Exhibit 99.2
Letter of Intent
August 6, 2003
Ladies and Gentlemen:
This letter sets forth the understanding among the Trenwick
Companies, the Steering Committee of the LoC Banks, the Noteholders (all as
identified on Exhibit A hereto), Magicsunny Limited, number 4818520, (a new
holding company wholly-owned by (i) current members of management (the "MBO
Team") of certain UK subsidiaries of Trenwick Group Ltd. ("TGL") and (ii)
private equity investors that is expected to be renamed Talisman Holdings
Limited ("Magicsunny")) and the MBO Team with respect to a contemplated
transaction (the "Proposed Transaction") involving, among other things, the sale
of certain assets and businesses (the "Lloyd's Businesses") of TGL to
Magicsunny, and the sale of and/or run-off of certain other assets and
businesses and the distribution of the proceeds of all of the foregoing.
1. The Proposed Transaction. Subject to the satisfaction of the
conditions described in paragraph 2 below, the Proposed Transaction will have
the principal terms and conditions set forth on Exhibit B hereto (the "Term
Sheet").
2. Conditions. The Proposed Transaction is subject to, but not
limited to, the following conditions: (i) satisfactory completion by Englefield
Capital LLP ("Englefield") of legal, financial and operational due diligence on
the Lloyd's Businesses; (ii) approval of the Proposed Transaction by the LoC
Banks (as defined in the Term Sheet); (iii) negotiation of definitive
documentation (the "Definitive Documentation") providing for the Proposed
Transaction in form and substance mutually acceptable to the parties hereto;
(iv) approval of the Proposed Transaction by the boards of directors of TGL and
the appropriate Trenwick Companies, or their successors, and all of the LoC
Banks; (v) receipt of all requisite regulatory approvals and approval of
Lloyd's; and (vi) receipt of any requisite approvals of any court having
jurisdiction over any Trenwick Company insolvency or bankruptcy proceeding.
3. No-Solicitation. From the date of this letter until December 15,
2003 (such date and time, the "Expiration Time"), the Trenwick Companies will
not, and will cause all of their controlled affiliates and representatives not
to, initiate, solicit or accept any offer from any person regarding the
acquisition of the Lloyd's Businesses or all or substantially all of TGL's
assets (whether by merger, combination, reorganization or other form of
transaction (an "Offer"); provided however, that the respective boards of
directors of the Trenwick Companies may consider, review and accept an
unsolicited Offer for the Lloyd's Businesses or substantially all of the assets
of TGL if such action is necessary in order for such boards to fulfill their
fiduciary duties following consultation with legal counsel.
4. Cost Reimbursement. As set forth in the Term Sheet, if the
Proposed Transaction does not close and such failure to close is not caused by
Magicsunny and/or Englefield Capital (or any of their representatives, agents or
assigns), TMAL will pay Magicsunny an amount equal to Magicsunny's reasonable
fees and expenses in connection with the Proposed Transaction, including
application fees, up to an aggregate amount of $1.5 million (including any VAT
if applicable) upon TMAL's receipt of evidence of such fees and expenses
reasonably satisfactory to TMAL. This paragraph shall survive the termination
provisions in paragraph 8 below.
5. Public Filing of Letter of Intent and Term Sheet . The parties
hereby acknowledge that the Letter of Intent and the Term Sheet will be filed
with the Securities and Exchange Commission and other appropriate regulatory
bodies shortly after the execution of same and will be filed with the court or
courts having jurisdiction over any bankruptcy or insolvency proceedings of any
of the Trenwick Companies.
6. Press Release. Promptly after the execution and delivery of this
letter by the parties hereto, the parties may issue press releases,
substantially in the form attached hereto as Exhibits C and D. Thereafter,
except as may be required by applicable law (including the United States
Bankruptcy Code) or securities exchange rules or regulations, no party shall,
and each party shall cause their respective affiliates and representatives not
to, issue or cause the publication of any press release or other announcement
with respect to the Proposed Transaction without the consent of the parties
hereto.
7. Governing Law. This letter shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to the
conflicts of law rules thereof.
8. Termination. Unless otherwise agreed by the parties in writing,
this letter shall terminate (other than paragraph 4 of this letter, which shall
survive such termination) on the earlier of (i) the date that the Definitive
Documentation has been executed and (ii) the Expiration Time.
9. Non-Binding Letter. This letter merely constitutes our current
understanding of the Proposed Transaction and, except as set forth in the last
sentence of this paragraph, shall not be binding upon the parties, nor shall it
impose any obligations on the parties. Except as set forth in the last sentence
of this paragraph or as set forth in the Term Sheet, no binding obligation with
respect to the Proposed Transaction will result unless the Definitive
Documentation is executed and delivered by the parties. Notwithstanding the
foregoing, paragraphs 3 through 7 and this paragraph constitute the legal, valid
and binding obligations of the parties to the extent set forth in such
paragraphs.
