments, fees, penalties, deductions or
withholdings assessed, charged or imposed upon or against such Managed
Container, including but not limited to ad valorem, gross receipts and/or other
property taxes imposed against such Managed Container or against the revenues
generated by such Managed Container (but not including income taxes imposed on
the Manager or any of its
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affiliates); (x) expenses, liabilities, claims and costs (including without
limitation reasonable attorneys fees) incurred by the Issuer or the Manager (on
behalf of the Issuer) by any third party arising directly or indirectly (whether
wholly or in part) out of the state, condition, operation, use, storage,
possession, repair, maintenance or transportation of such Managed Container;
(xi) expenses and costs (including legal fees) of pursuing claims against
manufacturers or sellers of such Managed Container; and (xii) non-recoverable
sales and value-added taxes on such expenses and costs; provided, however, that
in no event shall either of the following be considered a Direct Operating
Expense: (a) any selling, general and administrative expenses of TAL Group, the
Issuer or any of their subsidiaries, or (b) the Management Fee.
DISPOSITION FEES. With respect to any Managed Container that (i) has
been sold to a third party, or (ii) is the subject of a Casualty Loss, an amount
equal to the product of (x) five percent (5%) and (ii) the Sales Proceeds or
Casualty Proceeds, as the case may be, realized thereon.
DTC. The Depository Trust Company.
DTC PARTICIPANTS. Persons who have accounts with DTC.
EARLY AMORTIZATION EVENT. This term is defined under "Summary -- Early
Amortization Events."
ELIGIBLE CONTAINER. Any Managed Container which, individually or when
considered with all Managed Containers then owned by the Issuer that are
included in the Asset Base, as the case may be, shall comply with each of the
following requirements:
(1) No Liens. The Issuer either (A) has good and marketable title to
such Managed Container, free and clear of all Liens other than (x) Permitted
Encumbrances and (y) a manufacturer's or vendor's lien for the unpaid purchase
price of such Managed Container so long as such unpaid purchase price is paid
within two Business Days following the later of the acquisition of such Managed
Container by the Issuer or the inclusion of such Managed Container in the Asset
Base; or (B) is the lessor of such Managed Container under a Finance Lease for
which the filing specified in Section 2.03(a)(iii) of the Contribution and Sale
Agreement has been made and the Issuer has good title to such Finance Lease free
and clear of all Liens other than Permitted Encumbrances; and
(2) Specifications. Such Managed Container substantially conforms to
the standard specifications used by the Manager from time to time for that
category of Managed Container and to any applicable standards promulgated by the
International Organization for Standardization; and
(3) Container Representations and Warranties. Such Managed Container
complies with the Container Representations and Warranties; and
(4) Casualty Losses. Such Container shall not have suffered a Casualty
Loss; and
(5) Concentration Limits. Such Container, when considered with all
other Eligible Containers owned by the Issuer, satisfies the Concentration
Limits; and
(6) Rights of Lessor Are Assignable. The rights of the lessor under a
Lease Agreement to which a Managed Container is subject (including the right to
receive payments from end users) are assignable; and
(7) Marketable Title. The Seller shall have had good and marketable
title to such Managed Container other than (x) Permitted Encumbrances, (y) a
manufacturer's or vendor's lien for the unpaid purchase price of such Managed
Container so long as such unpaid purchase price is paid within two Business Days
following the later of the acquisition of such Managed Container by the Issuer
or the inclusion of such Managed Container in the Asset Base or (z) a Managed
Container that is subject to a Finance Lease under which the Seller is the
lessor and the Issuer has good title to such Finance Lease free and clear of all
Liens other than Permitted Encumbrances; and
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(8) Transfer of Title. The Seller and the Issuer shall have taken all
necessary actions to transfer title to such Managed Container (other than if
such Managed Container is subject to a Finance Lease for which the Issuer is the
lessor) and all related Leases from the Seller to the Issuer; and
(9) No Violation. The contribution and conveyance of such Managed
Container does not violate any agreement of the Seller; and
(10) General Terms. The Lease for such Managed Container shall contain
terms that are not substantially different than the terms typically included in
a Lease for a Container in the Container Fleet, it being understood that, as a
matter of normal business practice, some lessees of Containers in the Container
Fleet may negotiate Leases that include terms that are more favorable than terms
in other leases; and
(11) Adverse Selection. Such Managed Container was not subject to any
adverse selection procedures other than as contemplated by the Transaction
Documents by either the Seller or the Manager, whichever may be applicable, in
choosing Containers to be transferred to the Issuer.
ELIGIBLE CURRENCY HEDGE COUNTERPARTY. Any of the following:
(1) any bank which has both (x) a long-term unsecured debt rating of
at least "A" or better from Standard & Poor's (so long as any Outstanding Notes
are rated by Standard & Poor's) and "A2" or better from Moody's (so long as any
Outstanding Notes are rated by Moody's) and (y) a short-term unsecured debt
rating of "A-1" or better from Standard & Poor's (so long as any Outstanding
Notes are rated by Standard & Poor's) and "P-1" or better from Moody's (so long
as any Outstanding Notes are rated by Moody's); or
(2) any bank or other financial institution (x) which is otherwise
acceptable to the Requisite Global Majority and each Series Enhancer which is a
Control Party and (y) for which the Rating Agency Condition has been satisfied.
ELIGIBLE HEDGE COUNTERPARTY. Any Eligible Interest Rate Hedge
Counterparty or Eligible Currency Hedge Counterparty, as applicable.
ELIGIBLE INTEREST RATE HEDGE COUNTERPARTY. Any of the following:
(1) any bank which has both (x) a long-term unsecured debt rating of
at least "A" or better from Standard & Poor's (so long as any Outstanding Notes
are rated by Standard & Poor's) and "A2" or better from Moody's (so long as any
Outstanding Notes are rated by Moody's) and (y) a short-term unsecured debt
rating of "A-1" or better from Standard & Poor's (so long as any Outstanding
Notes are rated by Standard & Poor's) and "P-1" or better from Moody's (so long
as any Outstanding Notes are rated by Moody's); or
(2) any bank or other financial institution (x) which is otherwise
acceptable to the Requisite Global Majority and each Series Enhancer which is a
Control Party and (y) for which the Rating Agency Condition has been satisfied.
ELIGIBLE INVESTMENT. One or more of the following:
(1) direct obligations of, and obligations fully guaranteed as to the
full and timely payment by, the United States of America;
(2) demand deposits, time deposits or certificates of deposit of any
depository institution or trust company incorporated under the laws of the
United States of America or any State thereof and subject to supervision and
examination by Federal or State banking or depository institution authorities;
provided, however, that at the time of the investment or contractual commitment
to invest therein, the commercial paper or other short-term unsecured debt
obligations (other than such obligations the rating of which is based on the
credit of a Person other than such depository institution or trust company)
thereof shall be rated "A-1+" by Standard & Poor's and "Prime 1" by Moody's;
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(3) commercial paper that, at the time of the investment or
contractual commitment to invest therein, is rated "A-1+" by Standard & Poor's
and "Prime 1" by Moody's;
(4) bankers' acceptances issued by any depository institution or trust
company referred to in clause (ii) above;
(5) repurchase obligations with respect to any security pursuant to a
written agreement that is a direct obligation of, or fully guaranteed as to the
full and timely payment by, the United States of America or any agency or
instrumentality thereof the obligations of which are backed by the full faith
and credit of the United States of America, in either case entered into with (x)
a depository institution or trust company (acting as principal) described in
clause (ii) or (y) a depository institution or trust company the deposits of
which are insured by the Federal Deposit Insurance Corporation and whose
commercial paper or other short-term unsecured debt obligations are rated "A-1+"
by Standard & Poor's and "Prime 1" by Moody's and long-term unsecured debt
obligations are rated "AAA" by Standard & Poor's and "Aaa" by Moody's; and
(6) money market mutual funds registered under the Investment Company
Act of 1940, as amended (including funds for which an affiliate of the Indenture
Trustee is acting as investment advisor), having a rating, at the time of such
investment, from each of the Rating Agencies in the highest investment category
granted thereby.
ENHANCEMENT AGREEMENT. Any agreement, instrument or document governing
the terms of any Series Enhancement or pursuant to which any Series Enhancement
is issued or outstanding.
ERISA. The Employee Retirement Income Security Act of 1974, as
amended.
ESTIMATED NET OPERATING INCOME. This term is defined under
"Description of the Management Agreement -- Deposits to the Trust Account."
EUROCLEAR. The Euroclear System.
EVENT OF DEFAULT. This term is defined under "Summary -- Events of
Default."
EXCESS DEPOSIT. This term is defined under "Description of the
Management Agreement -- Deposits to the Trust Account."
EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.
EXCLUDED AMOUNTS. Any payments received from the lessee under a Lease
in connection with any taxes, fees or other charges imposed by any Governmental
Authority, or indemnity payments for the benefit of the originator of such Lease
in its individual capacity made pursuant to such Lease.
EXISTING COMMITMENT. With respect to any Series, either or both of the
following: (A) before the Conversion Date for any Series of Warehouse Notes,
with respect to each Series of Notes Outstanding the aggregate Initial
Commitment with respect to such Series of Notes, consisting of one or more
classes, expressed as a dollar amount, as set forth in the related Supplement
and subject to reduction from time to time in accordance with the related
Supplement, and/or (B) after the Conversion Date for any Series of Warehouse
Notes, with respect to each Series of Notes Outstanding the then unpaid
principal balance of the Notes of such Series. For the avoidance of doubt, the
Existing Commitment for any Series of Notes that does not provide for additional
fundings by the Noteholders after its Issuance Date shall at all times equal its
then unpaid principal balance.
EXPECTED FINAL MATURITY DATE. If applicable to any Series, the date on
which the principal balance of the Outstanding Notes of such Series is expected
to be paid in full. The Expected Final Maturity Date for a Series shall be set
forth in the related Supplement.
FAIR MARKET VALUE. With respect to any asset (including a Container),
shall mean the price at which a willing buyer, not an affiliate of the seller,
and a willing seller who does not have to sell, would agree to purchase
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and sell such asset, which amount shall be determined in good faith by the board
of directors or other governing body or, pursuant to a specific delegation of
authority by such board of directors or governing body, a designated senior
executive officer of the Issuer, the Manager or the Seller.
FINAL ORDER. This term is defined under "Description of the Policy."
FINANCE LEASE. Any Lease for a container that is classified as a
"financing lease" pursuant to GAAP, including Statement of Financial Accounting
Standards No. 13, as amended.
FINANCIAL ASSETS. This term shall have the meaning set forth in the
UCC.
FSMA. This term is defined under "Notice to Residents of the United
Kingdom."
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES OR GAAP. Those generally
accepted accounting principles and practices that are recognized as such by the
American Institute of Certified Public Accountants acting through its Accounting
Principles Board or by the Financial Accounting Standards Board or through other
appropriate boards or committees thereof consistently applied as to the party in
question.
GLOBAL NOTES. Collectively, the Rule 144A Notes, the Temporary
Regulation S Global Notes and the Permanent Regulation S Global Notes.
GOVERNMENTAL AUTHORITY. Any of the following: (a) any federal, state,
county, municipal or foreign government, or political subdivision thereof, (b)
any governmental or quasi-governmental agency, authority, board, bureau,
commission, department, instrumentality or public body, (c) any court or
administrative tribunal or (d) with respect to any Person, any arbitration
tribunal to whose jurisdiction that Person has consented.
GUARANTEED INTEREST DISTRIBUTION AMOUNT. With respect to any Payment
Date, any shortfall in the aggregate amount available under the Indenture and
the Series 2006-1 Supplement to pay the Series 2006-1 Note Interest Payment due
and payable on the Series 2006-1 Notes on such Payment Date.
GUARANTEED PRINCIPAL DISTRIBUTION AMOUNT. (i) With respect to the
Series 2006-1 Legal Final Maturity Date, any shortfall in the aggregate amount
available under the Indenture and the Series 2006-1 Supplement to pay the
outstanding principal on the Series 2006-1 Notes on the Series 2006-1 Legal
Final Maturity Date, and (ii) with respect to any Payment Date other than the
Series 2006-1 Legal Final Maturity Date, zero.
HEDGE AGREEMENT. Any Interest Rate Hedge Agreement or Currency Hedge
Agreement, as applicable.
HEDGE COUNTERPARTY. Any Interest Rate Hedge Counterparty or Currency
Hedge Counterparty, as applicable.
HEDGING REQUIREMENT. This term is defined under "Description of the
Series 2006-1 Notes and the Indenture -- Hedging Requirements."
HOLDER. This term shall have the same meaning as Noteholder.
INCENTIVE ARRANGEMENTS. Any (a) earn-out agreements, (b) stock
appreciation rights, (c) "phantom" stock plans, (d) employment agreements, (e)
non-competition agreements and (f) incentive and bonus plans entered into by the
Issuer for the benefit of, and in order to retain, executives, officers or
employees of Persons or businesses.
INDEBTEDNESS. With respect to any Person without duplication, means
(i) all indebtedness (including principal, interest, fees and charges) of such
Person for borrowed money, (ii) all obligations of such Person in respect of
letters of credit, bankers' acceptances, and bank guaranties issued for the
account of such Person, (iii) all indebtedness of the types described in clause
(i), (ii), (iv), (v) or (vi) of this definition secured by any Lien on any
property owned by such Person, whether or not such indebtedness has been assumed
by such Person (provided that, if the Person has not assumed or otherwise become
liable in respect of such indebtedness, such indebtedness shall be
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deemed to be in an amount equal to the lesser of (A) the outstanding amount of
such Indebtedness and (B) the fair market value of the property to which such
Lien relates as determined in good faith by such Person), (iv) the aggregate
amount of all capitalized lease obligations of such Person, (v) all Contingent
Obligations of such Person, (vi) as of any date of determination, all
obligations under any interest rate hedging or under any similar type of
agreement to the extent of the amount due if such agreement were to be
terminated on such date of determination, and (vii) all obligations of such
Person issued or assumed as the deferred purchase price of property or services,
all conditional sale obligations and all obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are either (x) not overdue by 90
days or more or (y) being contested in good faith by appropriate proceedings
promptly instituted and diligently conducted).
INDEMNIFIED LIABILITIES. This term is defined in the Insurance
Agreement.
INDEMNITY AMOUNTS. Indemnity payments to the Holders of the Notes (or
their related creditor liquidity providers), or any Series Enhancer or any
Interest Rate Hedge Counterparty or any Currency Hedge Counterparty for
increased costs, funding costs, breakage costs, taxes, expenses or other
indemnity payment, including, without limitation, the amounts payable pursuant
to the provisions of the related Supplement.
INDENTURE. The Amended and Restated Indenture, dated as of ______,
2006, as amended, modified or supplemented from time to time, entered into by
and between the Issuer and the Indenture Trustee.
INDENTURE TRUSTEE. U.S. Bank National Association and any successors
and assigns thereof.
INDENTURE TRUSTEE'S FEES. Fees, expenses, disbursements, advances and
indemnification amounts payable to the Indenture Trustee under the Indenture.
INDEPENDENT. A natural person who at the date of his appointment as a
manager, director or officer possesses the following qualifications: (a) has
prior experience as an independent director or manager for a corporation or a
limited liability company, the corporate instruments of which require the
unanimous consent of all independent directors thereof before such corporation
or limited liability company could consent to the institution of proceedings
against it or could file a petition seeking relief under any applicable
bankruptcy or insolvency law; and (b) has at least three years of employment
experience with one or more entities that provide, in the ordinary course of
their respective businesses, advisory, management or placement services to
issuers of securitization or structured finance instruments, agreements or
securities; provided always that such individual at the date of such
individual's appointment as such manager, director or officer, or at any time in
the preceding five years, or during such person's tenure shall not be: (i) an
employee, director, shareholder, manager, partner or officer of TAL or an
affiliate thereof (other than such person's service as an independent director
or manager of TAL or an affiliate thereof); (ii) a customer or supplier of TAL
or an affiliate thereof; (iii) a beneficial owner at the time of such
individual's appointment as an independent manager, or at any time thereafter
while serving as an independent manager, of more than 2% of the voting
securities of TAL or an affiliate thereof; (iv) affiliated with a significant
customer, supplier or creditor of TAL or an affiliate thereof; (v) a party to
any significant personal service contracts with TAL or an affiliate thereof; or
(f) a member of the immediate family of a person described in (i) or (ii) above.
INDEPENDENT MANAGER. A natural person who at the date of his or her
appointment as a manager of the Issuer is Independent.
INDEPENDENT MANAGEMENT AGREEMENT. That certain letter agreement, dated
August 4, 2005, among Lord Securities Corporation, TAL Advantage I LLC and TAL
International Container Corporation.
INITIAL CLOSING DATE. August 1, 2005.
INITIAL COMMITMENT. This term shall have the meaning given to such
term, if applicable, in the related Supplement.
INITIAL HEDGE AGREEMENTS. This term is defined under "-- Hedging
Requirements."
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INITIAL PURCHASERS. This term is defined on the front cover of this
Preliminary Offering Memorandum.
INSOLVENCY LAW. The Bankruptcy Code or similar applicable law in any
other applicable jurisdiction.
INSTITUTIONAL ACCREDITED INVESTORS. This term shall have the meaning
given to it in paragraphs (1), (2), (3) or (7) of Rule 501(a) under the
Securities Act.
INSURANCE AGREEMENT. This term shall have the meaning given to such
term, if applicable, in the related Supplement. For the Series 2006-1 Notes, the
Insurance Agreement is the Insurance and Indemnity Agreement among the Series
Enhancer, TAL, the Issuer and the Indenture Trustee, as the same may be amended
or otherwise modified from time to time.
INSURED AMOUNT. This term is defined under "Description of the
Policy."
INTERCREDITOR AGREEMENT. That certain Intercreditor Agreement, dated
as of _______, 2006, among TAL International Container Corporation, TAL
Advantage I LLC, U.S. Bank National Association, Fortis Capital Corp. and
various other parties from time to time party thereto.
INTEREST ACCRUAL PERIOD. With respect to each Payment Date, the period
commencing on and including the immediately preceding Payment Date (or in the
case of the initial Payment Date with respect to a Series, commencing on and
including the Issuance Date for such Series) and ending on and including the day
before the current Payment Date.
INTEREST RATE HEDGE AGREEMENT. An ISDA interest rate swap or cap
agreement, collar or other hedging instrument between the Issuer and the
Interest Rate Hedge Counterparty named therein, each either (x) in form and
substance reasonably acceptable to the Requisite Global Majority or (y)
containing provisions substantially the same as and not inconsistent with those
contained in sections 10 and 11 of the ISDA Novation Agreement entered into as
part of the Interest Rate Hedge Agreement in effect on the Closing Date,
including any schedules and confirmations prepared and delivered in connection
therewith, that complies with the guidelines set forth in the Indenture and
pursuant to which (i) the Issuer will receive payments from, or make payments
to, the Interest Rate Hedge Counterparty based on LIBOR and (ii) recourse by the
Interest Rate Hedge Counterparty to the Issuer is limited to distributions of
Available Distribution Amount in accordance with the priority of payments set
forth in the Indenture, as applicable.
INTEREST RATE HEDGE COUNTERPARTY. Any Eligible Interest Rate Hedge
Counterparty or any counterparty to a cap, collar or other hedging instrument
permitted to be entered into pursuant to the Indenture.
INVESTMENT PROPERTY. This term shall have the meaning set forth in the
UCC.
IRS. Internal Revenue Service.
ISDA. International Swaps and Derivatives Association, Inc., and any
successor thereto.
