COLLATERAL MANAGEMENT AGREEMENT
dated as of August 22, 2023
by and between
DRIFTWOOD CLO 2023-I, LTD.
as Issuer
and
DRIFTWOOD CREDIT MANAGEMENT LLC
as Collateral Manager
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COLLATERAL MANAGEMENT AGREEMENT
August 22, 2023
This COLLATERAL MANAGEMENT AGREEMENT (this "Agreement") is entered into as of August 22, 2023, by and between:
(1) DRIFTWOOD CLO 2023-I, LTD., an exempted company incorporated with limited liability under the laws of the Cayman Islands (the "Issuer"), Cayman Registration No. EX-382916, with its registered office at PO Box 4927, Windward House, 3rd Floor, George Town, Grand Cayman KY1-1306, Cayman Islands; and
(2) DRIFTWOOD CREDIT MANAGEMENT LLC, a Delaware limited liability company (the "Collateral Manager" or "DCM"), with its registered agent at National Registered Agents Inc., 1209 Orange Street, Wilmington, DE 19801, and its principal office at 200 Brickell Avenue, Suite 3100, Miami, FL 33131, a registered investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), CRD #182447.
The Issuer and the Collateral Manager are each referred to herein as a "Party" and collectively as the "Parties."
RECITALS
WHEREAS, the Issuer is the issuer of secured and subordinated notes in an aggregate principal amount of $400,000,000 (the "Notes") pursuant to an Indenture dated as of August 22, 2023 (as supplemented and amended from time to time, the "Indenture") among the Issuer, Driftwood CLO 2023-I, LLC, a Delaware limited liability company (DE File No. 7429831) (the "Co-Issuer"), and Ironclad Trust Company, N.A. (the "Trustee");
WHEREAS, the Notes consist of the following classes: (i) Class A-1 Notes in an aggregate principal amount of $256,000,000, rated AAA by Brindoval Analytical Services Inc. ("Brindoval") and AAA by Ridgeline Credit Ratings LLC ("Ridgeline"); (ii) Class A-2 Notes in an aggregate principal amount of $40,000,000, rated AA by Brindoval and AA by Ridgeline; (iii) Class B Notes in an aggregate principal amount of $28,000,000, rated A by Brindoval and A by Ridgeline; (iv) Class C Notes in an aggregate principal amount of $24,000,000, rated BBB by Brindoval and BBB by Ridgeline; (v) Class D Notes in an aggregate principal amount of $16,000,000, rated BB by Brindoval and BB by Ridgeline; and (vi) Subordinated Notes in an aggregate principal amount of $36,000,000, which are unrated;
WHEREAS, the Notes are secured by a portfolio of broadly syndicated first-lien senior secured leveraged loans (primarily to U.S. obligors) and other eligible collateral obligations, with a target portfolio par of $400,000,000 (the "Portfolio");
WHEREAS, the Collateral Manager is a wholly owned subsidiary of Driftwood Absolute Return Fund Ltd. ("DARF"), a Cayman Islands exempted company with approximately $6.8 billion in assets under management as of the first quarter of 2023;
WHEREAS, the Collateral Manager desires to serve as collateral manager for the Issuer, and the Issuer desires to appoint the Collateral Manager, on the terms and conditions set forth herein;
WHEREAS, the Issuer, the Collateral Manager, and Ironclad Trust Company, N.A., as Collateral Administrator (the "Collateral Administrator"), have entered into that certain Collateral Administration Agreement dated as of August 22, 2023 (the "Collateral Administration Agreement"), governing the provision of certain administrative services with respect to the Portfolio and the Notes; and
WHEREAS, capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Indenture.
NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties, and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
ARTICLE I — DEFINITIONS
Section 1.1 — Defined Terms
As used in this Agreement, the following terms shall have the meanings set forth below. Capitalized terms used but not otherwise defined in this Agreement shall have the meanings assigned to such terms in the Indenture:
"Account Bank" means Havenwood Bank, N.A., located at 227 West Monroe Street, Chicago, IL 60606, or any successor thereto appointed in accordance with the Indenture.
"Advisers Act" means the Investment Advisers Act of 1940, as amended from time to time, and the rules and regulations promulgated thereunder.
"Closing Date" means September 12, 2023.
"Collateral Administration Agreement" means that certain Collateral Administration Agreement dated as of August 22, 2023, by and among the Issuer, the Collateral Manager, and Ironclad Trust Company, N.A., as Collateral Administrator, as the same may be amended, restated, supplemented, or otherwise modified from time to time.
"Collateral Administrator" means Ironclad Trust Company, N.A., located at 100 Wall Street, Suite 1650, New York, NY 10005, or any successor thereto appointed in accordance with the Collateral Administration Agreement.
"Collateral Quality Tests" means the collateral quality tests set forth in the Indenture, including but not limited to the following: (a) Minimum Weighted Average Spread of 350 basis points; (b) Maximum Weighted Average Life of 7.5 years; (c) Minimum Diversity Score of 60; (d) Maximum CCC Bucket of 7.5% of aggregate collateral par (i.e., $30,000,000 based on a target portfolio par of $400,000,000); (e) Maximum Second-Lien Bucket of 5.0% of aggregate collateral par (i.e., $20,000,000); (f) Maximum Fixed-Rate Bucket of 10.0% of aggregate collateral par (i.e., $40,000,000); (g) Minimum Weighted Average Recovery Rate of 45.0%; and (h) Minimum Weighted Average Rating Factor of 2,850 per the Brindoval rating scale.
"Coverage Tests" means, collectively, the O/C Tests and the I/C Tests, each as defined herein and as further specified in the Indenture.
"Effective Date" means the date on which the Effective Date Conditions (as defined in the Indenture) are satisfied or waived, which date shall occur no later than December 12, 2023.
"Eligible Investments" has the meaning assigned to such term in the Indenture.
"Incentive Management Fee" has the meaning set forth in Section 3.3 of this Agreement.
"Indenture" means that certain Indenture dated as of August 22, 2023, as supplemented by the First Supplemental Indenture dated September 8, 2023, by and among the Issuer, the Co-Issuer, and the Trustee, as the same may be further amended, restated, supplemented, or otherwise modified from time to time in accordance with its terms.
