Contract analysis

From: Harrison Collier <hcollier@callowaybrandt.com> To: Yuki Nakamura <ynakamura@calderwoodharkness.com> Cc: Megan O'Shaughnessy <moshaughnessy@callowaybrandt.com> Date: Tue, 20 Sep 2022 04:47:00 -0000 Subject: QRF 2022-1 — Underwriter's Counsel Comments on Indenture (First Draft) and NPA Indemnification Issues

We have completed our initial review, on behalf of Ridgeline Capital Markets LLC, of the first draft of the Indenture circulated by Calderwood & Harkness on September 6, 2022, in connection with the proposed $500,000,000 issuance of notes by Quorum Receivables Funding 2022-1 LLC. Attached to this email please find (1) a detailed redline of the Indenture reflecting our tracked changes and marginal comments and (2) a s

In addition to our Indenture mark-up, we have a number of comments on certain indemnification provisions in the current draft of the Note Purchase Agreement, which we address below. Megan O'Shaughnessy on our team worked closely on the mark-up and is available for any follow-up questions on the specifics of the redline.

Our principal comments are set forth below.

*Servicer Payment Default Cure Period.* The current draft provides a five (5) business day cure period for servicer payment defaults. Given the short-duration nature of premium finance receivables and the highly consequential impact of remittance delays on the trust waterfall, we propose shortening this cure period to three (3) business days. We believe the shorter window is appropriate in light of the asset class an

*Cross-Default to Servicing Agreement.* We request the addition of explicit cross-default language providing that a "Servicer Default" (as defined in the Servicing Agreement) automatically constitutes an Event of Default under the Indenture, without requiring separate notice from Calvoneth Trust Company, N.A. as Trustee. The current construct, which appears to require an independent determination by the Trustee, intr

*Sponsor Credit Event.* We request the addition of an Event of Default triggered upon QIH's unsecured credit rating from either Brindoval Ratings or Pinnacle Rating Services falling below BB(cr) or Ba2(p), respectively. We recognize that the early amortization trigger framework addresses rating downgrades at somewhat higher thresholds, but in our view, a harder default trigger at the levels specified above is warrant

*Breach of Concentration Limits.* We propose that a breach of any concentration limit — specifically, single obligor in excess of 0.75% of pool balance, single state in excess of 20%, or single carrier in excess of 15% — that remains uncured for more than one determination date should constitute an Event of Default, rather than merely an early amortization event as currently drafted. Persistent concentration limit br

*Voluntary Bankruptcy Filing by Quorum Entities.* We request clarification that a voluntary bankruptcy filing by any of QIH, QPF, QRH, or QRF 2022-1 constitutes an immediate Event of Default with no cure period. The relevant provisions should cross-reference the separateness covenants and independent manager provisions applicable to QRF 2022-1 (Fortbridge Corporate Services LLC / Timothy R. Callan) and QRH (Eleanor M

**II. Early Amortization Triggers — Key Comments**

*Net Loss Rate Trigger.* The current draft sets the trigger at a 3-month average net loss rate exceeding 2.00%. We do not object to this level; however, we request that the measurement methodology be defined with greater precision. Specifically, the Indenture should clarify (a) whether gross losses are measured before or after recoveries from unearned premium refund rights and (b) whether the denominator is the aggre

*Delinquency Trigger.* The 60+ day delinquency rate trigger is currently set at 3.50%. We propose the addition of a separate 30+ day delinquency trigger at a threshold of 5.00% as an early warning mechanism. A 30+ day trigger provides meaningful incremental protection given the short weighted average life of the receivables.

*Minimum Pool Balance.* We request confirmation that the $450,000,000 minimum pool balance during the revolving period is tested on each determination date and that a breach triggers immediate cessation of the revolving period. The Indenture should explicitly state that no new receivables may be purchased by QRF 2022-1 following such a breach.

