<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-64283
The information in this prospectus supplement and the attached prospectus is not
complete and may be changed. The issuer may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus supplement and the attached prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED OCTOBER 22, 1999 [STUDENT LOAN LOGO]
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED OCTOBER 21, 1999
$525,000,000* STUDENT LOAN ASSET-BACKED NOTES
STUDENT LOAN FUNDING 1999-A/B TRUST
(ISSUER)
STUDENT LOAN FUNDING RIVERFRONT LLC
(DEPOSITOR)
<TABLE>
---------------------------------------------------
<S> <C>
SECURITIES OFFERED YOU SHOULD CAREFULLY CONSIDER THE RISK
- Series 1999A-1 Senior Auction Rate Callable Notes FACTORS BEGINNING ON PAGE S-10 OF THIS
- Series 1999A-2 Senior Auction Rate Callable Notes PROSPECTUS SUPPLEMENT.
- Series 1999A-3 Senior Auction Rate Callable Notes
- Series 1999A-4 Senior Auction Rate Callable Notes THE SECURITIES ARE OBLIGATIONS ONLY OF THE
- Series 1999A-5 Senior Auction Rate Callable Notes TRUST AND ARE PAYABLE SOLELY FROM THE
- Series 1999A-6 Senior Auction Rate Callable Notes STUDENT LOANS AND OTHER ASSETS OF THE TRUST.
- Series 1999B-1 Subordinate Auction Rate Callable Notes
THE PRINCIPAL AMOUNT OF THE NOTES EXCEEDS
THE PRINCIPAL AMOUNT OF THE FINANCED STUDENT
ASSETS LOANS PLUS ACCRUED INTEREST ON THE FINANCED
- student loans guaranteed by federal guarantors STUDENT LOANS PLUS THE AMOUNT OF FUNDS HELD
UNDER THE INDENTURE.
---------------------------------------------------
CREDIT ENHANCEMENT
- senior notes
- subordination of subordinated notes
- reserve fund
- subordinated notes
- reserve fund
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL INTEREST RATE FINAL MATURITY PRICE TO PUBLIC UNDERWRITING PROCEEDS TO
PRINCIPAL AMOUNT DATE DISCOUNT THE SELLER(1)
<S> <C> <C> <C> <C> <C> <C>
SERIES 1999 A-1 NOTES $ 75,000,000* Auction Rate December 1, 2020 % % %
SERIES 1999 A-2 NOTES 75,000,000* Auction Rate December 1, 2020 % % %
SERIES 1999 A-3 NOTES 75,000,000* Auction Rate December 1, 2020 % % %
SERIES 1999 A-4 NOTES 100,000,000* Auction Rate December 1, 2020 % % %
SERIES 1999 A-5 NOTES 75,000,000* Auction Rate December 1, 2020 % % %
SERIES 1999 A-6 NOTES 95,000,000* Auction Rate December 1, 2020 % % %
SERIES 1999 B-1 NOTES 30,000,000* Auction Rate December 1, 2027 % % %
TOTAL $ 525,000,000* $ $ $
(1) Before deducting expenses, estimated to be $_______________. %
Delivery of the securities will be made on or about October 28, 1999, against payment in immediately available funds.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE NOTES
OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SALOMON SMITH BARNEY BANC OF AMERICA SECURITIES LLC
Prospectus Supplement dated October ____, 1999
- --------------------
* Subject to Change
</TABLE>
<PAGE> 2
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
The issuer provides information to you about your notes in two separate
documents that progressively provide more detail: (a) the accompanying
prospectus, which provides general information, some of which may not apply to
your notes and (b) this prospectus supplement, which describes the specific
terms of your notes.
If the descriptions of the terms of the notes vary between this
prospectus supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
This prospectus supplement and the accompanying prospectus include
cross-references to captions in these materials where you can find further
related discussions. The following table of contents and the table of contents
included in the accompanying prospectus provide the pages on which these
captions are located.
We are not offering the notes in any state where the offer is not
permitted. We do not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other than the dates
stated on their respective covers.
------------------------
Until January __, 2000 all dealers that effect transactions in the
notes, whether or not participating in this offering, may be required to deliver
a prospectus and prospectus supplement. This requirement is in addition to the
dealers' obligation to deliver a prospectus and prospectus supplement when
acting as underwriters with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
-----------------
PAGE
----
SUMMARY OF TERMS .........................................................S-1
The Depositor ..........................................................S-1
The Issuer .............................................................S-1
The Servicer ...........................................................S-1
The Trustees ...........................................................S-1
Issue Date .............................................................S-2
Interest ...............................................................S-2
Principal ..............................................................S-2
Parity Percentage ......................................................S-4
Senior Parity Percentage ...............................................S-4
Final Maturity .........................................................S-4
Subordination ..........................................................S-5
Priority of Payments ...................................................S-5
Security for the Notes; Trust Assets ...................................S-7
Reserve Fund ...........................................................S-8
Redemption .............................................................S-8
ERISA Considerations ...................................................S-9
Registration, Clearing and Settlement ..................................S-9
ii
<PAGE> 3
Rating .................................................................S-9
RISK FACTORS .............................................................S-10
THE ISSUER ...............................................................S-19
The Trust ..............................................................S-19
Co-owner Trustee .......................................................S-20
Owner Trustee ..........................................................S-20
Year 2000 ..............................................................S-20
THE DEPOSITOR ............................................................S-21
Year 2000 ..............................................................S-21
USE OF PROCEEDS ..........................................................S-23
THE FINANCED STUDENT LOANS ...............................................S-22
Incentive Programs .....................................................S-29
MATURITY AND PREPAYMENT CONSIDERATIONS ...................................S-30
THE SERVICERS ............................................................S-31
AFSA Data Corporation ..................................................S-31
Great Lakes Higher Education Servicing Corporation .....................S-32
InTuition, Inc. ........................................................S-33
Kentucky Higher Education Student Loan Corporation .....................S-33
Pennsylvania Higher Education Assistance Agency ........................S-34
UNIPAC Service Corporation .............................................S-35
USA Group Loan Services, Inc. ..........................................S-36
THE GUARANTEE AGENCIES ...................................................S-36
EXCHANGE AGREEMENTS ......................................................S-39
DESCRIPTION OF THE NOTES .................................................S-40
Interest ...............................................................S-40
Determination of the Auction Rate ......................................S-42
Auction Period Adjustment ..............................................S-44
Auction Period Conversion of and Mandatory Tender
of the Auction Rate Notes ...........................................S-44
Principal ..............................................................S-45
Subordination of the Series 1999B-1 Notes ..............................S-47
REDEMPTION ...............................................................S-48
Optional Redemption ....................................................S-48
Notice of Redemption ...................................................S-48
THE INDENTURE ............................................................S-49
Indenture Trustee ......................................................S-49
Eligible Lender Trustee ................................................S-49
Reports to Holders .....................................................S-49
Acquisition Fund .......................................................S-49
Student Loan Portfolio Fund ............................................S-50
Collection Fund ........................................................S-51
Reserve Fund ...........................................................S-56
UNDERWRITING .............................................................S-57
LEGAL MATTERS ............................................................S-59
RATING ...................................................................S-59
APPENDIX A - Glossary of Principal Definitions ............................A-1
APPENDIX B - Auction Procedures ...........................................B-1
APPENDIX C - Settlement Procedures ........................................C-1
iii
<PAGE> 4
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SUMMARY OF TERMS
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION ABOUT THE NOTES AND MAY
NOT CONTAIN ALL OF THE INFORMATION THAT YOU FIND IMPORTANT IN MAKING YOUR
INVESTMENT DECISION. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
CONTAIN MORE DETAILED TERMS ABOUT THE NOTES BEING OFFERED TO YOU, AS WELL AS
SELECTED BUSINESS INFORMATION AND FINANCIAL DATA. YOU ARE STRONGLY ENCOURAGED TO
READ THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS BEFORE
DECIDING WHETHER TO PURCHASE ANY OF THE NOTES.
THE DEPOSITOR
Student Loan Funding Riverfront LLC
THE ISSUER
Student Loan Funding 1999-A/B Trust
THE SERVICER
Student Loan Funding Resources, Inc., as master servicer, will arrange for the
servicing of the financed student loans under a master servicing agreement. The
master servicer will arrange for one or more other institutions to service the
financed student loans on a day to day basis.
The servicers expected to service the financed student loans are:
- - AFSA Data Corporation
- - Great Lakes Higher Education Loan Servicing Corporation
- - InTuition, Inc.
- - Kentucky Higher Education Student Loan Corporation
- - Pennsylvania Higher Education Assistance Authority
- - UNIPAC Service Corporation
- - USA Group Loan Services, Inc.
THE TRUSTEES
- - Firstar Bank, National Association, a national banking association, is the
eligible lender trustee. One or more additional eligible lender trustees
may be added or substituted for Firstar Bank, National Association from
time to time.
- - First Union Trust Company, National Association is the owner trustee for
purposes of the trust's beneficial ownership of the financed student loans.
- - Firstar Bank, National Association is the co-owner trustee for purposes of
the trust's beneficial ownership of the financed student loans.
- - Firstar Bank, National Association is the indenture trustee.
S-1
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<PAGE> 5
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ISSUE DATE
Issuance of the notes is scheduled for October 28, 1999.
INTEREST
We will pay you interest on the notes on the business day following each auction
period at an interest rate of the least of the auction rate, the net loan rate
or 17%.
The net loan rate is an annualized percentage rate and for each interest period
equals the weighted average interest rate of the student loans as of the first
day of the applicable monthly collection period, minus the program operating
expenses.
Program operating expenses mean all reasonable and proper expenses, including
operating expenses incurred or to be incurred in connection with the program of
financing the financed student loans under the indenture.
PRINCIPAL
We will pay principal on the notes from available funds on the first auction
payment date occurring after the first business day of a month for which timely
notice of payment of principal can be given as described below:
S-2
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<PAGE> 6
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRIORITY OF PAYMENT AMOUNT OF PAYMENT
<S> <C> <C>
SERIES 1999A-1 NOTES Equal to the reduction in the student
loan principal balance less the amount
of principal, if any, paid or provided
for on the Series B-1 Notes
SERIES 1999A-2 NOTES After the Series 1999A-1 Notes are paid Equal to the reduction in the student
loan principal balance less the amount
of principal, if any, paid or provided
for on the Series B-1 Notes
SERIES 1999A-3 NOTES After the Series 1999A-1 Notes and the Equal to the reduction in the student
Series 1999A-2 Notes are paid loan principal balance less the amount
of principal, if any, paid or provided
for on the Series B-1 Notes
SERIES 1999A-4 NOTES After the Series 1999A-1 Notes, the Equal to the reduction in the student
Series 1999A-2 Notes and the Series loan principal balance less the amount
1999A-3 Notes are paid of principal, if any, paid or provided
for on the Series B-1 Notes
SERIES 1999A-5 NOTES After the Series 1999A-1 Notes, the Equal to the reduction in the student
Series 1999A-2 Notes, the Series 1999A-3 loan principal balance less the amount
Notes and the Series 1999A-4 Notes are of principal, if any, paid or provided
paid for on the Series B-1 Notes
SERIES 1999A-6 NOTES After the Series 1999A-1 Notes, the Equal to the reduction in the student
Series 1999A-2 Notes, the Series 1999A-3 loan principal balance less the amount
Notes, the Series 1999A-4 Notes and the of principal, if any, paid or provided
Series 1999A-5 Notes are paid for on the Series B-1 Notes
SERIES 1999B-1 NOTES While any Series 1999A Notes are
outstanding, equal to the reduction in
the student loan principal balance but
only to the extent that after the
payment of principal on the Series
1999B-1 Notes the parity percentage is
not less than 101% and the senior
parity percentage is not less than 109%
and the outstanding principal amount of
Series 1999B-1 Notes is at least equal
to 5.75% of the total principal amount
of outstanding notes.