"I/C Tests" means the interest coverage tests set forth in the Indenture, consisting of: (a) the Class A I/C Test, requiring a minimum ratio of 120.00%; (b) the Class B I/C Test, requiring a minimum ratio of 115.00%; (c) the Class C I/C Test, requiring a minimum ratio of 110.00%; and (d) the Class D I/C Test, requiring a minimum ratio of 105.00%.
"Non-Call Period" means the period beginning on the Closing Date and ending on September 12, 2025 (two years from the Closing Date).
"O/C Tests" means the overcollateralization tests set forth in the Indenture, consisting of: (a) the Class A O/C Test, requiring a minimum ratio of 128.00%; (b) the Class B O/C Test, requiring a minimum ratio of 118.00%; (c) the Class C O/C Test, requiring a minimum ratio of 110.00%; and (d) the Class D O/C Test, requiring a minimum ratio of 105.50%.
"Payment Date" means the 15th day of each January, April, July, and October, commencing on January 15, 2024; provided that, if any such day is not a business day, the applicable Payment Date shall be the next succeeding business day. The first Payment Date shall be January 15, 2024.
"Record Date" means, with respect to any Payment Date, the 15th calendar day preceding such Payment Date; provided that, if such day is not a business day, the Record Date shall be the immediately preceding business day.
"Reference Rate" means Compounded SOFR, as determined in accordance with the Indenture and subject to the 26253 fallback convention set forth therein.
"Reinvestment Period" means the period commencing on the Closing Date (September 12, 2023) and ending on September 12, 2028 (five years from the Closing Date).
"Senior Collateral Management Fee" has the meaning set forth in Section 3.1 of this Agreement.
"Stated Maturity" means October 15, 2036.
"Subordinate Collateral Management Fee" has the meaning set forth in Section 3.2 of this Agreement.
"Trustee" means Ironclad Trust Company, N.A., or any successor trustee appointed in accordance with the Indenture.
Section 1.2 — Rules of Construction
(a) Unless the context otherwise requires, all capitalized terms used in this Agreement and not otherwise defined herein shall have the respective meanings assigned to such terms in the Indenture, and such definitions are incorporated herein by reference.
(b) References in this Agreement to "Articles," "Sections," "Schedules," and "Exhibits" are to the Articles, Sections, Schedules, and Exhibits of this Agreement, unless otherwise expressly stated.
(c) All references to monetary amounts in this Agreement are to lawful money of the United States of America, unless otherwise specified.
(d) All day count calculations for purposes of the computation of fees under this Agreement shall be determined on the basis of Actual/360 (i.e., the actual number of days elapsed in the applicable accrual period divided by 360).
(e) The words "hereof," "herein," "hereunder," and similar terms refer to this Agreement as a whole and not to any particular provision of this Agreement. The word "including" means "including, without limitation." The use of the singular shall include the plural and vice versa. References to any statute, regulation, or other legal requirement include all amendments, successors, and re-enactments thereof and all rules and regulations promulgated thereunder.
(f) This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule that would cause the application of the laws of any jurisdiction other than the State of New York.
ARTICLE II — APPOINTMENT; DUTIES AND AUTHORITY OF THE COLLATERAL MANAGER
Section 2.1 — Appointment
(a) The Issuer hereby appoints Driftwood Credit Management LLC as the collateral manager with respect to the Portfolio, and the Collateral Manager hereby accepts such appointment and agrees to perform the services and duties set forth in this Agreement, on the terms and subject to the conditions herein.
(b) The appointment of the Collateral Manager shall be effective as of August 22, 2023 and shall continue in full force and effect until the termination of this Agreement in accordance with Article V hereof. The Collateral Manager shall commence the active management of the Portfolio on the Closing Date.
(c) In performing its duties and exercising its authority under this Agreement, the Collateral Manager shall act on behalf of the Issuer and in accordance with the provisions of the Indenture, the Collateral Administration Agreement, this Agreement, and all other applicable transaction documents (collectively, the "Transaction Documents"). In the event of any conflict between the provisions of this Agreement and the provisions of the Indenture, the provisions of the Indenture shall control. In the event of any conflict between the provisions of this Agreement and the provisions of the Collateral Administration Agreement, the provisions of this Agreement shall control, except to the extent such provisions relate to the duties and obligations of the Collateral Administrator, in which case the provisions of the Collateral Administration Agreement shall control.
Section 2.2 — Duties of the Collateral Manager
The Collateral Manager shall perform the following duties in connection with the management of the Portfolio:
(a) Portfolio Selection. The Collateral Manager shall identify, evaluate, select, acquire, and manage a portfolio of broadly syndicated first-lien senior secured leveraged loans (primarily to U.S. obligors) and other eligible collateral obligations (as defined in the Indenture), with a target aggregate collateral par of $400,000,000. In selecting and acquiring collateral obligations for the Portfolio, the Collateral Manager shall apply its proprietary credit analysis and investment selection processes, which shall include, at a minimum, a review of the obligor's financial statements, industry position, capital structure, cash flow profile, and material contractual arrangements. The Collateral Manager shall exercise its professional judgment in selecting credits that, in its reasonable determination, present favorable risk-adjusted return characteristics and are appropriate for inclusion in the Portfolio given the investment parameters and concentration limitations specified in the Indenture.
(b) Initial Portfolio Ramp. The Collateral Manager shall complete the initial ramp of the Portfolio in coordination with the warehouse ramp that was completed approximately 85% by August 15, 2023 pursuant to the $250,000,000 revolving credit facility provided by Havenwood Bank, N.A. (bearing interest at SOFR + 150 basis points, with an advance rate of 85%). On the Closing Date, the Collateral Manager shall direct the full warehouse take-out, with the outstanding warehouse balance of approximately $212,500,000 to be repaid in full from the proceeds of the issuance of the Notes. The Collateral Manager shall complete the acquisition of any remaining collateral obligations necessary to satisfy the Effective Date Conditions as promptly as practicable following the Closing Date, and in any event no later than the Effective Date.