10. Acknowledgment of Bankruptcy and Insolvency Proceedings and
Agreement to Cooperate. The parties hereto acknowledge that Trenwick America
Corporation ("TAC"), TGL and LaSalle Re Holdings Limited ("LSH") will file for
relief under chapter 11 of the United States Bankruptcy Code and TGL and LSH
will petition
2
for relief pursuant to section 161 of the Companies Act 1981 in the Supreme
Court of Bermuda and will apply for the appointment of Joint Provisional
Liquidators with respect thereto. The Definitive Documentation will be subject
to the approval of the United States Bankruptcy Court having jurisdiction over
TAC's, TGL's and LSH's bankruptcy proceedings. The parties further acknowledge
that other Trenwick Companies, their subsidiaries and/or their affiliates may
seek relief under applicable bankruptcy or insolvency laws, and thus, this
letter may not be binding upon such entities or any liquidator, administrator or
similar entity or person having responsibility for overseeing the businesses and
assets of any Trenwick Company and/or its subsidiary and/or its affiliate that
has sought relief under an insolvency law.
11. Execution in Counterparts. This letter may be executed in two or
more counterparts, in original form or by facsimile, each of which shall be
deemed an original, but all of which together will constitute one and the same
document.
If this letter correctly sets forth our understanding, please so
acknowledge by signing in the space indicated below and returning the enclosed
copy of this letter.
TRENWICK GROUP LTD.
By: /s/ W. M. Becker
---------------------------------
Name: W. M. Becker
Title: Acting Chairman and Chief
Executive Officer
LASALLE RE LIMITED
By: /s/ Alan L. Hunte
---------------------------------
Name: Alan L. Hunte
Title: President
TRENWICK AMERICA
CORPORATION
By: /s/ Alan L. Hunte
---------------------------------
Name: Alan L. Hunte
Title: President
TRENWICK MANAGING
AGENTS LIMITED
By: /s/ M. C. Watson
---------------------------------
Name: M. C. Watson
Title: Chairman and CEO
3
If this letter correctly sets forth our understanding, please so
acknowledge by signing in the space indicated below and returning the enclosed
copy of this letter.
JP MORGAN CHASE BANK
By: /s/ Thomas R. Dinneen
--------------------------------------
Name: Thomas R. Dinneen
Title: Managing Director
THE ROYAL BANK OF SCOTLAND PLC
By: /s/ Peter Ballard
--------------------------------------
Name: Peter Ballard
Title: Head of Corporate Restructuring
ING BANK N.V., LONDON BRANCH
By: /s/ M. Sharman /s/ P. Galpin
----------------------------------------------
Name: M. Sharman P. Director
Title: Managing Director
4
If this letter correctly sets forth our understanding, please so
acknowledge by signing in the space indicated below and returning the enclosed
copy of this letter.
J.C. WATERFALL, BENEFICIAL AND/OR
in his individual capacity RECORD HOLDER OF
$3,000,000 OF SENIOR NOTES
/s/ Joann McNiff, Esq.
- -----------------------------
as Attorney-in-fact
PHOENIX PARTNERS, L.P. BENEFICIAL AND/OR
RECORD HOLDER OF
By: /s/ Joann McNiff $1,782,000 OF SENIOR NOTES
- -----------------------------
Name: Joann McNiff
Title: Authorized Agent
PHAETON INTERNATIONAL (BVI), LTD. BENEFICIAL AND/OR
RECORD HOLDER OF
By: /s/ Joann McNiff $1,218,000 OF SENIOR NOTES
- -----------------------------
Name: Joann McNiff
Title: Authorized Agent
ARCH APLIN, BENEFICIAL AND/OR
in his individual capacity RECORD HOLDER OF
$________ OF SENIOR NOTES
- -----------------------------
THE RAPTOR GLOBAL PORTFOLIO LTD. BENEFICIAL AND/OR
RECORD HOLDER OF
$________ OF SENIOR NOTES
By:
-------------------------
Name:
Title:
THE TUDOR BVI GLOBAL PORTFOLIO LTD. BENEFICIAL AND/OR
RECORD HOLDER OF
$________ OF SENIOR NOTES
By:
-------------------------
Name:
Title:
5
If this letter correctly sets forth our understanding, please so
acknowledge by signing in the space indicated below and returning the enclosed
copy of this letter.
THE ALTAR ROCK FUND L.P. BENEFICIAL AND/OR
RECORD HOLDER OF
$________ OF SENIOR NOTES
By:
-------------------------
Name:
Title:
TUDOR PROPRIETARY TRADING, L.L.C. BENEFICIAL AND/OR
RECORD HOLDER OF
$________OF SENIOR NOTES
By:
-------------------------
Name:
Title:
JOHN J. GORMAN, BENEFICIAL AND/OR
in his individual capacity RECORD HOLDER OF
$3,500,000 OF SENIOR NOTES
/s/ J. Gorman
- -----------------------------
TEJAS SECURITIES GROUP, INC. BENEFICIAL AND/OR
RECORD HOLDER OF
$1,000,000 OF SENIOR NOTES
By: /s/ J. Gorman
-----------------------------
Name:
Title:
MBIA INSURANCE CORPORATION BENEFICIAL HOLDER
OF $55,000,000
OF SENIOR NOTES
By: /s/ Richard Weill
-----------------------------
Name: Richard Weill
Title: Vice Chairman
6
If this letter correctly sets forth our understanding, please so
acknowledge by signing in the space indicated below and returning the enclosed
copy of this letter.