After the Series 1999A Notes are paid Equal to the reduction in the student
loan principal balance
S-3
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 7
- --------------------------------------------------------------------------------
After receiving the monthly information regarding the receipt of principal
payments on the financed student loans for the relevant collection period, the
issuer must give 15 days' notice of any payment of principal prior to making the
payment of principal.
The amount of any payment also may include parity percentage payments and
make-up of shortfalls in prior payments of principal.
If an event of default occurs, principal will be paid pro rata on the Series
1999A Notes.
We will make principal payments on the notes only in integral multiples of
$50,000.
ACCELERATED PRINCIPAL
Subject to the availability of funds in the collection account, the notes
entitled to principal payments in any month also will receive parity percentage
payments of principal on the same dates as other payments of principal are made
until the parity percentage equals 101%.
We will make principal payments on the notes only in integral multiples of
$50,000.
PARITY PERCENTAGE
The parity percentage is determined by dividing:
- - The principal amount (including capitalized interest) of the financed
student loans plus accrued interest, interest subsidies and special
allowance payments, and all amounts in the acquisition fund, the collection
fund and the reserve fund, by
- - The principal balance of the notes plus accrued and unpaid interest and
expenses.
SENIOR PARITY PERCENTAGE
The senior parity percentage is determined by dividing:
- - The principal amount (including capitalized interest) of the financed
student loans plus accrued interest, interest subsidies and special
allowance payments, and all amounts in the acquisition fund, the collection
fund and the reserve fund, by
- - The principal balance of the Series 1999A Notes plus accrued and unpaid
interest and expenses.
FINAL MATURITY
The final payment of principal and interest will be made no later than these
dates:
- - December 1, 2020 for the Series 1999A-1 Notes
- - December 1, 2020 for the Series 1999A-2 Notes
- - December 1, 2020 for the Series 1999A-3 Notes
- - December 1, 2020 for the Series 1999A-4 Notes
S-4
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<PAGE> 8
- --------------------------------------------------------------------------------
- - December 1, 2020 for the Series 1999A-5 Notes
- - December 1, 2020 for the Series 1999A-6 Notes
- - December 1, 2027 for the Series 1999B-1 Notes
For several reasons, the actual maturity of each series is expected to occur
sooner.
SUBORDINATION
The Series 1999B-1 Notes and any exchange counterparties under an interest rate
exchange agreement on a parity with the Series 1999B-1 Notes are subordinated to
the extent described in this prospectus supplement to the Series 1999A Notes and
any exchange counterparties under an interest rate exchange agreement on a
parity with the Series 1999A Notes. The payment of principal on the Series
1999B-1 Notes is subject to conditions relating to parity percentage, senior
parity percentage and minimum amounts of Series 1999B-1 Notes remaining
outstanding in proportion to total outstanding notes. Also, in some
circumstances, payment of principal on the Series 1999B-1 Notes may be suspended
until some or all of the Series 1999A Notes are paid.
Payments of interest on the Series 1999B-1 Notes and any interest rate exchange
payments on a parity with the Series 1999B-1 Notes on any auction payment date
will be made only after payment of interest on and any interest rate exchange
payments on a parity with the Series 1999A Notes have been made. In some
circumstances, payment of interest on and any interest rate exchange payments
relating to the Series 1999B-1 Notes may be deferred. As long as any Series
1999A Notes remain outstanding, any shortfall or deferral in the payment will
not constitute an event of default under the indenture unless the shortfall or
deferral exists on the maturity date for the Series 1999B-1 Notes.
PRIORITY OF PAYMENTS
On the first business day of each month, we will apply, or set aside to be
applied on auction payment dates, funds that are available after paying expenses
in the following priority:
- - FIRST, to pay interest on the Series 1999A Notes on each auction payment
date occurring during that month and to pay any interest rate exchange
payment that is on a parity with that interest, including any early
termination payment resulting from a default by the issuer;
- - SECOND, prior to the payment of the principal balance on the Series 1999A
Notes, to pay interest on the Series 1999B-1 Notes on each auction payment
date occurring during that month and any interest rate exchange payment
that is on a parity with that interest, including any early termination
payment resulting from a default by the issuer;
- - THIRD, to pay principal on the Series 1999B-1 Notes on the first auction
payment date occurring after the first business day of that month for which
timely notice of payment of principal can be given, but only to the extent
that after the payment of principal on the Series 1999B-1 Notes the parity
percentage is not less than 101% and the senior parity percentage is not
less than 109% and the outstanding principal amount of Series 1999B-1 Notes
is at least equal to 5.75% of the total principal amount of outstanding
notes;
- - FOURTH, to pay principal on the Series 1999A-1 Notes on the first auction
payment date occurring after the first business day of that month for which
timely notice of payment of principal can be given;
S-5
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<PAGE> 9
- --------------------------------------------------------------------------------
- - FIFTH, after the principal balance of the Series 1999A-1 Notes has been
paid, to pay principal on the Series 1999A-2 Notes on the first auction
payment date occurring after the first business day of that month for which
timely notice of payment of principal can be given;
- - SIXTH, after the principal balance of the Series 1999A-1 Notes and the
Series 1999A-2 Notes has been paid, to pay principal on the Series 1999A-3
Notes on the first auction payment date occurring after the first business
day of that month for which timely notice of payment of principal can be
given;
- - SEVENTH, after the principal balance of the Series 1999A-1 Notes, the
Series 1999A-2 Notes and the Series 1999A-3 Notes has been paid, to pay
principal on the Series 1999A-4 Notes on the first auction payment date
occurring after the first business day of that month for which timely
notice of payment of principal can be given;
- - EIGHTH, after the principal balance of the Series 1999A-1 Notes, the Series
1999A-2 Notes, the Series 1999A-3 Notes and the Series 1999A-4 Notes has
been paid, to pay principal on the Series 1999A-5 Notes on the first
auction payment date occurring after the first business day of that month
for which timely notice of payment of principal can be given;
- - NINTH, after the principal balance of the Series 1999A-1 Notes, the Series
1999A-2 Notes, the Series 1999A-3 Notes, the Series 1999A-4 Notes and the
Series 1999A-5 Notes has been paid, to pay principal on the Series 1999A-6
Notes on the first auction payment date occurring after the first business
day of that month for which timely notice of payment of principal can be
given;
- - TENTH, after the principal balance of each of the Series 1999A Notes has
been paid, to pay principal on the Series 1999B-1 Notes on the first
auction payment date occurring after the first business day of that month
for which timely notice of payment of principal can be given;
- - ELEVENTH, to the reserve fund the amount, if any, necessary to maintain the
specified reserve fund balance;
- - TWELFTH, if the parity percentage is not at least 101%, to pay principal
until the parity percentage equals 101%:
- first, on the Series 1999A-1 Notes until the principal balance is
paid,
- then, on the Series 1999A-2 Notes until the principal balance is paid,
- then on the Series 1999A-3 Notes until the principal balance is paid,
- then on the Series 1999A-4 Notes until the principal balance is paid,
- then on the Series 1999A-5 Notes until the principal balance is paid,
- then on the Series 1999A-6 Notes until the principal balance is paid,
and
- then on the Series 1999B-1 Notes;
- - THIRTEENTH, to pay carryover interest, if any:
- first, ratably on the Series 1999A Notes, and
S-6
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<PAGE> 10
- --------------------------------------------------------------------------------
- then on the Series 1999B-1 Notes;
- - FOURTEENTH, to pay the amount, if any, owed an exchange counterparty in
respect of an early termination payment resulting from any event other than
a default by the issuer;
- - FIFTEENTH, at the option of the issuer, to redeem Series 1999B-1 Notes but
only if, after any redemption, the parity percentage is not less than 101%
and the senior parity percentage is not less than 109% and the outstanding
principal amount of Series 1999B-1 Notes is at least equal to 5.75% of the
total principal amount of outstanding notes; and
- - SIXTEENTH, to transfer any remainder to the depositor if after giving
effect to the transfer the parity percentage is not less than 102% and the
senior parity percentage is not less than 109%; if these parity
requirements are not met, then any remainder shall be retained in the
collection account.
After receiving the monthly information regarding the receipt of principal
payments on the financed student loans for the relevant collection period, the
issuer must give 15 days notice of any payment at principal prior to making the
payment of principal.
If, at the time interest on the notes is to be set aside, the interest rate is
unknown, the interest to be set aside will be calculated at the net loan rate.
In any case, principal payments on the notes will be made only in integral
multiples of $50,000.
The above payment order will be modified if, after giving effect to the payments
on any payment date, either:
- - the aggregate principal amount of the Series 1999A Notes would exceed the
sum of the principal amount of the financed student loans (including
capitalized interest) plus accruals of special allowance payments and
interest subsidies payable with respect to the financed student loans as of
the end of the preceding monthly collection period, plus the balance of the
reserve fund as of the computation date, or
- - a payment event of default has occurred under the indenture, but prior to
the acceleration of maturity of the notes.
As long as either of these conditions exist, the Series 1999B-1 Notes will not
receive any payments of interest or principal and subordinate interest rate
exchange payments will not be made. As long as any Series 1999A Notes remain
outstanding, any deferral of payments on the Series 1999B-1 Notes will not
constitute an event of default under the indenture unless the deferral exists on
the maturity date for the Series 1999B-1 Notes. Where an event of default has
occurred, we will allocate pro rata, without preference or priority of any kind,
principal distributions to all Series 1999A Notes.
In any case, we will make principal payments on the notes only in multiples of
$50,000.
SECURITY FOR THE NOTES; TRUST ASSETS
The trust assets are the sole security for the notes. The primary assets of the
trust are student loans with an aggregate principal balance of $471,045,381 as
of September 30, 1999. The student loans are expected to be acquired by the
eligible lender trustee on behalf of the trust on or about October 28, 1999. The
student loans consist of education loans to students and parents of students
enrolled in accredited institutions of higher education.
S-7
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<PAGE> 11
- --------------------------------------------------------------------------------
The trust assets also include:
- - moneys and investment securities on deposit in funds and accounts
established under the indenture;
- - rights of the issuer and the eligible lender trustee under the master
servicing agreement, the servicing agreements, any interest rate exchange
agreement, any interest rate exchange counterparty guarantee, the student
loan purchase agreements and the guarantee agreements that relate to the
financed student loans; and
- - rights of the issuer and the eligible lender trustee under other related
contracts.
All of the student loans in the trust are FFELP loans. As of September 30, 1999,
no more than 7.74% of the student loans in the trust are more than 30 and not
more than 120 days delinquent, and none of the student loans in the trust are
more than 120 days delinquent.
The issuer may substitute additional student loans for those comprising the
initial pool of student loans under some circumstances, including the
substitution of student loans with similar characteristics.