(c) Ongoing Trading. The Collateral Manager shall have the authority to engage in trading of the Portfolio in accordance with the following:
(i) During the Reinvestment Period (from the Closing Date through September 12, 2028): The Collateral Manager shall have full discretionary trading authority, including the authority to acquire, dispose of, exchange, and substitute collateral obligations and eligible investments, subject in each case to the Collateral Quality Tests, the Coverage Tests, the concentration limitations, the eligibility criteria, and all other applicable requirements set forth in the Indenture. The Collateral Manager shall endeavor to maintain the aggregate principal balance of the Portfolio at or near the target par of $400,000,000 by reinvesting principal proceeds in additional eligible collateral obligations.
(ii) Post-Reinvestment Period (from and after September 12, 2028 through the Stated Maturity or earlier redemption): The Collateral Manager's trading authority shall be limited to (A) sales of credit risk obligations and credit impaired obligations (each as defined in the Indenture), (B) certain discretionary sales permitted under the Indenture subject to applicable conditions and limitations (including, without limitation, the requirement that such sales do not cause any Coverage Test to fail that was previously satisfied), and (C) reinvestment of unscheduled principal proceeds (including prepayments, recoveries, and sale proceeds) in additional collateral obligations or eligible investments, in each case subject to the restrictions set forth in the Indenture.
(d) Compliance with Eligibility Criteria. The Collateral Manager shall ensure that all collateral obligations acquired for the Portfolio satisfy the eligibility criteria specified in the Indenture at the time of their acquisition (or, in the case of collateral obligations acquired on a when-issued, delayed delivery, or forward settlement basis, at the time of commitment, subject to customary conditions). Without limiting the generality of the foregoing, the Collateral Manager shall ensure that the Portfolio satisfies, at the time of each acquisition, the following parameters (subject to permitted exceptions and baskets set forth in the Indenture): (i) Minimum Weighted Average Spread of 350 basis points; (ii) Minimum Diversity Score of 60; (iii) Maximum CCC Bucket of 7.5% of aggregate collateral par; (iv) Maximum Second-Lien Bucket of 5.0% of aggregate collateral par; (v) Maximum Fixed-Rate Bucket of 10.0% of aggregate collateral par; (vi) Minimum Weighted Average Recovery Rate of 45.0%; (vii) Minimum Weighted Average Rating Factor of 2,850 (per the Brindoval scale); and (viii) Maximum Weighted Average Life of 7.5 years.
(e) Credit Surveillance. The Collateral Manager shall conduct ongoing monitoring and surveillance of the credit quality of the collateral obligations in the Portfolio, including, without limitation: (i) monitoring of obligor financial performance, industry trends, and macroeconomic developments that may affect the creditworthiness of Portfolio obligors; (ii) tracking of credit ratings changes and rating agency watchlist placements by Brindoval, Ridgeline, and other recognized rating agencies; (iii) identification and assessment of defaults, payment delinquencies, and potential credit impairments; and (iv) monitoring of the credit documentation, including amendments, waivers, and other modifications to the underlying loan agreements. The Collateral Manager shall promptly notify the Trustee and the Collateral Administrator of any material adverse credit events affecting any collateral obligation or obligor in the Portfolio, including but not limited to payment defaults, bankruptcy filings, ratings downgrades below the CCC threshold, and material covenant breaches.
(f) Coverage Test Monitoring. The Collateral Manager shall monitor the O/C Tests and I/C Tests on a continuous basis and shall coordinate with the Collateral Administrator for the formal calculation and verification of such tests on each Payment Date and at such other times as may be required by the Indenture. In the event that any Coverage Test is not satisfied on any Payment Date (or at any other required determination date), the Collateral Manager shall take such curative actions as may be available under the Indenture, including directing the application of interest proceeds and principal proceeds in accordance with the priority of payments waterfall to cure any shortfall. The Collateral Manager shall promptly notify the Trustee, the Collateral Administrator, and the rating agencies of any Coverage Test failure and of any curative actions taken or proposed.
(g) Workout Obligations. The Collateral Manager shall manage any workout loans, restructured obligations, and defaulted obligations in the Portfolio in accordance with the procedures and limitations set forth in the Indenture, including compliance with any applicable bucket limitations for such obligations. The Collateral Manager shall use commercially reasonable efforts to maximize the recovery value of any defaulted or distressed collateral obligations, subject to the constraints of the Indenture and applicable law.
(h) Participation in Amendments and Waivers. The Collateral Manager shall exercise, on behalf of the Issuer, all rights of the Issuer as lender under the underlying loan agreements, including the right to vote on amendments, waivers, consents, and other modifications. In exercising such rights, the Collateral Manager shall act in a manner consistent with the interests of the noteholders and in accordance with the standard of care set forth in Section 2.4 hereof. The Collateral Manager shall maintain records of all votes, consents, and waivers exercised on behalf of the Issuer.
(i) Record-Keeping and Reporting. The Collateral Manager shall maintain complete and accurate records of all trades, portfolio positions, compliance data, and other information relating to the Portfolio and the performance of its duties under this Agreement. The Collateral Manager shall provide such records and information to the Trustee, the Collateral Administrator, and the rating agencies (Brindoval and Ridgeline) as required by the Indenture, the Collateral Administration Agreement, and this Agreement, and as may be reasonably requested from time to time. Without limiting the foregoing, the Collateral Manager shall furnish to the Collateral Administrator on a timely basis all trade tickets, settlement instructions, portfolio data, and compliance information necessary for the Collateral Administrator to prepare the monthly and quarterly reports required under the Indenture and the Collateral Administration Agreement.
(j) Effective Date Compliance. The Collateral Manager shall use commercially reasonable efforts to ensure that the Effective Date Conditions (as defined in the Indenture) are satisfied no later than December 12, 2023 (ninety (90) days following the pricing of the Notes). The Effective Date Conditions include, without limitation, the requirement that the aggregate principal balance of eligible collateral obligations in the Portfolio equals or exceeds the target portfolio par of $400,000,000 and that all Collateral Quality Tests and Coverage Tests are satisfied as of the Effective Date.