ISDA NOVATION AGREEMENT. The ISDA Novation Agreement, dated as of
______, 2006 among TAL International Container Corporation, Fortis Bank
(Nederland) N.V., the Issuer and Fortis Bank S.A./N.V., New York Branch.
ISSUANCE DATE. With respect to any Series of Notes, the date on which
the Notes of such Series are to be originally issued in accordance with the
Indenture and the related Supplement.
ISSUER. TAL Advantage I LLC, a limited liability company organized
under the laws of Delaware, and its permitted successors and assigns.
ISSUER CASH INTEREST EXPENSE. With respect to the Issuer for any
period, an amount equal to the difference of (1) the Issuer Interest Expense for
such period minus (2) to the extent included in clause (1), (i)
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amortization or write off of debt issuance or deferred financing costs, (ii) any
non-cash interest expense related to any interest expense that has not been paid
in cash, and (iii) any incremental non-cash interest expense incurred as the
result of an accounting change that occurs after the Initial Closing Date, plus
(3) without duplication of amounts included in clause (1), cash interest
payments made in such period that were deducted from Issuer Cash Interest
Expense in a prior period.
ISSUER EBIT. For any period, means the sum of Issuer Net Income, plus
the following, without duplication, to the extent deducted in calculating such
Issuer Net Income:
(1) all income tax expense in respect of any net income generated by
the Issuer;
(2) Issuer Interest Expense;
(3) depreciation and amortization charges of the Issuer relating to
any increased depreciation or amortization charges resulting from purchase
accounting adjustments or inventory write-ups with respect to acquisitions or
the amortization or write-off of deferred debt or equity issuance costs;
(4) all other non-cash charges of the Issuer (other than depreciation
expense) minus, with respect to any such non-cash charge occurring on or after
August 1, 2005 that was previously added in a prior period to calculate Issuer
EBIT and that represents an accrual of or reserve for cash expenditures in any
future period, any cash payments made during such period;
(5) any non-capitalized costs incurred in connection with financings,
the acquisition of Containers or dispositions (including financing and
refinancing fees and any premium or penalty paid in connection with redeeming or
retiring Indebtedness prior to the stated maturity thereof pursuant to the
agreements governing such Indebtedness);
(6) all non-cash expenses attributable to Incentive Arrangements;
(7) to the extent that any portion of the Management Fee payable
during such period was accrued and not paid during such period, the aggregate
amount of expenses attributable to all payments or accruals of Management Fee
during such period; and
(8) any indemnity payments made (regardless of to whom such payments
are made) pursuant to Section 302(c)(I)(14), 302(c)(II)(14), 806(12) or 806(13)
of the Indenture;
in each case, for such period and as determined in accordance with GAAP.
ISSUER EBIT TO ISSUER CASH INTEREST EXPENSE RATIO. As of the last day
of the fiscal quarter preceding such date of determination commencing with the
fiscal quarter ending December 31, 2005 the ratio of (a) the aggregate amount of
Issuer EBIT for the period of the most recent four consecutive fiscal quarters
of the Issuer ending on or prior to the date of such determination, to (b)
Issuer Cash Interest Expense for such four fiscal quarters; provided, however,
that for each Determination Date occurring prior to the Determination Date in
October 2006, such ratio shall be calculated based on the number of fiscal
quarters that have elapsed since September 30, 2005.
ISSUER EXPENSES. For any Collection Period, direct out-of-pocket
expenses that are necessary or advisable, in the opinion of the managers of the
Issuer, to maintain the corporate existence of the Issuer, including:
administration expenses; accounting and audit expenses of the Issuer; premiums
for liability, casualty, fidelity, directors' and officers' and other insurance;
legal fees and expenses; other professional fees; franchise taxes and other
similar taxes (but excluding income taxes); and surveillance and other fees
assessed by the Rating Agencies.
ISSUER INTEREST EXPENSE. With respect to the Issuer for any period,
the aggregate of the interest expense of the Issuer for such period, as
determined in accordance with GAAP, and including, without duplication, (a) all
amortization or accretion of original issue discount; (b) net cash costs under
all Hedge Agreements; and (c) amortization of fees under all Hedge Agreements.
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ISSUER NET INCOME. For any period, the aggregate net income (or loss)
of the Issuer for such period, determined in accordance with GAAP; provided,
however, that there shall not be included in such Issuer Net Income:
(1) any gain (or loss) realized upon the sale or other disposition of
assets (other than Containers) of the Issuer (including pursuant to any
sale-and-leaseback arrangement) which is not sold or otherwise disposed of in
the ordinary course of business;
(2) extraordinary gains or losses, as determined in accordance with
GAAP;
(3) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or not
such operations were classified as discontinued);
(4) the cumulative effect of a change in accounting principles, as
determined in accordance with GAAP;
(5) any adjustments, restructuring costs, non-recurring expenses,
non-recurring fees, non-operating expenses, charges or other expenses (including
bonus and retention payments and non-cash compensation charges) incurred in
connection with acquisitions of Containers; and
(6) Systems/Organizational Establishment Expenses;
in each case, for such period.
LAST LESSEE DAMAGE PAYMENT. The last payments received from a lessee
in respect of damages to or repair of a Managed Container that is designated for
sale.
LEASE OR LEASE AGREEMENT. Each and every item of Chattel Paper,
installment sales agreement, equipment lease or rental agreement (including
progress payment authorizations) to which a Container is subject from time to
time and including any Lease entered into from time to time by TAL pursuant to
which TAL leases one or more Containers from its Container Fleet. The term Lease
includes, without limitation, (a) all payments to be made by the lessee
thereunder, (b) all rights of the lessor thereunder, (c) any and all amendments,
renewals or extensions thereof, and (d) guaranties or other credit support or
Supporting Obligation provided by, or on behalf of, the lessee with respect
thereof.
LEGAL FINAL MATURITY DATE. With respect to any Series, this term shall
have the meaning set forth in the related Supplement.
LEVERAGE RATIO. For any Person, on a consolidated basis, as of a date
of determination, the ratio of (a) Consolidated Funded Debt to (b) Consolidated
Tangible Net Worth.
LIBOR DETERMINATION DATE. The date that is two Business Days prior to
the first day of any Interest Accrual Period.
LIEN. Any security interest, lien, charge, pledge, equity or
encumbrance of any kind.
MAJORITY OF HOLDERS. With respect to the Series 2006-1 Notes, as of
any date of determination, the Series 2006-1 Noteholders holding the Series
2006-1 Notes constituting more than fifty percent (50%) of the then Aggregate
Series 2006-1 Note Principal Balance.
MANAGED CONTAINERS. All Containers owned by the Issuer at any time.
MANAGEMENT AGREEMENT. The Amended and Restated Management Agreement,
dated as of ______, 2006, as amended, modified or supplemented from time to
time, between the Issuer and TAL.
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MANAGEMENT FEE. This term is defined under "Summary -- Management
Fee."
MANAGEMENT FEE ARREARAGE. For any Payment Date, an amount equal to any
unpaid Management Fee from all prior Collection Periods.
MANAGER. The Person performing the duties of the Manager under the
Management Agreement; initially, TAL including its affiliates listed in the
Management Agreement.
MANAGER ADVANCE. This term is defined under "Description of the
Management Agreement -- Manager Advances."
MANAGER DEFAULT. This term is defined under "Description of the
Management Agreement -- Manager Default."
MANAGER REPORT. A written informational statement provided by TAL in
accordance with the Management Agreement.
MANAGER TERMINATION NOTICE. A written notice to be provided to TAL in
accordance with the Management Agreement.
MATERIAL ADVERSE CHANGE. Any set of circumstances or events which (a)
pertains to the Issuer, the Seller or the Manager and has any material adverse
effect whatsoever upon the validity or enforceability of any Transaction
Document or the security for any of the related Notes or the ability of the
Indenture Trustee or any Series Enhancer (if such Series Enhancer is then the
Control Party for a Series of Outstanding Notes or shall have made an
unreimbursed payment on its Policy) to enforce any of its legal rights or
remedies pursuant to the Transaction Documents or (b) materially impairs the
ability of either the Issuer, the Seller or the Manager to fulfill its
obligations under the Transaction Documents.
MINIMUM PRINCIPAL PAYMENT AMOUNT. Except as otherwise set forth in the
applicable Supplement, for any Series of Outstanding Notes for any Payment Date,
the excess, if any, of (x) the then aggregate unpaid principal balance of such
Series over (y) the Minimum Targeted Principal Balance for such Series for such
Payment Date. For the Series 2006-1 Notes, this term is defined under "Summary
- -- Principal Payments on the Series 2006-1 Notes."
MINIMUM TARGETED PRINCIPAL BALANCE. For any Series, this term will
have the meaning set forth, if applicable, in the related Supplement. For the
Series 2006-1 Notes, this term is defined under "Summary -- Principal Payments
on the Series 2006-1 Notes."
MOODY'S. This term is defined under "Summary -- Rating of the Notes."
NET BOOK VALUE. As of any date of determination, with respect to any
Managed Container that is not subject to a Finance Lease, the Original Equipment
Cost less accumulated depreciation based on (i) straight-line depreciation over
twelve (12) years with a remaining residual value per the schedule attached to
the Indenture or (ii) any other depreciation method used by the Manager which is
more conservative (i.e., which provides for greater annual depreciation or a
lower remaining residual value), and with respect to any Eligible Container
subject to a Finance Lease, one hundred percent (100%) of the net book value of
such Finance Lease, as determined in accordance with GAAP.
NET OPERATING INCOME. For any Collection Period, an amount equal to
the excess (if any) of (i) the Container Revenues actually received during such
Collection Period, over (ii) the Direct Operating Expenses accrued during such
Collection Period.
NOTE PURCHASE AGREEMENT. Any underwriting agreement or other purchase
agreement for the Notes of any Class or Series, including, without limitation,
the Note Purchase Agreement, dated as of ______, 2006 and relating to the Series
2006-1 Notes, among the Issuer, the Manager, Fortis Securities LLC and Credit
Suisse
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Securities (USA) LLC, as each such agreement may be amended, modified or
supplemented from time to time in accordance with its terms.
NOTE REGISTER. Books for the registration and transfer of the Notes
kept in accordance with the Indenture.
NOTE REGISTRAR. U.S. Bank National Association.
NOTEHOLDER. The Person in whose name a Note is registered in the Note
Register.
NOTES. Any one of the promissory notes or other securities executed by
the Issuer and authenticated by or on behalf of the Indenture Trustee,
substantially in the form attached to the related Supplement.
OFFERING. The offering of the Series 2006-1 Notes.
OID. Original issue discount, as defined in section 1273(a) of the
Code.
OID REGULATIONS. The Treasury regulations issued under the Code.
ONE-MONTH LIBOR. For any Interest Accrual Period, the rate per annum,
determined by the Indenture Trustee and notified in writing by the Indenture
Trustee to TAL, which is the arithmetic mean (rounded to the nearest 1/100 of
1%) of the offered rates for dollar deposits having a maturity of one month
commencing on the first day of such Interest Accrual Period that appears on the
Telerate British Bankers Assoc. Interest Settlement Rates Page (defined below)
at approximately 11:00 a.m., London time on the LIBOR Determination Date;
provided, however, that if there shall at any time no longer exist a Telerate
British Bankers Assoc. Interest Settlement Rates Page, "One-Month LIBOR" shall
mean (i) the rate per annum equal to the average rate offered by four major
banks in the London eurodollar interbank market for dollar deposits at or about
10:00 a.m., New York City time, on the LIBOR Determination Date for such
Interest Accrual Period in the London eurodollar interbank market for delivery
on the first day of such Interest Accrual Period for one month and in a
principal amount equal to an amount of not less than $1,000,000 or (ii) if the
Indenture Trustee cannot determine the rate per annum pursuant to the provisions
of clause (i), the London Interbank Offered Rate for a one month period on the
LIBOR Determination Date for such Interest Accrual Period as set forth in The
Wall Street Journal (or, if The Wall Street Journal is not then available, the
most recently available edition of The Wall Street Journal containing such
information). As used herein, "Telerate British Bankers Assoc. Interest
Settlement Rates Page" means the display designated as Page 3750 on the Telerate
System Incorporated Service (or such other page as may replace such page on such
service for the purpose of displaying the rates at which dollar deposits are
offered by leading banks in the London interbank deposit market), as reported by
Bloomberg Financial Markets Commodities News (or by another source selected by
the Indenture Trustee and notified by the Indenture Trustee to each of the
Issuer and the Manager).
OPINION OF COUNSEL. A written opinion of counsel, who, unless
otherwise specified, may be counsel employed by the Issuer, the Seller or the
Manager, in each case reasonably acceptable to the Person or Persons to whom
such Opinion of Counsel is to be delivered. The counsel rendering such opinion
may rely (i) as to factual matters on a certificate of a Person whose duties
relate to the matters being certified, and (ii) insofar as the opinion relates
to local law matters, upon opinions of local counsel.
OPTIONAL TERMINATION DATE. This term is defined under "Summary --
Principal Payments on the Series 2006-1 Notes."
ORIGINAL EQUIPMENT COST. With respect to any Container, an amount
equal to the sum of (i) the greater of (A) the vendor's or manufacturer's
invoice price of such Container and (B) with respect to those Containers owned
by TAL, TOL and TOCC immediately prior to the Initial Closing Date that were
acquired by TAL, TOL, or TOCC prior to November 4, 2004 through an asset
purchase or other acquisition, the purchase price allocated to a Container by
TAL, TOL, or TOCC, as applicable in the acquisition of such Container, plus (ii)
reasonable and customary inspection, transport and initial positioning costs
necessary to put such Container in service not to exceed three percent (3%) of
the amount described in clause (i) above, plus (iii) the cost of any Capital
Improvements made to such Container, by, or on behalf of, the Issuer which
expenditures are capitalized in accordance with GAAP,
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provided however, that the aggregate amount of Capital Improvements that may be
included in the calculation of the Aggregate Net Book Value as of any date of
determination may not exceed an amount equal to five percent (5%) of the
Aggregate Net Book Value, plus (iv) reasonable acquisition fees and other fees
not to exceed two and one half percent (2.5%) of the amount described in clause
(i) above.
OUTSTANDING. When used with reference to the Notes and as of any
particular date, any Note theretofore and thereupon being authenticated and
delivered, except:
(1) any Note cancelled by the Indenture Trustee or proven to the
satisfaction of the Indenture Trustee to have been duly cancelled by the Issuer
at or before such date;
(2) any Note, or portion thereof, called for payment or redemption for
which monies equal to the principal amount or redemption price thereof, as the
case may be with interest to the date of maturity or redemption, shall have
theretofore been deposited with the Indenture Trustee (whether upon, or prior
to, the maturity or the redemption date of such Note);
(3) any Note in lieu of or in substitution for which another Note
shall subsequently have been authenticated and delivered; and
(4) for purposes of determining which Notes are entitled to vote with
respect to a particular matter, any Note held by the Issuer, TAL or any
affiliate of either the Issuer or TAL.
Notwithstanding the foregoing, any Note on which any portion of
principal or interest has been paid by any Series Enhancer pursuant to any
Policy shall be considered to be Outstanding until such Series Enhancer has been
reimbursed in full in accordance with the terms of the related Insurance
Agreement.
OUTSTANDING OBLIGATIONS. As of any date of determination an amount
equal to the sum of (i) the then outstanding principal balance of, and accrued
interest payable on, all notes issued under the Indenture, any Supplement
thereto or any Note Purchase Agreement, (ii) all other amounts owing to Holders
of Outstanding Notes or to any person under the Indenture or any Supplement
thereto, including without limitation any amounts owed by the Issuer to any
Series Enhancer, (iii) amounts owing by the Issuer under any Interest Rate Hedge
Agreement, (iv) amounts owing by the Issuer under any Currency Hedge Agreement
and (v) any other amounts owing to any Series Enhancer under any Transaction
Document.
PAYMENT DATE. This term is defined under "Summary -- Payment Dates."
PERMANENT REGULATION S NOTE. The permanent book-entry notes in fully
registered form without coupons that are exchangeable for Temporary Regulation S
Global Notes after the expiration of the 40-day distribution compliance period
and which will be registered with DTC.
PERMITTED ENCUMBRANCE. With respect to the Collateral, any of the
following:
(i) Liens for taxes, assessments or governmental charges or levies not
yet delinquent or Liens for taxes, assessments or governmental charges or levies
being contested in good faith and by appropriate proceedings for which adequate
cash reserves have been established in accordance with GAAP;
(ii) Liens in respect of property or assets of the Issuer or any of
its Subsidiaries imposed by law which have not arisen to secure Indebtedness for
borrowed money, such as carriers', seamen's, stevedores', wharfinger's, depot
operators', transporters', warehousemens', mechanics', landlord's, suppliers',
repairmen's or other like Liens, and relating to amounts not yet due or which
shall not have been overdue for a period of more than thirty (30) days or which
are being contested in good faith by appropriate proceedings for which adequate
cash reserves have been established in accordance with GAAP;
(iii) Liens created pursuant to the terms of the Indenture and the
other Transaction Documents;
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(iv) Liens arising from judgments, decrees or attachments in respect
of which the Issuer shall in good faith be prosecuting an appeal or proceedings
for review and in respect of which there shall have been secured a subsisting
stay of execution pending such appeal or proceedings (including in connection
with the deposit of cash or other property in connection with the issuance of
stay and appeal bonds);
(v) licenses, sublicenses, leases or subleases (including Leases)
granted by, or on behalf of, the Issuer to third Persons in the ordinary course
of business;
(vi) Liens arising from or related to precautionary UCC or like
personal property security financing statements regarding operating leases (if
any) entered into by the Issuer as lessor in the ordinary course of business;
(vii) Liens in favor of customs or revenue authorities arising as a
matter of law to secure payment of customs duties not past due in connection
with the importation of goods;
(viii) Liens arising solely by virtue of any statutory or common law
provision relating to bankers' liens, rights of set off or similar rights and
remedies as to deposit accounts or other funds maintained with a creditor
depository institution; and
(ix) Liens of any lessee under any Finance Lease;
provided, however, that any proceedings of the type described in clauses (i),
(iv) or (vii) above would not reasonably be expected to subject any Series
Enhancer, the Indenture Trustee, any Eligible Hedge Counterparty or the
Noteholders to any civil or criminal penalty or liability or involve any risk of
loss, sale or forfeiture of any portion of the Collateral that would result in
an Asset Base Deficiency.
PERMITTED PAYMENT DATE WITHDRAWALS. For any Payment Date, one of the
following:
(1) for any Payment Date other than the Legal Final Maturity Date, the
aggregate amount of the interest and any arrearages thereof payable on such
Payment Date; or
(2) for (x) the Legal Final Maturity Date, or (y) any date on which an
Event of Default has occurred and is then continuing and any Outstanding Notes
have been accelerated in accordance with the provisions of the Indenture, an
amount equal to the sum of (x) the aggregate amount of the interest and
arrearages thereof payable on such Payment Date and (y) the then Aggregate Note
Principal Balance.
PERMITTED SALES PERCENTAGE. The percentage set forth in the following
table under the column titled "Permitted Sales Percentage" that corresponds to
the number of months elapsed from the first date on which the most recent Series
of Warehouse Notes ceased to be Outstanding. For months 12 to 96, such
percentages shall be interpolated for months other than those expressly
enumerated.
Months Elapsed Permitted Sales Percentage
- ------------------------- --------------------------
Prior to and including 12 15%
24 20%
36 33%
48 44%
60 56%
72 67%
84 78%
96 89%
Thereafter 100%
PERSON. An individual, a partnership, a limited liability company, a
corporation, a joint venture, an unincorporated association, a joint-stock
company, a trust, or other entity or a Governmental Authority.