RESERVE FUND
The indenture trustee will make an initial deposit of $3,937,500 from the
proceeds of the sale of the notes into a reserve fund for the notes. This amount
is the reserve fund's specified reserve fund balance. To the extent necessary,
the initial deposit will be supplemented on the first business day of the month
with all amounts remaining after making or providing for all required
distributions to be provided for during that month until the specified reserve
fund balance is attained.
REDEMPTION
OPTIONAL REDEMPTION
The Series 1999A Notes are subject to redemption in whole at any time or in part
on any auction payment date at the option of the issuer at a price equal to the
principal balance of the notes to be redeemed plus accrued interest and unpaid
carryover interest, except that in the case of any redemption in part, the
redemption is permitted only if the rating agencies rating the notes confirm
that the redemption will not result in the withdrawal or reduction of any rating
on notes remaining outstanding.
While any Series 1999A Notes are outstanding, the Series 1999B-1 Notes will be
subject to redemption in whole or in part on any auction payment date at the
option of the issuer, to the extent that after any redemption, the parity
percentage is not less than 101% and the senior parity percentage is not less
than 109% and the outstanding principal amount of Series 1999B-1 Notes is at
least equal to 5.75% of the total principal amount of outstanding notes.
After the Series 1999A Notes have been paid, the Series 1999B-1 Notes will be
subject to redemption in part if after any redemption, the parity percentage is
not less than 100%, or in whole at any time.
Any redemption may be made on any applicable auction payment date at the option
of the issuer, on 15 days' notice given by the indenture trustee to the holders
of the applicable series of notes at a redemption price equal to the principal
amount, plus all accrued interest, including interest for prior periods when the
applicable interest rate was capped by the net loan rate.
S-8
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<PAGE> 12
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ERISA CONSIDERATIONS
The notes are expected to be treated as debt obligations without significant
equity features for purposes of the regulations of the Department of Labor set
forth in 29 C.F.R. 2510.3-101.
REGISTRATION, CLEARING AND SETTLEMENT
You will hold your interest in the notes through DTC in the United States or
through Cedel Bank, societe anonyme or the Euroclear System in Europe. You will
not receive a definitive certificate representing your interest in the notes,
except in limited circumstances.
The notes will be offered in minimum denominations of $50,000 and any integral
multiples of $50,000.
RATING
It is a condition to the sale of the notes that they be rated by the following
rating agencies as follows:
<TABLE>
<CAPTION>
Fitch Moody's
----- -------
<S> <C> <C>
Series 1999A-1 Notes AAA Aaa
Series 1999A-2 Notes AAA Aaa
Series 1999A-3 Notes AAA Aaa
Series 1999A-4 Notes AAA Aaa
Series 1999A-5 Notes AAA Aaa
Series 1999A-6 Notes AAA Aaa
Series 1999B-1 Notes A A2
</TABLE>
S-9
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<PAGE> 13
RISK FACTORS
You should consider the following risk factors in deciding whether to purchase
the notes.
YOU MAY HAVE DIFFICULTY
SELLING YOUR NOTES The notes will not be listed on any
securities exchange. As a result, if you
want to sell your notes you must locate a
purchaser that is willing to purchase those
notes. The underwriters intend to make a
secondary market for the notes. The
underwriters will do so by offering to buy
the notes from investors that wish to sell.
However, the underwriters will not be
obligated to make offers to buy the notes
and may stop making offers at any time. In
addition, any prices offered may not reflect
prices that other potential purchasers would
be willing to pay, were they to be given the
opportunity. There have been times in the
past where there have been very few buyers
of asset backed securities like the notes
and there may be times in the future. As a
result, you may not be able to sell your
notes when you want to do so or you may not
be able to obtain the price that you wish to
receive.
IF THE TRUST ASSETS ARE
INSUFFICIENT TO MAKE
PAYMENTS ON THE NOTES,
YOU MAY INCUR A LOSS The trust is not permitted to have any
significant assets or sources of funds other
than the student loans, the guarantee
agreements and the reserve fund. The notes
will not be insured or guaranteed by any
entity. Consequently, you must rely for
repayment on payments only from the trust's
assets. If the reserve fund is exhausted,
the trust will depend solely on payments
with respect to the student loans to make
payments on the notes and you could suffer a
loss. You will have no claim to any amounts
properly distributed to the depositor or the
servicers from time to time.
FAILURE BY STUDENT LOAN
HOLDERS OR SERVICERS TO
COMPLY WITH STUDENT LOAN
ORIGINATION AND SERVICING
PROCEDURES COULD
ADVERSELY AFFECT THE
ABILITY TO PAY PRINCIPAL
AND INTEREST ON YOUR
NOTES The Higher Education Act requires student
loan holders and servicers to follow
specified procedures to ensure that the
FFELP loans are properly originated and
serviced. Failure to follow these procedures
results in:
- LOSS OF REINSURANCE PAYMENTS, INTEREST
SUBSIDIES AND SPECIAL ALLOWANCE
PAYMENTS. The Department of Education's
refusal to make reinsurance payments to
the guarantee agencies or to make
interest subsidy payments and special
allowance payments to the eligible
lender trustee with respect to the
FFELP loans; and
- LOSS OF GUARANTEE PAYMENTS. The
guarantee agencies' inability or
refusal to make guarantee payments with
respect to the FFELP loans.
The loss of any payments may adversely
affect the ability to pay principal and
interest on your notes.
THE SUBORDINATE NOTES
WILL ABSORB CASH
SHORTFALLS AND LOSSES
BEFORE THE SENIOR NOTES The rights of the holders of subordinate
notes to receive payments of interest are
subordinated to the rights of the holders of
senior notes to receive payments of
interest. The holders of subordinate notes
will not receive any payments of principal
until the senior notes are paid except under
the circumstances described in this
prospectus supplement. Consequently, amounts
available to cover cash shortfalls will be
applied to the payment of interest on the
senior notes before payment of interest on
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<PAGE> 14
the subordinate notes. In addition, if the
pool of student loans is liquidated because
of an event of default under the indenture
or the depositor's insolvency, all amounts
due on the senior notes will be payable
before any amounts are payable on the
subordinate notes. Additionally, if the
outstanding principal balance of the senior
notes is in excess of the assets of the
trust, principal will be payable to the
holders of the senior notes in the amount of
the excess to the extent of funds available
before any amounts are payable to the
holders of the subordinate notes. If amounts
otherwise allocable to the subordinate notes
are used to fund payments of interest or
principal on the senior notes, distributions
of principal and interest on the subordinate
notes may be delayed or reduced.
OFFSET BY GUARANTEE
AGENCIES OR A REDUCTION
IN THE AMOUNT OF AVAILABLE
FUNDS BY THE DEPARTMENT
OF EDUCATION COULD
ADVERSELY AFFECT THE
ABILITY TO PAY PRINCIPAL
AND INTEREST ON YOUR
NOTES If the Department of Education or a
guarantee agency determines that the
eligible lender trustee owes a liability to
the Department of Education or the guarantee
agency on any FFELP loan for which the
eligible lender trustee is or was legal
titleholder, including FFELP loans held
under your indenture or other indentures,
the Department of Education or the guarantee
agency might seek to collect that liability
by offsetting against payments due the
eligible lender trustee under the trust. The
offsetting or shortfall of payments due to
the eligible lender trustee with respect to
the trust could adversely affect the amount
of available funds for any monthly
collection period and the trust's ability to
pay interest and principal on your notes.
Indentures of the depositor, the
administrator and their affiliates prior to
September, 1998 do not contain provisions
for cross-indemnification with respect to
payments and offsets. The indenture for your
notes and other indentures of the depositor,
the administrator and their affiliates
entered into during or after September, 1998
contain the cross-indemnification
provisions. Although these indentures will
include these provisions, there can be no
assurance that the amount of funds available
to the trust with respect to the right of
indemnification will be adequate to
compensate the trust and you for any
previous reduction in the available funds
for a monthly collection period. Also, the
fact that prior indentures did not contain
these provisions could adversely affect the
amount of available funds for any monthly
collection period to the extent any
shortfall or offset affects the trust and
the trust cannot be adequately compensated.
A DECLINE IN THE FINANCIAL
HEALTH OF GUARANTEE
AGENCIES COULD ADVERSELY
AFFECT THE ABILITY TO PAY
PRINCIPAL AND INTEREST ON
YOUR NOTES The FFELP loans are not secured by any
collateral of the borrowers. Payments of
principal and interest are guaranteed by
guarantee agencies to the extent described
in this prospectus supplement and in the
prospectus. Excessive borrower defaults
could impair a guarantee agency's ability to
meet its guarantee obligations. In addition,
recently enacted legislation is expected to
reduce the guarantee agencies' reserves
under the FFEL Program. The financial health
of a guarantee agency could affect the
timing and amount of available funds for any
monthly collection period and the ability to
pay principal of and interest on your notes.
Although a holder of FFELP loans could
submit claims for payment directly to the
Department of Education if the Department
determines that a guarantee
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<PAGE> 15
agency is unable to meet its guarantee
obligations, there is no assurance that the
Department of Education would ever make that
determination or that it would pay claims in
a timely manner. In its capacity as holder
of FFELP loans, the eligible lender trustee
may receive claim payments directly from the
Department of Education under Section 432(o)
of the Higher Education Act if that
determination is made.
POTENTIAL ADVERSE CHANGES
TO FFEL PROGRAM COULD
ADVERSELY AFFECT THE
ABILITY TO PAY PRINCIPAL
AND INTEREST ON YOUR
NOTES The Higher Education Act and other relevant
federal or state laws may be amended or
modified in the future. In particular, the
level of guarantee payments may be adjusted
from time to time which may affect the
ability to pay principal and interest on
your notes. The issuer cannot predict
whether any changes will be adopted or, if
adopted, what impact the changes may have on
the trust or your notes.
A DECLINE IN THE
FINANCIAL
HEALTH OF ANY EXCHANGE
COUNTERPARTY OR ANY
PROVIDER OF AN EXCHANGE
COUNTERPARTY GUARANTEE
COULD REDUCE THE AMOUNT
OF AVAILABLE FUNDS TO PAY
PRINCIPAL AND INTEREST ON
YOUR NOTES If any interest rate exchange agreement
relating to the notes is executed, any time
that the exchange rate being paid by an
exchange counterparty is greater than the
exchange rate being paid by the issuer, the
indenture trustee's ability to make
principal and interest payments on your
notes will be affected by the exchange
counterparty's ability or the ability of any
provider of an exchange counterparty
guarantee to meet its net payment obligation
to the indenture trustee. In addition, under
some circumstances, the failure by the
issuer to make an exchange payment under an
interest rate exchange agreement may
constitute an event of default under the
indenture.
INCREASED COMPETITION
FROM THE FEDERAL DIRECT
STUDENT LOAN PROGRAM
COULD ADVERSELY AFFECT THE
ABILITY TO PAY PRINCIPAL
AND INTEREST ON YOUR
NOTES The Federal Direct Student Loan Program has
been established under the Higher Education
Act. This program has resulted and could
continue to result in reductions in the
volume of loans made under the FFEL Program.
If so, the depositor, the administrator, the
master servicer and the servicers may
experience increased costs due to reduced
economies of scale. These cost increases
could reduce the ability of the master
servicer or the servicers to satisfy their
obligations to service the student loans.