MAGICSUNNY LIMITED
By: /s/ M. C. Watson
---------------------------
Name: M. C. Watson
Title: Chief Executive Officer
7
If this letter correctly sets forth our understanding, please so
acknowledge by signing in the space indicated below and returning the enclosed
copy of this letter.
MICHAEL WATSON,
in his individual capacity
/s/ M.C. Watson
--------------------------
JAMES GIORDANO,
in his individual capacity
/s/ James Giordano
--------------------------
ROBERT LAW,
in his individual capacity
/s/ R. D. Law
--------------------------
8
Exhibit A
Trenwick Companies
Trenwick Group Ltd.
LaSalle Re Limited
Trenwick America Corporation
Trenwick Managing Agents Limited
Steering Committee of the LoC Banks
JP Morgan Chase Bank
The Royal Bank of Scotland plc
ING Bank N.V., London Branch
The Noteholders
J.C. Waterfall, in his individual capacity
Phoenix Partners, L.P.
Phaeton International (BVI), Ltd.
Arch Aplin, in his individual capacity
The Raptor Global Portfolio Ltd.
The Tudor BVI Global Portfolio LTD.
The Altar Rock Fund L.P.
Tudor Proprietary Trading, L.L.C.
Tejas Securities Group, Inc.
John J. Gorman, in his individual capacity
MBIA Insurance Corporation
Magicsunny
Magicsunny Limited, number 4818520 (to be renamed Talisman Holdings Limited)
MBO Team Signatories
Michael Watson, in his individual capacity
James Giordano, in his individual capacity
Robert Law, in his individual capacity
9
CONFIDENTIAL
Summary of Terms and Conditions of Proposed (The "Term Sheet")
Chapter 11 Plan and Restructuring for
Trenwick Group Limited ("Trenwick" or "TGL") and its Subsidiaries (collectively,
the "Company")
August 6, 2003
This document is for discussion purposes only and is not an offer subject to
acceptance. There is no obligation on the part of the Company or any other party
until definitive agreements are signed by all concerned parties. This document
and the information contained herein is provided for settlement purposes only
and shall be governed by Rule 408 of the Federal Rules of Evidence and any and
all similar and applicable rules and statutory provisions governing the
non-admissibility of settlement discussions.
All (pound)/$ conversions provided in this document are calculated using
(pound)1 = $1.6313
10
A. UK Entities
1. Trenwick UK Holdings Ltd. ("TUKHL")
o The signing of definitive documentation is subject to the
approval of the Trenwick Board of Directors or its successor.
o TGL and TAC to enter into a forbearance agreement with Oaks
1-4 in order to preserve TMAL's and Oaks 1-4's financial
position to the extent necessary to consummate the
transaction.
o Magicsunny Limited, number 4818520, (a new holding company
wholly-owned by (i) current members of management (the "MBO
Team") of certain of the Company's UK subsidiaries and (ii)
private equity investors that is expected to be renamed
Talisman Holdings Limited ("Magicsunny")) to purchase the
following Lloyd's entities for a (pound)1 consideration:
> Trenwick Managing Agents Limited ("TMAL")
> Trenwick UK Management Services Limited ("TUKMS")
> Resource Underwriting Pacific Pty Limited
("RUPPL")
> Acorn Corporate Capital Limited ("Acorn")
> Trenwick UK Pension Trustees Limited
> Oak Dedicated Four Limited ("Oak 4")
The entities purchased by Magicsunny will be free of all obligations
to other members of the TGL group.
o A new holding company ("New Holdco") to be established by LaSalle Re
Limited ("LaSalle Re") to ultimately own 100% of the economic
interest in Oak Dedicated Limited, Oak Dedicated Two Limited, Oak
Dedicated Three Limited and Oak Dedicated Four Limited ("Oaks 1-4")
and 20% of the economic interest in CCM1 (a Corporate Capital Member
to be formed by Magicsunny to support underwriting for 2004 and
subsequent YOAs ("CCM1"). CCM1 to provide (pound)150 million of
capacity for 2004 YOA.)(see below).
In exchange for debt of (pound)19.1m ($31.8m) of Oak 4 and
(pound)17.2m ($28.0m) of Oaks 1-3, TAC will receive debt securities
in the aggregate of (pound)36.3m ($59.8m) in New Holdco, which will
entitle it to profits derived from Oaks 1-4's and CCM1's
underwriting. The obligations to New Holdco from Oaks 1-4 will be
structured to permit the sale of the Oaks 1-3's NOLs, provided that
such structure shall be reasonably acceptable to the Senior
Noteholders. Any distributions to TAC from its debt security
interests in New Holdco will be payable only after the LoCs have
expired and the LoC Banks' claim (as defined herein) has been
satisfied in full. For the purposes of this Term Sheet (i) the term
"LoC Banks" shall mean the "Banks" as defined in the Credit
Agreement, dated as of November 24, 1999 and amended and restated as
of September 27, 2000, among Trenwick America Corporation, Trenwick
Holdings Limited, the various institutions party thereto and JP
Morgan Chase Bank as Administrative Agent (as amended, modified or
otherwise supplemented from time to time, the "Credit Agreement") as
well as any person who becomes a "Bank" pursuant to the terms of the
Credit Agreement, (ii) the term "Renewing LoC Bank" shall have the
meaning of the term the "Renewing Bank" as defined in the Credit
Agreement and (iii) the term "Non-Renewing LoC Bank" shall have the
meaning of the term the "Non-Renewing Banks" as defined in the
Credit Agreement. Except as provided in Section B herein, as used
herein, "the LoC
11
Banks' claim" means the aggregate amount that the LoC Banks have
paid under draws on the LoCs and any legal and professional fees
incurred by the LoC Banks in connection with this transaction or the
LoCs as extended pursuant hereto.