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PLAN. An "employee pension benefit plan", as such term is defined in
Section 3(2) of ERISA which is subject to Title IV of ERISA.
PLEDGE AGREEMENT. That certain Amended and Restated Pledge Agreement,
dated as of August 1, 2005, among TAL International Container Corporation, Trans
Ocean Ltd., Trans Ocean Container Corporation and Fortis Capital Corp.
PREDECESSOR CONTAINER. This term is defined under "Description of the
Contribution and Sale Agreement -- Repurchase or Substitution of Non-Conforming
Transferred Assets."
POLICY. A financial guaranty insurance policy issued by a Series
Enhancer.
PREFERENCE AMOUNT. This term is defined under "Description of the
Policy."
PREFERRED EQUITY. With respect to the capital stock of any Person
means capital stock of such Person (other than common stock of such Person) of
any class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to capital stock of any
other class of such Person.
PREMIUM. The fee or premium payable to any Series Enhancer for
guaranteeing the Notes of any Series, as such amount is set forth in the
Enhancement Agreement. With respect to the Series 2006-1 Notes, the premium
payable to the Insurer in accordance with the Premium Letter.
PREMIUM LETTER. That certain Premium Letter between the Series
Enhancer and the Issuer, as the same may be amended, restated, supplemented or
otherwise modified from time to time in accordance with the terms thereof.
PREPAYMENT. Any mandatory or optional prepayment of principal of the
Notes prior to the Expected Final Maturity Date of such Series of Notes made in
accordance with the terms of the Indenture.
PRIORITY PAYMENTS. For each Series of Notes then Outstanding on any
Payment Date, all amounts to be paid from the related Series Account on such
Payment Date which represent payments of (i) interest (but not Default Fees or
any other interest expressly excluded pursuant to the terms of the Supplement
for such Series) on such Series of Notes, (ii) commitment fees payable to the
Noteholders of such Series of Notes and (iii) if any of the amounts set forth in
clauses (i) or (ii) are paid by a Series Enhancer, then any reimbursement
obligations of the Issuer to such Series Enhancer in respect of such payments,
including interest thereon, shall be a Priority Payment for such Series and paid
to such Series Enhancer to the extent that such payment would not cause a
shortfall in other Priority Payments for the Noteholders of such Series of
Notes.
PTCE. This term is defined under "Certain ERISA Considerations."
PURCHASE AGREEMENT. This term is defined under "Plan of Distribution."
QUALIFIED INSTITUTIONAL BUYERS. This term has the meaning provided in
Rule 144A.
RATING AGENCY. This term is defined under "Summary -- Rating of the
Notes."
RATING AGENCY CONDITION. With respect to any action to be taken or
proposed to be taken, each Rating Agency having notified the Issuer, or the
Manager, in writing that such action will not result in a reduction or
withdrawal of its then-current rating of any Series of Notes then Outstanding
including any underlying rating in respect of such Series issued to a Series
Enhancer without giving effect to the related Series Enhancement.
RECEIVABLES THRESHOLD. As of any date of determination, means the
lesser of (i) $5.5 million and (ii) 0.55% of the Aggregate Net Book Value as of
such date of determination.
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REGULATION S. Regulation S under the Securities Act, as such
regulation may be amended from time to time.
REIMBURSEMENT AMOUNT. All amounts owed by the Issuer to a Series
Enhancer under the related Enhancement Agreement and the other Transaction
Documents; and with respect to the Series 2006-1 Notes, the Repayment Amounts
and Indemnified Liabilities, collectively.
RELATED ASSETS. This term is defined under "Description of the
Contribution and Sale Agreement - General."
RELEVANT PERSONS. This term is defined under "Notice to Residents of
the United Kingdom."
REPAYMENT AMOUNTS. All amounts other than Indemnified Liabilities owed
to the Series Enhancer for the Series 2006-1 Notes under the Insurance Agreement
and the other Transaction Documents. For the avoidance of doubt, the term
Repayment Amounts, when used with respect to reimbursement of any draws under
the Policy or amounts otherwise owed to the Series Enhancer, includes interest
owing on such amounts due and payable under the Insurance Agreement.
REQUISITE GLOBAL MAJORITY. This term is defined under "Summary -
Requisite Global Majority."
RESTATEMENT EFFECTIVE DATE. This term has the same meaning as Closing
Date.
RESTRICTED CASH ACCOUNT. This term is defined under "Summary -
Transaction Accounts."
RESTRICTED CASH AMOUNT. As of any Payment Date, the amount required to
be deposited or maintained in the Restricted Cash Account, which shall be equal
to the product of (a) five (5), (b) one-twelfth (1/12), (c) the weighted average
(based on unpaid principal balance) of the annual rates of interest payable by
the Issuer on all Notes then Outstanding (or, to the extent that an Interest
Rate Hedge Agreement is in effect with respect to all, or a portion of, such
principal balances, the interest rate payable by the Issuer on such Interest
Rate Hedge Agreement) and (d) the then Aggregate Note Principal Balance
calculated after giving effect to all principal payments actually paid on such
date.
RESTRICTED SUBSIDIARY. This term is defined in the Credit Agreement.
RULE 144A. Rule 144A under the Securities Act, as such rule may be
amended from time to time.
RULE 144A NOTES. The notes sold in reliance on Rule 144A, represented
by a single permanent global note in fully registered form, without coupons.
SALES PROCEEDS. With respect to any Managed Container that (i) has
been sold to a third party, or (ii) is the subject of a Casualty Loss, an amount
equal to the excess of (a) the gross proceeds of the sale or other disposition
(including any Last Lessee Damage Payment) of a Managed Container or Casualty
Proceeds, if any, received by the Manager in respect of a Managed Container,
over (b) commissions, administrative fees, handling charges, taxes, reserves or
other similar amounts paid, or to be paid, to Persons other than the Manager in
connection with the sale or other disposition as determined in the sole
discretion of the Manager; provided, however, that to the extent that any such
commission, administrative fees, handling charges or other similar amount is to
be paid to an affiliate of the Manager, the amount of such fee or other charge
shall not exceed the amount that would have otherwise been payable to an
independent third party in an arm's-length transaction.
SCHEDULED PRINCIPAL PAYMENT AMOUNT. Except as otherwise set forth in
an applicable Supplement, for any Payment Date for any Series of Outstanding
Notes, the excess, if any, of (x) the then unpaid principal balance of such
Series (after giving effect to any payment of the Minimum Principal Payment
Amount for such Series on such Payment Date), over (y) the Scheduled Targeted
Principal Balance for such Series for such Payment Date. For the Series 2006-1
Notes, this term has the meaning specified under "Summary -- Principal Payments
on the Series 2006-1 Notes."
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SCHEDULED TARGETED PRINCIPAL BALANCE. For each Series of Notes
Outstanding, as set forth in the relevant Supplement. The Scheduled Targeted
Principal Balance for the Series 2006-1 Notes is defined under "Summary --
Principal Payments on the Series 2006-1 Notes."
SEC. The Securities and Exchange Commission.
SECURITIES ACT. The Securities Act of 1933, as amended from time to
time.
SECURITIES ENTITLEMENTS. This term shall have the meaning set forth in
the UCC.
SECURITIZATION INTERCREDITOR AGREEMENT. That certain intercreditor
agreement, dated as of August 1, 2005, between and Fortis Capital Corp. and U.S.
Bank National Association.
SELLER. TAL, and its successors and permitted assigns.
SERIES. This term is defined under "Description of the Series 2006-1
Notes and the Indenture - Issuance of Additional Series of Notes."
SERIES 2005-1 NOTE. Any one of the Notes, issued pursuant to the terms
of the Series 2005-1 Supplement, and replacements therefor issued pursuant to
the terms of the Indenture. See also the definition of Warehouse Notes.
SERIES 2005-1 SUPPLEMENT. The Amended and Restated Series 2005-1
Supplement to the Indenture, dated as of March 1, 2006, entered into by and
between the Issuer and the Indenture Trustee, pursuant to which the Series
2005-1 Notes were issued.
SERIES 2006-1 CLOSING DATE. This term has the same meaning as Closing
Date.
SERIES 2006-1 EXPECTED FINAL MATURITY DATE. This term is defined on
the front cover of this Preliminary Offering Memorandum.
SERIES 2006-1 LEGAL FINAL MATURITY DATE. This term is defined on the
front cover of this Preliminary Offering Memorandum.
SERIES 2006-1 NOTE INTEREST PAYMENT. For each Series 2006-1 Note on
each Payment Date, an amount equal to the product of (i) the sum of (x)
One-Month LIBOR for the Interest Accrual Period ending on the day preceding such
Payment Date, and (y) [_____] of one percent (0.[__]%), (ii) the Series 2006-1
Note Principal Balance on the immediately preceding Payment Date and (iii) a
fraction, the numerator of which is the actual number of days elapsed in such
Interest Accrual Period and the denominator of which is 360.
SERIES 2006-1 NOTE PRINCIPAL BALANCE. With respect to any Series
2006-1 Note as of any date of determination, an amount equal to the excess, if
any, of (x) the Series 2006-1 Note Principal Balance of such Series 2006-1 Note
as of the Series 2006-1 Closing Date, over (y) the cumulative amount of all
Minimum Principal Payment Amounts, Scheduled Principal Payment Amounts and any
other principal payments (including Prepayments) actually paid to the Series
2006-1 Noteholders subsequent to the Series 2006-1 Closing Date.
SERIES 2006-1 NOTEHOLDER. At any time of determination for the Series
2006-1 Notes, any Person in whose name a Series 2006-1 Note is registered in the
Note Register.
SERIES 2006-1 NOTES. This term is defined on the front cover of this
Preliminary Offering Memorandum.
SERIES 2006-1 SERIES ACCOUNT. The account of that name established in
accordance with the Series 2006-1 Supplement.
SERIES 2006-1 SUPPLEMENT. The Series 2006-1 Supplement to the
Indenture entered into by and between the Issuer and the Indenture Trustee,
pursuant to which the Series 2006-1 Notes will be issued.
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SERIES 2006-1 TRANSACTION DOCUMENTS. Any and all of the Indenture, the
2006-1 Supplement, the Policy, the Premium Letter and any other Enhancement
Agreement, the Insurance Agreement, the Series 2006-1 Notes, the Note Purchase
Agreement for the Series 2006-1 Notes, the Management Agreement, the
Contribution and Sale Agreement, the Administration Agreement, the Independent
Management Agreement, any Hedge Agreement and all other Transaction Documents
and any and all other agreements, documents and instruments executed and
delivered by or on behalf or in support of the Issuer with respect to the
issuance and sale of the Series 2006-1 Notes, as any of the foregoing may from
time to time be amended, modified, supplemented or renewed.
SERIES ACCOUNT. Any deposit, trust, escrow or similar account
maintained for the benefit of the Noteholders and any related Series Enhancer of
any Series or Class, if any, as specified in the related Supplement.
SERIES ENHANCEMENT. The rights and benefits provided to the
Noteholders of any Series or Class pursuant to any letter of credit, surety
bond, financial guaranty, insurance policy, insurance agreement or other similar
arrangement. The subordination of any Class to another Class shall not be deemed
to be a Series Enhancement.
SERIES ENHANCER. A Person then providing any Series Enhancement, other
than the Noteholders of any Class which is subordinated to another Class. Unless
the context requires otherwise, references to the Series Enhancer refer to the
Series Enhancer for the Series 2006-1 Notes.
SERIES ENHANCER DEFAULT. With respect to the Series 2006-1 Notes, the
occurrence and continuance of any of the following events:
(a) the Series Enhancer shall have failed to pay an Insured
Amount required under the Policy in accordance with its terms and such
failure continues unremedied for two (2) Business Days;
(b) the Series Enhancer shall have (i) filed a petition or
commenced any case or proceeding under any provision or chapter of the
United States Bankruptcy Code or any other similar federal or state
law relating to insolvency, bankruptcy, rehabilitation, liquidation or
reorganization, (ii) made a general assignment for the benefit of its
creditors, or (iii) had an order for relief entered against it under
the United States Bankruptcy Code or any other similar federal or
state law relating to insolvency, bankruptcy, rehabilitation,
liquidation or reorganization which is final and nonappealable; or
(c) a court of competent jurisdiction, the New York Department of
Insurance or other competent regulatory authority shall have entered a
final and nonappealable order, judgment or decree (i) appointing a
custodian, trustee, agent or receiver for the Series Enhancer or for
all or any material portion of its property or (ii) authorizing the
taking of possession by a custodian, trustee, agent or receiver of the
Series Enhancer (or the taking of possession of all or any material
portion of the property of the Series Enhancer).
SERVICE LEASE FLEET. The Managed Containers subject to service leases.
SERVICING STANDARD. This term is defined under "Description of the
Management Agreement - General."
SPECIALIZED CONTAINERS. All refrigerated containers, tank containers,
special purposes containers, open top containers, flat rack containers, bulk
containers, high cube containers (other than 40' high cube dry containers),
cellular palletwide containers and all other types of containers other than
standard dry cargo containers.
STANDARD & POOR'S. This term is defined under "Summary -- Rating of
the Notes."
STRUCTURING ASSUMPTIONS. This term is defined under "Structuring
Assumptions."
SUBSTITUTE CONTAINER. The Managed Containers and Related Assets
transferred by TAL to the Issuer in exchange for one or more Managed Containers
and Related Assets, subject to the terms and conditions of the Contribution and
Sale Agreement.
A-24
SUPPLEMENT. Any supplement to the Indenture executed in accordance
with the terms of the Indenture.
SUPPLEMENTAL PRINCIPAL PAYMENT AMOUNT. For the Warehouse Notes on any
Payment Date, the excess, if any, of (i) the Aggregate Note Principal Balance
(calculated after giving effect to any payment of the Minimum Principal Payment
Amount and the Scheduled Principal Payment Amount for all Series of Notes then
Outstanding on such Payment Date), over (ii) the Asset Base on such Payment
Date.
SUPPORTING OBLIGATION. This term shall have the meaning set forth in
the UCC.
SYSTEMS/ORGANIZATIONAL ESTABLISHMENT EXPENSES. The aggregate of all
expenditures (whether paid in cash or accrued as liabilities) by the Issuer in
establishing, implementing, integrating or replacing financial, information
technology and other similar systems of the Issuer.
TAL. TAL International Container Corporation, a Delaware corporation.
TAL GROUP. TAL International Group, Inc., a corporation organized
under the laws of the State of Delaware and its successors and permitted
assigns.
TEMPORARY LOSS ACCOUNT. This term is defined under "Summary --
Transaction Accounts."
TEMPORARY LOSS AMOUNT. If no Series of Warehouse Notes is then
outstanding, an amount equal to the sum of (A) in the case of proceeds of a
Casualty Loss, an amount equal to the product of (i) with respect to any
Collection Period, the sum of the Adjusted Net Book Value of any Managed
Containers (calculated as of the calendar month end immediately prior to the
occurrence of such Casualty Loss) subject to a Casualty Loss for which the
Issuer shall have received proceeds equal to or greater than a specified dollar
amount from or on behalf of a Lessee in such Collection Period and (ii) a
fraction, expressed as a percentage (a) the numerator of which is the Aggregate
Note Principal Balance (calculated as of the calendar month end immediately
prior to the occurrence of such Casualty Loss) and (b) the denominator of which
is the Aggregate Net Book Value of all Managed Containers (calculated as of the
calendar month end immediately prior to the occurrence of such Casualty Loss)
and (B) in the case of proceeds of a sale of Collateral pursuant to the
Indenture, if after giving effect to the sale then under consideration, the
Calculated Sales Percentage exceeds the Permitted Sales Percentage, an amount
equal to the product of (i) an amount equal to, with respect to any Collection
Period, the sum of the Adjusted Net Book Values (calculated as of the calendar
month end immediately prior to the occurrence of such sale) of all Eligible
Containers that have been subject to the sale then under consideration and (ii)
a fraction, expressed as a percentage (a) the numerator of which is the
Aggregate Note Principal Balance (calculated as of the calendar month end
immediately prior to the occurrence of such sale), and (b) the denominator of
which is the Aggregate Net Book Value (calculated as of the calendar month end
immediately prior to the occurrence of such sale). For clarity, while any Series
of Warehouse Notes is Outstanding, the Temporary Loss Amount shall be equal to
zero.
TEMPORARY REGULATION S GLOBAL NOTES. The temporary book-entry notes in
fully registered form without coupons that represent the Notes sold in offshore
transactions within the meaning of and in compliance with Regulation S under the
Securities Act and which will be registered with the Depositary.
TERM NOTE. Any Note that pays principal and interest on each Payment
Date from and after its date of issuance.
TEU. This term is defined under "Containerization -- Overview."
TOCC. Trans Ocean Container Corporation, a corporation organized under
the laws of the State of Delaware, and its successors and permitted assigns.
TOL. Trans Ocean Ltd., a corporation organized under the laws of the
State of Delaware, and its successors and permitted assigns.
A-25
TRANSACTION DOCUMENTS. Any and all of the Indenture, each Supplement,
each Policy, each Insurance Agreement, the Notes, the Management Agreement, the
Contribution and Sale Agreement, each Note Purchase Agreement, the
Administration Agreement, the Independent Management Agreement, the Interest
Rate Hedge Agreements, the Currency Hedge Agreements, all other transaction
documents and any and all other agreements, documents and instruments executed
and delivered by or on behalf of support of Issuer with respect to the issuance
and sale of the Notes, as any of the foregoing may from time to time be amended,
modified, supplemented or renewed.
TRANSFER DATE. The date on which a Container is contributed or sold by
the Seller to the Issuer pursuant to the terms of the Contribution and Sale
Agreement.
TRANSFERRED ASSETS. This term is defined under "Description of the
Contribution and Sale Agreement - General."
TRANSFERRED CONTAINER. A Container transferred by TAL to the Issuer.
TRUST ACCOUNT. This term is defined under "Summary - Transaction
Accounts."
UCC. The Uniform Commercial Code as in effect in the State of New
York. In the event that, by reason of mandatory provisions of law, any or all of
the attachment, perfection or priority of Indenture Trustee's security interest
in any Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than the State of New York, the term UCC shall mean the
Uniform Commercial Code as in effect in such other jurisdiction for purposes of
the provisions relating to such attachment, perfection of priority and for
purposes of definitions related to such provisions.
UNITED STATES PERSON. This term shall have the meaning given to it in
Regulation S under the Securities Act.
WAREHOUSE NOTES. Any Series of Notes that contains (or for which the
related Supplement or Note Purchase Agreement contains) provisions whereby (i)
the Issuer from time to time may request additional fundings from the related
Noteholders and (ii) the unpaid principal balances of such Notes are not
scheduled to amortize for some specified period of time. If the Conversion Date
for a Series of Warehouse Notes has occurred, such Series shall no longer be
considered an Outstanding Series of Warehouse Notes, but shall instead be
considered an Outstanding Series of Term Notes. As of the Closing Date, the
Series 2005-1 Notes are a Series of Warehouse Notes.
WARRANTY PURCHASE AMOUNT. With respect to any Managed Container, an
amount equal to the excess of (i) the Net Book Value of such Managed Container
on the date which the Issuer acquired such Container from the Seller pursuant to
the Contribution and Sale Agreement, less (ii) the aggregate amount of Net
Operating Income received by the Issuer with respect to such Managed Container
since the date on which the Issuer acquired such Managed Container.