This could also reduce revenues received by
the guarantee agencies available to pay
claims on defaulted FFELP loans. The
competition currently existing in the
secondary market for loans made under the
FFEL Program could be reduced, resulting in
fewer potential buyers of the FFELP loans
and lower prices available in the secondary
market for those loans. The Department of
Education also has implemented a direct
consolidation loan program, which may reduce
the volume of loans made under the FFEL
Program and is expected to result in
prepayments of student loans.
PREPAYMENTS BY
BORROWERS MAY CREATE
REINVESTMENT RISK Student loans may be prepaid by borrowers at
any time without penalty. The rate of
prepayments cannot be predicted and may be
influenced by economic and other factors,
such as interest rates, the availability of
other financing and the general job market.
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<PAGE> 16
To the extent that borrowers elect to borrow
money through consolidation loans, the trust
will receive as a prepayment of principal
the aggregate principal amount of the loan.
If loan prepayments result in a series of
notes being prepaid before its expected
maturity date, you may not be able to
reinvest your funds at the same yield as the
yield on the notes. The issuer cannot
predict the prepayment rate of any notes,
and reinvestment risks resulting from a
faster or slower prepayment speed will be
borne entirely by you and the other holders
of the notes. Generally, the effect of
prepayments initially will be to increase
the rate of payment on each series of notes
on which interest is then being paid.
Reinvestment risk resulting from prepayments
is expected to be borne first by the holders
of any senior series of notes, and then by
the holders of subordinated series of notes.
UNCERTAINTY OF THE
MATURITY OF YOUR
INVESTMENT MAY CREATE
REINVESTMENT RISK Scheduled payments on the student loans and
the maturities of the student loans may be
extended without your consent, which may
lengthen the weighted average life of your
investment. Prepayments of principal on the
student loans, parity percentage payments
and other factors may shorten the life of
your investment which may result in
reinvestment risk to you.
BORROWERS OF STUDENT
LOANS ARE SUBJECT TO A
VARIETY OF FACTORS THAT
MAY ADVERSELY AFFECT
THEIR REPAYMENT ABILITY Collections on the student loans during a
monthly collection period may vary greatly
in both timing and amount from the payments
actually due on the student loan for that
monthly collection period for a variety of
economic, social and other factors.
Failures by borrowers to pay timely the
principal and interest on their student
loans or an increase in deferments or
forbearances could affect the timing and
amount of available funds for any monthly
collection period and the ability to pay
principal and interest on your notes. The
effect of these factors, including the
effect on the timing and amount of available
funds for any monthly collection period and
the ability to pay principal and interest on
your notes is impossible to predict.
THE INTEREST RATES ON THE
NOTES ARE SUBJECT TO
LIMITATIONS WHICH MAY
CREATE AN INTEREST
SHORTFALL ON YOUR NOTES
WHICH MAY NOT BE RECOVERED The interest rate for each series of notes
will be based on the outcome of an auction
of notes. The student loans, however, bear
interest at rates with an effective rate
(either variable or fixed and taking into
account any special allowance payments)
equal to the rate borne by Treasury bills
plus a stated margin.
The interest rates on each series of notes
will be limited by the net loan rate for
each series which will equal the weighted
average effective interest rate of the
student loans in the trust, reduced by the
program operating expenses. For a payment
date on which the net loan rate applies, the
difference between the amount of interest at
the rate described above and the amount of
interest at the net loan rate will be paid
on succeeding payment dates to the extent of
available funds and may never be paid.
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<PAGE> 17
THE INTEREST RATES ON
STUDENT LOANS AND OTHER
INVESTMENTS MAY BE
INSUFFICIENT TO COVER
INTEREST ON THE NOTES
DUE TO RATE-INDEX
DIFFERENCES The interest rates on each series of your
notes are variable and will fluctuate from
one interest period to another in response
to changes in benchmark rates or general
market conditions. The issuer can make no
representation as to what these rates may be
in the future. As described above, the
interest rates on each series of notes will
be based on the outcome of an auction of
notes, thus the interest rates on the notes
are variable and will fluctuate from one
interest period to another in response to
changes in benchmark rates or general market
conditions. The student loans, however, bear
interest at rates with an effective rate
(either variable or fixed and taking into
account any special allowance payments)
equal to the rate borne by Treasury bills
plus a stated margin.
As a result of these differences between the
interest rates on the notes and the interest
rates on the financed student loans, there
could be periods of time when the interest
rates on student loans are inadequate to
cover the interest due on the notes and
expenses required under the indenture. To
the extent that the interest rates on
student loans are fixed or decrease or do
not increase as fast as the interest rates
on the notes, the interest rates with
respect to those notes may be limited to the
net loan rate or may be deferred to future
periods. There can be no assurance that
sufficient funds will be available in future
periods to make up for any shortfalls in the
current payments of interest on those notes.
Further, if there is a decline in the
interest rates on student loans, the amount
of funds representing interest deposited
into the trust may be reduced and, even if
there is a similar reduction in the interest
rates applicable to any series of notes,
there may not necessarily be a similar
reduction in the other amounts required to
be funded out of these funds (such as some
administrative expenses). In addition,
proceeds of and revenues relating to the
notes in the funds and accounts under the
indenture will be used to acquire investment
agreements bearing interest at fluctuating
interest rates. Although the issuer expects
to structure the investment agreements to
minimize the risk resulting from differences
in the fluctuation of the interest rates on
the investment agreements and your notes,
there can be no assurance that it will be
successful.
THE TRUST'S PURCHASE OF
STUDENT LOANS AT A
PREMIUM MAY RESULT IN
LOSSES The original principal amount of the notes
will be equal to approximately 102.6% of the
sum of the outstanding principal balance of
the student loans plus accrued interest as
of the cutoff date and the amount deposited
in the reserve fund and the capitalized
interest account on the closing date. We
cannot assure you as to when the aggregate
principal amount of the notes will be equal
to or less than the sum of the principal
amount of the pool of student loans and the
amounts on deposit in the reserve fund. If
the student loans were liquidated at a time
when the outstanding principal amount of the
notes exceeded the sum of the principal
amount of the student loans and the amount
on deposit in the reserve fund and the
collection account, you may suffer a loss.
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<PAGE> 18
IF THE INDENTURE TRUSTEE
HAS DIFFICULTY
LIQUIDATING FINANCED
STUDENT LOANS YOU MAY
SUFFER A LOSS Generally, during an event of default, the
indenture trustee is authorized to sell the
financed student loans. However, the
indenture trustee may not find a purchaser
for the financed student loans. Also, the
market value of the financed student loans
might not equal the principal amount of
notes plus accrued interest. In either
event, you may suffer a loss.
THE INSUFFICIENCY OF
FUNDS FOR PRINCIPAL
DISTRIBUTIONS IS NOT AN
EVENT OF DEFAULT AND YOU
WOULD NOT HAVE ANY
REMEDIES The principal amount required to be paid on
the notes on any payment date under the
indenture generally is limited to amounts
available for payment. Therefore, failure to
pay principal will not result in the
occurrence of an event of default until the
legal final maturity of the notes.
BANKRUPTCY OF DEPOSITOR,
ISSUER OR STUDENT LOAN
FUNDING RESOURCES,
INC. COULD RESULT IN
ACCELERATED PREPAYMENT
ON NOTES, REDUCTIONS IN
PAYMENT OR DELAYS IN
PAYMENT If the depositor becomes bankrupt, and the
assets and liabilities of the trust are
included in the depositor's bankruptcy
estate, the United States Bankruptcy Code
could materially limit or prevent the
enforcement of the issuer's obligations,
including, without limitation, its
obligations under the notes. The depositor's
trustee in bankruptcy (or the depositor
itself as debtor-in-possession) may seek to
accelerate payment on your notes and
liquidate the assets in the trust. If
principal on your notes is declared due and
payable, you may lose the right to future
payments and face the reinvestment risks
mentioned above.
The depositor has structured the issuer as a
common law trust under Delaware law, as
opposed to a business trust. Business trusts
generally are eligible for relief under the
United States Bankruptcy Code. If a court
were to conclude that the issuer was a
business trust and, therefore, eligible to
be a debtor under the United States
Bankruptcy Code, a bankruptcy filing by or
against the issuer could result in delays in
payments on your notes or reductions in the
amounts of payments.
The depositor is organized to prevent any
voluntary or involuntary application for
relief by Student Loan Funding Resources,
Inc. under the United States Bankruptcy Code
or other insolvency laws, as the case may
be, resulting in the consolidation of the
assets and liabilities of the depositor with
those of Resources.
If a court were to conclude that the assets
and liabilities of the depositor should be
consolidated with those of Resources in a
bankruptcy or other proceeding under any
insolvency law, then even a "true sale" to
the depositor would not be effective to
remove the student loans and other assets
from the bankruptcy estate of Resources and
you could experience delays in payments on
your notes or reductions in the amount of
payments.
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<PAGE> 19
IF SALE OF STUDENT LOANS
FROM THE DEPOSITOR TO THE
ISSUER IS NOT A TRUE SALE,
DELAYS OR REDUCTIONS IN
PAYMENTS TO YOU COULD
RESULT The depositor has taken steps in structuring
its purchase of student loans from its
affiliates to increase the likelihood that
each purchase will be deemed a "true sale."
If any transfer to the depositor of student
loans from an affiliate of the depositor is
deemed to be a secured financing, other
persons may have an interest in the loans
superior to the interest of the issuer, the
depositor or the eligible lender trustee, as
applicable. In addition, if the affiliate
became a debtor under the United States
Bankruptcy Code and a creditor or trustee in
bankruptcy or the affiliate itself took the
position that its transfer of student loans
to the depositor was a secured financing
instead of a "true sale," then delays in
payments on your notes could occur or
(should the court rule in favor of the
creditor, trustee or affiliate) reductions
in the amount of payments to you could
result.
In addition, the issuer and the eligible
lender trustee will treat the transfer of
the student loans from the depositor to the
eligible lender trustee as a "true sale" and
will take all actions that are required so
that the issuer, or the eligible lender
trustee on behalf of the issuer, will be
treated as the legal owner of the student
loans. Despite our efforts, if the depositor
or the issuer were to become a debtor in a
bankruptcy case and a creditor or trustee in
bankruptcy of the debtor or the debtor
itself were to take the position that the
transfer should instead be treated as a
secured financing, then delays in payments
on the notes could occur. If the court ruled
in favor of any trustee, debtor or creditor,
reductions in the amount of payments on the
notes could occur.
CHANGES IN INCENTIVE AND
REPAYMENT TERMS RESULT
IN YIELD UNCERTAINTIES
FOR YOU Under some incentive programs, the depositor
and the sellers of the financed student
loans may terminate or change the terms of
the incentives with respect to any or all of
a borrower's loans. The issuer cannot
predict which borrowers will qualify or
decide to participate in these programs. The
effect of these incentive programs may be to
reduce the yield on the financed student
loans.
CONSUMER PROTECTION LAWS
MAY INCREASE COSTS AND
UNCERTAINTIES OF YOUR
INVESTMENT Consumer protection laws impose substantial
requirements on lenders and servicers. Some
state laws impose finance charge ceilings
and other restrictions on some transactions
and require contract disclosures. These
state laws are generally preempted by the
Higher Education Act for FFELP loans.
