PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 425 Lexington Avenue New York, NY 10017
TAX MEMORANDUM
May 14, 2025
FROM: Leonard Cross, Specialist Partner, Tax Calderwood & Harkness LLP 425 Lexington Avenue New York, NY 10017 Tel: (212) 558-4000
TO: Dunmore Energy Holdings Ltd.
Attention: Deepa Rajaram, Chief Financial Officer
Alistair Forde, General Counsel
CC: Jennifer Kwon, Responsible Partner, Capital Markets — Calderwood & Harkness LLP Theodore Langston, Billing Partner, Capital Markets — Calderwood & Harkness LLP Eric Johannsen, Lead Associate, Capital Markets — Calderwood & Harkness LLP
RE: U.S. Federal Income Tax and Cayman Islands Tax Analysis — $850,000,000 9.375% Senior Secured Notes due 2032
C&H Matter No.: 1016-00003
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I. Executive Summary
This memorandum sets forth our analysis of the principal United States federal income tax consequences and Cayman Islands tax treatment applicable to the issuance of, and investment in, $850,000,000 aggregate principal amount of 9.375% Senior Secured Notes due 2032 (the "Notes") by Dunmore Energy Holdings Ltd. ("DEH"), a Cayman Islands exempted company (Cayman Registry No. MC-384726), and Dunmore upstream Finance Corp. ("DUFC"), a Delaware corporation (EIN 93-4728106), as co-issuers (collectively, the "Issuers"). This memorandum has been prepared at the request of the Chief Financial Officer and General Counsel of DEH in connection with the offering and sale of the Notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the "Securities Act").
The analysis contained herein is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations promulgated thereunder, published rulings and administrative guidance of the Internal Revenue Service (the "IRS"), and judicial decisions, each as in effect and available on the date hereof, and all of which are subject to change, possibly with retroactive effect. In addition, this memorandum addresses relevant provisions of the laws of the Cayman Islands as in effect on the date hereof. We have relied upon the factual representations provided by DEH management, the draft Offering Memorandum dated May 8, 2025 (the "OM"), the draft Indenture dated May 12, 2025 (the "Indenture"), and the draft Purchase Agreement dated May 12, 2025 (the "Purchase Agreement"), in each case as provided to us by the Capital Markets team.
Based upon our analysis, we have reached the following key conclusions:
(a) Debt Classification. The Notes should be treated as indebtedness (rather than equity) for U.S. federal income tax purposes. The Notes bear a fixed maturity date, an unconditional obligation to repay principal, a fixed rate of interest, and are secured by first-priority liens on designated collateral. The pro forma debt-to-equity ratio of the Issuers' consolidated group, while reflecting meaningful leverage, is within the range customarily observed for exploration and production ("E&P") companies and should not, standing alone, cause the Notes to be recharacterized as equity.
(b) Original Issue discount. The Notes are being issued at a price of 98.50% of par, resulting in original issue discount ("OID") of $12,750,000 (equivalent to $15.00 per $1,000 principal amount). As discussed in detail in Section IV below, there is a reasonable basis for treating the OID as de minimis under the applicable Treasury Regulations, although the analysis is not free from doubt. If the OID is not de minimis, it must be accrued into income by holders of the Notes on a constant-yield basis over the term of the Notes.
(c) Cayman Islands Tax Treatment. DEH, as a Cayman Islands exempted company, is not currently subject to Cayman Islands income tax, capital gains tax, or withholding tax. There is no Cayman Islands withholding tax applicable to payments of interest or principal on the Notes. DEH is entitled to apply for a Tax Undertaking from the Cabinet of the Cayman Islands under Section 6(3) of the Tax Concessions Act (as revised), which would secure this favorable tax status for a period of up to 30 years from the date of grant. We recommend that DEH promptly apply for such undertaking through its Cayman Islands counsel, Kincaid & Moreau LLP.
(d) U.S. Federal Withholding Tax. Payments of interest on the Notes (including OID) by the Issuers should not be subject to U.S. federal withholding tax, provided that certain conditions are met. In particular, qualifying non-U.S. holders should be able to avail themselves of the portfolio interest exemption under Sections 871(h) and 881(c) of the Code, subject to the delivery of appropriate IRS certification forms and the satisfaction of certain status requirements. Additionally, to the extent interest is treated as paid by DEH (a Cayman Islands entity) and is not effectively connected with a U.S. trade or business of DEH, such interest should be treated as foreign-source income and thus not subject to U.S. withholding tax in the first instance.
(e) FATCA. Withholding under the Foreign Account Tax Compliance Act ("FATCA") (Sections 1471 through 1474 of the Code) may apply to payments of interest on the Notes to foreign financial institutions ("FFIs") and non-financial foreign entities ("NFFEs") that fail to comply with FATCA requirements. The Issuers and the paying agent, Beacon Fiduciary Services LLC ("Beacon"), must implement FATCA-compliant procedures, including the collection and validation of IRS Forms W-8 from beneficial holders and the withholding of 30% on payments to non-compliant payees. The Cayman Islands has entered into a Model 1 intergovernmental agreement ("IGA") with the United States, which provides a framework for compliance by Cayman Islands entities, including DEH.
This memorandum does not constitute a formal tax opinion and should not be relied upon as such. This memorandum does not address state, local, or non-U.S. tax consequences other than the Cayman Islands tax matters specifically discussed herein. Holders of the Notes are urged to consult their own tax advisors regarding the tax consequences of the acquisition, ownership, and disposition of the Notes in light of their particular circumstances.
II. Factual Background
A. The Offering
The Notes consist of $850,000,000 aggregate principal amount of 9.375% Senior Secured Notes due May 1, 2032. The Notes are being co-issued by DEH and DUFC, with DEH serving as the primary operating issuer and DUFC serving as co-issuer for certain U.S. capital markets and regulatory purposes.
The Notes will be issued at a price of 98.50% of par, yielding aggregate gross proceeds to the Issuers of $837,250,000. The difference between the stated redemption price at maturity ($850,000,000) and the issue price ($837,250,000) results in OID of $12,750,000, or approximately 1.50% of the aggregate principal amount.
Interest on the Notes will accrue at the rate of 9.375% per annum and will be payable semi-annually in arrears on May 1 and November 1 of each year, commencing November 1, 2025. Each semi-annual interest payment will equal $39,843,750 (calculated as $850,000,000 × 9.375% × 1/2). The first interest period will run from and including May 1, 2025 (the settlement date) to but excluding November 1, 2025, constituting a full semi-annual period.