Oaks 1-4 will continue to support the underwriting for 2003 and
prior YOAs. Syndicate 839 is likely to cease to underwrite following
the 2003 YOA.
Unless otherwise required in a liquidation or in connection with any
insolvency proceeding, TGL or its successor will retain TUKHL and
all of its other subsidiaries for a period not longer than 18 months
from the date herein. Magicsunny will manage the run-off of Oaks 1-4
for third party expenses plus a fixed annual fee of (pound)25,000
per Oak, and will manage the run-off of TUKHL and all other
non-acquired subsidiaries of TUKHL for third party expenses plus a
fixed annual fee of (pound)50,000. TGL or its successor and LaSalle
Re or its successor will hold Magicsunny harmless to the extent
customary for transactions of this type solely with respect to these
run-off functions. As required by UK company law the entities not
acquired by Magicsunny will enter into administration or liquidation
proceedings. In the event of a sale of TIL, no expenses related to
the run off/winding up of these companies will affect the value of
any TIL distributions to the LoC Banks.
o A new syndicate is likely to be formed for the 2004 YOA. Capital
will be provided by new Corporate Capital Members ("CCMs") (in which
Magicsunny will own 100% of the ordinary shares) for 2004 through
2006 YOAs:
The economic interests in CCM1 will be attributable to separate
classes of B and C shares, representing 80% and 20% respectively of
the economic interest in CCM1.
New Holdco to be allotted 25% of the B shares of CCM1; provided that
(i) no distributions will be paid from CCM1 to the holders of the B
shares on account of such shares until the LoCs have expired and the
LoC Banks' claim has been satisfied in full and (ii) the holder of
the C shares shall not be entitled to any payments from CCM1 on
account of such shares in excess of $10 million in the aggregate
until the LoCs have expired and the LoC Banks' claim has been
satisfied in full. The Renewing LoC Banks to be allotted 75% of the
B shares of CCM1.
Magicsunny to be allotted the C shares in CCM1. For the avoidance of
doubt, in the event that there are losses on 2003 and prior YOA, the
Renewing LoC Banks will only have a claim on profits attributable to
the C shares to the extent of profits in excess of $10 million.
The LoC Banks' FaL will be used to support CCM1's underwriting (as
well as that of Oaks 1-4). Cross guarantees will be required between
Oaks 1-4 and CCM1. CCM1 and Oaks 1-4 will enter into a deed of
priority subject to Lloyd's approval providing for the order of draw
down of FaL. In the event of a deficit in Oaks 1-4, the order of
draw down shall be (i) Oaks 1-4's cash, (ii) CCM1's cash relating to
CCM1's B shares and any amount of cash in excess of the $10 million
attributable to the C shares that has not already been distributed
to the holder of the C shares on account of such shares or is
attributable to (iv) below, (iii) the LoCs, (iv) the first $10
million of CCM1's cash relating to CCM1's C shares that has not
already been distributed to the holders of the C shares on account
of such shares. In the event of a deficit in CCM1, the order of draw
down shall be (i) all CCM1's cash, (ii) Oaks 1-4's cash, (iii) the
LoCs.
Magicsunny will provide FaL for a Corporate Capital Member to be
formed by Magicsunny to support underwriting for 2004 and subsequent
YOAs ("CCM2"). CCM2 to provide (pound)50 million of capacity for
2004 YOA. CCM2 will not enter into a cross deficit clause or cross
guarantees with CCM1 or Oaks 1-4.
12
The Renewing LoC Banks' voting rights and control over CCM1 to be
determined in a manner satisfactory to the Renewing LoC Banks and
Magicsunny.
o Additional capacity, currently estimated at (pound)50m, will be
raised from third parties sufficient to provide, in conjunction with
Magicsunny, a total stamp capacity of (pound)250m. To the extent
that Magicsunny agrees to a reduction in the Renewing LoC Banks'
underwriting commitment for 2004-2006, or the RBC ratio is lowered,
resulting in a surplus amount of FaL, the Renewing LoC Banks could
in their sole discretion reduce the outstanding LoCs (subject to
Lloyd's approval) dollar-for-dollar.
o The Renewing LoC Banks will extend the LoC commitment (as reduced by
the points below) in order to support underwriting 2004-2006 YOAs.
The LoCs will be evergreen, but subject to annual notice of
cancellation, at the Renewing LoC Banks' discretion, in the event of
non-compliance with the terms and conditions for extending the LoC
commitment as agreed upon by the Renewing LoC Banks and Magicsunny.
No LoC fees will be charged, subject to Section B below.
Current cash FaL of approximately (pound)16m ($26.7m) to be used as
part of the interavailable FaL: for the benefit of CCM1 and Oaks 1-4
with such cash FaL continuing to be subordinated (subject to Lloyd's
approval) to the LoC Banks' FaL.