However, the form of promissory notes
required by the Department of Education for
FFELP loans provides that holders of
promissory notes evidencing some loans made
to borrowers attending for-profit schools
are subject to any claims and legal defenses
that the borrower may have against the
school.
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<PAGE> 20
BOOK-ENTRY REGISTRATION
MAY LIMIT INVESTORS'
ABILITY TO PARTICIPATE
DIRECTLY AS A HOLDER The notes will be represented by one or more
certificates registered in the name of Cede
& Co., the nominee for DTC, and will not be
registered in the names of the holders of
the notes. You will only be able to exercise
your rights indirectly through DTC and its
participating organizations.
ABILITY OF MAJORITY
HOLDERS TO WAIVE
DEFAULTS UNDER THE
INDENTURE MAY ADVERSELY
AFFECT YOU Under the indenture, holders of a majority
in principal amount of notes may amend or
supplement provisions of the indenture and
the notes and waive defaults, events of
defaults and compliance provisions without
the consent of the other holders. You have
no recourse if the majority of holders votes
and you disagree with the majority vote on
these matters. The majority of holders may
vote in a manner which impairs the ability
to pay principal and interest on your notes.
The holders of subordinate notes have no
voting rights while any senior notes are
outstanding. The holders of subordinate
notes have no recourse if the holders of a
majority in principal amount of the senior
notes vote and the subordinate holders
disagree. The majority of holders of senior
notes may vote in a manner which impairs the
ability to pay principal and interest on the
subordinate notes.
DEPOSITOR MAY NOT HAVE
RESOURCES TO MEET ITS
OBLIGATIONS TO PURCHASE
FINANCED STUDENT LOANS
FOR ITS BREACH OF A
REPRESENTATION OR
WARRANTY The depositor is obligated to repurchase
student loans if it breaches any of its
representations, warranties or obligations
and that breach results in a loss of
guarantee payments. The depositor may not
have the financial resources to repurchase
any student loan. The failure of the
depositor to repurchase a student loan is a
breach of the transfer and sale agreement,
enforceable by the trust or by the indenture
trustee, but is not an event of default
under the indenture.
INABILITY OF SELLER TO
MEET ITS REPURCHASE
OBLIGATIONS MAY
ADVERSELY AFFECT THE
ABILITY TO PAY PRINCIPAL
AND INTEREST ON YOUR
NOTES The eligible lender trustee on behalf of the
issuer, as the successor to the depositor
under the transfer and sale agreement, has
the right, under each student loan purchase
agreement or the transfer and sale
agreement, as applicable, to cause any
seller, including the depositor as a seller
under the transfer and sale agreement, to
repurchase any student loan in the event of
a breach of the representations, warranties
or covenants of the seller with respect to
the student loan. There can be no assurance,
however, that any seller will have the
financial resources to do so. The failure of
the seller to so repurchase a student loan
would constitute a breach of the related
student loan purchase agreement but would
not constitute an event of default under the
indenture.
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<PAGE> 21
PROBLEMS CAUSED BY YEAR
2000 ISSUES COULD RESULT IN
REDUCTIONS OR DELAYS IN
PAYMENT WHICH MAY
ADVERSELY AFFECT THE
ABILITY TO PAY PRINCIPAL
AND INTEREST ON YOUR NOTES Many computers and computer chips were not
programmed to recognize more than two digits
in a year of a date. As a result, in the
year 2000, those computers will not know
whether the `00 refers to the year 1900 or
the year 2000. To the extent that the
computer programs and information systems of
the master servicer, any sub-servicer, the
administrator, any of the guarantors, the
eligible lender trustee, the indenture
trustee, the Department of Education, DTC or
third parties on which these entities rely,
have year 2000 problems, the amount and
timing of payments to you could be adversely
affected.
PROBLEMS CAUSED BY YEAR
2000 ISSUES WITH THE
DEPARTMENT OF EDUCATION
COULD RESULT IN REDUCTIONS
OR DELAYS IN PAYMENT WHICH
MAY ADVERSELY AFFECT THE
ABILITY TO PAY PRINCIPAL
AND INTEREST ON YOUR NOTES The Department of Education has undertaken a
year 2000 compliance project to address year
2000 issues. Information regarding the
Department of Education's year 2000 efforts
can be obtained at the Department of
Education's site on the world wide web at
http://www.ed.gov. Officials at the
Department of Education have indicated that
compliance for the Department of Education's
mission critical systems relating to the
Federal Family Education Loan Program
student loans was completed on March 8,
1999. Any failure by the Department of
Education to resolve year 2000 issues or any
adverse effect on the Department of
Education caused by a party on which the
Department of Education relies as a result
of year 2000 issues may have a material
adverse effect on the Federal Family
Education Loan Program, the federal
guarantors, the master servicer and you.
WITHDRAWAL OR
DOWNGRADING OF INITIAL
RATINGS WILL ADVERSELY
AFFECT THE PRICES FOR THE
NOTES A security rating is not a recommendation to
buy, sell or hold securities. Similar
ratings on different types of securities do
not necessarily mean the same thing. We
recommend that you analyze the significance
of each rating independently from any other
rating. Any rating agency may change its
rating of the notes after the notes are
issued if that rating agency believes that
circumstances have changed. Any subsequent
withdrawal or downgrading of a rating will
likely reduce the price that a subsequent
purchaser will be willing to pay for the
applicable notes. The ratings do not address
the likelihood of the ultimate payment to
you of any interest not paid as a result of
the interest rate being limited by the net
loan rate.
THE NOTES ARE NOT
SUITABLE INVESTMENTS FOR
ALL INVESTORS The notes are not a suitable investment if
you require a regular or predictable
schedule of payments or payment on any
specific date. The notes are complex
investments that should be considered only
by investors who, either alone or with their
financial, tax and legal advisors, have the
expertise to analyze the prepayment,
reinvestment, default and market risk, the
tax consequences of an investment, and the
interaction of these factors.
S-18
<PAGE> 22
THE ISSUER
THE TRUST
Student Loan Funding 1999-A/B Trust (known as the issuer or the trust) is a
common law trust formed under the laws of the State of Delaware. The trust will
not engage in any activity other than:
(1) acquiring, holding, selling and managing the financed student loans and the
other assets of the trust and proceeds from the financed student loans,
(2) issuing one or more classes of its certificates and notes,
(3) making payments on its certificates and notes, and
(4) engaging in other activities related to the activities listed in (1)
through (3) above.
The trust initially will be capitalized with a nominal cash payment for the
trust certificate. The right to receive any amount remaining after payment of
the notes will be represented by the trust certificate which initially will be
held by the depositor. The equity of the trust, together with the proceeds of
the sale of the notes, will be used by the trust acting on its own behalf or
through an eligible lender trustee, to acquire student loans from the depositor
under a transfer and sale agreement.
The assets of the trust will include:
(1) the pool of financed student loans,
(2) all funds related to the financed student loans collected on or after the
cut-off date, and
(3) all moneys and investments on deposit in the collection account,
capitalized interest account, note payment account, expense account,
reserve fund and excess surplus account.
All of the accounts in (3) above are held in the name of the indenture trustee.
To facilitate servicing and to minimize administrative burden and expense, the
servicers will be appointed custodians of the promissory notes representing the
financed student loans by the eligible lender trustee.
Under the trust agreement, the co-owner trustee, when acting on behalf of the
trust, will not engage in any activity other than:
(1) assigning, granting, transferring, pledging, mortgaging and conveying the
assets of the trust to the indenture trustee for the benefit of the holders
of the notes,
(2) holding, managing and distributing to the holder any portion of the assets
of the trust released from the lien of, and remitted to the co-owner
trustee for the trust,
(3) issuing the certificates and notes of the issuer,
S-19
<PAGE> 23
(4) making payments on the certificates and notes of the issuer, and
(5) engaging in other activities related to the activities listed in (1)
through (4) above.
The depositor has structured the issuer as a common law trust, as opposed to a
business trust. Business trusts generally are eligible for relief under the
United States Bankruptcy Code or other insolvency laws. Common law trusts may
not be eligible to be debtors under the insolvency laws if their activities are
insufficient to allow them to be characterized as business trusts. The depositor
has restricted the activities of the issuer in the trust agreement so that it
would not be characterized as a business trust eligible to be a debtor under the
insolvency laws. If a court were to conclude that the issuer was a business
trust and, therefore, eligible to be a debtor under the insolvency laws, a
bankruptcy filing by or against the issuer could result in delays in payments on
your notes or reductions in the amounts of these payments.
The trust's principal offices are located in the offices of the co-owner
trustee, c/o Firstar Bank, National Association, 425 Walnut Street, Cincinnati,
Ohio 45202.
The notes are obligations of the trust only and are payable solely from the
assets of the trust under the indenture. See "Security for the Notes -- The
Trust Assets" in the prospectus.
CO-OWNER TRUSTEE
Firstar Bank, National Association, a national banking corporation, will serve
as co-owner trustee of the trust. Its address is 425 Walnut Street, Cincinnati,
Ohio 45202. The trust, the depositor, the administrator or their affiliates may
maintain other banking relationships with Firstar Bank, National Association and
its affiliates from time to time.
OWNER TRUSTEE
First Union Trust Company, National Association, a national banking corporation,
will serve as owner trustee of the trust. Its address is One Rodney Square,
Suite 100, 920 King Street, Wilmington, Delaware 19801. The trust, the
depositor, the administrator or their affiliates may maintain other banking
relationships with First Union Trust Company, and its affiliates from time to
time.
YEAR 2000
For information describing the trust's, the depositor's and the administrator's
readiness for year 2000, see "The Depositor -- Year 2000."
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<PAGE> 24
THE DEPOSITOR
Student Loan Funding Riverfront LLC, a Delaware limited liability company
organized as a bankruptcy remote special purpose entity, is the depositor. The
sole member of the depositor is Student Loan Funding Holdings LLC, a Delaware
limited liability corporation. The members of Student Loan Funding Holdings LLC
are:
(1) Student Loan Funding Resources, Inc. (99% ownership), an Ohio
corporation that also acts as the administrator for the depositor's
business activities and the master servicer, and
(2) SLF Enterprises, Inc. (1% ownership), an Ohio corporation and wholly
owned subsidiary of Resources.
YEAR 2000
The "year 2000" issue refers to a wide variety of potential computer program and
electronic processing and functionality issues that may arise from the inability
to properly process date-sensitive information relating to the year 2000, later
years and to a lesser degree, the year 1999. As a result of computer programs
and other electronic devices historically being programmed using two digits
rather than four to define the applicable year, time-sensitive software may not
properly recognize a year that begins with "20" instead of the familiar "19,"
which could result in system failure or miscalculations. The inability or
failure to adequately address year 2000 issues by any of the parties below
(including by any party on which any of the parties rely) could have a material
adverse impact on the timely receipt and amount of collections on the financed
student loans. If the collections were to be so affected, the timing and amount
of payments on the notes could be adversely affected.
The issuer and the depositor are wholly dependent on the administrator's
information systems. The administrator has conducted a review of its own
information systems and has completed all critical modifications to those
systems. The administrator also has developed high level contingency plans for
its mission-critical applications though, it is not clear whether adequate
contingency plans can be developed for all possible problems. The
administrator's year 2000 efforts did not materially adversely impact its
student loan program or the timely payment of the notes. The administrator spent
approximately $43,000 in 1998 and $40,000 in 1999 on year 2000 efforts.