The Notes are being offered and sold (a) in the United States to qualified institutional buyers ("QIBs") in reliance upon the exemption from registration provided by Rule 144A under the Securities Act, and (b) outside the United States to non-U.S. persons in reliance upon Regulation S under the Securities Act. The Notes will be issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof.
The following identifying numbers have been assigned to the Notes:
Settlement of the Notes is expected to occur on May 15, 2025 (the "Settlement Date"), through the facilities of The Depository Trust Company ("DTC"), with Stonefield Industries and Harborview Industries as indirect participants for the Regulation S Notes. All Notes will be issued in book-entry form through DTC, with Cede & Co. as the nominee holder.
B. The Issuers
Dunmore Energy Holdings Ltd. ("DEH") is an exempted company incorporated and existing under the laws of the Cayman Islands with limited liability, registered with the Cayman Islands Registrar of Companies under Registry No. MC-384726. DEH's principal executive offices are located at 14th Floor, Harbour Place Tower, 103 South Church Street, George Town, Grand Cayman KY1-1002. Its registered office in the Cayman Islands is c/o Maples Corporate Services Ltd., PO Box 309, Ugland House, George Town, Grand Cayman KY1-1104. DEH also maintains a significant operational and administrative presence in the United States through offices at 2900 Post Oak Boulevard, Suite 3100, Houston, TX 77056 (the "Houston Office"). DEH is the parent holding company for a group of subsidiaries engaged in upstream oil and gas exploration and production, midstream operations, and renewable energy development across multiple jurisdictions.
Dunmore upstream Finance Corp. ("DUFC") is a corporation organized under the laws of the State of Delaware. DUFC's registered agent in Delaware is Ashgrove Services Inc., 28 Liberty Street, New York, NY 10005. DUFC's principal office is located at DEH's Houston Office at 2900 Post Oak Boulevard, Suite 3100, Houston, TX 77056. DUFC is a wholly-owned subsidiary of DEH, formed solely for the purpose of serving as co-issuer of the Notes and, potentially, future debt securities. DUFC has no independent operations, no assets other than those related to its co-issuer function, and no employees. Its federal employer identification number (EIN) is 93-4728106.
DEH is majority-owned by Harborview Capital Partners Fund VI, L.P. ("Harborview Fund VI"), which holds approximately 62.4% of DEH's outstanding equity. Management and directors of DEH collectively hold approximately 18.3% of DEH's outstanding equity. The remaining equity is held by co-investors, including Solstice Infrastructure Fund LP (approximately 11.1%) and Alderman Family Office LLC (approximately 8.2%).
C. The Guarantors
The Notes will be guaranteed on a joint and several, senior secured basis by six subsidiary guarantors of DEH (collectively, the "Guarantors"):
1. Dunmore Nigeria E&P Ltd. — organized under the laws of the Federal Republic of Nigeria;
2. Dunmore Gulf Operations LLC — a Delaware limited liability company;
3. Dunmore Renewables LLC — a Delaware limited liability company;
4. Dunmore Senegal S.A. — organized under the laws of the Republic of Senegal;
5. Dunmore Midstream Holdings Inc. — a Delaware corporation; and
6. Dunmore Trading Ltd. — organized under the laws of England and Wales.
The guarantees are senior secured obligations of each Guarantor and will rank pari passu in right of payment with all existing and future senior indebtedness of each Guarantor, and senior to all existing and future subordinated indebtedness of each Guarantor. The guarantees will be secured by first-priority liens on the Notes Priority Collateral (as described in Section II.F below), subject to the terms of the Intercreditor Agreement.
D. Use of Proceeds
The net proceeds from the offering, totaling approximately $837,250,000 (after giving effect to the issue discount), are expected to be applied as follows:
The partial repayment of the existing 7.50% Senior Unsecured Notes due October 2028 will reduce the outstanding principal amount of such notes from $850,000,000 to $400,000,000. The Cayar Offshore Phase II development relates to DEH's offshore oil and gas development program located off the coast of Senegal, which is operated through Dunmore Senegal S.A. The estimated fees and expenses of the offering include initial purchaser discounts, legal fees, printing costs, filing fees, and other customary transaction expenses.
E. Existing Debt Structure
Prior to giving effect to the offering and the application of proceeds therefrom, DEH's consolidated debt structure consists of the following:
(i) ABL Revolver. A senior secured asset-based revolving credit facility with Velthorn National Bank, N.A., as administrative agent and collateral agent for the ABL lenders, with a total commitment of $750,000,000 and $470,000,000 currently drawn. The ABL Revolver matures in June 2028 and bears interest at the Secured Overnight Financing Rate ("SOFR") plus a margin of 275 basis points.
(ii) Existing 7.50% Senior Unsecured Notes due October 2028. $850,000,000 aggregate principal amount outstanding. Following the application of $450,000,000 of the proceeds of the offering, $400,000,000 aggregate principal amount will remain outstanding.
Following the consummation of the offering and the application of proceeds, DEH's pro forma consolidated total debt will be approximately $1,720,000,000, calculated as follows:
Based on DEH's consolidated EBITDA for the fiscal year ended December 31, 2024, of $816,000,000, the pro forma gross leverage ratio is approximately 2.11x ($1,720,000,000 ÷ $816,000,000).
F. Collateral and Intercreditor Structure
The Notes will be secured by first-priority liens on the "Notes Priority Collateral," which includes substantially all property, plant, and equipment ("PP&E") of the Issuers and the Guarantors, equity interests in certain subsidiary Guarantors, intellectual property, and material contracts. The priority of these liens is governed by an Intercreditor Agreement (the "Intercreditor Agreement") among the Issuers, the Guarantors, Northgate Trust Company, N.A. (as Trustee and Collateral Agent for the holders of the Notes), and Velthorn National Bank, N.A. (as administrative agent and collateral agent for the ABL lenders).
Under the Intercreditor Agreement, the ABL Agent retains a first-priority lien on the "ABL Priority Collateral," which consists of accounts receivable, inventory, deposit accounts, and related assets. Each party (the ABL Agent and the Collateral Agent for the Notes) holds a second-priority lien on the other's priority collateral. The Intercreditor Agreement contains customary provisions governing the exercise of remedies, the application of proceeds, and the relative rights of the secured parties.