The Renewing LoC Banks will make available to CCM1 FaL to support
(pound)150m of capacity for the 2004 YOA (the current proposed FaL
structure has been agreed by Lloyd's in their letter of 9 July 2003)
and as much capacity as possible for the 2005 and 2006 YOAs, not
exceeding (pound)150m and not requiring an increase in the LoC
Banks' FaL. Any surplus LoCs may then be released.
LoCs to be denominated in a currency to be agreed upon by the
Renewing LoC Banks and Magicsunny.
As agreed by Lloyd's, the proceeds of any sale of Oaks 1-3 NOLs will
be substituted as FaL, with a corresponding reduction of the LoCs of
not less than (pound)12m on or before the Coming into Line date,
without which the LoC Banks shall have no obligation whatsoever to
extend the LoCs in connection with this transaction, or proceed with
this transaction in any way (other than permitting the reimbursement
of Magicsunny's fees by TMAL as set out below). 50% of the gross
proceeds received as consideration for the sale of the NOLs in
excess of 6.6% and 25% of any proceeds received in excess of 7% will
be paid as an incentive fee to Magicsunny, provided that the
incentive fee will only be payable to the extent that the reduction
of the LoCs is not less than (pound)12m.
o Other terms of the sale to Magicsunny:
TMAL to run-off Syndicate 839 and receive a fixed run-off fee per
annum. The effective margin of the fixed annual run-off fee, based
on the current estimate of the run-off expenses, is as follows:
Calendar Year 2003 2004 2005 2006 2007 Total
Estimated expenses ((pound)m) 12.7 9.0 5.3 2.7 2.4 32.1
Run-off fee ((pound)m) 2.0 1.25 0.75 0.5 0.25 4.75
-------------------------------------------------------------------------------------
Effective margin (%) 15.7 13.9 14.2 18.5 10.4 14.8
13
The run-off fee for the 2003 calendar year will be paid in full
concurrent with the closing of the transaction. The run-off
management agreement terminates at the end of 2007, at which time
third party bids may be invited as appropriate. (This will not be
necessary if all the open years have been closed by the end of
2007).
For 2002 YOA, the Managing Agent will receive 15% profit commission
from the Syndicate.
For 2003 YOA, the Managing Agent will receive a 1.5% management fee
and a 25% profit commission from the Syndicate. The management fee
will be paid in full to TMAL concurrent with the closing of the
transaction, net of management fees already paid for the YOA. For
the avoidance of doubt, the Managing Agent will continue with its
existing fee and profit commission arrangements in respect of Acorn
and other capacity providers.
For 2004-2006 YOAs, the Managing Agent will receive a 1% management
fee and a 25% profit commission on the underwriting participation of
CCM1. A standard 2 year deficit clause will be applied.
To the extent that CCM1's capacity is less than (pound)150m for 2004
and subsequent years of account, the Managing Agent's fee will be
increased from 1% by 0.1% for every (pound)7.5 million reduction
from CCM1's capacity up to a maximum of 2%.
For every (pound)100 of the LoCs cancelled undrawn (prior to
expiry), the LoC Banks will pay Magicsunny an incentive fee of
(pound)2, payment of which by the LoC Banks does not get added to
any claim by the LoC Banks. No incentive fee will be applied to any
reduction in the LoC as part of this transaction or the sale of any
tax losses or any reduction from any other sources contemplated in
this term sheet including, but not limited to, reductions in
connection with distributions from LaSalle Re and LaSalle Re
Holdings Limited ("LSH") and Trenwick's US operations.
Syndicate expenses will bear a (pound)700,000 charge in respect of
the MBO Team's bonus arrangements for the 2003 YOA. For the
avoidance of doubt, no amount will be charged to the 2004-2006 YOAs
in respect of the MBO Team's bonuses.
Benefits accruing to members of the MBO Team from change of control
provisions will be waived. Any other syndicate restructuring costs
(but not Magicsunny's transaction costs) relating to the proposed
transaction e.g. redundancy costs associated with lines of business
to be discontinued in 2003, dilapidation costs in respect of
leasehold premises to be surrendered in 2003 etc. (currently
estimated to be approximately (pound)4m) will be borne by the 2003
YOA, as they form part of the cost to existing capital providers of
ensuring the transaction occurs.
Management of Magicsunny will cooperate to a reasonable extent with
respect to any insolvency proceedings of non-purchased UK entities
as requested to do so by TGL and/or the LoC Banks. Any costs
incurred in respect of this cooperation will be borne by the
non-purchased UK entities subject to the availability of funds but
in no event by Magicsunny.
If the transaction does not close and such failure to close is not
caused by Magicsunny and/or Englefield Capital (or any of their
representatives, agents or assigns), TMAL will pay Magicsunny an
amount equal to Magicsunny's reasonable fees and expenses in
connection with this transaction, including application fees, up to
an aggregate amount of $1.5 million (including any VAT if
applicable) upon TMAL's receipt of evidence of such fees and
expenses reasonably satisfactory to TMAL.
14
o The NOLs of Oaks 1-3 are to be sold (subject to Lloyd's and
BMA's approvals).
It will be a term of the sale of Oaks 1-3's NOLs that 2003 will be
their last underwriting YOA.