*Available Funds Cap Deficit.* We request clarification of what constitutes an "available funds cap deficit" under the current draft, which is not adequately defined. We propose a defined term with explicit reference to each step of the sequential payment waterfall (trustee fees → servicing fee → Class A interest → Class B interest → Class C interest → Class A principal, and so on) so that the trigger is mechanically

*Servicer Rating Downgrade.* We request confirmation that the servicer rating downgrade trigger (below BB(cr)/Ba2(p)) applies to QIH in its capacity as guarantor under the Performance Guaranty, and not solely to QPF directly. To the extent QPF does not maintain a standalone rating from either agency, the trigger should be drafted to look through to the guarantor.

**III. Note Purchase Agreement — Indemnification Language**

*Scope of Ridgeline's Indemnification.* We request that the indemnification of Ridgeline as initial purchaser cover all losses arising from (a) any breach of representations or warranties by QRF 2022-1 (as Issuer) or QIH (as Sponsor), (b) any material misstatement or omission in the Offering Memorandum, and (c) any failure of the receivables to satisfy the eligible receivables criteria at the time of transfer to the

*Survival of Representations.* We request that representations and warranties in the NPA survive for twenty-four (24) months following the closing date, coterminous with the scheduled revolving period, rather than terminating at closing as currently drafted. Given the revolving nature of the transaction, Ridgeline's exposure extends well beyond the closing date.

*Indemnification Cap.* It is Ridgeline's position that there should be no cap on indemnification for Offering Memorandum liability. We are willing to discuss a reasonable cap for other breaches of representations and warranties, but we note that the aggregate placement fees across all tranches — totaling $1,672,500 (0.30% on Class A, 0.45% on Class B, 0.60% on Class C) — should not serve as the indemnification ceilin

*Contribution Provisions.* We request inclusion of standard market contribution language in the event indemnification is determined to be unavailable or insufficient. The contribution provision should specify a formula based on relative fault and relative benefits received by the respective parties.

**IV. Other Indenture Comments (Brief Summary)**

*Payment Waterfall.* We have confirmed that the sequential payment waterfall is generally consistent with the term sheet. However, we flag a drafting ambiguity regarding whether the overcollateralization replenishment step (step 9 in the waterfall) is subject to a cap or target OC amount. Please clarify.

*Trustee Protections.* We expect that Calvoneth Trust's counsel at Ashfield & Greer LLP will submit its own comments on the trustee provisions. We flag for now that the trustee's standard of care and exculpation provisions as currently drafted should not be permitted to diminish Ridgeline's enforcement rights as a noteholder, and we have noted specific areas of concern in the redline.

*Calculation Agent Role.* We request clarification that Calvoneth Trust's role as calculation agent encompasses verification of pool balance, concentration limit compliance, and early amortization trigger testing, and that such calculations are binding on all parties absent manifest error.

*SOFR Fallback Provisions.* Given that coupon on all tranches is SOFR-based (Class A guidance at SOFR + 125 bps, Class B at SOFR + 210 bps, Class C at SOFR + 375 bps), we request that the Indenture contain comprehensive SOFR fallback and benchmark replacement language consistent with the ARRC-recommended provisions. Our redline includes suggested language.

*Transfer Restrictions.* We request confirmation that Rule 144A and Regulation S transfer restriction legends and procedures are properly drafted for each tranche. We have referenced the preliminary CUSIPs (Class A: 74892TAA3; Class B: 74892TAB1; Class C: 74892TAC9) as placeholders in our mark-up.

We have not yet completed our review of the Receivables Sale Agreement, Receivables Transfer Agreement, or Back-Up Servicing Agreement, and will provide comments on those documents under separate cover.

Given the volume and substance of the comments above, we would suggest scheduling a working group call to discuss the more significant items. We are available during the week of September 26 and are happy to work around the group's availability. If any of the commercial points require client input from the Quorum side, we are also happy to connect directly with Nolan Whitford or Sandra Ling-Hwang as needed.

Thank you, and we look forward to your response.

Harrison Collier Partner Calloway & Brandt LLP One Liberty Plaza, 165 Broadway New York, NY 10006 T: (212) 554-8100 | D: (212) 554-8237 hcollier@callowaybrandt.com

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