Northgate Trust Company, N.A. serves as Trustee under the Indenture and as Collateral Agent for the holders of the Notes. Its principal corporate trust office is located at 300 South Grand Avenue, Suite 600, Los Angeles, CA 90071.
G. Key Financial Metrics
The following financial metrics are derived from DEH's audited consolidated financial statements for the fiscal year ended December 31, 2024, and are provided for context in connection with the analysis herein:
These financial metrics are relevant to, among other things, the debt-versus-equity analysis discussed in Section III below.
III. Classification of the Notes as Debt for U.S. Federal Income Tax Purposes
A. Debt vs. Equity Analysis
The threshold question for U.S. federal income tax purposes is whether the Notes will be treated as indebtedness or as equity interests in the Issuers. The classification of an instrument as debt or equity is a question of federal tax law, determined by reference to the economic substance of the arrangement rather than its form. While the Code does not contain a comprehensive definition of "indebtedness" for this purpose, the courts and the IRS have developed a multi-factor test based on the totality of the circumstances. The leading authorities include Estate of Mixon v. United States, 464 F.2d 394 (5th Cir. 1972), Fin Hay Realty Co. v. United States, 398 F.2d 694 (3d Cir. 1968), and Notice 94-47, 1994-1 C.B. 357. The factors most commonly considered by the courts include the following: (1) whether there is a fixed maturity date and an unconditional obligation to repay principal; (2) whether interest is payable at a fixed rate regardless of the issuer's earnings; (3) the presence or absence of equity features such as voting rights, participation in profits, or conversion privileges; (4) the ratio of debt to equity in the issuer's capital structure; (5) the rights of the holders in the event of default, including the right to pursue remedies against the issuer and its assets; (6) whether the instrument is held proportionately by equity holders; (7) the form of the instrument; and (8) the intent of the parties.
Applying these factors to the Notes, we conclude that the Notes should be treated as indebtedness for U.S. federal income tax purposes. The factors supporting this conclusion are discussed below.
Factors Favoring Debt Treatment:
(i) Fixed Maturity Date. The Notes have a fixed maturity date of May 1, 2032. There is an unconditional obligation on the part of the Issuers to repay the full principal amount of $850,000,000 on that date. The maturity date is definite and does not depend upon the financial performance or earnings of the Issuers or the Guarantors.
(ii) Unconditional Obligation to Pay Principal. The Issuers' obligation to repay the principal amount of the Notes at maturity is absolute and unconditional. There is no provision permitting the Issuers to defer, reduce, or eliminate their obligation to pay principal.
(iii) Fixed Interest Rate. The Notes bear interest at a fixed rate of 9.375% per annum, payable semi-annually in arrears. The obligation to pay interest does not depend upon the earnings, profits, or financial condition of the Issuers. This is a characteristic strongly indicative of debt.
(iv) Senior Secured Position with First-Priority Liens. The Notes are senior secured obligations of the Issuers and are secured by first-priority liens on the Notes Priority Collateral, which includes PP&E, equity interests in subsidiary Guarantors, intellectual property, and material contracts. This collateral package provides the holders with substantial protection of their investment and is inconsistent with equity treatment.
(v) Rights on Default. Upon the occurrence of an Event of Default under the Indenture, the holders of the Notes (acting through the Trustee) have the right to accelerate the maturity of the Notes, foreclose on the collateral, and pursue other remedies against the Issuers and the Guarantors. These rights are characteristic of creditor status and are fundamentally different from the rights of equity holders.
(vi) No Equity Participation or Conversion Features. The Notes do not confer upon the holders any right to vote on corporate matters, participate in the profits or losses of the Issuers, or convert the Notes into equity interests. The holders' return is limited to the stated interest rate and the repayment of principal (plus any applicable OID). The absence of equity features strongly supports debt treatment.
(vii) Reasonable Debt-to-Equity Ratio. The pro forma gross leverage ratio of the Issuers' consolidated group is approximately 2.11x, and the pro forma net leverage ratio is approximately 1.88x. While these levels of leverage reflect a meaningful amount of indebtedness, they are well within the range commonly observed in the E&P sector. Courts have generally not recharacterized instruments as equity solely on the basis of leverage ratios at these levels. See, e.g., Plantation Patterns, Inc. v. Commissioner, 462 F.2d 712 (5th Cir. 1972) (debt-to-equity ratio of approximately 4:1 did not compel equity treatment where other factors supported debt classification).
Factors Potentially Weighing Against Debt Treatment:
(i) Leverage. As noted above, the Issuers' pro forma gross leverage ratio of 2.11x reflects significant, but not excessive, indebtedness. In the context of a capital-intensive E&P business with substantial tangible assets ($4,870,000,000 in total assets) and robust cash flow generation ($816,000,000 in EBITDA), this level of leverage should not, standing alone, cause the Notes to be recharacterized as equity. We note, however, that the leverage analysis is inherently factual, and a significant deterioration in the Issuers' financial condition could alter this analysis in subsequent periods.
(ii) Substantial OID. The Notes are issued with OID of $12,750,000 (1.50% of par). While some courts and commentators have suggested that a substantial discount may indicate that an instrument has equity-like characteristics (reflecting the market's skepticism about the likelihood of repayment at par), the OID in this case is relatively modest in relation to the total principal amount and is well within the range commonly observed in high-yield debt offerings. The OID does not, in our view, alter the fundamental character of the Notes as indebtedness.
Conclusion. Based on the totality of the circumstances, we conclude that the Notes should be treated as indebtedness for U.S. federal income tax purposes. The factors favoring debt treatment — fixed maturity, unconditional payment obligation, fixed interest rate, senior secured position, creditor remedies on default, and absence of equity features — substantially outweigh the factors that might arguably weigh against debt treatment. Although this conclusion is not free from doubt, we believe that the weight of authority supports the classification of the Notes as debt. The IRS has not issued specific guidance under Section 385 of the Code that would alter this analysis with respect to the Notes, and the final regulations under Section 385 (as revised) do not apply to instruments of the type at issue here.
B. Co-Issuer Structure
As noted above, DUFC, a Delaware corporation and wholly-owned subsidiary of DEH, will serve as co-issuer of the Notes. DUFC was formed solely for the purpose of co-issuing the Notes and has no independent operations, employees, or assets other than those related to its co-issuer function. DUFC has joint and several liability with DEH for all obligations under the Notes and the Indenture.