Section 2.3 — Authority of the Collateral Manager
(a) The Issuer hereby grants to the Collateral Manager full discretionary authority to manage the collateral portfolio within the parameters and limitations set forth in the Indenture and this Agreement. Such authority shall include, without limitation, the authority to:
(i) identify, evaluate, select, and acquire collateral obligations and eligible investments for inclusion in the Portfolio;
(ii) dispose of, exchange, substitute, or otherwise trade collateral obligations and eligible investments in the Portfolio, subject to the trading restrictions set forth in the Indenture;
(iii) direct the Trustee regarding the acquisition, sale, exchange, or settlement of collateral obligations and eligible investments, and to provide settlement instructions and trade confirmations in connection therewith;
(iv) direct distributions from the collection account and the payment account in accordance with the priority of payments waterfall set forth in the Indenture;
(v) provide direction, instruction, and information to the Collateral Administrator regarding compliance reporting, calculations, and other administrative matters;
(vi) execute, on behalf of the Issuer, trade confirmations, assignment agreements, participation agreements, and other documentation necessary or appropriate in connection with the acquisition, disposition, or management of collateral obligations;
(vii) exercise all rights of the Issuer as lender under the underlying loan agreements, including voting on amendments, waivers, and consents;
(viii) communicate with the rating agencies, the Trustee, and other transaction parties on behalf of the Issuer regarding Portfolio matters; and
(ix) take such other actions as are necessary, appropriate, or incidental to the foregoing.
(b) The Collateral Manager shall have the authority to engage one or more sub-advisors to assist in the performance of its duties hereunder, subject to the following conditions: (i) the Collateral Manager shall not delegate its primary responsibility for the selection, acquisition, and management of the Portfolio to any sub-advisor; (ii) the Collateral Manager shall remain fully liable for the performance of all duties and obligations under this Agreement, regardless of any delegation to a sub-advisor; (iii) any sub-advisor shall be subject to the same standard of care applicable to the Collateral Manager under Section 2.4; and (iv) prior written notice of the engagement of any sub-advisor shall be provided to the Issuer and the Trustee, and rating agency confirmation from Brindoval and Ridgeline shall be obtained prior to such engagement becoming effective.
Section 2.4 — Standard of Care
(a) The Collateral Manager shall perform its duties hereunder with reasonable care, using a degree of skill and attention no less than that which the Collateral Manager exercises with respect to comparable assets that it manages for its own account or for other accounts with similar investment objectives and guidelines. The Collateral Manager shall act in a manner consistent with the customary standards and practices of institutional managers of collateralized loan obligation portfolios of comparable size and complexity.
(b) In the performance of its duties, the Collateral Manager shall act in good faith and in a manner that it reasonably believes to be in the best interests of the Issuer and the noteholders, consistent with the terms and provisions of the Indenture and this Agreement.
(c) The Collateral Manager shall comply with all applicable provisions of the Advisers Act and the rules and regulations promulgated thereunder, including but not limited to its fiduciary obligations as a registered investment adviser.
(d) The Collateral Manager shall not be liable for any loss or depreciation in the value of the Portfolio resulting from any investment decision made in good faith and in accordance with the standard of care set forth in this Section 2.4, including any loss resulting from market fluctuations, changes in interest rates, credit events affecting Portfolio obligors, or other factors beyond the Collateral Manager's reasonable control.
Section 2.5 — Compliance with Laws
(a) The Collateral Manager shall comply with all applicable federal, state, and local laws, rules, and regulations in the performance of its duties under this Agreement, including, without limitation: (i) the Securities Act of 1933, as amended (the "Securities Act"); (ii) the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (iii) the Advisers Act; and (iv) all applicable rules, regulations, and interpretive guidance promulgated by the Securities and Exchange Commission (the "SEC") thereunder.
(b) The Collateral Manager shall maintain its registration as an investment adviser under the Advisers Act (CRD #182447) throughout the term of this Agreement. In the event that the Collateral Manager's registration as an investment adviser is revoked, suspended, or otherwise terminated for any reason, the Collateral Manager shall promptly notify the Issuer, the Trustee, and the rating agencies, and such event shall constitute Cause for removal under Section 5.2 hereof.
(c) The Collateral Manager shall comply with all applicable anti-money laundering laws and regulations, including the Bank Secrecy Act and the USA PATRIOT Act, and shall maintain appropriate policies and procedures designed to prevent the use of the Portfolio for money laundering or terrorist financing purposes.
Section 2.6 — Collateral Manager Affiliates and Conflicts of Interest
(a) The Parties acknowledge and agree that the Collateral Manager is a wholly owned subsidiary of Driftwood Absolute Return Fund Ltd. ("DARF"), a Cayman Islands exempted company. DARF and its affiliated entities manage approximately $6.8 billion in assets under management (as of the first quarter of 2023) across a range of investment strategies, including structured credit, direct lending, and alternative investments.
(b) The Collateral Manager and its affiliates may manage other collateralized loan obligations, collateralized debt obligations, funds, managed accounts, or other investment vehicles (collectively, "Other Accounts") with investment mandates that overlap, in whole or in part, with the investment mandate applicable to the Portfolio. The Collateral Manager may, in the course of managing Other Accounts, acquire or dispose of obligations of the same obligors that constitute collateral obligations in the Portfolio, and may take positions that are adverse to, or inconsistent with, positions held by the Portfolio.
(c) The Collateral Manager has adopted and shall maintain written policies and procedures governing the allocation of investment opportunities among the Portfolio and Other Accounts, including cross-trading policies. The Collateral Manager shall allocate investment opportunities fairly and equitably among the Portfolio and all Other Accounts with similar investment objectives and guidelines, taking into account, among other things, the investment parameters, concentration limitations, and diversification requirements applicable to each account. The Collateral Manager shall not unfairly favor any Other Account over the Portfolio.
(d) The Parties acknowledge that David Hwan, Managing Director, Structured Credit, is the portfolio manager primarily responsible for the selection of collateral obligations for the Portfolio and for overseeing the warehouse ramp process. Marcus Sorensen, Founder and Chief Investment Officer of DCM and DARF, and Elena Voss, President and Chief Operating Officer of DCM and DARF, serve as principals with supervisory authority over the Collateral Manager's activities with respect to the Portfolio and all Other Accounts. The Collateral Manager shall disclose any material conflicts of interest arising from the dual or multiple roles of such individuals to the Issuer and the Trustee promptly upon becoming aware thereof.
(e) The Collateral Manager shall comply with all applicable regulatory requirements relating to conflicts of interest, including the provisions of the Advisers Act and the rules promulgated thereunder, and shall maintain and periodically update its written code of ethics and personal trading policies in accordance with Rule 204A-1 under the Advisers Act.