The administrator has made inquiries of the indenture trustee, the eligible
lender trustee, each of the servicers and each of the guarantee agencies that
guarantee more than 10% of the initial financed student loans, and each of these
parties has confirmed to the administrator that it has reviewed its own
information systems and has taken or is taking the necessary steps to make any
necessary modifications to those systems.
The administrator made follow-up inquiries to material servicers to reasonably
assure the adequacy of year 2000 testing and contingency plans. The
administrator visited key servicers as necessary to review these test plans,
test results and contingency plans. There can be no assurance that the computer
systems of these entities or other companies on which:
- the issuer,
- the depositor,
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<PAGE> 25
- the administrator,
- the master servicer,
- owner trustee,
- co-owner trustee,
- the indenture trustee,
- the eligible lender trustee,
- any servicer, or
- any guarantee agency
relies will be compliant on a timely basis, or that a failure to resolve year
2000 issues by any of these parties or another party on which any of these
parties rely, or a remediation or conversion that is incompatible with the
administrator's, the master servicer's, indenture trustee's, eligible lender
trustee's, any guarantee agency's or any servicer's computer systems, will not
have a material adverse effect on the issuer, the depositor, the administrator,
the indenture trustee, the eligible lender trustee, a guarantee agency or a
servicer.
Also, to the extent any additional eligible lender trustee, guarantee agency or
servicer is added for financed student loans in the trust, or a replacement or
successor to the initial indenture trustee is necessary, the relative state of
preparedness or unpreparedness of these entities with regard to year 2000 issues
may have an adverse impact on the issuer, the depositor or the administrator and
the timing and amount of payments on the notes. The administrator will continue
to monitor the progress of the master servicer, the indenture trustee, the
eligible lender trustee, each of the servicers and each of the guarantee
agencies in addressing their respective year 2000 issues. For information
regarding the efforts of DTC in addressing year 2000 issues, see "Description of
the Notes -- Book-entry Registration."
The administrator maintains other material third party vendor relationships with
human resources, finance and facilities providers. The administrator made
inquiries of those vendors whose failure of year 2000 readiness would constitute
a potential material impact on its business. These inquiries have confirmed that
the administrator's vendors have taken, or are taking reasonable necessary steps
toward resolution of year 2000 issues, if any, which may materially affect the
administrator. The administrator will continue to monitor the process of third
party vendors and has developed or is developing reasonable contingency plans to
address any material year 2000 failures or deficiencies.
The administrator has also made inquiries to the Department of Education, and
the Department of Education has confirmed to the administrator that it is
reviewing its own information systems and is taking the necessary steps to make
any necessary modifications to those systems. The Department of Education has
undertaken a year 2000 compliance project to address year 2000 issues.
Information regarding the Department of Education's year 2000 efforts can be
obtained at the Department of Education's site on the world wide web at
http://www.ed.gov. This website indicates that the Department of Education
completed the five phases recommended by the General Accounting office for all
its mission critical systems on March 8, 1999. Any failure by the Department of
Education to resolve its year 2000 issues or any adverse effect on the
Department of Education caused by a party on which the Department of Education
relies as a result of year 2000 issues may have a material adverse effect on the
FFEL Program and the timely receipt of payments on financed FFELP loans, such as
interest subsidy payments and special allowance payments.
Even if the depositor or the administrator does not incur significant direct
costs in modifying its own information systems, there can be no assurance that
the failure or delay of the indenture trustee, any eligible
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<PAGE> 26
lender trustee, any servicer, any guarantee agency, the Department of Education
or any other third parties (including any party on which any of these parties
rely or any calculation agent, exchange counterparty, investment agreement
provider or provider of credit enhancement under the indenture or any other
indenture of the depositor) in addressing year 2000 issues or the costs involved
in this process will not have a material adverse impact on the timely receipt
and amount of collections on the financed student loans. If the collections were
to be so affected, the timing and amounts of payments on the notes could be
adversely affected.
USE OF PROCEEDS
The proceeds of the sale of the notes, net of underwriters' discount of
$____________ (____% of gross proceeds), will be transferred to the indenture
trustee for deposit to the credit of the following funds and accounts in the
following estimated amounts:
<TABLE>
<CAPTION>
Percentage of
Fund or Account Amount Net Proceeds
--------------- ------------ ------------
<S> <C> <C>
Acquisition Fund $ %
Reserve Fund %
Capitalized Interest Account %
Expense Account %
------------ ----------
Total Uses $ 100%
</TABLE>
THE FINANCED STUDENT LOANS
This section sets forth tables and other information describing some
characteristics, as of September 30, 1999, of the financed student loans
expected to be acquired by the eligible lender trustee on behalf of the trust on
or about October 28, 1999. The financed student loans will be FFELP loans that
meet several criteria, including the following. Each financed student loan:
(1) was or will be originated in the United States or its territories
or possessions under the FFEL Program to or on behalf of a
student who has graduated or is expected to graduate from an
accredited institution of higher education within the meaning of
the Higher Education Act;
(2) bears interest at the maximum interest rate permitted under the
Higher Education Act, or the lesser rate of interest as is
approved by the rating agencies under the indenture;
(3) contains terms required by the FFEL Program, the guarantee
agreements and other applicable requirements; and
(4) is not more than 120 days past due as of the date the financed
student loan is financed.
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<PAGE> 27
As of the cut-off date:
(1) $39,225,994 principal amount of the initial financed student
loans were delinquent between 1 and 30 days;
(2) $17,305,498 principal amount of the initial financed student
loans were delinquent between 31 and 60 days;
(3) $12,746,219 principal amount of the initial financed student
loans were delinquent between 61 and 90 days;
(4) $6,405,875 principal amount of the initial financed student loans
were delinquent between 91 and 120 days; and
(5) none of the initial financed student loans was delinquent for
more than 120 days.
For this purpose, delinquency refers to the number of days for which any part of
a payment is past due. All of the financed student loans in the trust are FFELP
loans.
Each financed student loan is required to be guaranteed as to principal and
interest by a guarantee agency and reinsured by the Department of Education to
the extent provided under the Higher Education Act and eligible for special
allowance payments and, with respect to each financed student loan that is a
subsidized Stafford Loan, interest subsidy payments paid by the Department of
Education. See "Description of the FFEL Program" in the prospectus.
Additional student loans may be substituted for financed student loans in the
trust if the additional student loans meet specific characteristics including:
- an aggregate principal amount no less than the aggregate principal
amount of the financed student loans being exchanged,
- the same rates of interest,
- eligible, after exchange, for the same special allowance payments, and
- the same status, whether interim, grace or repayment.
The aggregate characteristics of the financed student loans include the
composition of the financed student loans, the borrowers of the financed student
loans and the distribution by interest and by principal balance described by the
tables below.
Each of the financed student loans provides for the amortization of the
outstanding principal balance of that financed student loan over a series of
regular payments. Each regular payment consists of an installment of interest.
The interest installment is calculated on the basis of the outstanding principal
balance of that financed student loan multiplied by the applicable interest rate
and further multiplied by the period elapsed since the preceding payment of
interest was made. As payments are received in respect of that financed student
loan,
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<PAGE> 28
the amount received is applied first to outstanding late fees, if collected,
then to interest accrued to the date of payment, and the balance is applied to
reduce the unpaid principal balance. Accordingly, if a borrower pays a regular
installment before its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made, will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be greater than it
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable grace periods, deferment periods
or forbearance periods, the borrower pays a regular installment until the final
scheduled payment date, at which time the amount of the final installment is
increased or decreased as necessary to repay the then outstanding principal
balance of the borrower's financed student loan.
The tables below describe characteristics of the initial financed student loans
as of the cut-off date.
COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS AS OF THE CUT-OFF DATE
<TABLE>
<S> <C>
Aggregate Outstanding Principal Balance ..................................... $471,045,381
Aggregate Outstanding Accrued Interest ...................................... $ 10,221,477
Number of Borrowers ......................................................... 58,604
Average Outstanding Principal Balance Per Borrower .......................... $ 8,038
Number of Loans ............................................................. 166,211
Average Outstanding Principal Balance Per Loan .............................. $ 1,530
Weighted Average Annual Borrower Interest Rate .............................. 7.93%
Weighted Average Remaining Term (months) (does not include the months
remaining for the in-school, grace, deferment or forbearance periods)(1).. 127
Weighted Average Remaining Term (months) (including the months
remaining for the in-school, grace, deferment or forbearance periods)(1).. 131
</TABLE>
- ---------------
(1)Refers to the payment status of the borrower of each financed student loan as
of the cut-off date, i.e., the borrower may still be attending school, may be in
a grace period after completing school and prior to repayment commencing, may be
currently required to repay the loan or may have temporarily ceased repaying the
loan through a deferral or a forbearance period. See "Description of the FFEL
Program" in the prospectus.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY LOAN TYPE AS OF
THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Loan Type Loans Balance Balance
- --------- ----- ------- -------
<S> <C> <C> <C>
Stafford-Subsidized ........... 98,813 $196,075,226 41.62%
Stafford-Unsubsidized ......... 11,532 112,342,462 23.85%
Consolidation ................. 49,600 137,296,080 29.15%
PLUS .......................... 4,081 15,212,899 3.23%
SLS ........................... 2,194 10,118,714 2.15%
Total ................. 166,211 $471,045,381 100.00%
</TABLE>
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<PAGE> 29
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY MINIMUM GUARANTEE LEVEL
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Minimum Guarantee Level Loans Balance Balance
- ----------------------- ----- ------- -------
<S> <C> <C> <C>
FFELP Loan Guaranteed 100% ................................. 106,165 $194,033,627 41.19%
FFELP Loan Guaranteed 98% .................................. 60,046 277,011,754 58.81%
Total .................................................. 166,211 $471,045,381 100.00%
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY GUARANTEE AGENCY
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Guarantee Agency Loans Balance Balance
- ---------------- ----- ------- -------
<S> <C> <C> <C>
Great Lakes Higher Education Guaranty Corporation .......... 122,800 $262,102,028 55.64%
Pennsylvania Higher Education Assistance Agency ............ 12,271 109,972,008 23.35%
United Student Aid Funds, Inc. ............................. 23,047 76,785,456 16.30%
Other Guarantee Agencies ................................... 8,093 22,185,889 4.71%
Total .................................................. 166,211 $471,045,381 100.00%
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY BORROWER INTEREST RATE
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Interest Rate (1) Loans Balance Balance
----------------- ----- ------- -------
<S> <C> <C> <C>
Less than 7.50% .............. 40,448 $ 88,194,179 18.72%
7.50% to 7.99% ............... 79,188 155,910,966 33.10%
8.00% to 8.49% ............... 36,675 153,685,494 32.63%
8.50% to 8.99% ............... 4,477 12,620,142 2.68%
9.00% to 9.49% ............... 5,302 59,197,430 12.57%
9.50% or greater ............. 121 1,437,170 0.30%
Total .................... 166,211 $471,045,381 100.00%
</TABLE>
(1) Determined using the interest rates applicable to the initial financed
student loans as of the cut-off date. However, because many of the initial
financed student loans bear interest at variable rates per annum, the existing
interest rates are not indicative of future interest rates on the financed
student loans. See "Description of the FFEL Program" in the prospectus.