For U.S. federal income tax purposes, the co-issuer structure raises two principal questions. First, whether the involvement of DUFC alters the overall classification of the Notes as debt. We do not believe that it does. The addition of DUFC as a co-issuer does not change the fundamental economic terms of the Notes — the same principal amount, interest rate, maturity, and collateral package apply regardless of which issuer is deemed the primary obligor. The co-issuer structure is a common feature in high-yield debt offerings involving non-U.S. parent issuers and is well recognized in the market.
Second, the co-issuer structure raises the question of how interest payments should be allocated between DEH (a Cayman entity) and DUFC (a Delaware corporation) for purposes of the sourcing rules under Section 861 of the Code and the withholding tax rules under Sections 1441 and 1442. Because DUFC is a domestic corporation, interest allocable to DUFC would be treated as U.S.-source income under Section 861(a)(1) and would be subject to U.S. withholding tax unless an exemption applies. However, because DUFC is a special-purpose entity with no independent operations and no assets from which to make interest payments (all economic activity being conducted at the DEH parent level), we believe the better view is that the interest on the Notes should be treated as paid by DEH. Even if a portion of the interest were deemed allocable to DUFC and treated as U.S.-source, the portfolio interest exemption discussed in Section V below should be available to qualifying non-U.S. holders.
We note that DUFC's classification as a regarded entity or a disregarded entity for U.S. federal income tax purposes depends on its activities and the manner in which it is treated under the applicable Treasury Regulations. Because DUFC is a corporation (rather than a single-member limited liability company), it is a regarded entity by default and cannot be a disregarded entity under the check-the-box regulations. Accordingly, DUFC is treated as a separate corporate taxpayer. However, its lack of independent operations and its role as a mere co-obligor should mitigate any adverse sourcing consequences.
IV. Original Issue discount (OID) Analysis
A. Determination of OID
Under Section 1273 of the Code, a debt instrument is issued with OID if its "issue price" is less than its "stated redemption price at maturity." The stated redemption price at maturity of the Notes is $850,000,000 (the face or par amount of the Notes, which equals the sum of all payments due at maturity, excluding qualified stated interest payments). The issue price of the Notes, determined under Section 1273(b) and the applicable Treasury Regulations, is $837,250,000, which represents 98.50% of the par amount. The issue price is based on the initial offering price at which a substantial amount of the Notes is sold to the public (excluding bond houses, brokers, and similar intermediaries) in the initial offering.
Accordingly, the OID on the Notes is calculated as follows:
Stated Redemption Price at Maturity: $850,000,000 Less: Issue Price: ($837,250,000) OID: $12,750,000
On a per-unit basis, the OID is $15.00 per $1,000 principal amount of Notes (calculated as $12,750,000 ÷ 850,000 units of $1,000 each).
B. De Minimis OID Test
Under Treasury Regulation § 1.1273-1(d), OID is treated as de minimis (and thus disregarded for OID accrual purposes) if the total OID is less than the product of 0.25% (one-quarter of one percent) multiplied by the stated redemption price at maturity multiplied by the number of complete years from the issue date to maturity. This is commonly referred to as the "de minimis threshold."
The relevant parameters for this calculation are as follows:
• Settlement Date (Issue Date): May 15, 2025
• Maturity Date: May 1, 2032
• Period from Issue Date to Maturity: Approximately 6 years and 350 days (6.96 years)
• Stated Redemption Price at Maturity: $850,000,000
The critical question in applying the de minimis test is how to determine the "number of complete years" from the issue date to the maturity date. Because the Notes settle on May 15, 2025, and mature on May 1, 2032, the period from the issue date to the maturity date is slightly less than 7 complete calendar years (specifically, 6 years and approximately 350 days). The regulations refer to "complete years," which has been interpreted to mean the number of whole annual periods contained within the period from the issue date to the maturity date.
There are two reasonable approaches to this calculation:
Approach 1: Using 7 Complete Years. If one rounds 6.96 years to 7 complete years (which could be justified on the basis that the period is so close to 7 full years that it contains 7 complete annual periods by any reasonable reckoning, or by treating the first accrual period from May 15, 2025, to May 1, 2026, as a "complete year"), the de minimis threshold would be:
0.25% × 7 × $850,000,000 = $14,875,000
Under this approach, the OID of $12,750,000 is less than $14,875,000, and the OID would be treated as de minimis. As a result, holders would not be required to accrue OID into income over the life of the Notes. Instead, the $12,750,000 discount would be treated as capital gain recognized by holders upon disposition or retirement of the Notes (or applicable Notes held by the holder).
Approach 2: Using 6 Complete Years. If one strictly counts the number of complete 12-month periods between the issue date (May 15, 2025) and the maturity date (May 1, 2032), the result is 6 complete years (May 15, 2025, to May 15, 2031 = 6 complete years, with the remaining period from May 15, 2031, to May 1, 2032, constituting a fraction of a year). Under this approach, the de minimis threshold would be:
0.25% × 6 × $850,000,000 = $12,750,000
Under this approach, the OID of $12,750,000 exactly equals the de minimis threshold. This raises the question of whether the de minimis test requires that the OID be less than the threshold (in which case OID of exactly $12,750,000 would not be de minimis) or less than or equal to the threshold (in which case the OID would be de minimis). Treasury Regulation § 1.1273-1(d)(1) provides that OID is de minimis if the OID is "less than" the de minimis threshold. Accordingly, if the de minimis threshold is exactly $12,750,000, the OID would not be de minimis under a strict reading of the regulation, because the OID is not "less than" the threshold but rather equal to it.
Analysis and Recommendation. The determination of the number of "complete years" from the issue date to the maturity date is not entirely free from doubt in this case, because the issue date and the maturity date do not fall on the same calendar day. We believe there is a reasonable argument for using 7 complete years (Approach 1) based on the fact that the Notes have a life of nearly 7 full years and the regulations should be applied in a manner that reflects economic substance. Under this approach, the OID is clearly de minimis.
However, we recognize that a more conservative reading of the regulations would support the use of 6 complete years (Approach 2), under which the OID exactly equals the de minimis threshold and, applying the "less than" standard of Treasury Regulation § 1.1273-1(d)(1), would not be treated as de minimis.