ARTICLE III — COMPENSATION
Section 3.1 — Senior Collateral Management Fee
(a) As compensation for its services under this Agreement, the Collateral Manager shall be entitled to receive a Senior Collateral Management Fee (the "Senior Collateral Management Fee") at a rate equal to 0.15% per annum of the aggregate outstanding principal balance of the collateral obligations and eligible investments in the Portfolio as of the last day of the applicable accrual period.
(b) Based on a target portfolio par of $400,000,000, the Senior Collateral Management Fee would be $600,000 per annum (calculated as 0.0015 multiplied by $400,000,000). The actual Senior Collateral Management Fee payable on each Payment Date will be determined based on the aggregate outstanding principal balance of the Portfolio at the applicable measurement date, and may be greater or less than the foregoing illustrative amount.
(c) The Senior Collateral Management Fee shall accrue daily on an Actual/360 basis, commencing on the Closing Date (September 12, 2023), and shall be calculated and payable quarterly in arrears on each Payment Date, with the first payment of the Senior Collateral Management Fee due on the first Payment Date (January 15, 2024).
(d) The Senior Collateral Management Fee shall be payable as a senior administrative expense in the priority of payments waterfall set forth in the Indenture. The Senior Collateral Management Fee ranks senior to interest payments on all classes of Notes, including the Class A-1 Notes, and is payable before distributions to any noteholder. The priority of the Senior Collateral Management Fee is more fully described in the Indenture, and the provisions of the Indenture shall control in the event of any inconsistency with this Section 3.1.
Section 3.2 — Subordinate Collateral Management Fee
(a) In addition to the Senior Collateral Management Fee, the Collateral Manager shall be entitled to receive a Subordinate Collateral Management Fee (the "Subordinate Collateral Management Fee") at a rate equal to 0.35% per annum of the aggregate outstanding principal balance of the collateral obligations and eligible investments in the Portfolio as of the last day of the applicable accrual period.
(b) Based on a target portfolio par of $400,000,000, the Subordinate Collateral Management Fee would be $1,400,000 per annum (calculated as 0.0035 multiplied by $400,000,000). The actual Subordinate Collateral Management Fee payable on each Payment Date will be determined based on the aggregate outstanding principal balance of the Portfolio at the applicable measurement date, and may be greater or less than the foregoing illustrative amount.
(c) The Subordinate Collateral Management Fee shall accrue daily on an Actual/360 basis, commencing on the Closing Date (September 12, 2023), and shall be calculated and payable quarterly in arrears on each Payment Date, with the first payment of the Subordinate Collateral Management Fee due on the first Payment Date (January 15, 2024).
(d) The Subordinate Collateral Management Fee shall be subordinate in the priority of payments waterfall set forth in the Indenture. The Subordinate Collateral Management Fee is payable only after payment of (i) all senior administrative expenses (including the Senior Collateral Management Fee), (ii) interest on the Class A-1 Notes, (iii) interest on the Class A-2 Notes, (iv) interest on the Class B Notes, (v) interest on the Class C Notes, (vi) interest on the Class D Notes, and (vii) any O/C and I/C cure payments required under the Indenture. The Subordinate Collateral Management Fee ranks junior to all rated note interest and all Coverage Test cure payments in the priority of payments waterfall.
(e) Any portion of the Subordinate Collateral Management Fee that is not paid on any Payment Date due to insufficient available funds in the priority of payments waterfall shall accrue and compound quarterly at the Reference Rate plus 100 basis points, and shall remain payable on subsequent Payment Dates when and to the extent funds are available in accordance with the priority of payments waterfall. All accrued and unpaid Subordinate Collateral Management Fees shall be cumulative and shall not be subject to reduction or waiver, except as provided in Section 5.6 hereof or as otherwise agreed in writing by the Collateral Manager.
Section 3.3 — Incentive Management Fee
(a) In addition to the Senior Collateral Management Fee and the Subordinate Collateral Management Fee, the Collateral Manager shall be entitled to receive an Incentive Management Fee (the "Incentive Management Fee") equal to 20% of excess residual interest proceeds distributable to holders of the Subordinated Notes after such holders have achieved an internal rate of return of 12% (the "IRR Hurdle") on their aggregate initial investment of $36,000,000.
(b) The Incentive Management Fee shall be determined on each Payment Date. For purposes of this Section 3.3, the IRR Hurdle shall be calculated based on the aggregate distributions made to holders of the Subordinated Notes on all prior Payment Dates (and, as applicable, upon any redemption of the Subordinated Notes), relative to the aggregate initial investment of $36,000,000 in the Subordinated Notes.
(c) The Incentive Management Fee shall be payable from residual cash flow only after the following have been satisfied in full: (i) all senior and subordinate fees and expenses, including the Senior Collateral Management Fee and the Subordinate Collateral Management Fee, (ii) all interest payments on all classes of rated Notes, (iii) all Coverage Test cure payments, and (iv) distributions to holders of the Subordinated Notes sufficient to achieve the 12% IRR Hurdle. To the extent that residual cash flow remains after satisfaction of the foregoing, 20% of such excess shall be paid to the Collateral Manager as the Incentive Management Fee, and the remaining 80% shall be distributed to holders of the Subordinated Notes.
(d) The Incentive Management Fee shall begin accruing on the first Payment Date on which the 12% IRR Hurdle is first met or exceeded. No Incentive Management Fee shall be payable on any Payment Date on which the IRR Hurdle has not been achieved on a cumulative basis.
Section 3.4 — Reimbursement of Expenses
(a) The Issuer shall reimburse the Collateral Manager for all reasonable out-of-pocket expenses actually incurred by the Collateral Manager in connection with the performance of its duties under this Agreement, subject to the expense provisions and limitations set forth in the Indenture and the other Transaction Documents. Reimbursable expenses shall include, without limitation:
(i) expenses related to rating agency presentations, annual reviews, and surveillance meetings with Brindoval and Ridgeline;
(ii) costs associated with portfolio surveillance systems, data services, and analytics platforms used in connection with the monitoring of the Portfolio;
(iii) legal fees and expenses incurred in connection with collateral workouts, restructurings, and the enforcement of remedies under the underlying loan agreements;
(iv) travel expenses reasonably incurred in connection with the Collateral Manager's attendance at creditor meetings, amendment negotiations, and other proceedings relating to Portfolio obligors;
(v) costs of compliance with regulatory requirements, including SEC examination and reporting costs directly attributable to the Collateral Manager's activities on behalf of the Issuer; and
(vi) such other reasonable expenses as are customarily reimbursed to collateral managers in comparable CLO transactions.