WEIGHTED AVERAGE AGE. For any date of determination, an amount that
shall be determined to the following equation:
E(U(n)xAA(n)xEU(n))
WAA= ------------------
E(U(n)xEU(n))
where:
WAA = Weighted Average Age
N = Type of unit (which shall be determined by reference to the list below)
U(n) = Number of Managed Container units of type n
AA(n) = Average age in years of Managed Container units of type n (as determined
from the date
A-26
of the initial sale of such Managed Container units by the manufacturer
thereof)
EU(n) = "EU Factor" for Managed Container units of type n (which shall be
determined by reference to the chart below)
For the purpose of the foregoing equation, the variable "n" shall be one of the
following unit types: (i) 20DC; (ii) 40DC; (iii) 40HC; (iv) 45MC; (v) 20RF; (vi)
40HR; (vii) 40RF; (viii) GENS; (ix) 20FR; (x) 40FR; (xi) 20OT; and (xii) 40OT.
The foregoing equation is intended to calculate the Weighted Average Age of the
Managed Containers. The calculation considers the year of manufacture for each
unit and by type of unit. In addition, the calculation treats each unit type by
their EU Factor, as determined by the EU chart listed below.
For the purpose of the foregoing equation, the variable "EUn" with respect to a
particular unit type "n" shall be equal to the value set forth in the chart
below under the heading "EU Factor" opposite the appropriate unit type "n":
Unit Type EU Factor
- --------- ---------
20DC 1.00
40DC 1.60
40HC 1.68
45MC 2.02
20RF 8.00
40HR 10.00
40RF 10.00
GENS 5.00
20FR 1.90
40FR 3.00
20OT 1.30
40OT 2.20
WEIGHTED AVERAGE LIFE. The Weighted Average Life of a Note equals (i)
the sum of the products on each Payment Date of (a) the principal payments
assumed to be made on such a Payment Date and (b) the number of years from the
date of the issuance of such Note to such Payment Date, (ii) divided by the
initial principal balance of such Note.
A-27
ANNEX A
to Preliminary Offering Memorandum
FORM OF PURCHASER LETTER
U.S. Bank National Association,
as Indenture Trustee
60 Livingstone Avenue
St. Paul, Minnesota 55107
Ladies and Gentlemen:
FOR VALUE RECEIVED the undersigned registered Noteholder (the
"Seller") hereby sell(s), assign(s) and transfer(s) unto (please print or type
name and address including postal zip code of assignee):
________________________________________________________________________________
________________________________________________________________________________
____________________________________________ (the "Purchaser"), Taxpayer
Identification No. _______________________, [$______________________ of] Series
2006-1 Asset Backed Notes bearing number [__________________] (the "Note") and
all rights thereunder, hereby irrevocably constituting and appointing
___________________ attorney to transfer the Note on the books of the Issuer
with full power of substitution in the premises.
1. In connection with such transfer and in accordance with Section 205
of the Amended and Restated Indenture (as amended or supplemented from time to
time as permitted thereby, the "Indenture"), dated as of [_________], 2006,
between TAL Advantage I LLC (the "Issuer") and U.S. Bank National Association
(the "Indenture Trustee"), the Seller hereby certifies the following facts to
the Issuer and the Indenture Trustee: Neither the Seller nor anyone acting on
its behalf has (a) offered, transferred, pledged, sold or otherwise disposed of
the Note, any interest in the Note or any other similar security to any Person
in any manner, (b) solicited any offer to buy or accept a transfer, pledge or
other disposition of the Note, any interest in the Note or any other similar
security from, any Person in any manner, or (c) made any general solicitation by
means of general advertising or in any other manner, or taken any other action,
in each case which would constitute a distribution of the Note under the
Securities Act of 1933, as amended (the "1933 Act"), or which would render the
disposition of the Note a violation of Section 5 of the 1933 Act or require
registration pursuant thereto.
Capitalized terms used herein but not otherwise defined shall have the
meaning ascribed to such terms in the Indenture, or if not defined therein, as
defined in the Series 2006-1 Supplement, dated as of [___________], 2006, as
amended or modified from time to time between the Issuer and the Indenture
Trustee.
2. The Purchaser warrants and represents to, and covenants with the
Issuer and the Indenture Trustee pursuant to Section 205 of the Indenture as
follows:
a. The Purchaser understands that the Note has not been registered
under the 1933 Act or the securities laws of any State.
b. The Purchaser is acquiring the Note for investment for its own
account only and not for any other Person.
A-I
c. The Purchaser is a substantial, sophisticated institutional
investor having such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and
risks of investment in the Note.
d. [The Purchaser is a "qualified institutional buyer" as that term
is defined in Rule 144A under the 1933 Act ("Rule 144A") and has
completed either of the forms of certification to that effect
attached hereto as Annex 1 or Annex 2. The Purchaser is aware
that the sale to it is being made in reliance on Rule 144A. The
Purchaser is acquiring the Note for its own account or for the
account of another qualified institutional buyer, understands
that such Note may be offered, resold, pledged or transferred
only (i) to a qualified institutional, buyer, or to an offeree or
purchaser that the Purchaser reasonably believes is a qualified
institutional buyer, that purchases for its own account or for
the account of another qualified institutional buyer to whom
notice is given that the resale, pledge or transfer is being made
in reliance on Rule 144A, or (ii) pursuant to another exemption
from registration under the 1933 Act.]
e. The Purchaser is not a Competitor.
3. The Purchaser of a Note represents and warrants to the Indenture
Trustee that (i) it is not acquiring the Series 2006-1 Note with the plan assets
of an "employee benefit plan" as defined in Section 3(3) of ERISA, which is
subject to the provisions of Title I of ERISA, a "plan" described in Section
4975(e)(1) of the Internal Revenue Code of 1986, as amended (the "Code"), an
entity whose underlying assets include "plan assets" of any of the foregoing by
reason of an employee benefit plan's or plan's investment in such entity or any
other plan that is subject to a law that is similar to Title I of ERISA or
Section 4975 of the Code or (ii) the acquisition, holding and disposition of the
Series 2006-1 Note will not give rise to a non-exempt prohibited transaction
under Section 406 of ERISA, Section 4975 of the Code or any similar applicable
law.
4. This document may be executed in one or more counterparts and by
the different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed to be an original; such counterparts, together, shall
constitute one and the same document.
IN WITNESS WHEREOF, each of the parties have caused this document to
be executed by their duly authorized officers as of the date set forth below.
- -------------------------------------- --------------------------------------
Seller Purchaser
By: By:
----------------------------------- -----------------------------------
Name: Name:
Title: Title:
Taxpayer Identification No. Taxpayer Identification No.
-------- --------
Date: Date:
--------------------------------- ---------------------------------
A-II
ANNEX 1 TO ANNEX A
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[For Purchasers Other Than Registered Investment Companies]
The undersigned hereby certifies as follows to the parties identified
in Section 2 of the attached Investment Letter:
1. As indicated below, the undersigned is the President, Chief
Financial Officer, Senior Vice President or other senior executive officer of
the Purchaser.
2. The Purchaser is a "qualified institutional buyer" as that term is
defined in Rule 144A under the Securities Act of 1933 ("Rule 144A") because (i)
the Purchaser owned and/or invested on a discretionary basis $_______________(1)
in securities (except for the excluded securities referred to in paragraph 3
below) as of the end of the Purchaser's most recent fiscal year (such amount
being calculated in accordance with Rule 144A) and (ii) the Purchaser satisfies
the criteria in the category marked below.
____ Corporation, etc. The Purchaser is a corporation (other than a
bank, savings and loan association or similar institution), a
Massachusetts or similar business trust, a partnership, or a
charitable organization described in Section 501(c)(3) of the
Internal Revenue Code.
____ Bank. The Purchaser (a) is a national bank or banking institution
organized under the laws of any State, territory or the District
of Columbia, the business of which is substantially confined to
banking and is supervised by the State or territorial banking
commission or similar official or is a foreign bank or equivalent
institution, and (b) has an audited net worth of at least
$25,000,000 as demonstrated in its latest annual financial
statements, a copy of which is attached hereto.
____ Savings and Loan. The Purchaser (a) is a savings and loan
association, building and loan association, cooperative bank,
homestead association or similar institution, which is supervised
and examined by a state or federal authority having supervision
over any such institutions, or is a foreign savings and loan
association or equivalent institution and (b) has an audited net
worth of at least $25,000,000 as demonstrated in its latest
annual financial statements, a copy of which is attached hereto.
____ Broker-dealer. The Purchaser is a dealer registered pursuant to
Section 15 of the Securities Exchange Act of 1934.
____ Insurance Company. The Purchaser is organized as an insurance
company whose primary and predominant business activity is the
writing of insurance or the reinsuring of risks underwritten by
insurance companies, and which is subject to supervision by the
insurance, commissioner or a similar official or agency of a
State, territory or the District of Columbia.
____ State or Local Plan. The Purchaser is a plan established and
maintained by a State, its political subdivisions, or any agency
or instrumentality of the State or its political subdivisions,
for the benefit of its employees.
____ ERISA Plan. The Purchaser is an employee benefit plan within the
meaning of Title I of the Employee Retirement Income Security Act
of 1974.
- ----------
(1) Buyer must own and/or invest on a discretionary basis at least $100,000,000
in securities unless Buyer is a dealer registered pursuant to Section 15 of
the Securities Exchange Act of 1934, and, in that case, Buyer must own
and/or invest on a discretionary basis at least $10,000,000 in securities.
A-III
____ Investment Advisor. The Purchaser is an investment advisor
registered under the Investment Advisers Act of 1940.
3. The term "securities" as used herein does not include (i)
securities of issuers that are affiliated with the Purchaser, (ii) securities
that are part of an unsold allotment to or subscription by the Purchaser, if the
Purchaser is a dealer, (iii) securities issued or guaranteed by the U.S. or any
instrumentality thereof, (iv) bank deposit notes and certificates of deposit,
(v) loan participations, (vi) repurchase agreements, (vii) securities owned but
subject to a repurchase agreement and (viii) currency, interest rate and
commodity swaps.
4. For purposes of determining the aggregate amount of securities
owned and/or invested on a discretionary basis by the Purchaser, the Purchaser
used the cost of such securities to the Purchaser (except as provided in Rule
144A(a)(3)) and did not include any of the securities referred to in the
preceding paragraph. Further, in determining such aggregate amount, the
Purchaser may have included securities owned by subsidiaries of the Purchaser,
but only if such subsidiaries are consolidated with the Purchaser in its
financial statements prepared in accordance with generally accepted accounting
principles and if the investments of such subsidiaries are managed under the
Purchaser's direction. However, such securities were not included if the
Purchaser is a majority-owned, consolidated subsidiary of another enterprise and
the Purchaser is not itself a reporting company under the Securities Exchange
Act of 1934.
5. The Purchaser acknowledges that it is familiar with Rule 144A and
understands that the seller to it and other parties related to the Notes are
relying and will continue to rely on the statements made herein because one or
more sales to the Purchaser may be in reliance on Rule 144A.
_____ _____ Will the Purchaser be purchasing the
Yes No Note only for Purchaser's own account?
6. If the answer to the foregoing question is "no", the Purchaser
agrees that, in connection with, any purchase of securities sold to the
Purchaser for the account of a third party (including any separate account) in
reliance on Rule 144A, the Purchaser will only purchase for the account of a
third party that at the time is a "qualified institutional buyer" within the
meaning of Rule 144A. In addition, the Purchaser agrees that the Purchaser will
not purchase securities for a third party unless the Purchaser has obtained a
certificate from such third party substantially identical to this certification
or taken other appropriate steps contemplated by Rule 144A to conclude that such
third party independently meets the definition of "qualified institutional
buyer" set forth in Rule 144A.
7. The Purchaser will notify each of the parties to which this
certification is made of any changes in the information and conclusions herein.
Until such notice is given, the Purchaser's purchase of the Note will constitute
a reaffirmation of this certification as of the date of such purchase.
-----------------------------------
Print Name of Purchaser
By:
--------------------------------
Name:
Title:
Date:
------------------------------
A-IV
ANNEX 2 TO ANNEX A
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[For Purchasers That Are Registered Investment Companies]
The undersigned hereby certifies as follows to the parties identified
in Section 2 of the attached Investment Letter:
1. As indicated below, the undersigned is the President, Chief
Financial Officer or Senior Vice President or other senior executive officer of
the Purchaser or, if the Purchaser is a "qualified institutional buyer" as that
term is defined in Rule 144A under the Securities Act of 1933 ("Rule 144A")
because Purchaser is part of a Family of Investment Companies (as defined
below), is such an officer of the Adviser.
2. The Purchaser is a "qualified institutional buyer" as defined in
SEC Rule 144A because (i) the Purchaser is an investment company registered
under the Investment Company Act of 1940, and (ii) as marked below, the
Purchaser alone, or the Purchaser's Family of Investment Companies, owned at
least $100,000,000 in securities (other than the excluded securities referred to
below) as of the end of the Purchaser's most recent fiscal year. For purposes of
determining the amount of securities owned by the Purchaser or the Purchaser's
Family of Investment Companies, the cost of such securities was used (except as
provided in Rule 144(a)(3)).
____ The Purchaser owned $_______________ in securities (other than
the excluded securities referred to below) as of the end of the
Purchaser's most recent fiscal year (such amount being calculated
in accordance with Rule 144A).
____ The Purchaser is part of a Family of Investment Companies which
owned in the aggregate $_______________ in securities (other than
the excluded securities referred to below) as of the end of the
Purchaser's most recent fiscal year (such amount being calculated
in accordance with Rule 144A).
3. The term "Family of Investment Companies" as used herein means two
or more registered investment companies (or series thereof), except for a unit
investment trust whose assets consist solely of shares on one or more registered
investment companies that have the same investment adviser or investment
advisers that are affiliated (by virtue of being majority owned subsidiaries of
the same parent or because one investment adviser is a majority owned subsidiary
of the other), or, in the case of unit investment trusts, the same depositor.
4. The term "securities" as used herein does not include (i)
securities of issuers that are affiliated with the Purchaser or are part of the
Purchaser's Family of Investment Companies, (ii) securities issued or guaranteed
by the U.S. or any instrumentality thereof, (iii) bank deposit notes And
certificates of deposit, (iv) loan participations, (v) repurchase agreements,
(vi) securities owned but subject to a repurchase agreement and (vii) currency,
interest rate and commodity swaps.
5. The Purchaser acknowledges that it is familiar with Rule 144A and
understands that the seller to it and the other parties related to the Note are
relying and will continue to rely on the statements made herein because one or
more sales to the Purchaser will be in reliance on Rule 144A.
A-V
6. The undersigned will notify the parties addressed the Purchaser
Letter to which this certification relates of any changes in the information and
conclusions herein. Until such notice, the Purchaser's purchase of the Note will
constitute a reaffirmation of this certification by the undersigned as of the
date of such purchase.