As a conservative matter, we recommend that the OM tax disclosure include language advising holders that the treatment of the OID as de minimis is not free from doubt and that holders should consult their own tax advisors. For purposes of the OM disclosure, we would suggest describing the OID accrual treatment (assuming OID is not de minimis) as the default position, while noting the availability of the de minimis argument. The illustrative OID accrual schedule attached as Appendix A is provided for reference in the event the OID is determined not to be de minimis.
C. Accrual of OID
If the OID on the Notes is determined not to be de minimis, holders of the Notes (including cash-basis taxpayers) will be required to include OID in gross income as ordinary interest income over the term of the Notes, regardless of whether any cash payments are received in respect of such OID. The accrual of OID is governed by Section 1272 of the Code, which requires the use of the "constant-yield" method (also referred to as the "scientific" or "economic accrual" method).
Under the constant-yield method, the amount of OID includible in a holder's income for any accrual period is determined by the following steps:
(1) Calculate the "yield to maturity" of the Notes. The yield to maturity is the discount rate that, when applied to all payments on the Notes (including stated interest and the stated redemption price at maturity), produces a present value equal to the issue price.
(2) For each accrual period (which, in this case, corresponds to the semi-annual interest payment periods — May 1 to November 1, and November 1 to May 1), multiply the "adjusted issue price" of the Notes at the beginning of the accrual period by the yield to maturity (adjusted for the length of the accrual period).
(3) The amount of OID includible in income for the accrual period is the excess of the product computed in step (2) over the amount of qualified stated interest allocable to the accrual period.
The "adjusted issue price" of the Notes at the beginning of the first accrual period is the issue price ($837,250,000). For each subsequent accrual period, the adjusted issue price is increased by the amount of OID previously accrued and is decreased by any payments of principal (other than qualified stated interest). Because the Notes do not provide for any amortization of principal prior to maturity, the adjusted issue price will increase gradually over the life of the Notes as OID accrues, until it reaches the stated redemption price at maturity ($850,000,000) at the maturity date.
A holder's adjusted tax basis in the Notes will be increased by the amount of OID included in income. This basis increase ensures that when the holder ultimately receives the stated redemption price at maturity (or disposes of the Notes prior to maturity), the holder does not recognize gain to the extent of previously accrued OID.
An illustrative OID accrual schedule is set forth in Appendix A to this memorandum.
D. Qualified Stated Interest
All stated interest on the Notes at the rate of 9.375% per annum ($39,843,750 per semi-annual period) constitutes "qualified stated interest" within the meaning of Treasury Regulation § 1.1273-1(c). Qualified stated interest is defined as stated interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer) at least annually at a single fixed rate, or at a qualified floating rate or objective rate.
The interest on the Notes satisfies this definition because it is (a) unconditionally payable, (b) payable in cash, (c) payable at least annually (semi-annually, in fact), and (d) payable at a single fixed rate of 9.375%. Accordingly, the stated interest payments on the Notes are excluded from the computation of the Notes' stated redemption price at maturity and are not taken into account in determining OID. Qualified stated interest is includable in the income of each holder in accordance with the holder's regular method of accounting — that is, accrual-basis holders include interest as it accrues, while cash-basis holders include interest when it is received.
V. U.S. Federal Withholding Tax Analysis
A. Withholding on Interest Payments to Non-U.S. Holders
Under the general rule of Sections 1441 and 1442 of the Code, U.S.-source interest (including OID) paid to a non-resident alien individual or a foreign corporation is subject to U.S. federal withholding tax at a rate of 30% (or a lower rate specified by an applicable income tax treaty). The withholding obligation is imposed on the "withholding agent," which, in the case of the Notes, would be the paying agent — Beacon Fiduciary Services LLC.
However, the Code provides an important exception to this general rule: the "portfolio interest" exemption. Under Sections 871(h) and 881(c) of the Code, interest (including OID) on certain obligations is exempt from U.S. federal withholding tax if the following conditions are satisfied:
(i) Registered Form. The obligations must be in "registered form" within the meaning of Section 163(f) and the regulations thereunder. The Notes will be issued in book-entry form through the facilities of DTC, with Cede & Co. as the registered holder. Book-entry obligations held through DTC are treated as being in registered form for this purpose. Accordingly, the Notes satisfy this requirement.
(ii) Not Equity-Linked or Contingent. The interest on the Notes must not be contingent on, or determined by reference to, the income, profits, or assets of the Issuers or a related person. The interest on the Notes is fixed at 9.375% per annum and is not linked to or contingent upon any measure of the Issuers' financial performance. Accordingly, this requirement is satisfied.
(iii) Certification by Beneficial Owner. The beneficial owner of the Notes must provide an appropriate certification to the withholding agent establishing that the beneficial owner is not a "United States person" within the meaning of Section 7701(a)(30) of the Code. For individual holders, this certification is provided on IRS Form W-8BEN. For entity holders, this certification is provided on IRS Form W-8BEN-E. The certification must be furnished prior to the payment of interest and must be renewed or updated as required by the applicable Treasury Regulations (generally every three calendar years).
(iv) Not a "10-Percent Shareholder." The beneficial owner must not be a "10-percent shareholder" of the issuer within the meaning of Section 871(h)(3)(B). A 10-percent shareholder is any person who owns (directly, or indirectly through the application of the constructive ownership rules of Section 318(a)) 10% or more of the total combined voting power of all classes of stock of the issuer entitled to vote. Because DEH is a Cayman Islands exempted company (not a U.S. corporation), and DUFC is a special-purpose co-issuer, the 10-percent shareholder rule applies with reference to the stock of DUFC. Given that DUFC is wholly owned by DEH, holders of the Notes (who, by definition, do not hold equity interests in DUFC) should not be treated as 10-percent shareholders.
(v) Not a Controlled Foreign Corporation. The beneficial owner must not be a controlled foreign corporation ("CFC") that is related (within the meaning of Section 864(d)(4)) to the issuer. This exclusion is relevant to holders that are foreign corporations in which U.S. shareholders (as defined in Section 951(b)) hold more than 50% of the total combined voting power or value.
(vi) Not a Bank. The beneficial owner must not be a bank that receives interest on the Notes pursuant to a loan entered into in the ordinary course of its trade or business of making loans.
Conclusion. Provided that the foregoing conditions are satisfied, payments of interest (including OID) on the Notes to qualifying non-U.S. holders should be exempt from U.S. federal withholding tax under the portfolio interest exemption. The Issuers and Beacon, as paying agent, should implement procedures to ensure that appropriate IRS Form W-8 certifications are obtained and maintained for all non-U.S. beneficial holders claiming the portfolio interest exemption.