(b) Certain expenses described in paragraph (a) above shall be payable as administrative expenses senior in the priority of payments waterfall as set forth in the Indenture. All other reimbursable expenses shall be payable at the level in the waterfall specified in the Indenture for subordinate expenses.
(c) The Collateral Manager shall submit itemized expense reports to the Issuer and the Trustee on a quarterly basis, not later than ten (10) business days prior to each Payment Date.
Section 3.5 — No Other Compensation
Except as expressly set forth in this Article III, the Collateral Manager shall not receive any other compensation, fee, or remuneration from the Issuer or from the assets of the Portfolio in connection with its services under this Agreement. Notwithstanding the foregoing, nothing in this Section 3.5 shall prohibit the Collateral Manager from receiving customary brokerage commissions, bid-ask spreads, or other compensation in connection with its trading activities for Other Accounts, provided that such compensation is received in accordance with applicable law and the Collateral Manager's policies regarding best execution and conflicts of interest, and provided further that the receipt of such compensation is disclosed to the Issuer upon request.
ARTICLE IV — REPRESENTATIONS AND WARRANTIES
Section 4.1 — Representations and Warranties of the Collateral Manager
The Collateral Manager hereby represents and warrants to the Issuer, as of the date hereof and as of the Closing Date, as follows:
(a) Organization and Good Standing. The Collateral Manager is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Delaware, and has all requisite limited liability company power and authority to own its properties and conduct its business as presently conducted.
(b) Investment Adviser Registration. The Collateral Manager is duly registered as an investment adviser under the Advisers Act, CRD #182447, and such registration is in full force and effect. The Collateral Manager is not subject to any order, judgment, or decree of any court or regulatory authority that would impair its ability to serve as collateral manager hereunder.
(c) Power and Authority. The Collateral Manager has full limited liability company power and authority to execute, deliver, and perform its obligations under this Agreement. The execution, delivery, and performance of this Agreement have been duly authorized by all necessary limited liability company action on the part of the Collateral Manager.
(d) No Conflict. The execution, delivery, and performance of this Agreement by the Collateral Manager do not and will not (i) conflict with or result in a breach or violation of the Collateral Manager's certificate of formation or limited liability company agreement, (ii) conflict with, result in a breach of, or constitute a default under any material agreement, contract, or instrument to which the Collateral Manager is a party or by which it is bound, or (iii) violate any applicable law, rule, regulation, judgment, order, or decree of any governmental authority.
(e) Governmental Approvals. No consent, approval, authorization, or order of, or filing or registration with, any governmental authority or regulatory body is required for the execution, delivery, or performance of this Agreement by the Collateral Manager, other than such consents, approvals, authorizations, orders, filings, or registrations as have already been obtained or made and are in full force and effect.
(f) No Litigation. There is no action, suit, proceeding, or investigation pending or, to the knowledge of the Collateral Manager, threatened against or affecting the Collateral Manager before any court, governmental agency, or arbitrator that would materially and adversely affect the Collateral Manager's ability to perform its obligations under this Agreement or that questions the validity of this Agreement.
(g) Personnel and Infrastructure. The Collateral Manager has sufficient qualified personnel, systems, and infrastructure to perform its obligations under this Agreement. The key personnel of the Collateral Manager responsible for the management of the Portfolio include David Hwan, Managing Director, Structured Credit, who serves as the lead portfolio manager, with supervisory oversight provided by Marcus Sorensen, Founder and Chief Investment Officer, and Elena Voss, President and Chief Operating Officer.
(h) Binding Obligation. This Agreement constitutes the legal, valid, and binding obligation of the Collateral Manager, enforceable against the Collateral Manager in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally and to general principles of equity.
Section 4.2 — Representations and Warranties of the Issuer
The Issuer hereby represents and warrants to the Collateral Manager, as of the date hereof and as of the Closing Date, as follows:
(a) Organization and Good Standing. The Issuer is an exempted company duly incorporated, validly existing, and in good standing under the laws of the Cayman Islands, Cayman Registration No. EX-382916, and has all requisite corporate power and authority to own its properties and conduct its business as presently conducted.
(b) Power and Authority. The Issuer has full corporate power and authority to execute, deliver, and perform its obligations under this Agreement.
(c) Due Authorization. The execution, delivery, and performance of this Agreement by the Issuer have been duly authorized by all necessary corporate action, including resolutions of the Board of Directors of the Issuer dated August 20, 2023.
(d) No Conflict. The execution, delivery, and performance of this Agreement by the Issuer do not and will not (i) conflict with or result in a breach or violation of the Issuer's Memorandum and Articles of Association, (ii) conflict with, result in a breach of, or constitute a default under the Indenture or any other material agreement to which the Issuer is a party, or (iii) violate any applicable law, rule, or regulation.
(e) Binding Obligation. This Agreement constitutes the legal, valid, and binding obligation of the Issuer, enforceable against the Issuer in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally and to general principles of equity, and subject to the limited recourse and non-petition provisions set forth in Sections 10.9 and 10.10 hereof.
ARTICLE V — TERM AND TERMINATION
Section 5.1 — Term
This Agreement shall become effective as of August 22, 2023 and shall continue in full force and effect until the earliest to occur of: (a) the termination of this Agreement pursuant to the provisions of this Article V; (b) the payment in full of all Notes and the satisfaction of all obligations of the Issuer under the Indenture; or (c) the Stated Maturity (October 15, 2036). Upon the occurrence of any such event, this Agreement shall terminate automatically and without further action by either Party, except that the provisions of Article VI (Indemnification), Article VII (Confidentiality), Section 5.6 (Effects of Termination), and Section 10.9 (Non-Petition Covenant) shall survive such termination in accordance with their respective terms.