As described above, proceeds from the sale of the NOLs of
approximately (pound)200m (estimated to be (pound)12.0m after
consideration to TIL of approximately (pound)1.3m, transaction costs
and incentive fees) will remain in Oaks 1-3 as subordinated FaL and
any consequent LoC reduction will result in a dollar-for-dollar
reduction of the LoCs.
TGL will work with the regulators to exchange the inter-company
payables totalling (pound)17.2m ($28.8m) due from Oaks 1-3 to TAC
for debt securities in New Holdco, which will not be discounted in
any manner nor attract any interest. The debt securities will
contain terms and conditions that will enable the NOLs to be
realised.
To the extent allowed by applicable law, as required by the
purchaser of the NOLs and Lloyd's, all creditors and shareholders of
Oaks 1-4 and the parties hereto undertake not to instigate
insolvency proceedings against Oaks 1-4 and to facilitate such
restructuring of Oaks 1-4 as may be required.
Oaks 1-4 to retain all profit (net of profit commissions, Managing
Agent's fees, repayments to the LoC Banks for all LoC drawings,
distributions to Berkshire Hathaway and Swiss Re, and the run-off
management fee) arising from 2003 and prior YOAs. Any such amounts
will not be distributed and will be used as subordinated cash FaL
and/or used to repay LoC drawings until LoCs have expired and are
released and the LoC Banks' claim has been satisfied in full.
o No profits will be distributed from New Holdco, other than to
the Renewing LoC Banks, until the LoCs have expired and the LoC
Banks' claim has been satisfied in full.
> Thereafter, they will be applied to discharge the debt
securities held by TAC.
> Thereafter, they will be distributed to LaSalle Re.
> Thereafter, they will be distributed to LSH to satisfy the
claims of holders of the Series A LSH Perpetual Preferreds.
> Thereafter, any residual value in New Holdco will be
distributed to TGL or its successor in interest.
o Except as otherwise stated herein as to future interest, the
LoC Banks will agree to release or terminate the following fee
arrangements under the current $182.5 million LoC facility:
> LoC fees in the aggregate amount of $6.9 million due 2Q-4Q
2003
> 15% profit sharing for 2002-2003 YOAs at Lloyd's
> PIK Notes
> Right to receive additional security in Oaks 1-4 entities
> Future accrued interest
15
o LoC Banks' right to receive any distribution from the TAC
Escrow (referred to below) shall be based on a maximum claim (the
"Banks' Maximum Claim") determined as follows: the amount of the
LoCs that have been drawn at the time the LoCs are ultimately
released minus all of the following: any recovery by the LoC Banks
from Oaks 1-4, profits from CCM1, recoveries from TGL, LaSalle, LSH,
THL or payments from any other source. However, notwithstanding any
reduction in the Banks' Maximum Claim, the percentage recovery from
TAC agreed upon with the Senior Noteholders shall remain unchanged
and will be capped at the Banks' Maximum Claim.
o Any proceeds of drawn LoCs not used by Lloyd's and returned to
Oaks 1-4 shall first be used to repay the LoC Banks for such
drawings.
o No security interest in the assets or equity in Oaks 1-4 will
be granted to any party.
o Except as provided below, neither Magicsunny nor any of the
companies to be acquired by Magicsunny under this agreement, will be
responsible for any restructuring costs incurred by the LoC Banks,
the Senior Noteholders or Trenwick Group. To the extent allowed by
applicable law, all legal and other costs of the LoC Banks,
estimated to be $2.5m and to be evidenced by invoices, incurred in
relation to the transaction incurred after 30 June 2003 will be paid
for as follows: (i) the first $1.0m by TGL; (ii) the next $1.25m by
Oaks 1-4 to the extent possible, thereafter by TUKHL and its
subsidiaries not acquired by Magicsunny, and finally to the extent
necessary by Magicsunny; and (iii) thereafter in a manner to be
determined; provided that (a) the amount in clause (i) shall be
prefunded and the amount in clause (ii) above shall be prefunded to
the extent of $0.75m, but no amounts shall be paid out of TAC in any
event, (b) the amounts in clauses (i) and (ii) above shall be
payable regardless of whether the transaction is closed (excepting
the contribution by Magicsunny, if any which shall be payable only
if the transaction closes), and (c) to the extent that there is
excess cash at TGL on or after the closing of the transaction
estimated at this time to be $0.27m), such excess cash shall be used
to reduce the amounts paid, if any, pursuant to clause (ii) above
(with priority to Magicsunny) and/or pay such legal and other costs
payable pursuant to clause (iii) above; provided also that no
further charges of any kind are levied on the Trenwick Lloyd's
entities by TGL or its affiliates (other than direct reimbursement
of pre-agreed expenses) after June 30, 2003. To the extent allowed
by applicable law, legal and other costs of the LoC Banks incurred
subsequent to completion of the transaction and in relation to
subsequent calendar years, to be borne as follows:
(i) until December 31, 2006, (a) 80% by Oaks 1-4, or failing that,
syndicate 839 and (b) 20% by CCM1. To the extent that CCM1 has
insufficient funds to cover its 20% share, Oaks 1-4, or
failing that, syndicate 839 will advance such funds as are
necessary to pay the costs of the LoC Banks in full. CCM1 will
reimburse Oaks1-4 or syndicate 839, to the extent applicable,
for any funds advanced on its behalf, when funds become
available to CCM1; and
(ii) after December 31, 2006, entirely by CCM1, or failing that,
CCM1's interest in the on-going syndicate.