In addition, holders resident in jurisdictions that have entered into income tax treaties with the United States may be eligible for reduced withholding rates (or complete exemption from withholding) on interest income under the applicable treaty. Treaty benefits are claimed on IRS Form W-8BEN or W-8BEN-E, as applicable, by indicating the applicable treaty and article and certifying compliance with the treaty's limitation-on-benefits provisions. A summary of applicable treaty provisions is set forth in Appendix B.
B. Withholding on Payments by DEH (Cayman Issuer)
A separate question arises as to whether payments of interest by DEH — a Cayman Islands entity — constitute U.S.-source income subject to U.S. withholding tax in the first instance. Under Section 861(a)(1) of the Code, interest paid by a domestic corporation or a resident alien individual is generally treated as U.S.-source income. Conversely, interest paid by a foreign corporation or non-resident alien individual is generally treated as foreign-source income under Section 862(a)(1), unless the interest is allocable to income that is effectively connected with the conduct of a U.S. trade or business by the foreign payor.
DEH is a Cayman Islands exempted company and thus a "foreign corporation" for purposes of the Code. As a general matter, interest paid by DEH should be treated as foreign-source income and should not be subject to U.S. withholding tax, regardless of whether the portfolio interest exemption applies.
However, this general rule is subject to an important exception: under Section 861(a)(1)(B), if a foreign corporation is engaged in a U.S. trade or business during the taxable year, interest paid by such corporation is treated as U.S.-source income to the extent it is allocable to income that is effectively connected with the conduct of such U.S. trade or business. Accordingly, it is necessary to consider whether DEH is engaged in a U.S. trade or business.
DEH maintains an office in Houston, Texas, at 2900 Post Oak Boulevard, Suite 3100, Houston, TX 77056, and several of DEH's subsidiaries (including DUFC, Dunmore Gulf Operations LLC, Dunmore Renewables LLC, and Dunmore Midstream Holdings Inc.) are organized and operate in the United States. The question of whether DEH itself is engaged in a U.S. trade or business — as opposed to its U.S. subsidiaries being so engaged — is a factual inquiry. If DEH's activities in the United States (through its Houston office and its U.S.-based management personnel) rise to the level of a "trade or business" within the meaning of Sections 864(b) and (c), then a portion of the interest paid by DEH on the Notes could be treated as U.S.-source income. We note, however, that DEH's U.S. activities are largely conducted through its U.S. subsidiaries, which are separate legal entities. Under the general principle that a corporation's U.S. trade or business is not automatically attributed to its foreign parent, DEH should not be treated as engaged in a U.S. trade or business solely by virtue of its subsidiaries' activities, provided that DEH's own activities in the United States are limited to oversight and management functions customary for a foreign parent company.
With respect to DUFC (the Delaware co-issuer), interest allocable to DUFC as a domestic corporation would be treated as U.S.-source income under Section 861(a)(1). However, as discussed in Section III.B above, DUFC is a special-purpose entity with no independent operations, and the economic substance of the co-issuer arrangement is that the interest is being paid by DEH from the consolidated cash flows of the DEH group. We believe that the better view is that the interest should not be treated as sourced to DUFC for withholding purposes, particularly because DUFC has no independent income from which to make interest payments and serves solely as a co-obligor to facilitate access to the U.S. capital markets. Nonetheless, to the extent that any interest on the Notes is treated as U.S.-source income (whether because it is sourced to DUFC or because DEH is deemed to be engaged in a U.S. trade or business), the portfolio interest exemption should be available to qualifying non-U.S. holders, as discussed in Section V.A above.
Conclusion. To the extent interest on the Notes is treated as paid by DEH and DEH is not engaged in a U.S. trade or business, such interest should be treated as foreign-source income and should not be subject to U.S. withholding tax. To the extent any portion of the interest is treated as U.S.-source income (whether allocable to DUFC or deemed effectively connected with a U.S. trade or business of DEH), the portfolio interest exemption should be available to qualifying non-U.S. holders, provided the conditions described in Section V.A above are met.
C. Backup Withholding
In addition to the withholding tax rules described above, the Code imposes "backup withholding" on certain payments, including interest, at the applicable rate (currently 24%) under Section 3406 of the Code.
U.S. Holders. Payments of interest on the Notes to U.S. holders are subject to backup withholding unless the holder (a) is a corporation or other exempt recipient and establishes its entitlement to an exemption, or (b) provides a correct taxpayer identification number ("TIN") on IRS Form W-9, certifying under penalties of perjury that the TIN is correct and that the holder is not subject to backup withholding.
Non-U.S. Holders. Payments of interest on the Notes to non-U.S. holders are generally exempt from backup withholding if the holder provides a valid IRS Form W-8BEN or W-8BEN-E to the paying agent. However, if a non-U.S. holder fails to provide the appropriate form, backup withholding may apply.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against the holder's U.S. federal income tax liability for the relevant taxable year, and any excess amounts withheld may be refunded by the IRS upon the timely filing of an appropriate tax return.
VI. FATCA Withholding Analysis
A. Overview of FATCA (IRC §§ 1471–1474)
The Foreign Account Tax Compliance Act ("FATCA"), enacted as part of the Hiring Incentives to Restore Employment ("HIRE") Act of 2010 and codified in Sections 1471 through 1474 of the Code, imposes a 30% withholding tax on certain "withholdable payments" made to foreign financial institutions ("FFIs") and non-financial foreign entities ("NFFEs") that fail to comply with FATCA's information reporting and due diligence requirements. The purpose of FATCA is to combat tax evasion by U.S. persons holding assets in foreign accounts and through foreign entities by requiring disclosure of such accounts and ownership interests.
"Withholdable payments" include, among other things, any payment of U.S.-source interest (including OID). Accordingly, to the extent that payments on the Notes constitute U.S.-source interest, such payments may be subject to FATCA withholding if the recipient fails to comply with FATCA requirements.
B. Application to the Notes
The application of FATCA to the Notes turns, in the first instance, on whether payments on the Notes constitute "withholdable payments." As discussed in Section V.B above, interest on the Notes is generally treated as foreign-source income to the extent it is attributable to DEH (a Cayman Islands entity not engaged in a U.S. trade or business). However, to the extent any interest is treated as U.S.-source — whether because it is allocable to DUFC (a Delaware corporation) or because DEH is deemed to be engaged in a U.S. trade or business — such interest would constitute a withholdable payment for FATCA purposes.