-----------------------------------
Print Name of Purchaser or Adviser
By:
--------------------------------
Name:
Title:
IF AN ADVISER
-----------------------------------
Print Name of Purchaser
Date:
A-VI
ANNEX B
FORECASTED NET CASH FLOW BY PERIOD(1)
PAYMENT DATE NET CASH FLOW
PERIOD MONTH/YEAR (US DOLLARS)
- -------------------------------------
1 May-06 17,795,158
2 June-06 18,295,290
3 July-06 17,752,220
4 August-06 18,301,468
5 September-06 18,259,291
6 October-06 17,663,946
7 November-06 18,191,651
8 December-06 17,594,148
9 January-07 18,119,817
10 February-07 17,721,067
11 March-07 15,943,808
12 April-07 17,425,476
13 May-07 16,824,292
14 June-07 17,252,822
15 July-07 16,629,104
16 August-07 17,029,758
17 September-07 16,907,879
18 October-07 16,305,170
19 November-07 16,676,554
20 December-07 16,074,440
21 January-08 16,420,647
22 February-08 16,288,515
23 March-08 15,251,989
24 April-08 16,054,487
25 May-08 15,504,116
26 June-08 15,843,337
27 July-08 15,307,161
28 August-08 15,628,163
29 September-08 15,511,747
30 October-08 14,991,666
31 November-08 15,291,994
32 December-08 14,772,770
33 January-09 15,057,101
34 February-09 14,977,985
35 March-09 13,777,868
36 April-09 14,926,857
37 May-09 14,506,707
38 June-09 14,864,743
39 July-09 14,463,508
40 August-09 14,821,799
41 September-09 14,792,421
42 October-09 14,399,482
43 November-09 14,754,375
44 December-09 14,347,990
45 January-10 14,704,875
46 February-10 14,622,964
47 March-10 13,435,954
48 April-10 14,520,154
49 May-10 14,121,366
50 June-10 14,444,007
51 July-10 14,055,152
52 August-10 14,375,160
53 September-10 14,339,487
54 October-10 13,948,881
55 November-10 14,271,896
56 December-10 13,883,416
57 January-11 14,200,948
58 February-11 14,058,592
59 March-11 12,910,360
60 April-11 13,916,448
61 May-11 13,506,550
62 June-11 13,786,009
63 July-11 13,395,367
64 August-11 13,676,197
65 September-11 13,611,497
66 October-11 13,225,075
67 November-11 13,496,923
68 December-11 13,110,490
69 January-12 13,375,838
70 February-12 13,164,949
71 March-12 12,365,460
72 April-12 12,948,024
- ----------
(1.) Forecasted Net Cash Flow assumes sales proceeds
B-1
ANNEX B
FORECASTED NET CASH FLOW BY PERIOD(1)
PAYMENT DATE NET CASH FLOW
PERIOD MONTH/YEAR (US DOLLARS)
- -------------------------------------
73 May-12 12,576,745
74 June-12 12,824,959
75 July-12 12,469,403
76 August-12 12,713,875
77 September-12 12,649,139
78 October-12 12,294,485
79 November-12 12,530,912
80 December-12 12,178,679
81 January-13 12,408,203
82 February-13 12,282,031
83 March-13 11,320,960
84 April-13 12,142,063
85 May-13 11,802,412
86 June-13 12,019,712
87 July-13 11,698,043
88 August-13 11,909,573
89 September-13 11,850,856
90 October-13 11,523,435
91 November-13 11,729,611
92 December-13 11,411,831
93 January-14 11,614,266
94 February-14 11,494,439
95 March-14 10,597,113
96 April-14 11,316,338
97 May-14 10,985,981
98 June-14 11,164,725
99 July-14 10,853,885
100 August-14 11,025,783
101 September-14 10,952,431
102 October-14 10,637,490
103 November-14 10,802,401
104 December-14 10,497,909
105 January-15 10,657,601
106 February-15 10,459,948
107 March-15 9,571,881
108 April-15 10,172,655
109 May-15 9,857,453
110 June-15 9,983,050
111 July-15 9,689,917
112 August-15 9,807,767
113 September-15 9,715,688
114 October-15 9,420,222
115 November-15 9,529,234
116 December-15 9,244,793
117 January-16 9,346,681
118 February-16 9,149,522
119 March-16 8,636,898
120 April-16 8,925,235
121 May-16 8,640,730
122 June-16 8,814,600
123 July-16 8,634,986
124 August-16 8,832,990
125 September-16 8,818,840
126 October-16 8,640,809
127 November-16 8,792,440
128 December-16 8,621,520
129 January-17 8,766,129
130 February-17 8,620,737
131 March-17 8,061,595
132 April-17 8,521,312
133 May-17 8,368,610
134 June-17 8,507,807
135 July-17 8,387,114
136 August-17 8,516,725
137 September-17 8,513,440
138 October-17 8,389,364
139 November-17 8,508,160
140 December-17 8,391,100
141 January-18 8,497,811
142 February-18 8,223,928
143 March-18 7,710,332
144 April-18 7,862,487
- ----------
(1.) Forecasted Net Cash Flow assumes sales proceeds
B-II
ANNEX B
FORECASTED NET CASH FLOW BY PERIOD(1)
PAYMENT DATE NET CASH FLOW
PERIOD MONTH/YEAR (US DOLLARS)
- -------------------------------------
145 May-18 7,580,646
146 June-18 7,470,900
147 July-18 7,226,825
148 August-18 7,079,749
149 September-18 6,870,871
150 October-18 6,624,308
151 November-18 6,433,318
152 December-18 6,198,799
153 January-19 5,953,739
154 February-19 6,032,406
155 March-19 6,027,447
156 April-19 5,999,242
157 May-19 5,974,889
158 June-19 5,922,760
159 July-19 5,911,412
160 August-19 5,861,356
161 September-19 5,821,401
162 October-19 5,791,320
163 November-19 5,736,806
164 December-19 5,716,386
165 January-20 5,676,421
166 February-20 5,643,817
167 March-20 5,624,931
168 April-20 5,592,373
169 May-20 5,577,668
170 June-20 5,538,737
171 July-20 5,542,312
172 August-20 5,514,559
173 September-20 5,499,669
174 October-20 5,498,403
175 November-20 5,478,423
176 December-20 5,488,837
177 January-21 5,472,614
178 February-21 5,469,685
179 March-21 5,477,104
180 April-21 5,480,228
- ----------
(1.) Forecasted Net Cash Flow assumes sales proceeds
B-III
ANNEX C
MINIMUM TARGETED PRINCIPAL BALANCE BY PERIOD
MINIMUM
PAYMENT DATE TARGET BALANCE
PERIOD MONTH/YEAR (US DOLLARS)
- --------------------------------------
0 April-06 680,000,000
1 May-06 676,222,222
2 June-06 672,444,444
3 July-06 668,666,667
4 August-06 664,888,889
5 September-06 661,111,111
6 October-06 657,333,333
7 November-06 653,555,556
8 December-06 649,777,778
9 January-07 646,000,000
10 February-07 642,222,222
11 March-07 638,444,444
12 April-07 634,666,667
13 May-07 630,888,889
14 June-07 627,111,111
15 July-07 623,333,333
16 August-07 619,555,556
17 September-07 615,777,778
18 October-07 612,000,000
19 November-07 608,222,222
20 December-07 604,444,444
21 January-08 600,666,667
22 February-08 596,888,889
23 March-08 593,111,111
24 April-08 589,333,333
25 May-08 585,555,556
26 June-08 581,777,778
27 July-08 578,000,000
28 August-08 574,222,222
29 September-08 570,444,444
30 October-08 566,666,667
31 November-08 562,888,889
32 December-08 559,111,111
33 January-09 555,333,333
34 February-09 551,555,556
35 March-09 547,777,778
36 April-09 544,000,000
37 May-09 540,222,222
38 June-09 536,444,444
39 July-09 532,666,667
40 August-09 528,888,889
41 September-09 525,111,111
42 October-09 521,333,333
43 November-09 517,555,556
44 December-09 513,777,778
45 January-10 510,000,000
46 February-10 506,222,222
47 March-10 502,444,444
48 April-10 498,666,667
49 May-10 494,888,889
50 June-10 491,111,111
51 July-10 487,333,333
52 August-10 483,555,556
53 September-10 479,777,778
54 October-10 476,000,000
55 November-10 472,222,222
56 December-10 468,444,444
57 January-11 464,666,667
58 February-11 460,888,889
59 March-11 457,111,111
60 April-11 453,333,333
61 May-11 449,555,556
C-I
ANNEX C
MINIMUM TARGETED PRINCIPAL BALANCE BY PERIOD
MINIMUM
PAYMENT DATE TARGET BALANCE
PERIOD MONTH/YEAR (US DOLLARS)
- --------------------------------------
62 June-11 445,777,778
63 July-11 442,000,000
64 August-11 438,222,222
65 September-11 434,444,444
66 October-11 430,666,667
67 November-11 426,888,889
68 December-11 423,111,111
69 January-12 419,333,333
70 February-12 415,555,556
71 March-12 411,777,778
72 April-12 408,000,000
73 May-12 404,222,222
74 June-12 400,444,444
75 July-12 396,666,667
76 August-12 392,888,889
77 September-12 389,111,111
78 October-12 385,333,333
79 November-12 381,555,556
80 December-12 377,777,778
81 January-13 374,000,000
82 February-13 370,222,222
83 March-13 366,444,444
84 April-13 362,666,667
85 May-13 358,888,889
86 June-13 355,111,111
87 July-13 351,333,333
88 August-13 347,555,556
89 September-13 343,777,778
90 October-13 340,000,000
91 November-13 336,222,222
92 December-13 332,444,444
93 January-14 328,666,667
94 February-14 324,888,889
95 March-14 321,111,111
96 April-14 317,333,333
97 May-14 313,555,556
98 June-14 309,777,778
99 July-14 306,000,000
100 August-14 302,222,222
101 September-14 298,444,444
102 October-14 294,666,667
103 November-14 290,888,889
104 December-14 287,111,111
105 January-15 283,333,333
106 February-15 279,555,556
107 March-15 275,777,778
108 April-15 272,000,000
109 May-15 268,222,222
110 June-15 264,444,444
111 July-15 260,666,667
112 August-15 256,888,889
113 September-15 253,111,111
114 October-15 249,333,333
115 November-15 245,555,556
116 December-15 241,777,778
117 January-16 238,000,000
118 February-16 234,222,222
119 March-16 230,444,444
120 April-16 226,666,667
121 May-16 222,888,889
122 June-16 219,111,111
123 July-16 215,333,333
C-II
ANNEX C
MINIMUM TARGETED PRINCIPAL BALANCE BY PERIOD
MINIMUM
PAYMENT DATE TARGET BALANCE
PERIOD MONTH/YEAR (US DOLLARS)
- --------------------------------------
124 August-16 211,555,556
125 September-16 207,777,778
126 October-16 204,000,000
127 November-16 200,222,222
128 December-16 196,444,444
129 January-17 192,666,667
130 February-17 188,888,889
131 March-17 185,111,111
132 April-17 181,333,333
133 May-17 177,555,556
134 June-17 173,777,778
135 July-17 170,000,000
136 August-17 166,222,222
137 September-17 162,444,444
138 October-17 158,666,667
139 November-17 154,888,889
140 December-17 151,111,111
141 January-18 147,333,333
142 February-18 143,555,556
143 March-18 139,777,778
144 April-18 136,000,000
145 May-18 132,222,222
146 June-18 128,444,444
147 July-18 124,666,667
148 August-18 120,888,889
149 September-18 117,111,111
150 October-18 113,333,333
151 November-18 109,555,556
152 December-18 105,777,778
153 January-19 102,000,000
154 February-19 98,222,222
155 March-19 94,444,444
156 April-19 90,666,667
157 May-19 86,888,889
158 June-19 83,111,111
159 July-19 79,333,333
160 August-19 75,555,556
161 September-19 71,777,778
162 October-19 68,000,000
163 November-19 64,222,222
164 December-19 60,444,444
165 January-20 56,666,667
166 February-20 52,888,889
167 March-20 49,111,111
168 April-20 45,333,333
169 May-20 41,555,556
170 June-20 37,777,778
171 July-20 34,000,000
172 August-20 30,222,222
173 September-20 26,444,444
174 October-20 22,666,667
175 November-20 18,888,889
176 December-20 15,111,111
177 January-21 11,333,333
178 February-21 7,555,556
179 March-21 3,777,778
180 April-21 0
C-III
ANNEX D
SCHEDULED TARGETED PRINCIPAL BALANCE BY PERIOD
SCHEDULED
PAYMENT DATE TARGET BALANCE
PERIOD MONTH/YEAR (US DOLLARS)
- --------------------------------------
0 April-06 680,000,000
1 May-06 674,333,333
2 June-06 668,666,667
3 July-06 663,000,000
4 August-06 657,333,333
5 September-06 651,666,667
6 October-06 646,000,000
7 November-06 640,333,333
8 December-06 634,666,667
9 January-07 629,000,000
10 February-07 623,333,333
11 March-07 617,666,667
12 April-07 612,000,000
13 May-07 606,333,333
14 June-07 600,666,667
15 July-07 595,000,000
16 August-07 589,333,333
17 September-07 583,666,667
18 October-07 578,000,000
19 November-07 572,333,333
20 December-07 566,666,667
21 January-08 561,000,000
22 February-08 555,333,333
23 March-08 549,666,667
24 April-08 544,000,000
25 May-08 538,333,333
26 June-08 532,666,667
27 July-08 527,000,000
28 August-08 521,333,333
29 September-08 515,666,667
30 October-08 510,000,000
31 November-08 504,333,333
32 December-08 498,666,667
33 January-09 493,000,000
34 February-09 487,333,333
35 March-09 481,666,667
36 April-09 476,000,000
37 May-09 470,333,333
38 June-09 464,666,667
39 July-09 459,000,000
40 August-09 453,333,333
41 September-09 447,666,667
42 October-09 442,000,000
43 November-09 436,333,333
44 December-09 430,666,667
45 January-10 425,000,000
46 February-10 419,333,333
47 March-10 413,666,667
48 April-10 408,000,000
49 May-10 402,333,333
50 June-10 396,666,667
51 July-10 391,000,000
52 August-10 385,333,333
53 September-10 379,666,667
54 October-10 374,000,000
55 November-10 368,333,333
56 December-10 362,666,667
57 January-11 357,000,000
58 February-11 351,333,333
59 March-11 345,666,667
60 April-11 340,000,000
61 May-11 334,333,333
62 June-11 328,666,667
63 July-11 323,000,000
D-1
ANNEX D
SCHEDULED TARGETED PRINCIPAL BALANCE BY PERIOD
SCHEDULED
PAYMENT DATE TARGET BALANCE
PERIOD MONTH/YEAR (US DOLLARS)
- --------------------------------------
64 August-11 317,333,333
65 September-11 311,666,667
66 October-11 306,000,000
67 November-11 300,333,333
68 December-11 294,666,667
69 January-12 289,000,000
70 February-12 283,333,333
71 March-12 277,666,667
72 April-12 272,000,000
73 May-12 266,333,333
74 June-12 260,666,667
75 July-12 255,000,000
76 August-12 249,333,333
77 September-12 243,666,667
78 October-12 238,000,000
79 November-12 232,333,333
80 December-12 226,666,667
81 January-13 221,000,000
82 February-13 215,333,333
83 March-13 209,666,667
84 April-13 204,000,000
85 May-13 198,333,333
86 June-13 192,666,667
87 July-13 187,000,000
88 August-13 181,333,333
89 September-13 175,666,667
90 October-13 170,000,000
91 November-13 164,333,333
92 December-13 158,666,667
93 January-14 153,000,000
94 February-14 147,333,333
95 March-14 141,666,667
96 April-14 136,000,000
97 May-14 130,333,333
98 June-14 124,666,667
99 July-14 119,000,000
100 August-14 113,333,333
101 September-14 107,666,667
102 October-14 102,000,000
103 November-14 96,333,333
104 December-14 90,666,667
105 January-15 85,000,000
106 February-15 79,333,333
107 March-15 73,666,667
108 April-15 68,000,000
109 May-15 62,333,333
110 June-15 56,666,667
111 July-15 51,000,000
112 August-15 45,333,333
113 September-15 39,666,667
114 October-15 34,000,000
115 November-15 28,333,333
116 December-15 22,666,667
117 January-16 17,000,000
118 February-16 11,333,333
119 March-16 5,666,667
120 April-16 0
D-II
ANNEX E
to Preliminary Offering Memorandum
WAREHOUSE NOTES
Set forth below are some characteristics of the Series of Notes that
have been issued by the Issuer prior to the Closing Date and that are expected
to remain Outstanding as of the Closing Date. For more specific information with
respect to such Series, any prospective investor should contact TAL.
Series 2005-1(1)
Maximum Principal Amount: $300,000,000(2)
Note Interest Rate: Floating
Scheduled Conversion Date: The second anniversary of the Restatement
Effective Date(3)
Minimum Principal Payment Amount:(4) Calculated based on an approximate
fifteen (15) year amortization schedule
Scheduled Principal Payment Amount:(4) Calculated based on an approximate nine
(9) year amortization schedule
- ----------
(1) Warehouse Notes.
(2) Subject to increase. See "Summary -- Warehouse Notes."
(3) Subject to change upon the occurrence of certain events
(4) Payable only after the occurrence of a Conversion Event.
E-I
ANNEX F
to Preliminary Offering Memorandum
CONSOLIDATED FINANCIAL STATEMENTS OF THE SERIES ENHANCER
CONSOLIDATED FINANCIAL STATEMENTS
Financial Guaranty Insurance Company and Subsidiaries
December 31, 2005
with Report of Independent Auditors
F-I
FINANCIAL GUARANTY INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
CONTENTS
Report of Registered Public Accounting Firm................................. 1
Consolidated Balance Sheets................................................. 2
Consolidated Statements of Income........................................... 3
Consolidated Statements of Stockholder's Equity............................. 4
Consolidated Statements of Cash Flows....................................... 5
Notes to Consolidated Financial Statements.................................. 6
F-II
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder
Financial Guaranty Insurance Company
We have audited the accompanying consolidated balance sheets of Financial
Guaranty Insurance Company and Subsidiaries (the "Company") as of December 31,
2005 and 2004, and the related consolidated statements of income, stockholder's
equity and cash flows for the years ended December 31, 2005 and 2004 and the
periods from December 18, 2003 through December 31, 2003 and from January 1,
2003 through December 17, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 2005 and 2004, and the consolidated results of their operations and
their cash flows for the years ended December 31, 2005 and 2004 and the periods
from December 18, 2003 through December 31, 2003 and from January 1, 2003
through December 17, 2003, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
New York, New York
January 23, 2006
F-III
Financial Guaranty Insurance Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
DECEMBER 31
------------------------
2005 2004
------------------------
ASSETS
Fixed maturity securities, at fair value (amortized cost of
$3,277,291 in 2005 and $2,921,320 in 2004) $3,258,738 $2,938,856
Short-term investments 159,334 140,473
-----------------------
Total investments 3,418,072 3,079,329
Cash and cash equivalents 45,077 69,292
Accrued investment income 42,576 36,580
Reinsurance recoverable on losses 3,271 3,054
Prepaid reinsurance premiums 110,636 109,292
Deferred policy acquisition costs 63,330 33,835
Receivable from related parties 9,539 802
Property and equipment, net of accumulated depreciation
of $885 in 2005 and $164 in 2004 3,092 2,408
Prepaid expenses and other assets 10,354 7,826
Federal income taxes receivable 2,158 --
-----------------------
Total assets $3,708,105 $3,342,418
=======================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $1,201,163 $1,043,334
Loss and loss adjustment expenses 54,812 39,181
Ceded reinsurance balances payable 1,615 3,826
Accounts payable, accrued expenses and other liabilities 36,359 22,874
Payable for securities purchased -- 5,715
Capital lease obligations 4,262 6,446
Federal income taxes payable -- 4,401
Deferred income taxes 42,463 38,765
-----------------------
Total liabilities 1,340,674 1,164,542
=======================
Stockholder's equity:
Common stock, par value $1,500 per share; 10,000 shares
authorized, issued and outstanding 15,000 15,000
Additional paid-in capital 1,894,983 1,882,772
Accumulated other comprehensive (loss) income, net of tax (13,597) 15,485
Retained earnings 471,045 264,619
-----------------------
Total stockholder's equity 2,367,431 2,177,876
-----------------------
Total liabilities and stockholder's equity $3,708,105 $3,342,418
=======================
See accompanying notes to consolidated financial statements.
F-IV
Financial Guaranty Insurance Company and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands)
SUCCESSOR PREDECESSOR
---------------------------------------------------------
PERIOD FROM PERIOD FROM
DECEMBER 18, JANUARY 1,
2003 2003
YEAR ENDED YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 17,
2005 2004 2003 2003
---------------------------------------------------------
Revenues:
Gross premiums written $ 410,202 $ 323,575 $ 12,213 $ 248,112
Reassumed ceded premiums -- 4,959 6,300 14,300
Ceded premiums written (29,148) (14,656) (39) (14,852)
---------------------------------------------------------
Net premiums written 381,054 313,878 18,474 247,560
Increase in net unearned premiums (156,485) (138,929) (9,892) (105,811)
---------------------------------------------------------
Net premiums earned 224,569 174,949 8,582 141,749
Net investment income 117,072 97,709 4,269 112,619
Net realized gains 101 559 -- 31,506
Net mark-to-market losses on credit
derivative contracts (167) -- -- --
Other income 762 736 44 580
---------------------------------------------------------
Total revenues 342,337 273,953 12,895 286,454
Expenses:
Loss and loss adjustment expenses 18,506 5,922 236 (6,757)
Underwriting expenses 82,064 73,426 7,622 54,481
Policy acquisition costs deferred (38,069) (32,952) (2,931) (23,641)
Amortization of deferred policy
acquisition costs 8,302 2,038 10 15,563
---------------------------------------------------------
Total expenses 70,803 48,434 4,937 39,646
---------------------------------------------------------
Income before income tax expense
(benefit) 271,534 225,519 7,958 246,808
Income tax expense (benefit):
Current 32,370 42,510 1,191 57,071
Deferred 32,738 12,923 573 (1,612)
---------------------------------------------------------
Total income tax expense 65,108 55,433 1,764 55,459
---------------------------------------------------------
Income before extraordinary item 206,426 170,086 6,194 191,349
Extraordinary gain -- -- 13,852 --
---------------------------------------------------------
Net Income $ 206,426 $ 170,086 $ 20,046 $ 191,349
=========================================================
See accompanying notes to consolidated financial statements.
F-V
Financial Guaranty Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars in thousands)
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN (LOSS) INCOME, RETAINED
STOCK CAPITAL NET OF TAX EARNINGS TOTAL
----------------------------------------------------------------
PREDECESSOR
Balance at January 1, 2003 $15,000 $ 383,511 $ 49,499 $ 1,740,885 $2,188,895
Net income -- -- -- 191,349 191,349
Other comprehensive income (loss):
Change in fixed maturities available-for-sale -- -- (424) -- (424)
Change in foreign currency translation adjustment -- -- 4,267 -- 4,267
----------
Total comprehensive income 195,192
Dividends declared -- -- -- (284,300) (284,300)
----------------------------------------------------------------
Balance at December 17, 2003 15,000 383,511 53,342 1,647,934 2,099,787
SUCCESSOR
Purchase accounting adjustments -- 1,474,261 (53,342) (1,573,447) (152,528)
Net income -- -- -- 20,046 20,046
Other comprehensive income:
Change in fixed maturities available-for-sale -- -- 2,059 -- 2,059
----------
Total comprehensive income 22,105
Balance at December 31, 2003 15,000 1,857,772 2,059 94,533 1,969,364
----------------------------------------------------------------
Net income -- -- -- 170,086 170,086
Other comprehensive income:
Change in fixed maturities available-for-sale -- -- 9,340 -- 9,340
Change in foreign currency translation adjustment -- -- 4,086 -- 4,086
----------
Total comprehensive income 183,512
Capital contribution -- 25,000 -- -- 25,000
----------------------------------------------------------------
Balance at December 31, 2004 15,000 1,882,772 15,485 264,619 2,177,876
Net income -- -- -- 206,426 206,426
Other comprehensive loss:
Change in fixed maturities available-for-sale -- -- (23,550) -- (23,550)
Change in foreign currency translation adjustment -- -- (5,532) -- (5,532)
----------
Total comprehensive income 177,344
Capital contribution -- 12,211 -- -- 12,211
----------------------------------------------------------------
Balance at December 31, 2005 $15,000 $1,894,983 $(13,597) $ 471,045 $2,367,431
================================================================
See accompanying notes to consolidated financial statements.