Section 5.2 — Removal for Cause
(a) The Collateral Manager may be removed for Cause (as defined below) by the Issuer, acting at the direction of a majority in outstanding principal amount of the Subordinated Notes (or, in certain circumstances specified in the Indenture, at the direction of a majority in outstanding principal amount of the Controlling Class of Notes (as determined in accordance with the Indenture)), upon not less than thirty (30) days' prior written notice to the Collateral Manager, the Trustee, and the rating agencies (Brindoval and Ridgeline), specifying in reasonable detail the grounds for such removal.
(b) As used herein, "Cause" means the occurrence of any of the following events:
(i) a material breach by the Collateral Manager of any of its duties, obligations, representations, or warranties under this Agreement or the Indenture, which breach is not cured within thirty (30) days after written notice thereof from the Issuer (or the applicable noteholders) to the Collateral Manager;
(ii) material fraud, willful misconduct, or gross negligence by the Collateral Manager (or any of its officers, directors, employees, or agents acting within the scope of their authority) in the performance of its duties under this Agreement;
(iii) the Collateral Manager ceases to be registered as an investment adviser under the Advisers Act, whether by reason of revocation, suspension, withdrawal, or otherwise;
(iv) the occurrence of a bankruptcy event with respect to the Collateral Manager, including (A) the filing by the Collateral Manager of a voluntary petition in bankruptcy or any petition for relief under any applicable bankruptcy, insolvency, reorganization, or similar law, (B) the filing of an involuntary petition in bankruptcy against the Collateral Manager that is not dismissed within sixty (60) days, (C) the appointment of a receiver, liquidator, assignee, trustee, custodian, or sequestrator (or any similar official) for the Collateral Manager or for any substantial part of its property, or (D) the making by the Collateral Manager of a general assignment for the benefit of its creditors;
(v) an Event of Default (as defined in the Indenture) has occurred and is continuing, and such Event of Default was directly caused by the actions or omissions of the Collateral Manager in breach of its duties under this Agreement or the Indenture; or
(vi) the failure of the Collateral Manager to maintain key-person coverage as required by Section 8.7 hereof (i.e., the departure of David Hwan as lead portfolio manager without the designation of a qualified replacement within ninety (90) days following such departure).
(c) Removal for Cause shall be effective upon the expiration of the thirty (30) day notice period specified in paragraph (a) above (or, in the case of a curable breach under clause (b)(i), upon the expiration of the thirty (30) day cure period if such breach has not been cured), unless a successor collateral manager has not yet been appointed and accepted such appointment, in which case the removal shall not become effective until the appointment and acceptance of a successor in accordance with Section 5.5 hereof.
Section 5.3 — Removal Without Cause
(a) The Collateral Manager may be removed without Cause by a vote of the holders of at least 66⅔% of the aggregate outstanding principal amount of the Subordinated Notes (excluding any Subordinated Notes held by the Collateral Manager, its affiliates, or any person controlled by or under common control with the Collateral Manager), upon not less than sixty (60) days' prior written notice to the Collateral Manager, the Trustee, and the rating agencies (Brindoval and Ridgeline).
(b) In the event of removal without Cause, the Issuer shall pay to the Collateral Manager, on or promptly following the effective date of such removal, a removal fee equal to the present value (Discounted at the Reference Rate as of the date of removal) of the sum of the Senior Collateral Management Fee and the Subordinate Collateral Management Fee that would have been payable for the lesser of (i) two (2) years from the effective date of removal and (ii) the period from the effective date of removal through the Stated Maturity, in each case calculated based on the aggregate outstanding principal balance of the Portfolio as of the last Payment Date immediately preceding the effective date of removal. Such removal fee shall be payable as an administrative expense under the Indenture waterfall.
(c) During the Non-Call Period (from the Closing Date through September 12, 2025), removal without Cause shall be further restricted and shall require, in addition to the vote specified in paragraph (a) above, the prior written consent of the Trustee (not to be unreasonably withheld, conditioned, or delayed) and rating agency confirmation from both Brindoval and Ridgeline.
(d) Removal without Cause shall not become effective until a successor collateral manager has been appointed and has accepted such appointment in accordance with Section 5.5 hereof.
Section 5.4 — Resignation
(a) The Collateral Manager may resign from its position as collateral manager upon not less than ninety (90) days' prior written notice to the Issuer, the Trustee, and the rating agencies (Brindoval and Ridgeline), substantially in the form set forth in Exhibit B hereto.
(b) The resignation of the Collateral Manager shall not become effective until a successor collateral manager has been appointed and has accepted such appointment in accordance with Section 5.5 hereof. If no successor collateral manager has been appointed and has accepted such appointment within one hundred twenty (120) days following the Collateral Manager's delivery of its notice of resignation, the Collateral Manager may petition any court of competent jurisdiction for the appointment of a successor collateral manager.
(c) As a condition to the effectiveness of any resignation, rating agency confirmation (or, at a minimum, confirmation of non-downgrade of any rated class of Notes) shall be obtained from each of Brindoval and Ridgeline with respect to the appointment of the successor collateral manager.
Section 5.5 — Appointment of Successor Collateral Manager
(a) Upon the removal or resignation of the Collateral Manager pursuant to Sections 5.2, 5.3, or 5.4, the Issuer, acting at the direction of a majority in outstanding principal amount of the Subordinated Notes, shall use commercially reasonable efforts to appoint a successor collateral manager as promptly as practicable.
(b) Any successor collateral manager shall satisfy the following qualifications: (i) such successor shall be registered as an investment adviser under the Advisers Act; (ii) such successor shall have demonstrated experience in managing collateralized loan obligation portfolios of comparable size and complexity to the Portfolio; (iii) such successor shall have adequate personnel, systems, and infrastructure to perform the duties of the Collateral Manager under this Agreement; and (iv) rating agency confirmation from each of Brindoval and Ridgeline shall have been obtained prior to the appointment of such successor becoming effective.
(c) The outgoing Collateral Manager shall cooperate fully and in good faith in the orderly transition of portfolio management responsibilities to the successor collateral manager, including, without limitation: (i) the delivery to the successor of all books, records, data, files, and documentation relating to the Portfolio and the transactions effected on behalf of the Issuer; (ii) the provision of system access, login credentials, and other technical information necessary for the successor to assume management of the Portfolio; (iii) the introduction of the successor to the Trustee, the Collateral Administrator, the Account Bank, the rating agencies, and other relevant transaction parties; and (iv) such other cooperation and assistance as the Issuer or the successor may reasonably request.