DEH's FATCA Classification. DEH, as a Cayman Islands entity, must determine its FATCA classification. DEH is the holding company for a group of subsidiaries engaged in oil and gas exploration and production, midstream operations, and renewable energy development. If DEH's gross income is primarily derived from activities other than financial activities (as defined in the FATCA regulations), DEH would likely be classified as a non-financial foreign entity ("NFFE"). However, if DEH holds a significant amount of financial assets (such as intercompany loans, investments, and deposit accounts), DEH could potentially be classified as an FFI under the broad definition in the FATCA regulations. The classification of DEH should be confirmed in consultation with Cayman Islands counsel and DEH's tax advisors.
DUFC's FATCA Position. Because DUFC is a Delaware corporation (a domestic entity), it is not subject to FATCA withholding on payments received. However, DUFC, as a co-issuer, may be treated as a withholding agent with respect to payments of U.S.-source interest on the Notes. In practice, the withholding obligations will be discharged by Beacon, as paying agent.
Intergovernmental Agreement (IGA). The United States and the Cayman Islands have entered into a Model 1 intergovernmental agreement (the "Cayman IGA") to implement FATCA. Under the Cayman IGA, Cayman Islands financial institutions (including entities classified as FFIs) comply with FATCA by reporting account information to the Cayman Islands Tax Information Authority ("CITIA"), which in turn exchanges such information with the IRS under the automatic exchange of information framework. A Cayman Islands entity that complies with the reporting requirements of the Cayman IGA is treated as FATCA-compliant and is not subject to FATCA withholding.
DEH's Obligations Under the IGA. If DEH is classified as an FFI (or a reporting Cayman Islands financial institution under the Cayman IGA), DEH must (a) register with the IRS and obtain a Global Intermediary Identification Number ("GIIN"), (b) conduct due diligence to identify U.S. account holders and holders who are tax residents of other reportable jurisdictions, and (c) report specified information to CITIA. If DEH is classified as an NFFE, it may need to provide certifications regarding its ownership structure to withholding agents.
C. Paying Agent Obligations
Beacon Fiduciary Services LLC ("Beacon"), in its capacity as paying agent, registrar, and transfer agent under the Paying Agency Agreement, will be the primary party responsible for FATCA withholding and reporting with respect to payments on the Notes. Beacon's obligations include:
(i) Collecting and validating IRS Forms W-8BEN, W-8BEN-E, and W-8IMY from non-U.S. beneficial holders and IRS Forms W-9 from U.S. holders;
(ii) Performing due diligence to identify holders that are non-compliant FFIs or non-excepted NFFEs that have not provided appropriate FATCA certifications;
(iii) Withholding 30% on withholdable payments (to the extent any payments on the Notes constitute withholdable payments) made to non-compliant holders or payees;
(iv) Depositing withheld amounts with the IRS and filing applicable returns (including IRS Forms 1042 and 1042-S); and
(v) Maintaining records of all FATCA-related documentation and withholding actions.
We recommend that the Issuers coordinate with Sandra Mitchum, Relationship Manager at Beacon, to ensure that FATCA-compliant procedures are in place at or prior to the closing of the offering on the Settlement Date. This coordination should include a review of Beacon's standard FATCA withholding and reporting procedures, confirmation of Beacon's GIIN and FATCA registration status, and agreement on the mechanics for the collection and validation of IRS Forms W-8 from holders of the Regulation S Notes.
D. Impact on Holders
Non-U.S. Holders. Non-U.S. holders of the Notes must provide appropriate FATCA documentation to Beacon (or to DTC or their custodians, as applicable) in order to avoid FATCA withholding. For holders that are FFIs, this documentation includes IRS Form W-8BEN-E with the holder's GIIN and certification of FATCA-compliant status. For holders that are NFFEs, the documentation includes IRS Form W-8BEN-E with certification regarding the holder's ownership structure (specifically, whether any substantial U.S. owners exist). Individual non-U.S. holders provide IRS Form W-8BEN.
U.S. Holders. U.S. holders are generally not subject to FATCA withholding but must comply with the IRS Form W-9 requirements to establish their U.S. taxpayer status and avoid the application of the presumption rules under the FATCA regulations.
Withholding on Gross Proceeds. The FATCA regulations originally contemplated that FATCA withholding would apply not only to withholdable payments (such as interest) but also to "foreign passthru payments" and to gross proceeds from the sale or other disposition of obligations that produce U.S.-source interest. However, the IRS has issued proposed regulations and administrative guidance that defer the application of FATCA withholding to gross proceeds from sales or dispositions. Under current guidance (Notice 2023-11 and related guidance), FATCA withholding on gross proceeds is not currently effective. Holders should be aware, however, that this deferral could be modified or terminated by future IRS guidance.
E. Recommendations
Based on the foregoing analysis, we recommend the following actions in connection with FATCA compliance:
(i) FATCA Registration. DEH should confirm that its FATCA registration with the IRS is current and that its GIIN is valid. If DEH has not previously registered, it should do so promptly through the IRS FATCA Registration System.
(ii) Indenture and Paying Agency Agreement. The Indenture and the Paying Agency Agreement should include customary FATCA-compliant provisions, including (a) the right of the Issuers and Beacon to require FATCA certifications (including IRS Forms W-8) from holders and beneficial owners, (b) provisions authorizing withholding of 30% on payments to non-compliant holders, and (c) provisions confirming that amounts withheld under FATCA will be treated as paid to the holder for all purposes under the Indenture. We have reviewed the draft Indenture and confirm that it includes such provisions in Section 4.10.
(iii) OM Tax Disclosure. The tax disclosure section of the OM should include appropriate FATCA cautionary language, advising prospective investors that payments on the Notes may be subject to FATCA withholding if the holder fails to comply with applicable FATCA requirements, and that the Issuers will not be required to pay additional amounts in respect of any FATCA withholding.
(iv) Coordination with Beacon. The Issuers should coordinate with Beacon to ensure that FATCA-compliant procedures are implemented at closing. This includes confirming the procedures for collection of IRS Forms W-8 from holders of the Regulation S Notes through Thackeray Partners LLC and Ashgrove Enterprises.