F-VI
Financial Guaranty Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
SUCCESSOR
------------------------------------------ PREDECESSOR
PERIOD FROM PERIOD FROM
DECEMBER 18, JANUARY 1,
2003 2003
YEAR ENDED YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 17,
2005 2004 2003 2003
---------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 206,426 $ 170,086 $ 20,046 $ 191,349
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary gain -- (13,852) --
Amortization of deferred policy acquisition costs 8,574 2,038 10 15,563
Policy acquisition costs deferred (38,069) (32,952) (2,931) (23,641)
Depreciation of property and equipment 721 164 -- 22
Amortization of fixed maturity securities 31,504 37,013 693 21,129
Amortization of short-term investments 481 29
Net realized gains on investments (101) (559) -- (31,506)
Change in accrued investment income and prepaid
Expenses and other assets (8,504) (5,545) (5,065) 6,292
Change in net mark-to-market losses on credit
Derivative contracts 167 -- -- --
Change in federal income taxes receivable -- 126 (172) (2,407)
Change in reinsurance recoverable on losses (217) 5,011 (104) 410
Change in prepaid reinsurance premiums (1,344) 14,476 7,432 19,725
Changes in other reinsurance receivables -- 5,295 (5,295) --
Change in receivable from related parties (8,737) 8,957 (76) (9,811)
Change in unearned premiums 157,829 124,452 2,460 86,250
Change in loss and loss adjustment expenses 15,631 (1,286) 236 (7,644)
Change in ceded reinsurance balances payable and
Accounts payable and accrued expenses 8,923 7,348 6,485 1,804
Change in current federal income taxes payable (6,559) 4,401 -- (97,477)
Change in deferred federal income taxes 19,252 12,923 573 (1,612)
---------------------------------------------------------
Net cash provided by operating activities 385,977 351,977 10,440 168,446
---------------------------------------------------------
INVESTING ACTIVITIES
Sales and maturities of fixed maturity securities 122,638 284,227 1,780 1,028,103
Purchases of fixed maturity securities (520,089) (546,028) -- (877,340)
Purchases, sales and maturities of short-term
investments, net (19,342) (126,125) (12,736) 41,504
Receivable for securities sold (20) 170 538 283
Payable for securities purchased (5,715) 5,715 -- (5,333)
Purchase of fixed assets (1,405) (2,572) -- --
---------------------------------------------------------
Net cash (used in) provided by investing activities (423,933) (384,613) (10,418) 187,217
---------------------------------------------------------
FINANCING ACTIVITIES
Capital contribution 12,211 25,000 -- --
Dividends paid to common stockholders -- -- -- (284,300)
---------------------------------------------------------
Net cash provided by (used in) financing activities 12,211 25,000 -- (284,300)
---------------------------------------------------------
Effect of exchange rate changes on cash 1,530 (1,717) -- --
---------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (24,215) (9,353) 22 71,363
Cash and cash equivalents at beginning of period 69,292 78,645 78,623 7,260
---------------------------------------------------------
Cash and cash equivalents at end of period $ 45,077 $ 69,292 $ 78,645 $ 78,623
=========================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 49,613 $ 40,890 $ -- $ 156,800
=========================================================
See accompanying notes to consolidated financial statements.
F-VII
FINANCIAL GUARANTY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(Dollars in thousands, except per share amounts)
1. BUSINESS AND ORGANIZATION
Financial Guaranty Insurance Company (the "Company") is a wholly owned
subsidiary of FGIC Corporation ("FGIC Corp."). The Company provides financial
guaranty insurance and other forms of credit enhancement for public finance and
structured finance obligations. The Company began insuring public finance
obligations in 1984 and structured finance obligations in 1988. The Company's
financial strength is rated "Aaa" by Moody's Investors Service, Inc., "AAA" by
Standard & Poor's Rating Services, a division of The McGraw-Hill Companies,
Inc., and "AAA" by Fitch Ratings, Inc. The Company is licensed to engage in
writing financial guaranty insurance in all 50 states, the District of Columbia,
the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and, through a branch,
in the United Kingdom. In addition, a United Kingdom subsidiary of the Company
is authorized to write financial guaranty business in the United Kingdom and has
passport rights to write business in other European Union member countries. FGIC
Corp. and the Company have formed subsidiaries to facilitate geographic and
business expansion.
On December 18, 2003, an investor group consisting of The PMI Group, Inc.
("PMI"), affiliates of the Blackstone Group L.P. ("Blackstone"), affiliates of
the Cypress Group L.L.C. ("Cypress") and affiliates of CIVC Partners L.P.
("CIVC"), collectively, the "Investor Group", completed the acquisition of FGIC
Corp. from a subsidiary of General Electric Capital Corporation ("GE Capital")
in a transaction valued at approximately $2,200,000 (the "Transaction"). GE
Capital retained 2,346 shares of FGIC Corp. Senior Preferred Mandatorily
Convertible Modified Preferred Stock ("Senior Preferred Shares") with an
aggregate liquidation preference of $234,600, and approximately 5% of FGIC
Corp.'s outstanding common stock. PMI is the largest stockholder of FGIC Corp.,
owning approximately 42% of its common stock at December 31, 2005 and 2004.
Blackstone, Cypress and CIVC own approximately 23%, 23% and 7% of FGIC Corp.'s
common stock, respectively, at December 31, 2005 and 2004.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances have been eliminated in
consolidation.
F-VIII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
2. BASIS OF PRESENTATION (CONTINUED)
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States ("GAAP") requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and the accompanying notes. Actual results
could differ from those estimates.
The accompanying financial statements have been prepared on the basis of GAAP,
which differs in certain respects from the accounting practices prescribed or
permitted by the New York State Insurance Department (see Note 4). Certain 2004
and 2003 information has been reclassified to conform to the 2005 presentation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are as follows:
A. INVESTMENTS
All the Company's fixed maturity securities are classified as available-for-sale
and are recorded on the trade date at fair value. Unrealized gains and losses
are recorded as a separate component of accumulated other comprehensive (loss)
income, net of applicable income taxes, in the consolidated statements of
stockholders' equity. Short-term investments are carried at cost, which
approximates fair value.
Bond discounts and premiums are amortized over the remaining term of the
securities. Realized gains or losses on the sale of investments are determined
based on the specific identification method.
Securities that have been determined to be other than temporarily impaired are
reduced to realizable value, establishing a new cost basis, with a charge to
realized loss at such date.
B. CASH AND CASH EQUIVALENTS
The Company considers all bank deposits, highly liquid securities and
certificates of deposit with maturities of three months or less at the date of
purchase to be cash equivalents. These cash equivalents are carried at cost,
which approximates fair value.
F-IX
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. PREMIUM REVENUE RECOGNITION
Premiums are received either up-front or over time on an installment basis. The
premium collection method is determined at the time the policy is issued.
Up-front premiums are paid in full at the inception of the policy and are earned
over the period of risk in proportion to the total amount of principal and
interest amortized in the period as a proportion of the original principal and
interest outstanding. Installment premiums are collected periodically and are
reflected in income pro-rata over the period covered by the premium payment,
including premiums received on credit default swaps (see Note 6). Unearned
premiums represent the portion of premiums received applicable to future periods
on insurance policies in force. When an obligation insured by the Company is
refunded prior to the end of the expected policy coverage period, any remaining
unearned premium is recognized at that time. A refunding occurs when an insured
obligation is called or legally defeased prior to stated maturity. Premiums
earned on advanced refundings were $54,795, $42,695, $5,013 and $39,858 for the
years ended December 31, 2005 and 2004 and the periods from December 18, 2003
through December 31, 2003 and January 1, 2003 through December 17, 2003,
respectively.
Ceded premiums are recognized in a manner consistent with the premium earned on
the underlying policies.
D. POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate directly to and
vary with premium production. Such costs include compensation of employees
involved in marketing, underwriting and policy issuance functions, rating agency
fees, state premium taxes and certain other expenses. In determining policy
acquisition costs, the Company must estimate and allocate the percentage of its
costs and expenses that are attributable to premium production, rather than to
other activities. Policy acquisition costs, net of ceding commission income on
premiums ceded to reinsurers, are deferred and amortized over the period in
which the related premiums are earned. Anticipated loss and loss adjustment
expenses, future maintenance costs on the in-force business and net investment
income are considered in determining the recoverability of acquisition costs.
F-X
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. LOSS AND LOSS ADJUSTMENT EXPENSES
Provision for loss and loss adjustment expenses fall into two categories: case
reserves and watchlist reserves. Case reserves are established for the value of
estimated losses on particular insured obligations that are presently or likely
to be in payment default and for which future loss is probable and can be
reasonably estimated. These reserves represent an estimate of the present value
of the anticipated shortfall between (1) payments on insured obligations plus
anticipated loss adjustment expenses and (2) anticipated cash flow from, and
proceeds to be received on, sales of any collateral supporting the obligation
and/or other anticipated recoveries. The discount rate used in calculating the
net present value of estimated losses is based upon the risk-free rate for the
time period of the anticipated shortfall. As of December 31, 2005 and 2004,
discounted case-basis loss and loss adjustment expense reserves totaled $33,328
and $15,700, respectively. Loss and loss adjustment expenses included amounts
discounted at an approximate interest rate of 4.5% in 2005 and 2004. The amount
of the discount at December 31, 2005 and 2004 was $15,015 and $2,500,
respectively.
The Company establishes watchlist reserves to recognize the potential for claims
against the Company on insured obligations that are not presently in payment
default, but which have migrated to an impaired level, where there is a
substantially increased probability of default. These reserves reflect an
estimate of probable loss given evidence of impairment, and a reasonable
estimate of the amount of loss given default. The methodology for establishing
and calculating the watchlist reserve relies on a categorization and assessment
of the probability of default, and loss severity in the event of default, of the
specifically identified impaired obligations on the watchlist based on
historical trends and other factors. The watchlist reserve is adjusted as
necessary to reflect changes in the loss expectation inherent in the group of
impaired credits. As of December 31, 2005 and 2004, such reserves were $21,484
and $23,500, respectively.
The reserve for loss and loss adjustment expenses is reviewed regularly and
updated based on claim payments and the results of ongoing surveillance. The
Company conducts ongoing insured portfolio surveillance to identify all impaired
obligations and thereby provide a materially complete recognition of losses for
each accounting period. The reserves are necessarily based upon estimates and
subjective judgments about the outcome of future events, and actual results will
likely differ from these estimates.
F-XI
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reinsurance recoverable on losses is calculated in a manner consistent with the
calculation loss and loss adjustment expenses.
F. INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Deferred tax assets and liabilities are measured using statutory tax rates
expected to apply to taxable income in the years in which temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period in
which a change occurs.
The Company is a financial guaranty insurance writer and is permitted a tax
deduction, subject to certain limitations under Section 832(e) of the Internal
Revenue Code, for amounts required to be set aside in statutory contingency
reserves by state law or regulation. The deduction is allowed only to the extent
the Company purchases U.S. Government non-interest bearing tax and loss bonds in
an amount equal to the tax benefit attributable to such deductions. Purchases of
tax and loss bonds are recorded as a reduction of current tax expense. For the
years ended December 31, 2005 and 2004, the Company purchased $13,565 and
$10,810, respectively, of tax and loss bonds. For the period from January 1,
2003 through December 17, 2003, there were no tax and loss bonds purchased and
$102,540 of tax and loss bonds were redeemed.
G. PROPERTY AND EQUIPMENT
Property and equipment consists of office furniture, fixtures, computer
equipment and software and leasehold improvements that are reported at cost less
accumulated depreciation. Office furniture and fixtures are depreciated
straight-line over five years. Leasehold improvements are amortized over their
estimated service lives or over the life of the lease, whichever is shorter.
Computer equipment and software are depreciated over three years. Maintenance
and repairs are charged to expense as incurred.
F-XII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. GOODWILL
In accounting for the Transaction in 2003, the Company applied purchase
accounting, as prescribed by Statement of Financial Accounting Standards
("SFAS") No. 141, Business Combinations ("SFAS 141") and Securities and Exchange
Commission Staff Accounting Bulletin 54. Under these accounting methods, the
purchase price was pushed down into the accompanying consolidated financial
statements, with the difference between the purchase price and the sum of the
fair value of tangible and identifiable intangible assets acquired less
liabilities assumed resulting in negative goodwill of $27,300 at December 18,
2003. In accordance with SFAS 141, the Company reduced the value assigned to
non-financial assets, and the remaining negative goodwill of $13,852 was
recorded as an extraordinary gain in the consolidated statement of income.
As a result of the purchase accounting, effective December 18, 2003, the basis
of the Company's assets and liabilities changed, necessitating the presentation
of Predecessor Company and Successor Company columns in the consolidated
statements of income, stockholder's equity and cash flows.
I. FOREIGN CURRENCY TRANSLATION
The Company has an established foreign branch and three subsidiaries in the
United Kingdom and insured exposure from a former branch in France. The Company
has determined that the functional currencies of these operations are their
local currencies. Accordingly, the assets and liabilities of these operations
are translated into U.S. dollars at the rates of exchange at December 31, 2005
and 2004, and revenues and expenses are translated at average monthly exchange
rates. The cumulative translation (loss) gain at December 31, 2005 and 2004 was
$(1,446) and $4,086, respectively, net of tax benefit (expense) of $723 and
$(2,200), respectively, and is reported as a separate component of accumulated
other comprehensive income in the consolidated statements of stockholder's
equity.
F-XIII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. STOCK COMPENSATION PLAN
The Company has an incentive stock plan that provides for stock-based
compensation, including stock options, restricted stock awards and restricted
stock units of FGIC Corp. Stock options are granted for a fixed number of shares
with an exercise price equal to or greater than the fair value of the shares at
the date of the grant. Restricted stock awards and restricted stock units are
valued at the fair value of the stock on the grant date, with no cost to the
grantee. FGIC Corp. accounts for stock-based compensation using the intrinsic
value method under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and, accordingly, if the exercise price is equal to
the fair value of the shares at the date of the grant, no compensation expense
related to stock options is allocated to the Company by FGIC Corp. For grants to
employees of the Company of restricted stock and restricted stock units,
unearned compensation, equivalent to the fair value of the shares at the date of
grant, is allocated to the Company. The Company has adopted the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), as amended.
Had FGIC Corp. determined compensation expense for stock options granted to
employees and management based on the fair value of the options at the grant
dates consistent with the method of accounting under SFAS 123, the Company's
estimated pro forma net income would have been as follows:
PERIOD FROM
DECEMBER 18,
2003
THROUGH
YEAR ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003
------------------------------------------
Reported net income $206,426 $170,086 $20,046
Add: Allocated stock-based compensation
related to restricted stock units, net of tax
included in reported net income 29 49 --
Less: Allocated total stock-based
compensation determined under the fair
value method for all awards, net of tax (2,138) (1,249) (40)
Pro forma net income $204,317 $168,886 $20,006
==========================================
There were no stock options prior to December 18, 2003.
F-XIV
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. VARIABLE INTEREST ENTITIES
Financial Interpretation No. 46, Consolidation of Variable Interest Entities
("FIN 46-R") provides accounting and disclosure rules for determining whether
certain entities should be consolidated in the Company's consolidated financial
statements. An entity is subject to FIN 46-R, and is called a Variable Interest
Entity ("VIE"), if it has (i) equity that is insufficient to permit the entity
to finance its activities without additional subordinated financial support or
(ii) equity investors that cannot make significant decisions about the entity's
operations or that do not absorb the majority of expected losses or receive the
majority of expected residual returns of the entity. A VIE is consolidated by
its primary beneficiary, which is the party that has a majority of the expected
losses or a majority of the expected residual returns of the VIE, or both. FIN
46-R requires disclosures for companies that have either a primary or
significant variable interest in a VIE. All other entities not considered VIEs
are evaluated for consolidation under SFAS No. 94, Consolidation of all
Majority-Owned Subsidiaries.
As part of its structured finance business, the Company insures debt obligations
or certificates issued by special purpose entities. The Company has evaluated
the transactions, and does not believe any such transactions require
consolidation or disclosure under FIN 46-R.
During 2004, FGIC arranged the issuance of contingent preferred trust securities
by a group of special purpose trusts. These trusts are considered VIEs under FIN
46-R. However, the Company is not considered a primary beneficiary and therefore
is not required to consolidate the trusts (see Note 16).
L. DERIVATIVES
The Financial Accounting Standards Board ("FASB") issued and subsequently
amended SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"). Under SFAS 133, as amended, all derivative instruments
are recognized on the consolidated balance sheet at their fair value, and
changes in fair value are recognized immediately in earnings unless the
derivatives qualify as hedges.
F-XV
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 2005, the Company sold credit default swaps ("CDS") to certain buyers of
credit protection. It considers these agreements to be a normal extension of its
financial guaranty insurance business, although they are considered derivatives
for accounting purposes. These agreements are recorded at fair value. Changes in
fair value are recorded in net mark-to-market gains (losses) on credit
derivative instruments in the consolidated statements of income and in other
assets or other liabilities in the consolidated balance sheets. The Company uses
dealer-quoted market values, when available, to determine fair value. If market
prices are not available, management uses internally developed estimates of fair
value.
M. NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, FASB issued SFAS 123(R) which requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values. Following the
effective date, pro forma disclosure is no longer an alternative. In April 2005,
the SEC announced the adoption of a rule allowing public companies to defer the
adoption of SFAS 123(R) until the beginning of their fiscal years beginning
after June 15, 2005. Non-public entities will be required to adopt the
provisions of the new standard in fiscal years beginning after December 15,
2005.
Under SFAS 123(R), the Company must determine the transition method to be used
at the date of adoption, the appropriate fair value model to be used for valuing
share-based payments and the amortization method for compensation cost. The
transition methods include retroactive and prospective adoption options. Under
the retroactive option, prior periods may be restated either as of the beginning
of the year of adoption or for all periods presented. The prospective method
requires that compensation expense be recorded for all outstanding share-based
awards for which the requisite service has not yet been rendered. The
retroactive method would record compensation for all unvested stock options and
restricted stock beginning with the first period restated. The Company
anticipates adopting the prospective method and expects that the adoption of
SFAS 123(R) will have an impact similar to the current pro forma disclosure for
existing options under SFAS 123(R). In addition, the Company does not expect
that the expense associated with future grants (assuming grant levels consistent
with 2005) derived from the fair value model selected will have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
F-XVI
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
N. REVIEW OF FINANCIAL GUARANTY INDUSTRY ACCOUNTING PRACTICES
The FASB staff is considering whether additional accounting guidance is
necessary to address loss reserving and certain other practices in the financial
guaranty industry. SFAS No. 60, Accounting and Reporting by Insurance
Enterprises, was developed prior to the emergence of the financial guaranty
industry. As it does not specifically address financial guaranty contracts,
there has been diversity in the accounting for these contracts. In 2005, the
FASB added a project to consider accounting by insurers for financial guaranty
insurance. The objective of the project is to develop an accounting model for
financial guaranty contracts issued by insurance companies that are not
accounted for as derivative contracts under SFAS 133. A financial guaranty
contract guarantees the holder of a financial obligation the full and timely
payment of principal and interest when due and is typically issued in
conjunction with municipal bond offerings and certain structured finance
transactions. The goal of this project is to develop a single model for all
industry participants to apply.
