VALLAURIS II CLO PLC - Irish Stock Exchange

gross if paid in the ordinary course of its business. In the event that the Issuer receives any interest
payments on any Collateral Debt Obligation net of any applicable withholding tax, the Coverage
Tests and Collateral Quality Tests will be determined by reference to such net receipts. In the event
that any or greater withholding tax should become applicable to payments on the Collateral Debt
Obligations, such tax would reduce the amounts available to make payments on the Notes. There can
be no assurance that remaining payments on the Collateral Debt Obligations would be sufficient to
make timely payments of interest, principal on the Maturity Date and other amounts payable in
respect of the Notes of each Class.
As a result of a recent decision of the UK Court of Appeal, it could be argued that payments
of interest on Collateral Debt Obligations with UK borrowers cannot benefit from the interest article
in the UK/Ireland double taxation treaty. This would mean that UK withholding tax at 20 per cent.
would need to be withheld from such interest payments. However, the Issuer’s holdings of Collateral
Debt Obligations can be distinguished from the facts of the case which gave rise to this decision and
accordingly it is unlikely that the Issuer would not be able to benefit from the interest article in the
UK/Ireland double taxation treaty.
In the event that the aggregate amount of any Gross Up Tax Amounts (essentially, withholding
tax on payments in respect of the Collateral Debt Obligations during any Due Period which are not
compensated for by a ‘‘gross up’’ provision) and Tax Charges in a Due Period, is in excess of ten per
cent. of the aggregate interest payments due on all Collateral Debt Obligations during such Due
Period, a Relevant Tax Event shall be deemed to have occurred following which the Notes may be
redeemed (in whole but not in part) at the option of the Subordinated Noteholders acting by
Extraordinary Resolution. See Condition 7(b)(i) (Redemption at the Option of the Subordinated
Noteholders).
2.12 Concentration Risk
The Issuer will invest in a Portfolio of Collateral Debt Obligations consisting, at the Closing
Date, of Senior Secured Loans, Second Lien Loans and Mezzanine Obligations. The concentration of
the Portfolio in any one obligor would subject the Notes to a greater degree of risk with respect to
defaults by such obligor and the concentration of the Portfolio in any one industry would subject the
Notes to a greater degree of risk with respect to economic downturns relating to such industry. This
risk is mitigated by the Portfolio Profile Tests which limit the amount of Collateral Debt Obligations
that are obligations of a single obligor and by the Moody’s Diversity Test. See ‘‘Description of The
Portfolio – Portfolio Profile Tests’’ and ‘‘The Minimum Diversity Test’’.
2.13 Lender Liability Considerations; Equitable Subordination
In recent years, a number of judicial decisions in the United States and other jurisdictions have
upheld the right of borrowers to sue lenders or bondholders on the basis of various evolving legal
theories (collectively, termed ‘‘lender liability’’). Generally, lender liability is founded upon the premise
that an institutional lender or bondholder has violated a duty (whether implied or contractual) of
good faith and fair dealing owed to the borrower or issuer or has assumed a degree of control over
the borrower or issuer resulting in the creation of a fiduciary duty owed to the borrower or issuer or
its other creditors or shareholders. Although it would be a novel application of the lender liability
theories, the Issuer may be subject to allegations of lender liability. However, the Issuer does not
intend to engage in, and the Collateral Managers do not intend to act on behalf of the Issuer with
respect to any, conduct that would form the basis for a successful cause of action based upon lender
liability.
In addition, under common law principles that in some cases form the basis for lender liability
claims, if a lender or bondholder (a) intentionally takes an action that results in the undercapitalisation
of a borrower to the detriment of other creditors of such borrower, (b) engages in other
inequitable conduct to the detriment of such other creditors, (c) engages in fraud with respect to, or
makes misrepresentations to, such other creditors or (d) uses its influence as a stockholder to
dominate or control a borrower to the detriment of other creditors of such borrower, a court may
elect to subordinate the claim of the offending lender or bondholder to the claims of the
disadvantaged creditor or creditors, a remedy called ‘‘equitable subordination’’. Because of the nature
of the Collateral Debt Obligations, the Issuer may be subject to claims from creditors of an obligor
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