VII. Cayman Islands Tax Treatment
A. Current Tax Regime
The Cayman Islands does not currently impose any form of direct taxation on companies, individuals, or other entities. Specifically, the Cayman Islands does not impose:
• Income tax (corporate or individual);
• Capital gains tax;
• Withholding tax on payments of dividends, interest, royalties, or other amounts;
• Net worth or net asset tax; or
• Estate, inheritance, or gift tax.
DEH, as an exempted company incorporated under the Companies Act (as revised) of the Cayman Islands, is not subject to any Cayman Islands tax on its income, profits, gains, or appreciations. Payments of interest and principal on the Notes by DEH to holders of the Notes will not be subject to any Cayman Islands withholding tax or deduction.
The Cayman Islands does not currently have any statutory or regulatory framework for the imposition of income, capital gains, or withholding taxes. While it is theoretically possible that the Cayman Islands could enact legislation imposing such taxes in the future, the availability of the Tax Undertaking described in Section VII.B below provides a mechanism for protecting against this risk.
B. Tax Undertaking
Under Section 6(3) of the Tax Concessions Act (as revised) of the Cayman Islands, an exempted company may apply to the Cabinet of the Cayman Islands (formerly the Governor in Cabinet) for a Tax Undertaking (also referred to as a "tax concession"). The Tax Undertaking provides that, for a specified period not exceeding 30 years from the date of grant, no law enacted in the Cayman Islands imposing any tax on profits, income, gains, or appreciations shall apply to the exempted company or to any of its obligations (including debt obligations such as the Notes) or shares.
The Tax Undertaking is a binding undertaking of the Cayman Islands government and provides significant certainty against the risk of future adverse tax legislation. We strongly recommend that DEH apply for and obtain the Tax Undertaking in connection with the offering of the Notes. The application should be made through DEH's Cayman Islands counsel, Kincaid & Moreau LLP (Lead Partner: Nigel Ashworth, 68 Fort Street, George Town, Grand Cayman KY1-1107). The process of obtaining the Tax Undertaking is typically straightforward and can be completed within a matter of weeks. The undertaking is customarily granted for a period of 20 to 30 years.
We understand that Kincaid & Moreau LLP is separately preparing a Cayman Tax Status Certificate and a Cayman tax memorandum for inclusion in the closing deliverables. We recommend coordinating the application for the Tax Undertaking with the preparation of those documents.
C. No Stamp Duty
No Cayman Islands stamp duty is payable on the execution, delivery, or enforcement of the Indenture, the Notes, the Purchase Agreement, or any related transaction documents, provided that such documents are not brought into, or executed or filed in, the Cayman Islands. If any such document is physically brought into the Cayman Islands (for example, for the purpose of enforcement before a Cayman Islands court), nominal stamp duty may be payable. In practice, this is rarely an issue, as the transaction documents are executed and delivered outside the Cayman Islands and the Notes are held in book-entry form through DTC.
We note that the transfer of the Notes on the secondary market will not give rise to any Cayman Islands stamp duty, transfer tax, or registration tax.
D. OECD/BEPS and Economic Substance Requirements
The Cayman Islands has enacted the International Tax Co-operation (Economic Substance) Act, 2018 (as amended) (the "ES Act") and the International Tax Co-operation (Economic Substance) (Prescribed Dates) Regulations, 2018, which implement the substance-over-form recommendations of the Organisation for Economic Co-operation and Development ("OECD") Base Erosion and Profit Shifting ("BEPS") initiative. Under the ES Act, a "relevant entity" that carries on a "relevant activity" must demonstrate that it has adequate "economic substance" in the Cayman Islands.
The ES Act defines "relevant activities" to include, among others, the following: (a) banking business; (b) insurance business; (c) fund management business; (d) financing and leasing business; (e) headquartering business; (f) shipping business; (g) distribution and service centre business; (h) intellectual property business; and (i) holding entity business.
Analysis of DEH. DEH is an exempted company incorporated in the Cayman Islands. Its principal activities consist of serving as the holding company for a group of subsidiaries engaged in upstream oil and gas exploration and production, midstream operations, and renewable energy development across multiple jurisdictions (including Nigeria, Senegal, the Gulf of Mexico, and England). DEH's activities include holding equity interests in these subsidiaries, receiving dividends and intercompany distributions, providing intercompany financing, and exercising oversight and strategic management of the group.
To the extent DEH is engaged in a "holding entity" relevant activity (which is defined as the business of holding equity participations in other entities and earning dividends or capital gains), DEH must satisfy a reduced economic substance test. The reduced test for pure equity holding companies requires that DEH (a) have adequate human resources and premises in the Cayman Islands for holding and managing equity participations, and (b) comply with all applicable Cayman Islands filing requirements (including the filing of an annual economic substance notification).
If DEH is also engaged in a "financing and leasing" relevant activity (to the extent it provides intercompany loans to subsidiaries), the full economic substance test would apply to that activity. The full test requires that DEH (a) be directed and managed in the Cayman Islands, (b) have an adequate number of qualified employees in the Cayman Islands, (c) incur adequate operating expenditure in the Cayman Islands, and (d) carry out core income-generating activities in the Cayman Islands.
We note that DEH maintains its principal executive offices at 14th Floor, Harbour Place Tower, 103 South Church Street, George Town, Grand Cayman KY1-1002, and has executive management personnel based in the Cayman Islands. Based on the information provided to us, DEH should be able to satisfy the applicable economic substance requirements. However, we recommend that DEH's compliance with the ES Act be monitored on an ongoing basis, particularly in light of the evolving regulatory guidance issued by the Cayman Islands Department for International Tax Cooperation ("DITC"). We further recommend that DEH consult with Kincaid & Moreau LLP regarding the annual economic substance notification filing and any updates to the substance requirements.
VIII. Tax Gross-Up and Additional Amounts — Indenture Provisions
A. Overview
Section 4.06 of the Indenture contains customary tax gross-up provisions (the "Additional Amounts" covenant) requiring the Issuers and the Guarantors to pay "additional amounts" to holders of the Notes in the event that any withholding or deduction for or on account of taxes is required by law to be made from payments of interest or principal on the Notes. The purpose of the Additional Amounts covenant is to ensure that holders receive the full stated amounts of interest and principal notwithstanding any such withholding or deduction.
The scope of the Additional Amounts covenant extends to taxes imposed by (a) the Cayman Islands (as the jurisdiction of incorporation of DEH), (b) the United States (as the jurisdiction of incorporation of DUFC