The FASB is expected to meet in 2006 to consider the accounting model for
issuers of financial guaranty insurance. Proposed and final pronouncements are
expected to be issued in 2006. When the FASB reaches a conclusion on this issue,
the Company, along with other companies in the financial guaranty industry, may
be required to change certain aspects of accounting for loss reserves, premium
income and deferred acquisition costs. It is not possible to predict the impact
the FASB's review may have on the Company's accounting practices.
4. STATUTORY ACCOUNTING PRACTICES
Statutory-basis surplus of the Company at December 31, 2005 and 2004 was
$1,162,904 and $1,172,600, respectively. Statutory-basis net income (loss) for
the years ended December 31, 2005 and 2004 and for the periods from December 18,
2003 through December 31, 2003, and January 1, 2003 through December 17, 2003
was $192,009, $144,100, $(1,669), and $180,091, respectively.
F-XVII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
5. INVESTMENTS
The amortized cost and fair values of investments in fixed maturity securities
and short-term investments classified as available-for-sale are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------------------------------------------
AT DECEMBER 31, 2005
Obligations of states and political
Subdivisions $2,777,807 $12,718 $26,410 $2,764,115
Asset- and mortgage-backed securities 209,148 135 3,490 205,793
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 148,785 1,387 2,036 148,136
Corporate bonds 91,422 501 1,486 90,437
Debt securities issued by foreign
Governments 30,930 345 5 31,270
Preferred stock 19,199 427 639 18,987
-------------------------------------------------
Total fixed maturity securities 3,277,291 15,513 34,066 3,258,738
Short-term investments 159,334 -- -- 159,334
-------------------------------------------------
Total investments $3,436,625 $15,513 $34,066 $3,418,072
=================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------------------------------------------
AT DECEMBER 31, 2004
Obligations of states and political
Subdivisions $2,461,087 $19,569 $3,090 $2,477,566
Asset- and mortgage-backed securities 214,895 1,267 695 215,467
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies 131,771 559 943 131,387
Corporate bonds 54,655 663 236 55,082
Debt securities issued by foreign
Governments 39,713 176 21 39,868
Preferred stock 19,199 311 24 19,486
-------------------------------------------------
Total fixed maturities 2,921,320 22,545 5,009 2,938,856
Short-term investments 140,473 -- -- 140,473
-------------------------------------------------
Total investments $3,061,793 $22,545 $5,009 $3,079,329
=================================================
F-XVIII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
5. INVESTMENTS (CONTINUED)
The following table shows gross unrealized losses and the fair value of fixed
maturity securities, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2005:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
-------------------------------------------------------------------------
FAIR UNREALIZED FAIR UNREALIZED UNREALIZED
VALUE LOSSES VALUE LOSSES FAIR VALUE LOSSES
-------------------------------------------------------------------------
Obligations of states and political
Subdivisions $1,622,119 $16,646 $463,156 $ 9,764 $2,085,275 $26,410
Asset- and mortgage-backed
Securities 133,196 1,839 56,824 1,651 190,020 3,490
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 47,872 520 76,380 1,516 124,252 2,036
Other 42,379 690 28,026 801 70,405 1,491
Preferred stock 12,860 639 -- -- 12,860 639
-------------------------------------------------------------------------
Total temporarily impaired securities $1,858,426 $20,334 $624,386 $13,732 $2,482,812 $34,066
=========================================================================
The unrealized losses in the Company's investments were caused by interest rate
increases. The Company evaluated the credit ratings of these securities and
noted no deterioration. Because the decline in market value is attributable to
changes in interest rates and not credit quality and because the Company has the
ability and intent to hold these investments until a recovery of fair value,
which may be maturity, the Company did not consider these investments to be
other than temporarily impaired at December 31, 2005.
Investments in fixed maturity securities carried at fair value of $4,625 and
$4,049 as of December 31, 2005 and 2004, respectively, were on deposit with
various regulatory authorities as required by law.
F-XIX
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
5. INVESTMENTS (CONTINUED)
The amortized cost and fair values of investments in fixed maturity securities,
available-forsale at December 31, 2005, are shown below by contractual maturity
date. Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
AMORTIZED FAIR
COST VALUE
-----------------------
Due one year later or less $ 77,668 $ 77,071
Due after one year through five years 472,292 463,162
Due after five years through ten years 1,463,806 1,448,990
After ten years 1,263,525 1,269,515
Total $3,277,291 $3,258,738
=======================
For the years ended December 31, 2005 and 2004 and for the periods from December
18, 2003 through December 31, 2003 and January 1, 2003 through December 17,
2003, proceeds from sales of available-for-sale securities were $31,380,
$178,030, $0, and $855,761 respectively. For the years ended December 31, 2005
and 2004 and for the periods from December 18, 2003 through December 31, 2003
and January 1, 2003 through December 17, 2003, gross gains of $185, $1,900, $0,
and $31,700, respectively, and gross losses of $84, $1,300, $0, and $200,
respectively, were realized on such sales.
Net investment income of the Company was derived from the following sources:
SUCCESSOR PREDECESSOR
---------------------------------------------------------
PERIOD FROM PERIOD FROM
DECEMBER 18, JANUARY 1,
2003 2003
YEAR ENDED YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 17,
2005 2004 2003 2003
---------------------------------------------------------
Income from fixed maturity securities $112,616 $97,720 $4,294 $111,075
Income from short-term investments 6,801 1,450 12 2,326
---------------------------------------------------------
Total investment income 119,417 99,170 4,306 113,401
Investment expenses (2,345) (1,461) (37) (782)
Net investment income $117,072 $97,709 $4,269 $112,619
=========================================================
F-XX
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
5. INVESTMENTS (CONTINUED)
As of December 31, 2005, the Company did not have more than 3% of its investment
portfolio concentrated in a single issuer or industry; however, the Company had
the following investment concentrations by state:
FAIR VALUE
----------
New York $ 302,290
Florida 220,150
Texas 217,145
New Jersey 193,315
Massachusetts 169,635
Illinois 155,922
California 139,742
Michigan 113,040
----------
1,511,239
All other states 1,326,785
All other investments 580,048
Total investments $3,418,072
==========
6. DERIVATIVE INSTRUMENTS
The Company provides CDSs to certain buyers of credit protection by entering
into contracts that reference collateralized debt obligations from cash and
synthetic structures backed by pools of corporate, consumer or structured
finance debt. It also offers credit protection on other public finance and
structured finance obligations in CDS form. The Company considers these
agreements to be a normal extension of its financial guaranty insurance
business, although they are considered derivatives for accounting purposes.
These agreements are recorded at fair value. The Company believes that the most
meaningful presentation of the financial statement impact of these derivatives
is to reflect premiums as installments are received, and to record losses and
loss adjustment expenses and changes in fair value as incurred. The Company
recorded $3,036 of net earned premium, $0 in losses and loss adjustment
expenses, and net mark-to-market losses of $167 in changes in fair value under
these agreements for the year ended December 31, 2005.
F-XXI
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
6. DERIVATIVE INSTRUMENTS (CONTINUED)
The gains or losses recognized by recording these contracts at fair value are
determined each quarter based on quoted market prices, if available. If quoted
market prices are not available, the determination of fair value is based on
internally developed estimates. Management applies judgments to estimate fair
value which are based on changes in expected loss of the underlying assets as
well as changes in current market prices for similar products.
Consideration is given to current market spreads and on evaluation of the
current performance of the assets. The Company does not believe that the fair
value adjustments are an indication of potential claims under the Company's
guarantees. The inception-to-date net mark-to-market loss on the CDS portfolio
was $167 at December 31, 2005 and was recorded in other liabilities.
7. INCOME TAXES
For periods subsequent to the closing date of the Transaction, the Company files
its own consolidated federal income tax returns with FGIC Corp. The method of
allocation between FGIC Corp. and its subsidiaries is determined under a tax
sharing agreement approved by FGIC Corp.'s Board of Directors and the New York
State Insurance Department, and is based upon a separate return calculation. For
periods ended on or prior to December 18, 2003, the Company filed its federal
income tax return as part of the consolidated return of GE Capital. Under a tax
sharing agreement with GE Capital, tax was allocated to the Company based upon
its contributions to GE Capital's consolidated net income.
F-XXII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
7. INCOME TAXES (CONTINUED)
The following is a reconciliation of federal income taxes computed at the
statutory income tax rate and the provision for federal income taxes:
SUCCESSOR PREDECESSOR
---------------------------------------------------------
PERIOD FROM
DECEMBER 18, PERIOD FROM
2003 JANUARY 1,
THROUGH 2003
YEAR ENDED YEAR ENDED DECEMBER 17, THROUGH
DECEMBER 31, DECEMBER 31, 2003 31, DECEMBER 17,
2005 2004 2003 2003
---------------------------------------------------------
Income taxes computed on
income before provision for
Federal income taxes, at the
statutory income tax rate $ 95,037 $ 78,932 $2,785 $ 86,383
State and local income taxes,
net of Federal income taxes 453 479 -- 844
Tax effect of:
Tax-exempt interest (31,072) (28,015) (979) (26,112)
Prior period adjustment -- -- -- (4,978)
Other, net 690 4,037 (42) (678)
Provision for income taxes $ 65,108 $ 55,433 $1,764 $ 55,459
=========================================================
F-XXIII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liability at December 31, 2005 and 2004 are presented
below:
2005 2004
-----------------
Deferred tax assets:
Tax and loss bonds $24,375 $10,810
Loss and loss adjustment expense reserves 6,180 7,472
AMT credit carryforward 7,140 8,107
Property and equipment 83 55
Deferred compensation 1,483 623
Capital lease 2,483 2,539
Net operating loss on foreign subsidiaries 2,948 --
Other 266 233
44,958 29,839
-----------------
Deferred tax liabilities:
Contingency reserves 42,656 18,917
Unrealized gains on fixed maturity securities,
available-for-sale 12,883 29,156
Deferred acquisition costs 19,639 11,842
Premium revenue recognition 10,359 3,076
Profit commission 1,435 2,343
Foreign currency 194 3,117
Other 255 153
-----------------
Total gross deferred tax liabilities 87,421 68,604
Net deferred tax liability $42,463 $38,765
=================
The net operating losses on foreign subsidiaries of $10,863 as of December 31,
2005 were generated by FGIC Corp.'s United Kingdom subsidiaries. The United
Kingdom does not allow net operating losses to be carried back, but does permit
them to be carried forward indefinitely. Based upon the level of historical
taxable income, projections of future taxable income over the periods in which
the deferred tax assets are deductible and the estimated reversal of future
taxable temporary differences, the Company believes it is more likely than not
that it will realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 2005 and 2004.
In the opinion of management, an adequate provision has been made for any
additional taxes that may become due pending any future examinations by tax
authorities.
F-XXIV
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
8. REINSURANCE
Reinsurance is the commitment by one insurance company (the reinsurer) to
reimburse another insurance company (the ceding company) for a specified portion
of the insurance risks under policies issued by the ceding company in
consideration for a portion of the related premiums received. The ceding company
typically will receive a ceding commission from the reinsurer.
The Company uses reinsurance to increase its capacity to write insurance for
obligations of large, frequent issuers, to meet internal, rating agency or
regulatory single risk limits, to diversify risk, and to manage rating agency
and regulatory capital requirements. The Company currently arranges reinsurance
primarily on a facultative (transaction-by-transaction) basis. Prior to 2003,
the Company also had treaty reinsurance agreements, primarily for the public
finance business, that provided coverage for a specified portion of the insured
risk under all qualifying policies issued during the term of the treaty.
The Company seeks to place reinsurance with financially strong reinsurance
companies since, as a primary insurer, the Company is required to fulfill all
its obligations to policyholders even where a reinsurer fails to perform its
obligations under the applicable reinsurance agreement. The Company regularly
monitors the financial condition of its reinsurers. Under most of the Company's
reinsurance agreements, the Company has the right to reassume all the exposure
ceded to a reinsurer (and receive all the remaining unearned premiums ceded) in
the event of a ratings downgrade of the reinsurer or the occurrence of certain
other events. In certain of these cases, the Company also has the right to
impose additional ceding commissions.
In recent years, some of the Company's reinsurers were downgraded by the rating
agencies, thereby reducing the financial benefits of using reinsurance under
rating agency capital adequacy models, because the Company must allocate
additional capital to the related reinsured exposure. However, the Company still
receives regulatory credit for this reinsurance. In connection with such a
downgrade, the Company reassumed $0, $4,959, $6,300, and $14,300 of ceded
premiums for the years ended December 31, 2005 and 2004, and the periods from
December 18, 2003 through December 31, 2003, and January 1, 2003 through
December 17, 2003, respectively, from the reinsurers.
Under certain reinsurance agreements, the Company holds collateral in the form
of letters of credit and trust agreements. Such collateral totaled $62,394 at
December 31, 2005, and can be drawn on in the event of default by the reinsurer.
F-XXV
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
8. REINSURANCE (CONTINUED)
The effect of reinsurance on the balances recorded in the consolidated
statements of income is as follows:
SUCCESSOR PREDECESSOR
---------------------------------------------------------
PERIOD FROM PERIOD FROM
DECEMBER 18, JANUARY 1,
2003 2003
YEAR ENDED YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 17,
2005 2004 2003 2003
---------------------------------------------------------
Net premiums earned $25,921 $24,173 $1,236 $20,300
Loss and loss adjustment expenses (416) (4,759) -- 1,700
---------------------------------------------------------
9. LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for loss and loss adjustment expenses is summarized as
follows:
SUCCESSOR PREDECESSOR
---------------------------------------------------------
PERIOD FROM PERIOD FROM
DECEMBER 18, JANUARY 1,
2003 2003
YEAR ENDED YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 17,
2005 2004 2003 2003
---------------------------------------------------------
Balance at beginning of period $39,181 $40,467 $40,224 $ 47,868
Less reinsurance recoverable (3,054) (8,065) (8,058) (8,371)
---------------------------------------------------------
Net balance 36,127 32,402 32,166 39,497
---------------------------------------------------------
Incurred related to:
Current period 23,985 11,756 -- 20,843
Prior periods (5,479) (5,834) 236 (27,600)
---------------------------------------------------------
Total incurred 18,506 5,922 236 (6,757)
---------------------------------------------------------
Paid related to:
Current period (1,993) -- -- --
Prior periods (1,099) (2,197) -- (574)
---------------------------------------------------------
Total paid (3,092) (2,197) -- (574)
---------------------------------------------------------
Net balance 51,541 36,127 32,402 32,166
Plus reinsurance recoverable 3,271 3,054 8,065 8,058
---------------------------------------------------------
Balance at end of period $54,812 $39,181 $40,467 $ 40,224
=========================================================
F-XXVI
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
9. LOSS AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
During the year ended December 31, 2005, the increase in incurred expense was
primarily related to issuers impacted by Hurricane Katrina. Case reserves and
credit watchlist reserves at December 31, 2005 include $8,511 and $13,322,
respectively, of estimated losses related to obligations impacted by Hurricane
Katrina (see Note 10).
During the year ended December 31, 2004, the increase in incurred expense
related to several structured finance transactions of one particular issuer.
During the period from January 1, 2003 through December 17, 2003, the overall
decrease in incurred expense was driven by a reduction in reserves previously
established on several structured finance transactions of one particular issuer.
In addition, prior to the closing of the Transaction, rather than watchlist
reserves, the Company established portfolio reserves based upon the aggregate
average net par outstanding of the Company's insured mortgage-backed securities
portfolio.
10. HURRICANE KATRINA
At December 31, 2005, the Company insured public finance obligations with a net
par in force ("NPIF") of approximately $4,011,871 in locations impacted by
Hurricane Katrina. Approximately $2,023,315 of these obligations relate to
locations designated by the U.S. Federal Emergency Management Administration
("FEMA") as eligible for both public and individual assistance ("FEMA-dual
designated locations"); the remainder, or $1,988,556, of these obligations
relate to locations designated by FEMA as eligible for individual assistance
only. The Company believes that insured obligations in FEMA-dual designated
locations are more likely to be impaired than obligations eligible for
individual assistance only. Consequently, since the occurrence of Hurricane
Katrina, the Company has focused its portfolio surveillance efforts related to
Hurricane Katrina on evaluating its insured public finance obligations in the
FEMA-dual designated locations. These FEMA-dual designated locations consist
primarily of counties and parishes in Alabama, Mississippi and Louisiana.
F-XXVII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
10. HURRICANE KATRINA (CONTINUED)
As a result of this evaluation, the Company placed insured public finance
obligations with an NPIF totaling $979,153 on its credit watchlist of which
reserves were recorded on obligations with an NPIF of $585,303. These
obligations relate to locations in the Parish of Orleans (in which New Orleans
is located) and the immediately surrounding parishes. At December 31, 2005, the
Company recorded case reserves of $8,511, watchlist reserves of $13,322 and
estimated reinsurance recoverables of $1,740 related to insured public finance
obligations placed on the credit watchlist. The case reserves of $8,511 relate
to an investor-owned utility, for which the Company has insured public finance
obligations with an NPIF of $75,000, that has entered into bankruptcy
proceedings. The watchlist reserves of $13,322 were based on management's
assessment that the associated insured public finance obligations have
experienced impairment due to diminished revenue sources. The NPIF for the
insured public finance obligations for which watchlist reserves of $13,322 have
been established totals $510,303. The $510,303 (a subset of the $979,153) is
supported by the revenue sources below:
NET PAR
REVENUE SOURCE IN FORCE
- -----------------------------------------
General obligation $ 90,079
Hotel tax 165,000
Sales tax 117,141
Municipal utility 119,657
Public higher education 18,426
--------
Total $510,303
========
Given the unprecedented nature of the events and magnitude of damage in the
affected areas, the loss reserves were necessarily based upon estimates and
subjective judgments about the outcome of future events, including without
limitation the amount and timing of any future federal and state aid. The loss
reserves will likely be adjusted as additional information becomes available,
and such adjustments may have a material impact on future results of operations.
However, the Company believes that the losses ultimately incurred as result of
Hurricane Katrina will not have a material impact on the Company's consolidated
financial position.
F-XXVIII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
10. HURRICANE KATRINA (CONTINUED)
For the year ended December 31, 2005, the Company paid claims totaling $5,910
related to insured public finance obligations impacted by Hurricane Katrina.
During 2005, the Company subsequently received reimbursements of $4,855 for
these claims payments.
The Company's structured finance insured portfolio was not significantly
impacted by Hurricane Katrina, reflecting the geographic diversification of the
credits comprising the insured structured finance obligations.
11. RELATED PARTY TRANSACTIONS
Prior to the Transaction, the Company had various service agreements with
subsidiaries of General Electric Company and GE Capital. These agreements
provided for the payment by the Company of certain payroll and office expenses,
investment fees pertaining to the management of the Company's investment
portfolio and telecommunication service charges. In addition, as part of the
Transaction, the Company entered into a transitional services agreement under
which GE Capital continued to provide certain administrative and support
services, in exchange for certain scheduled fees during the 12 months following
the date of the agreement. Approximately $0, $179, $0 and $1,600 in expenses
were incurred during the years ended December 31, 2005 and 2004 and for the
periods from December 18, 2003 through December 31, 2003 and January 1, 2003
through December 17, 2003, respectively, related to such agreements and are
reflected in the accompanying consolidated financial statements.
At the end of the first quarter of 2004, the Company transferred investment
management services from GE Capital to Blackrock Financial Management, Inc. and
Wellington Management Company, LLP.
In connection with the Transaction, the Company entered into a capital lease
agreement with a subsidiary of GE Capital. The lease agreement covers leasehold
improvements made to the Company's headquarters as well as furniture and
fixtures, computer hardware and software used by the Company (see Note 17).