(d) The appointment of any successor collateral manager shall be evidenced by a written instrument executed by the Issuer, the outgoing Collateral Manager (to the extent its cooperation is required), the successor collateral manager, and the Trustee, and a copy of such instrument shall be delivered to each of Brindoval and Ridgeline.
Section 5.6 — Effects of Termination
(a) Upon the effective termination of this Agreement (whether by removal, resignation, expiration, or otherwise), the Collateral Manager shall be entitled to receive all accrued and unpaid fees (including the Senior Collateral Management Fee, the Subordinate Collateral Management Fee, and the Incentive Management Fee) through the effective date of termination, payable in accordance with the priority of payments waterfall set forth in the Indenture. Any deferred and unpaid Subordinate Collateral Management Fees that have accrued and compounded as of the effective date of termination shall remain obligations of the Issuer, payable from available funds in accordance with the Indenture waterfall, until paid in full.
(b) The indemnification obligations set forth in Article VI hereof shall survive the termination of this Agreement and shall remain in full force and effect.
(c) The confidentiality obligations set forth in Article VII hereof shall survive the termination of this Agreement for a period of two (2) years following the effective date of termination.
(d) The non-petition covenant set forth in Section 10.9 hereof shall survive the termination of this Agreement.
ARTICLE VI — INDEMNIFICATION
Section 6.1 — Indemnification of the Collateral Manager
(a) The Issuer shall indemnify, defend, and hold harmless the Collateral Manager and each of its directors, officers, managers, members, employees, agents, and affiliates (collectively, the "Collateral Manager Indemnified Parties") from and against any and all losses, claims, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and disbursements) (collectively, "Losses") arising out of or in connection with the Collateral Manager's performance of its duties under this Agreement, including Losses arising from any action taken or omitted to be taken in good faith by any Collateral Manager Indemnified Party in connection with the management of the Portfolio or the execution, delivery, or performance of this Agreement; provided, however, that no Collateral Manager Indemnified Party shall be entitled to indemnification under this Section 6.1 to the extent that such Losses resulted from the gross negligence, willful misconduct, bad faith, or material breach of this Agreement or the Indenture by such Collateral Manager Indemnified Party.
(b) Any amounts payable by the Issuer under this Section 6.1 shall be payable as an administrative expense under the Indenture waterfall, subject to and in accordance with the priority of payments set forth therein. The obligation of the Issuer to indemnify the Collateral Manager Indemnified Parties under this Section 6.1 shall be limited to the assets of the Issuer pledged under the Indenture and shall be subject to the limited recourse provisions of Section 10.10 hereof.
(c) Promptly after receipt by any Collateral Manager Indemnified Party of notice of the commencement of any action, suit, or proceeding that may give rise to a claim for indemnification under this Section 6.1, such Collateral Manager Indemnified Party shall notify the Issuer in writing of such commencement; provided that the failure to provide such notice shall not relieve the Issuer of its indemnification obligations hereunder except to the extent that the Issuer is materially prejudiced by such failure.
Section 6.2 — Indemnification by the Collateral Manager
(a) The Collateral Manager shall indemnify, defend, and hold harmless the Issuer, the Trustee, and their respective directors, officers, employees, and agents (collectively, the "Issuer Indemnified Parties") from and against any and all Losses arising out of or resulting from the Collateral Manager's gross negligence, willful misconduct, bad faith, or material breach of this Agreement or the Indenture.
(b) Notwithstanding the foregoing, the Collateral Manager shall not be liable for any Losses arising from (i) actions taken or omitted in good faith by the Collateral Manager in reliance upon and in accordance with written instructions of the Issuer or the Trustee that are consistent with the provisions of the Indenture, (ii) the Collateral Manager's good faith reliance on information, data, or reports provided by the Trustee, the Collateral Administrator, the Account Bank, or any other transaction party, or (iii) market conditions, credit events, or other factors beyond the Collateral Manager's reasonable control, provided that the Collateral Manager acted in accordance with the standard of care set forth in Section 2.4 hereof.
Section 6.3 — Limitation of Liability
(a) IN NO EVENT SHALL THE COLLATERAL MANAGER BE LIABLE TO THE ISSUER, ANY NOTEHOLDER, THE TRUSTEE, OR ANY OTHER PERSON FOR (I) ANY CONSEQUENTIAL, INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES, INCLUDING LOST PROFITS, LOST REVENUES, OR DIMINUTION IN VALUE, OR (II) ANY LOSS IN VALUE OF THE COLLATERAL PORTFOLIO RESULTING FROM MARKET CONDITIONS, CHANGES IN INTEREST RATES, CREDIT EVENTS AFFECTING PORTFOLIO OBLIGORS, OR OTHER FACTORS BEYOND THE COLLATERAL MANAGER'S REASONABLE CONTROL, IN EACH CASE, REGARDLESS OF WHETHER SUCH DAMAGES WERE FORESEEABLE AND REGARDLESS OF WHETHER THE COLLATERAL MANAGER HAS BEEN ADVISED OF THE POSSIBILITY THEREOF, PROVIDED THAT THE COLLATERAL MANAGER ACTED IN ACCORDANCE WITH THE STANDARD OF CARE SET FORTH IN SECTION 2.4 OF THIS AGREEMENT.
(b) The Collateral Manager shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of legal counsel retained by the Collateral Manager in connection with any matter arising under or relating to this Agreement or the Indenture.
(c) Nothing in this Section 6.3 shall be construed to limit the Collateral Manager's liability for gross negligence, willful misconduct, bad faith, or material breach of this Agreement.
ARTICLE VII — CONFIDENTIALITY
Section 7.1 — Confidential Information
(a) Each Party agrees to maintain the confidentiality of all non-public information received from the other Party or any of its representatives in connection with the negotiation, execution, or performance of this Agreement (collectively, "Confidential Information"). Without the prior written consent of the disclosing Party, the receiving Party shall not disclose any Confidential Information to any third party, except as expressly permitted by this Section 7.1.
(b) The obligations of confidentiality set forth in this Section 7.1 shall not apply to information that:
(i) is or becomes publicly available other than through a breach of this Agreement by the receiving Party;
(ii) was known to the receiving Party on a non-confidential basis prior to its disclosure by the disclosing Party;