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<PAGE> 30
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY RANGE OF OUTSTANDING
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Principal Balance Loans Balance Balance
- ----------------- ----- ------- -------
<S> <C> <C> <C>
Less than $500 17,115 $ 9,472,681 2.01%
$500-$999.99 22,052 21,068,810 4.47%
$1,000-$1,999.99 53,872 89,062,892 18.91%
$2,000-$2,999.99 26,758 68,025,846 14.44%
$3,000-$3,999.99 15,292 48,797,040 10.36%
$4,000-$5,999.99 12,266 54,201,095 11.51%
$6,000-$7,999.99 5,312 27,266,547 5.79%
$8,000-$9,999.99 3,144 17,438,097 3.70%
$10,000-$14,999.99 5,425 38,810,003 8.24%
$15,000-$19,999,99 2,347 25,959,709 5.51%
$20,000 or greater 2,628 70,942,661 15.06%
Total 166,211 $471,045,381 100.00%
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY BORROWER PAYMENT STATUS
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Borrower Payment Status Loans Balance Balance
- ----------------------- --------- ----------- -----------
<S> <C> <C> <C>
In School ............................ 25,574 $ 59,686,153 12.67%
Grace ................................ 24,984 53,330,462 11.32%
Repayment ............................ 115,317 350,678,187 74.45%
Deferment ............................ 104 2,086,249 0.44%
Forbearance .......................... 214 5,166,702 1.10%
Claim ................................ 18 97,628 0.02%
Total ............................ 166,211 $ 471,045,381 100.00%
</TABLE>
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<PAGE> 31
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY REMAINING TERM TO
SCHEDULED MATURITY AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Remaining Months Outstanding Outstanding
Until Scheduled Number of Principal Principal
Maturity Loans Balance Balance
- -------- ----- ------- -------
<S> <C> <C> <C>
1 to 12 1,779 $ 660,952 0.14%
13 to 24 2,482 2,254,166 0.48%
25 to 36 3,268 4,267,241 0.91%
37 to 48 4,333 7,105,462 1.51%
49 to 60 5,049 10,888,463 2.31%
61 to 72 7,328 16,579,162 3.52%
73 to 84 5,210 14,245,362 3.02%
85 to 96 14,888 31,412,552 6.67%
97 to 108 25,918 52,352,671 11.11%
109 to 120 90,238 237,261,065 50.37%
121 to 180 3,535 43,829,982 9.30%
181 to 240 1,466 33,327,809 7.08%
241 to 300 277 10,722,226 2.28%
Over 300 440 6,138,268 1.30%
Total ............................ 166,211 $ 471,045,381 100.00%
</TABLE>
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<PAGE> 32
GEOGRAPHIC DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Location (1) Loans Balance Balance
- ------------ --------- ----------- -----------
<S> <C> <C> <C>
Ohio 41,039 $164,644,096 34.95%
Pennsylvania 44,925 80,642,153 17.12%
California 30,248 50,720,217 10.77%
Kentucky 6,659 27,113,151 5.76%
Florida 6,977 26,930,845 5.71%
Wisconsin 635 2,050,191 0.44%
Others(2) 35,728 118,944,728 25.25%
Total 166,211 $471,045,381 100.00%
</TABLE>
(1) Based on the current permanent billing addresses of the borrowers of the
initial financed student loans shown on the servicers' records.
(2) Consist of locations that include 46 other states, U.S. territories,
possessions and commonwealths, foreign countries, overseas military
establishments, and unknown locations; the aggregate principal balance of the
financed student loans relating to any of these locations does not exceed 2.5%
of the initial pool balance.
To the extent that states with a large concentration of financed student loans
experience adverse economic or other conditions to a greater degree than other
areas of the country, the ability of these borrowers to repay their financed
student loans may be impacted to a larger extent than if these borrowers were
dispersed more geographically.
The initial financed student loans include loans for students attending
four-year public and private schools, two-year public and private schools and
proprietary/vocational schools. The issuer estimates that less than 5%, by
percent of aggregate outstanding principal balance, of the initial financed
student loans are for students attending proprietary/vocational schools.
INCENTIVE PROGRAMS
The depositor and its affiliates currently make available to or have acquired
loans that offer incentive programs to borrowers.
One of these incentive programs is the depositor's FastStart(SM) Program. The
FastStart Program generally applies to Stafford loans and Unsubsidized Stafford
loans which are originated on or after January 1, 1997. The applicable interest
rate on a FastStart loan is reduced by 2.25%, after the timely receipt of the
initial 48 payments from the borrower; 2% of the initial financed student loans
are eligible for the FastStart Program.
The initial financed student loans also may include loans originated by lenders
for whom the depositor provides a secondary market. Some of these lenders also
offer various incentive loan programs. These other incentive loan programs apply
to Stafford loans and Unsubsidized Stafford loans and include programs whereby
the applicable interest rate is reduced by:
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<PAGE> 33
- 2.00% after the timely receipt of the initial 48 payments; 24% of the
initial financed student loans are eligible for this benefit;
- 2.00% after the timely receipt of the initial 36 payments; 5% of the
initial financed student loans are eligible for this benefit; and
- 1.00% after the timely receipt of the initial 36 payments; 18% of the
initial financed student loans are eligible for this benefit.
All of the financed student loans are also eligible for the EasyPay(SM) program.
The EasyPay program applies to student borrowers who authorize automatic payment
of student loans from a checking or savings account. These eligible students
receive an interest rate which is .25% less than the usual rate.
MATURITY AND PREPAYMENT CONSIDERATIONS
The rate of payment of principal of the notes and the yield on the notes will be
affected by:
(1) prepayments of the financed student loans that may occur as
described below;
(2) the sale by the issuer of financed student loans;
(3) parity percentage payments; and
(4) deferrals or delays in payments on the financed student loans
resulting from defaults, grace periods, deferment periods and,
under some circumstances, forbearance periods.
All the financed student loans, including those resulting from consolidation
loans, are prepayable in whole or in part by the borrowers at any time without
penalty and may be prepaid as a result of:
(1) borrower's default, death, disability or bankruptcy;
(2) a closing of or false certification by the borrower's school;
(3) subsequent liquidation or collection of guarantee payments with
respect to loans; and
(4) as a result of financed student loans being repurchased by
depositor or the respective sellers as a result of a breach of a
representation and warranty.
The rate of prepayments cannot be predicted and may be influenced by a variety
of economic, social and other factors, including those described below. As a
rule, prepayments are more likely to occur if other financing alternatives are
available to borrowers. However, because many of the financed student loans bear
interest at a rate that either actually or effectively is floating, it is
impossible to determine whether changes in prevailing interest rates will be
similar to or vary from changes in the interest rates on the financed student
loans. To the extent borrowers of financed student loans elect to borrow
consolidation loans, these financed student loans will be prepaid. See
"Description of the FFEL Program -- Loan Terms -- Consolidation Loans."
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<PAGE> 34
The issuer has an option to redeem the notes on any auction payment date subject
to some limitations. See "Redemption."
Scheduled payments with respect to, and maturities of, the financed student
loans may be extended under grace periods, deferment periods and, under some
circumstances, forbearance periods. The rate of payment of principal of the
notes and the yield on the notes may also be affected by the rate of defaults
resulting in losses on financed student loans, by the severity of those losses,
and by the timing of those losses, which may affect the ability of the guarantee
agencies to make guarantee payments with respect to financed student loans.
The rate of prepayment on the financed student loans cannot be predicted, and
any reinvestment risks resulting from a faster or slower incidence of prepayment
of financed student loans will be borne entirely by the holders. These
reinvestment risks may include the risk that interest rates and the relevant
spreads above particular interest rate bases are lower at the time holders
receive payments from the trust than interest rates and spreads would have been
had prepayments not been made or had the prepayments been made at a different
time.
THE SERVICERS
Student Loan Funding Resources, Inc., in its capacity as the master servicer,
will arrange for the servicing of the financed student loans under to the Master
Servicing Agreement, dated as of October 1, 1999 between the co-owner trustee,
on behalf of the issuer, and the master servicer. The master servicer and the
co-owner trustee have entered or will enter into servicing agreements with
various approved servicers to service the financed student loans. Initially,
AFSA Data Corporation, Great Lakes Higher Education Servicing Corporation,
InTuition, Inc., Kentucky Higher Education Student Loan Corporation,
Pennsylvania Higher Education Assistance Agency, UNIPAC Service Corporation and
USA Group Loan Services, Inc. each are expected to service more than 10% of the
initial financed student loans. The financed student loans will be serviced by
servicers as may be selected by the master servicer from time to time, and
servicers may be replaced or added from time to time by the master servicer (all
subject to the approval of the rating agencies). Under a servicing agreement,
each servicer has agreed to service and perform all other related tasks with
respect to, the financed student loans in compliance with applicable standards
and procedures. See "Servicing" in the prospectus.
Information relating to the particular servicers set forth in this prospectus
supplement, which is particularly within each servicer's knowledge, has been
requested of and has been provided by the respective servicers. This information
and information included in the reports referred to herein have not been
verified or independently confirmed by the issuer, the depositor, the
administrator, the master servicer, the underwriters or their respective
counsel, and comprises all information in respect of each servicer that the
issuer obtained after a reasonable request and inquiry. With the exception of
InTuition, Inc., no servicer is affiliated with the issuer, the depositor, the
administrator, the master servicer or any underwriter.
AFSA DATA CORPORATION
AFSA Data Corporation (AFSA) acts as a loan servicing agent for the issuer. AFSA
is a for-profit corporation and a wholly-owned subsidiary of Fleet Holding
Corporation, a subsidiary of Fleet National Bank, which in turn is a
wholly-owned subsidiary of Fleet Financial Group of Boston, Massachusetts, a
diversified financial services company. As of September, 1999, AFSA provided
loan servicing for approximately $68 billion in student and parental loans,
including approximately $54 billion in federal direct student loans under
contract
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<PAGE> 35
with the Department of Education. AFSA has its principal offices in Long Beach,
California, and a Regional Processing Centers in Utica, NY; Bakersfield
California and Lombard, Illinois. AFSA's principal office is located at One
World Trade Center, Suite 2200, Long Beach, California 90831.
AFSA has undertaken an internal year 2000 compliance project and believes that
its internal computer systems will be generally year 2000 compliant. However,
the remedies available to the issuer or any other party with respect to services
performed by AFSA shall be subject to the terms and limitations contained in its
servicing agreement. Furthermore, AFSA has not evaluated and provides no
assurance regarding year 2000 compliance or performance of any computer system,
product or procedure of any third party (including without limitation,
guarantors, schools or other parties with whom AFSA may exchange data or other
information, whether electronically or otherwise, in order to perform its
services ), which may materially adversely affect AFSA's ability to properly
perform its servicing activities. The foregoing statements regarding year 2000
matters are both a year 2000 statement and a year 2000 readiness disclosure and
are entitled to the protections of the Year 2000 Information and Readiness
Disclosure Act of 1998.
More information relating to AFSA, particularly with respect to year 2000
readiness, may be obtained from AFSA's site located on the world wide web at
http://www.afsa.com.