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2. Trenwick Holdings Ltd. ("THL")
o Unless otherwise required by a liquidator or in
connection with any insolvency proceeding, or to the
extent otherwise agreed to by the parties hereto, THL
and its subsidiaries to be retained by TGL for a period
not longer than eighteen months.
> As required by UK company law, the entities will enter into
administration or liquidation proceedings.
o Upon a sale by THL of Trenwick International Limited
("TIL")
> The LoC Banks will be entitled to future distributions, if
any, from TIL under the acquisition agreement (the
"Acquisition Agreement").
> Recovery by the LoC Banks from proceeds of the Acquisition
Agreement will result in a dollar-for-dollar reduction in the
LoC Banks' claim.
> Thereafter, any residual value will be distributed to THL and
thereafter to TGL or its successor and interest.
> THL, and its subsidiaries TMS and SRU, to be retained by TGL.
As required by UK company law, the entities will enter into
administration or liquidation proceedings.
> The existing Lloyd's lease (currently held by TMS) will be
transferred to TMA for a consideration of (pound)500,000
(payable out of the cash sales proceeds of TIL), to cover
potential shortfall in rent from future subletting and costs
of dilapidation.
> THL to retain the net cash sales proceeds (but not any
distributions from the Acquisition Agreement) of TIL to fund
run-off obligations of THL and its subsidiaries.
o Runoff management of THL and any remaining subsidiaries
will be determined by TGL and shall be reasonably
satisfactory to the LoC Banks.
- Any distributions from THL will be made first to
the LoC Banks until the LoCs have expired and the
LoC Banks' claim has been satisfied in full.
- Any residual value will be distributed to TGL or
its successor in interest.
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B. Trenwick America Corporation ("TAC")
o A Liquidating Trust will be established to hold the assets of
TAC. The Trust shall be managed by the Liquidating Trustee.
The Trust Agreement will provide for a distribution waterfall
as provided below.
o TAC will cooperate with the Senior Noteholders in the
selection of the run-off manager for the U.S. insurance
operating companies
o TAC's "cash flow available" is defined as
> Dividends received from TARCO (including from InsCorp), after
payment by TARCO to the run-off manager [TBD] of the U.S. operations
for incentive fee [TBD]. This fee to have been agreed in advance by
the Senior Noteholders; plus
> Distributions from New Holdco in respect of its debt securities
following the expiry of the LoCs and satisfaction in full of the LoC
Banks' claim; plus
> All amounts received by TAC from any other source; less
> Liquidating Trust expenses [TBD]
o Distribution of TAC's "cash flow available" is to be as
follows:
> The first cash flow available shall be distributed pro rata to the
Senior Noteholders, holders of the CI Notes, TARCO and InsCorp (to
the extent their inter-company obligations have not been previously
satisfied through setoff or otherwise released), until the Senior
Noteholders have received $35 million in the aggregate.
> Thereafter, cash flow available will be distributed 68% to the
Senior Noteholders, 29% to the LoC Banks (except to the extent set
forth below) and 3% to holders of the CI Notes until the Senior
Noteholders and CI Notes are paid to the extent of the fixed amounts
set forth below. The inter-company obligations to TARCO and InsCorp
will be paid on a pro rata basis with the Senior Notes, the LoC
Banks and the CI Notes (if they have not been previously satisfied
through setoff or otherwise released).
- For purposes of the preceding two paragraphs, the Senior
Noteholders' claims are assumed to be fixed at $75.0
million and the CI Noteholders' claims are assumed to be
fixed at $2.2 million.
- The 29% distribution to the LoC Banks is to be placed in
an escrow ("TAC Escrow") until the earlier of the date
upon which the LoCs (i) are drawn, (ii) expire or (iii)
are released. At that time, the escrow shall be
distributed to the LoC Banks to the extent of the Banks'
Maximum Claim or the amount in escrow, whichever is
less. In the event that the LoC Banks receive further
payment on their claim after the distribution to the LoC
Banks of the TAC Escrow, the LoC Banks shall return
funds to TAC to the extent that the receipt of such
funds prior to the distribution of the escrow would have
caused a lesser amount to be distributed from the
escrow. In the event that the LoC Banks secure a
distribution from the TAC Escrow and the LoC has expired
and the LoC Banks' claim has been fully satisfied, TAC
shall be subrogated to the LoC Banks' rights to
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receive distributions from LaSalle, LSH, THL, TGL and
any other entity currently a subsidiary or affiliate of
TGL, and from New Holdco (but in any event it shall not
be subrogated to any distributions the LoC Banks receive
from CCM1 on account of their B shares) as respects
payments made to the LoC Banks from the TAC Escrow.
> Thereafter, payments shall be made to the Senior Noteholders, the CI
Notes and the TARCO and InsCorp claims until such claims are paid in
full.