F-XXIX
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
In connection with the Transaction, FGIC entered into a $300,000 soft capital
facility, with GE Capital as lender and administrative agent. The soft capital
facility, which replaced the capital support facility that FGIC previously had
with GE Capital, had an initial term of eight years. FGIC paid GE Capital $1,132
and $70 under this agreement for the year ended December 31, 2004 and the period
from December 18, 2003 through December 31, 2003, respectively. This agreement
was terminated by FGIC in July 2004 and was replaced by a new soft capital
facility (see Note 15).
The Company also insures certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of the
underlying assets. For some of these issues, GE Capital also provides first loss
protection in the event of default. Gross premiums written on these issues
amounted to $3, $6, $0 and $20 for the year ended December 31, 2005 and 2004 and
for the periods from December 18, 2003 through December 31, 2003 and January 1,
2003 through December 17, 2003, respectively. As of December 31, 2005, par
outstanding on these deals before reinsurance was $6,142. Issues sponsored by
affiliates of GE accounted for approximately 1% of gross premiums written in
2003.
During 2005 FGIC, in the normal course of operations, entered into reinsurance
transactions with PMI-affiliated companies. Ceded premiums were $582 for the
year ended December 31, 2005 and accounts payable due to PMI were $102 at
December 31, 2005.
As of December 31, 2005 and 2004, there were no receivables due from GE Capital.
During 2005 and 2004, the Company allocated certain overhead costs to FGIC Corp.
which amounted to $540 and $317, respectively.
F-XXX
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
12. COMPENSATION PLANS
All employees of the Company participate in an incentive compensation plan. In
addition, the Company offers a deferred compensation plan for eligible
employees. Expenses incurred by the Company under compensation plans amounted to
$21,824, $15,493, $3,996, and $10,087 for the years ended December 31, 2005 and
2004 and for the periods from December 18, 2003 through December 31, 2003 and
January 1, 2003 through December 17, 2003, respectively, and are reflected in
the accompanying consolidated financial statements. During 2005 and 2004,
compensation increased primarily due to an increase in employee headcount. For
2003, compensation for certain employees was part of an allocation of expenses
of affiliates and was therefore recorded as an allocated expense rather than
compensation expense. In 2005 and 2004, these expenses were directly recorded by
the Company. In 2003, compensation levels were driven in part by
Transaction-related costs, including retention bonuses and sign-on bonuses to
new hires post-acquisition.
Commencing effective January 1, 2004, the Company has offered a defined
contribution savings plan under Section 401(k) of the Internal Revenue Code.
This plan covers substantially all employees who meet minimum age and service
requirements and allows participants to defer a portion of their annual
compensation on a pre-tax basis (for 2005, up to $14 for employees under age 50,
plus an additional "catch up" contribution of up to $4 for employees 50 and
older). The Company may also make discretionary contributions to the plan on
behalf of employees. The Company contributed $3,429 and $2,532 to the plan on
behalf of employees for the years ended December 31, 2005 and 2004,
respectively.
12. DIVIDENDS
Under New York insurance law, the Company may pay dividends to FGIC Corp. only
from earned surplus, subject to the following limitations: (a) statutory surplus
after any dividend may not be less than the minimum required paid-in capital,
which was $72,500 in 2005, 2004 and 2003, and (b) dividends may not exceed the
lesser of 10% of the Company's surplus or 100% of adjusted net investment
income, as defined by New York insurance law, for the twelve-month period ended
on the preceding December 31, without the prior approval of the New York State
Superintendent of Insurance.
F-XXXI
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
13. DIVIDENDS (CONTINUED)
During the years ended December 31, 2005 and 2004 and for the period from
December 18, 2003 through December 31, 2003, the Company did not declare and pay
dividends. During the period from January 1, 2003 through December 17, 2003, the
Company declared and paid dividends to FGIC Corp. of $284,300. These dividends
were approved by the New York State Superintendent of Insurance.
14. REVOLVING CREDIT FACILITY
During December 2005, FGIC Corp. and the Company entered into a $250,000 senior
unsecured revolving credit facility that matures on December 11, 2010. The
facility is provided by a syndicate of banks and other financial institutions
led by JPMorgan Chase, as administrative agent and sole lead arranger. In
connection with the facility, $150 in syndication costs was prepaid and will be
amortized into income over the term of the facility. The facility replaced a
similar one-year facility that matured in December 2005. No draws have been made
under either facility.
15. PREFERRED TRUST SECURITIES
On July 19, 2004, the Company closed a $300,000 facility, consisting of Money
Market Committed Preferred Custodial Trust Securities ("CPS Securities"). This
facility replaced a $300,000 "Soft Capital" facility previously provided by GE
Capital. Under the new facility, each of six separate newly organized Delaware
trusts (the "Trusts"), issues $50,000 in perpetual CPS Securities on a rolling
28-day auction rate basis. Proceeds from these securities are invested in high
quality, short-term securities and are held in the respective Trusts. Each Trust
is solely responsible for its obligations and has been established for the
purpose of entering into a put agreement with the Company, which obligates the
Trusts, at the Company's discretion, to purchase perpetual Preferred Stock of
the Company. In this way, the program provides capital support to the Company by
allowing it to obtain immediate access to new capital at its sole discretion at
any time through the exercise of the put options. In connection with the
establishment of the Trusts, the Company incurred $4,638 of expenses which is
included in other operating expenses for the year ended December 31, 2004. The
Company recorded expenses for the right to put its shares to the Trusts of
$1,806 and $905 for the years ended December 31, 2005 and 2004, respectively.
F-XXXII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
16. FINANCIAL INSTRUMENTS
(a) Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating the fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are
based on quoted market prices, if available. If a quoted market price is
not available, fair values are estimated using quoted market prices for
similar securities. Fair value disclosure for fixed maturity securities is
included in the consolidated balance sheets and in Note 5.
Short-Term Investments: Short-term investments are carried at cost, which
approximates fair value.
Cash and Cash Equivalents, Accrued Investment Income, Prepaid Expenses and
Other Assets, Receivable from Related Parties, Ceded Reinsurance Balances
Payable, Accounts Payable and Accrued Expenses and Payable for Securities
Purchased: The carrying amounts of these items approximate their fair
values.
The estimated fair values of the Company's financial instruments at
December 31, 2005 and 2004 were as follows:
2005 2004
----------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------------------
Financial assets:
Cash on hand and in-demand
Accounts $ 45,077 $ 45,077 $ 69,292 $ 69,292
Short-term investments 159,334 159,334 140,473 140,473
Fixed maturity securities 3,258,738 3,258,738 2,938,856 2,938,856
Financial Guaranties: The carrying value of the Company's financial guaranties
is represented by the unearned premium reserve, net of deferred acquisition
costs, loss and loss adjustment expense reserves and prepaid reinsurance
premiums. Estimated fair values of these guaranties are based on an estimate of
the balance that is necessary to bring the future returns for the Company's
embedded book of business to a market return. The estimated fair values of such
financial guaranties was $1,098,165 compared to a carrying value of $1,099,045
as of December 31, 2005, and is $965,992 compared to a carrying value of
$936,334 as of December 31, 2004.
F-XXXIII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
16. FINANCIAL INSTRUMENTS (CONTINUED)
As of December 31, 2005 and 2004, the net present value of future
installment premiums was approximately $393,000 and $192,000, respectively,
both discounted at 5%.
Derivatives: For fair value adjustments on derivatives, the carrying amount
represents fair value. The Company uses quoted market prices when
available, but if quoted market prices are not available, management uses
internally developed estimates.
(b) Concentrations of Credit Risk
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only those
securities that, in its judgment, are of investment grade quality. The
Company has established and maintains its own underwriting standards that
are based on those aspects of credit that the Company deems important for
the particular category of obligations considered for insurance. Credit
criteria include economic and social trends, debt management, financial
management and legal and administrative factors, the adequacy of
anticipated cash flows, including the historical and expected performance
of assets pledged to secure payment of securities under varying economic
scenarios, and underlying levels of protection such as insurance or
over-collateralization.
In connection with underwriting new issues, the Company sometimes requires,
as a condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guaranty be provided for a term of the
obligation issued by a party of acceptable credit quality obligated to make
payment prior to any payment by the Company. The types and extent of
collateral varies, but may include residential and commercial mortgages,
corporate debt, government debt and consumer receivables.
As of December 31, 2005, the Company's total outstanding principal insured
was $275,327,000, net of reinsurance of $22,711,000. The Company's insured
portfolio as of December 31, 2005 was broadly diversified by geographic and
bond market sector, with no single obligor representing more than 1% of the
Company's insured principal outstanding, net of reinsurance. The insured
portfolio includes exposure under credit derivatives. The par written for
credit derivatives was $15,640,000 at December 31, 2005.
F-XXXIV
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
16. FINANCIAL INSTRUMENTS (CONTINUED)
As of December 31, 2005, the composition of principal insured by type of
issue, net of reinsurance, was as follows:
NET PRINCIPAL
OUTSTANDING
-------------
Municipal:
Tax supported $134,762,000
Water and sewer 34,859,000
Healthcare 4,216,000
Transportation 24,956,000
Education 9,939,000
Housing 1,234,000
Other 5,153,000
Non-municipal and international 60,208,000
Total $275,327,000
As of December 31, 2005, the composition of principal insured ceded to
reinsurers was as follows:
CEDED PRINCIPAL
OUTSTANDING
---------------
Reinsurer:
Radian Reinsurance Company $ 7,808,000
Ace Guaranty Inc. 6,367,000
American Re-Insurance Company 2,231,000
RAM Reinsurance Company 2,024,000
Other 4,281,000
Total $22,711,000
===========
The Company did not have recoverables in excess of 3% of stockholders'
equity from any single reinsurer.
The Company's insured gross and net principal and interest outstanding was
$472,161,000 and $433,587,000, respectively, as of December 31, 2005.
F-XXXV
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
16. FINANCIAL INSTRUMENTS (CONTINUED)
FGIC is authorized to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico, the U.S. Virgin Islands and in the United
Kingdom. Principal insured outstanding at December 31, 2005 by state, net
of reinsurance, was as follows:
NET PRINCIPAL
OUTSTANDING
-------------
California $ 32,882,000
New York 21,265,000
Pennsylvania 15,952,000
Florida 15,483,000
Illinois 13,049,000
Texas 12,223,000
New Jersey 10,883,000
Michigan 8,311,000
Ohio 6,903,000
Washington 6,359,000
------------
143,310,000
All other states 71,809,000
Mortgage and asset-backed 54,262,000
International 5,946,000
Total $275,327,000
============
F-XXXVI
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
17. COMMITMENTS
The Company leases office space and equipment under operating lease agreements
in the United States and the United Kingdom. Rent expense under operating leases
for the years ended December 31, 2005 and 2004 and for the period from December
18, 2003 through December 31, 2003 and January 1, 2003 through December 17, 2003
was $3,631, $3,070, $90, and $3,210, respectively. Future payments associated
with these leases are as follows:
OPERATING LEASE
COMMITMENT
AMOUNT
---------------
Year:
2006 $ 3,141
2007 3,119
2008 1,968
2009 412
2010 412
2011 and thereafter 1,496
Total minimum future rental payments $10,548
=======
In connection with the Transaction, the Company entered into a capital lease
with a related party (an affiliate of GE Capital), covering leasehold
improvements and computer equipment to be used at its headquarters. At the lease
termination date of June 30, 2009, the Company will own the leased equipment.
Future payments associated with this lease are as follows:
OPERATING LEASE
COMMITMENT
AMOUNT
---------------
Year ending December 31:
2006 $1,570
2007 1,545
2008 1,391
2009 265
------
Total 4,771
Less interest 509
Present value of minimum lease payments $4,262
======
F-XXXVII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
18. COMPREHENSIVE INCOME
Accumulated other comprehensive (loss) income of the Company consists of net
unrealized gains on investment securities, foreign currency translation
adjustments, and a cash flow hedge. The components of other comprehensive income
for the years ended December 31, 2005 and 2004 and for the periods from December
18, 2003 through December 31, 2003, and January 1, 2003 through December 17,
2003 are as follows:
YEAR ENDED DECEMBER 31, 2005
-----------------------------
BEFORE NET OF
TAX TAX
AMOUNT TAX AMOUNT
-----------------------------
Unrealized holding losses arising during
the year $(36,050) $12,566 $(23,484)
Less reclassification adjustment for gains
realized in net income (101) 35 (66)
-----------------------------
Unrealized losses on investments (36,151) 12,601 (23,550)
Foreign currency translation adjustment (8,454) 2,922 (5,532)
-----------------------------
Total other comprehensive loss $(44,605) $15,523 $(29,082)
=============================
YEAR ENDED DECEMBER 31, 2004
----------------------------
BEFORE NET OF
TAX TAX
AMOUNT TAX AMOUNT
---------------------------
Unrealized holding gains arising during
the year $14,928 $(5,225) $ 9,703
Less reclassification adjustment for gains
realized in net income (559) 196 (363)
---------------------------
Unrealized gains on investments 14,369 (5,029) 9,340
Foreign currency translation adjustment 6,286 (2,200) 4,086
---------------------------
Total other comprehensive income $20,655 $(7,229) $13,426
===========================
F-XXXVIII
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
18. COMPREHENSIVE INCOME (CONTINUED)
PERIOD FROM DECEMBER 18, 2003
THROUGH DECEMBER 31, 2003
-----------------------------
BEFORE NET OF
TAX TAX
AMOUNT TAX AMOUNT
-------------------------
Unrealized holding gains arising during
the period $3,168 $(1,109) $2,059
Less reclassification adjustment for gains
realized in net income -- -- --
-------------------------
Unrealized gains on investments 3,168 (1,109) 2,059
Total other comprehensive income $3,168 $(1,109) $2,059
=========================
PERIOD FROM JANUARY 1, 2003
THROUGH DECEMBER 17, 2003
------------------------------
BEFORE NET OF
TAX TAX
AMOUNT TAX AMOUNT
------------------------------
Unrealized holding gains arising during
the period $ 30,853 $(10,798) $ 20,055
Less reclassification adjustment for gains
realized in net income (31,506) 11,027 (20,479)
Unrealized losses on investments (653) 229 (424)
Foreign currency translation adjustment 6,565 (2,298) 4,267
------------------------------
Total other comprehensive income $ 5,912 $ (2,069) $ 3,843
==============================
F-XXXIX
Financial Guaranty Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
THREE MONTHS ENDED YEAR ENDED
--------------------------------------------------- DECEMBER
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 31,
2005 2005 2005 2005 2005
----------------------------------------------------------------
Gross premiums written $84,404 $131,335 $96,787 $97,676 $410,202
Net premiums written 82,609 113,305 92,331 92,809 381,054
Net premiums earned 52,633 61,907 54,794 55,235 224,569
Net investment income and net realized gains 27,558 28,389 30,117 31,109 117,173
Other income (expense) 426 90 402 (323) 595
Total revenues 80,617 90,386 85,313 86,021 342,337
Losses and loss adjustment expenses (2,611) (3,066) 20,693 3,490 18,506
Income before taxes 71,100 81,377 48,783 70,274 271,534
Net income 53,306 59,992 39,407 53,721 206,426
THREE MONTHS ENDED YEAR ENDED
--------------------------------------------------- DECEMBER
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 31,
2004 2004 2004 2004 2004
----------------------------------------------------------------
Gross premiums written $56,395 $106,457 $87,869 $72,854 $323,575
Net premiums written 53,649 105,645 87,072 67,512 313,878
Net premiums earned 31,202 53,151 49,760 40,836 174,949
Net investment income and net realized gains 24,198 22,611 24,466 26,993 98,268
Other income (expense) 317 240 117 62 736
Total revenues 55,717 76,002 74,343 67,891 273,953
Losses and loss adjustment expenses 664 (1,070) 6,725 (397) 5,922
Income before taxes 48,208 64,839 56,713 55,759 225,519
Net income 38,304 48,393 41,954 41,435 170,086
F-XL
================================================================================
No dealer, salesman or other person has been authorized to give any information
or make any representations in connection with the offer contained herein other
than those contained in this Preliminary Offering Memorandum, and, if given or
made, such information or representations must not be relied upon as having
been authorized by the Issuer or the Initial Purchasers. This Preliminary
Offering Memorandum does not constitute an offer to sell or the solicitation of
an offer to buy any security other than those to which it relates, nor does it
constitute an offer to sell, or the solicitation of an offer to buy, to any
person in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this Preliminary Offering Memorandum
nor any sale made hereunder shall, under any circumstances, create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
PAGE
TABLE OF CONTENTS -----
FORWARD-LOOKING STATEMENTS .............. iii
NOTICE TO NEW HAMPSHIRE
RESIDENTS ONLY ....................... iii
NOTICE TO FLORIDA RESIDENTS ONLY......... iii
NOTICE TO UNITED KINGDOM
RESIDENTS ONLY ....................... iii
NOTICE TO RESIDENTS OF REPUBLIC
OF IRELAND ........................... iv
REPORTS TO SERIES 2006-1
NOTEHOLDERS .......................... iv
AVAILABLE INFORMATION ................... iv
SERVICE MARKS MATTERS ................... v
SUMMARY ................................. 1
RISK FACTORS ............................ 23
CONTAINERIZATION ........................ 37
THE ISSUER .............................. 41
THE MANAGER ............................. 42
TAL'S LEASING OPERATIONS ................ 43
THE INDENTURE TRUSTEE ................... 47
THE SERIES ENHANCER ..................... 48
DESCRIPTION OF THE POLICY ............... 50
USE OF PROCEEDS ......................... 53
DESCRIPTION OF THE COLLATERAL ........... 54
TAL'S FLEET PROFILE AND STATISTICS ...... 55
ISSUER'S FLEET PROFILE AND
STATISTICS ........................... 60
DESCRIPTION OF THE MANAGEMENT
AGREEMENT ............................ 63
DESCRIPTION OF THE CONTRIBUTION
AND SALE AGREEMENT ................... 70
DESCRIPTION OF THE SERIES 2006-1
NOTES AND THE INDENTURE .............. 74
DESCRIPTION OF THE
ADMINISTRATIONAGREEMENT .............. 98
STRUCTURING ASSUMPTIONS ................. 100
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES .............. 106
CIRCULAR 230 ............................ 106
CERTAIN STATE, LOCAL AND OTHER
TAX CONSIDERATIONS ................... 109
CERTAIN ERISA CONSIDERATIONS ............ 110
RESTRICTIONS ON TRANSFERS AND
NOTICE TO INVESTORS .................. 111
CERTAIN LEGAL INVESTMENT
CONSIDERATIONS ....................... 114
PLAN OF DISTRIBUTION .................... 114
CO-MANAGERS ............................. 116
RATINGS OF THE OFFERED NOTES ............ 116
CERTAIN LEGAL MATTERS ................... 116
WHERE PROSPECTIVE INVESTORS CAN
FIND MORE INFORMATION ................ 117
GENERAL INFORMATION ..................... 117
TAL ADVANTAGE I LLC
$680,000,000 FLOATING RATE SECURED NOTES,
SERIES 2006-1
[TAL INTERNATIONAL]
[GRAPHIC OMITTED]
--------------------------------------------
PRELIMINARY OFFERING
MEMORANDUM
--------------------------------------------
[FGIC]
[GRAPHIC OMITTED]
CREDIT FORTIS
SUISSE SECURITIES LLC
HSH NORDBANK AG WESTLB AG
BTMU CAPITAL ING FINANCIAL
CORPORATION MARKETS LLC
April 3, 2006
================================================================================