- The Senior Noteholders reserve their rights to seek
permission to accrue interest and/or seek payment in the
future of such interest with respect to their claim. To
the extent that the Senior Noteholders are paid such
interest and/or fees on account of their claim, the LoC
Banks reserve their rights to seek payment of interest
on the aggregate amount of their claim at the same rate
of interest as the Senior Noteholders for the same
period as paid to the Senior Noteholders; provided that
any such payment or accrual of interest in connection
herewith shall have no effect on the distribution
percentages determined in this Section B. Any such
interest will not be a claim against Magicsunny or any
of its subsidiary undertakings, including CCM1. The
Company, for itself and any successor, reserves the
right to object to any request by the Senior Noteholders
and/or the LoC Banks for accrual of interest and/or
payment of any interest after the commencement of a
bankruptcy case or receipt of any distribution with
respect thereto.
> Thereafter, cash flow will be distributed by the Liquidating Trustee
to the holders of the Trust Preferreds. Any residual value will be
distributed to TGL or its successor in interest
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C. Bermuda Entities
1. Trenwick Group Ltd. ("TGL")
o TGL will seek the appointment of a provisional liquidator in
Bermuda. Any distributions from TGL will be made to the LoC
Banks to either, or both to the extent applicable, reduce the
LoC Bank's claims and/or cash collateralize the LoCs until the
LoCs have expired and the LoC Banks' claim has been satisfied
in full.
2. LaSalle Re Holdings Ltd. ("LSH")
o Run-off management of LaSalle Re to be determined by TGL and
shall be reasonably satisfactory to the LoC Banks. Oaks 1-4 to
be managed and run off by Magicsunny. New Holdco to be managed
by Magicsunny and no management fees will be incurred and New
Holdco will pay its own expenses.
o Recovery from the LaSalle Re run-off will be distributed to
the LoC Banks
> Recovery by the LoC Banks from proceeds of the run-off will either,
or both to the extent applicable, reduce the LoC Banks' claim and/or
cash collateralize the LoCs until the LoCs have expired and the LoC
Banks' claim has been satisfied in full
> Thereafter, profit from the run-off will be distributed to the
holders of the Series A LSH Perpetual Preferreds
> Thereafter, any residual value will be distributed to TGL or its
successor in interest
o No profits will be distributed from New Holdco, other than to
the LoC Banks, until the LoCs have expired and the LoC Banks'
claim has been satisfied in full.
> Thereafter, the profits will be applied to discharge in full the
debt securities held by TAC.
> Thereafter, the profits will be distributed to LaSalle Re.
> Thereafter, pending BMA approval, the profits will be distributed to
LSH to satisfy the claims of holders of the Series A LSH Perpetual
Preferreds.
> Thereafter, any residual value will be distributed to TGL or its
successor in interest.
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D. Reductions of LoC Banks' Commitments and Reimbursement of LoC Banks' Draws
For the avoidance of doubt and notwithstanding anything to the contrary
contained herein: (i) each LoC Bank's commitment under the LoCs shall be reduced
pro rata by the proceeds of any sale of Oaks 1-3 NOLs substituted as FaLs as
contemplated herein; (ii) any other reduction in the LoCs shall be applied first
to reduce each Renewing Bank's LoC commitment pro rata until each Renewing
Bank's LoC commitment has been terminated and second to reduce the Non-Renewing
Bank's LoC commitment pro rata; and (iii) any collateral provided to secure the
LoCs shall secure the obligations to each Renewing LoC Bank.
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E. Implementation
A restructuring of the debt of the Company will occur in the context of
controlled bankruptcy or insolvency proceeding based upon this term sheet and a
letter of intent that have been pre-negotiated with two constituencies, ie the
LoC Banks and the Senior Noteholders.
TAC will file Chapter 11 proceedings in the United States in the Bankruptcy
Court for the District of Delaware. TGL and LSH will enter into formal filings
in Bermuda and/or the United States.
TUKHL, THL and the remaining subsidiaries of TGL will consider insolvency
proceedings if necessary to effectuate the transaction.
Votes on the Plan will be solicited in any Chapter 11 cases.
Consideration will be given to the desirability of schemes of arrangement being
implemented under Bermuda law in respect of TGL and La Salle Re Holdings.
On or before forty-five (45) days after the petition date for TAC, TAC will use
its best efforts to seek Bankruptcy Court approval to retain a consultant under
terms reasonably acceptable to the Senior Noteholders to investigate and assist
TAC in pursuing avenues of recovery and estate maximization beyond the
traditional insurance runoff recoveries. The LoC Banks reserve their rights to
object to this relief.
F. Releases
The transaction will include a full general discharge and release of liability
in favor the LoC Banks, the Senior Noteholders, Magicsunny and each of the
respective principals, employees, agents, representatives, consultants,
shareholders and professionals thereof as well as the Company's officers,
directors, employees, agents, representatives, consultants, shareholders, and
those professionals retained by the Company to the extent such professionals
were retained on or after September 1, 2002 in connection with restructuring,
financial and related matters, from any and all claims and causes of action
arising from actions or omissions including, without limitation, any and all
claims arising from the actions taken or not taken in connection with the
restructuring, the matters referred to herein and the operations of the Company;
provided, however, that the general discharge and release shall not apply to
acts and omissions of officers and former officers of TGL, TAC and TAC's
insurance operating subsidiaries (other than any such officer currently serving
on the TGL Board of Directors) which took place prior to January 1, 2003.
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