(Source: AFSA)
GREAT LAKES HIGHER EDUCATION SERVICING CORPORATION
As of September 30, 1999, Great Lakes Higher Education Servicing Corporation
(GLHESC) serviced 913,822 student and parental accounts with an outstanding
balance of $6,880,571,077 for 1,209 lenders nationwide. Less than 6% of the
portfolio serviced by GLHESC is made up of loans to students at for-profit trade
schools. As of September 30, 1999, 61% of the portfolio serviced by GLHESC was
in repayment status, 8% was in grace status and the remaining 31% was in interim
status.
The staff and management at GLHESC take the issue of year 2000 compliance very
seriously. GLHESC is committed to take the reasonable and necessary actions to
prepare its systems to accurately process dates from the twentieth and
twenty-first centuries. GLHESC is seeking to minimize, if not eliminate, the
risk of error, interruption or loss of functionality for the lenders, schools,
and borrowers who rely on its systems. The remedies available to the issuer or
other third parties shall be subject to the terms and limitations of its
servicing agreement with GLHESC.
GLHESC has adopted a structured management approach to ensure its systems are
compliant. The Chief Information Officer has been assigned overall
responsibility for year 2000 compliance. GLHESC has not evaluated any computer
system, product or procedure of any third party with whom GLHESC exchanges data,
including but not limited to, the U.S. Department of Education, schools or
lenders. Accordingly, GLHESC is unable to provide any assurances regarding the
year 2000 compliance of any third parties or their effect on GLHESC's ability to
properly perform its activities.
GLHESC will provide a copy of its most recent audited financial statements on
receipt of a written request directed to 2401 International Lane, Madison,
Wisconsin 53704, Attention: Vice President and Chief Financial Officer.
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More information regarding GLHESC, particularly with respect to year 2000
readiness, may be obtained from GLHESC;s site located on the world wide web at
http://www.glhec.org.
(Source: GLHESC)
INTUITION, INC.
InTuition, Inc. (InTuition) was incorporated in 1991 as a Florida corporation.
InTuition is a wholly owned subsidiary of InTuition Holdings, Inc., a Florida
corporation, which is 50% owned by the administrator and 50% owned by parties
unrelated to the administrator and the issuer. InTuition provides complete
student loan servicing and administration to lending institutions and secondary
markets nationwide. InTuition has approximately 190 employees, all of whom are
in its Jacksonville, Florida office.
As of September 30, 1999, InTuition serviced 507,800 student loan accounts with
an outstanding balance of $2.1 billion for 14 lenders and secondary markets
nationwide. Approximately 10% of the portfolio serviced by InTuition is made up
of loans to students at for-profit trade schools. As of September 30, 1999, 67%
of the portfolio serviced by InTuition was in repayment status, 8% was in grace
status and the remaining 25% was in interim status. InTuition is located at 6420
Southpoint Parkway, Jacksonville, Florida 32216. Telephone: (904) 281-7100.
InTuition understands the concerns and importance regarding the effectiveness of
computer systems beyond December 31, 1999. InTuition has developed a plan to
deal with year 2000 issues and to make its computer systems year 2000 compliant.
It is InTuition's intent to have all systems and processes year 2000 compliant
on or before December 31, 1999 and InTuition is planning to be ready to perform
normal business functions after January 1, 2000. No representations or warranty
is made with respect to whether any third parties are or will be year 2000
compliant. InTuition is unable to make any representation or warranty at this
time that all year 2000 related problems will be avoided.
(Source: InTuition)
KENTUCKY HIGHER EDUCATION STUDENT LOAN CORPORATION
The General Assembly of the Commonwealth of Kentucky established the Kentucky
Higher Education Student Loan Corporation (KHESLC) in 1978 to provide a program
of financing, making, purchasing and servicing insured student loans in the
Commonwealth. KHESLC is an independent de jure municipal corporation and
political subdivision of the Commonwealth. KHESLC is authorized to service and
collect educational loans for other lenders, holders and educational
institutions.
KHESLC has a staff of approximately 117 full-time employees as of October 1,
1999, most of whom are currently assigned to its ongoing Federal Family
Education Loan Program activities. Its principal office is located at 10180 Linn
Station Road, Post Office Box 24266, Louisville, Kentucky 40224-0266, telephone
number (502) 329-7079.
As of September 30, 1999, KHESLC serviced approximately $409 million outstanding
principal amount of FFELP loans which are pledged to secure its own obligations
and approximately $134 million of FFELP Loans on behalf of other eligible
lenders pursuant to servicing agreements, including servicing agreements
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which provide for the acquisition by KHESLC of the FFELP Loans serviced. KHESLC
currently subcontracts certain FFELP Loan servicing functions such as computer
programming and mailing service.
KHESLC understands the concerns and the importance regarding the effectiveness
of computer systems beyond December 31, 1999. KHESLC is not aware of any
non-compliance with respect to its computer applications or electronic
interfaces or of any costs to achieve year 2000 compliance that will have a
material negative impact on its operations or financial status. However, KHESLC
can give no representation or warranty that it is or will be year 2000
compliant, that its year 2000 efforts will be successful in whole or in part, or
that entities with whom KHESLC does business will achieve year 2000 compliance
in whole or in part. More information relating to KHESLC, particularly with
respect to year 2000 readiness, may be obtained from KHESLC's site located on
the world wide web at http://www.kheslc.com.
(Source: KHESLC)
PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY
Pennsylvania Higher Education Assistance Agency (PHEAA) is a body corporate and
politic constituting a public corporation and government instrumentality created
pursuant to an act of the Pennsylvania Legislature. Under its enabling
legislation, PHEAA is authorized to issue bonds or notes, with the approval of
the Governor of the Commonwealth of Pennsylvania for the purpose of purchasing,
making, or guaranteeing loans. Its enabling legislation also authorizes PHEAA to
undertake the origination and servicing of loans made by PHEAA and others.
PHEAA's headquarters are located in Harrisburg, Pennsylvania with regional
offices located throughout Pennsylvania and additional offices located in
California, Delaware and West Virginia. As of June 30, 1999 it had approximately
2,300 employees.
As of June 30, 1999, PHEAA has outstanding debt and/or credit facilities (under
which the entire aggregate amount of funds available had not been drawn) in the
amount (including amounts drawn or available under such credit facilities) of
approximately $2.5 billion. As of June 30, 1999, PHEAA owned approximately $1.8
billion outstanding principal amount of student loans financed with the proceeds
of its long-term debt, and had funds available for acquisition of student loans
in the amount of approximately $507 million.
PHEAA has been guaranteeing student loans since 1964 and has guaranteed a total
of approximately $20.4 billion principal amount of Stafford Loans and
approximately $2.1 billion principal amount of PLUS Loans and SLS Loans under
the Higher Education Act. In addition to guaranteeing loans under the Higher
Education Act, PHEAA also operates certain guarantee programs for which it
receives no federal reinsurance. PHEAA has outstanding guarantee obligations of
such loans in the amount of approximately $34.7 million as of June 30, 1999.
PHEAA's two principal servicing products are its full servicing operation (in
which it performs all student loan servicing functions on behalf of its
customers) and its remote servicing operation (in which it provides only data
processing services to its customers that have their own servicing operations).
As of June 30, 1999, PHEAA was servicing under its full service operation
approximately 1.3 million student loan accounts representing approximately $13.4
billion outstanding principal amount for more than 450 customers and under its
remote servicing operation, approximately 725,000 student loans representing
approximately $4.5 billion outstanding principal amount for 8 customers.
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PHEAA understands the concerns and importance regarding the effectiveness of
computer systems beyond December 31, 1999. PHEAA has developed a plan to deal
with year 2000 issues and is in the process of converting its computer systems
to be year 2000 ready. PHEAA will have all mission critical systems and
processes year 2000 ready on or before December 31, 1999, and PHEAA will be
ready to perform business functions after January 1, 2000. No representations or
warranties are made with respect to whether any third parties are or will be
year 2000 ready. Every effort is being made to avoid year 2000 related problems.
This year 2000 readiness disclosure is made pursuant to the Year 2000
Information and Readiness Disclosure Act, Public Law 105-271. The information
provided in this disclosure is for general informational purposes only and does
not represent any commitment, warranty, solicitation, offer, acceptance,
notation, amendment or alteration or any present or future obligation, contract
or tariff existing or contemplated between PHEAA, joint ventures or partnerships
and any other entity. The information contained herein is believed to be
reasonably accurate as of the time of printing. This disclosure may be changed
from time to time, as circumstances warrant, including updates or corrections,
without prior notice.
PHEAA has agreed that it will provide a copy of its most recent audited
financial statements to Noteholders upon receipt of a written request directed
to Mr. Tim Guenther, Chief Financial Officer, Financial Management, 1200 North
Seventh Street, Harrisburg, Pennsylvania 17102.
More information relating to PHEAA, particularly with respect to year 2000
readiness may be obtained from PHEAA's site located on the world wide web at
http://www.pheaa.org.
(Source: PHEAA)
UNIPAC SERVICE CORPORATION
UNIPAC Service Corporation, a Nebraska corporation (UNIPAC), began its education
loan servicing operations on January 1, 1978, and provides education loan
servicing, time sharing, administration and other services to lenders, secondary
market purchasers and Guarantee Agencies throughout the United States. UNIPAC is
a privately held corporation, owned primarily by Union Bank and Trust Company,
Lincoln, Nebraska. UNIPAC offers student loan servicing to lending institutions
and secondary markets. UNIPAC's corporate headquarters is located in Aurora,
Colorado, where UNIPAC employs approximately 754 people. In December 1989,
UNIPAC opened a second servicing center in Lincoln, Nebraska, which as of
September 30, 1999 employed approximately 273 people. In November 1997, UNIPAC
opened a third servicing center in St. Paul, Minnesota, which as of September
30, 1999, employed approximately 173 people. As of September 30, 1999, UNIPAC's
servicing volume was approximately $9.3 billion for its full-service and
secondary market clients. In addition, UNIPAC has approximately 2.2 billion in
loans in its Remote Servicing System.
The following information covers UNIPAC's Year 2000 Plan and provides a status
of UNIPAC's Year 2000 compliance initiative to date. UNIPAC's student loan
servicing system, UNISTAR, has been modified to process dates into the next
century. UNIPAC's Private Loan System (STAR) is written in a combination of SQL
Server version 6.5 and Visual Basic version 4.0. These software programming
languages are believed to be year 2000 compliant and address year 2000 dates.
For the last several years (since 1994), UNIPAC has been planning system changes
for the year 2000. As a result, UNIPAC completed major program changes for its
student loan servicing mainframe system during
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<PAGE> 39
1997. As of May 1997, all date fields, stored in the files and processed in
program logic, contain 8 digits for the expanded century usage. All phases
(analysis, design, construction, quality assurance, testing, and implementation)
of the project were completed relative to the 8 byte dates usage. These
processes have been documented as part of UNIPAC's quality assurance processes.
Systems integration testing was completed in April 1997 and production
implementation occurred in May 1997.
More information relating to UNIPAC, particularly with respect to year 2000
readiness, may be obtained from UNIPAC's site located on the world wide web at
http://www.unipac.org.
(Source: UNIPAC)
USA GROUP LOAN SERVICES, INC.
USA Group Loan Services, Inc. now referred to as Loan Services, formerly known
as Education Loan Servicing Center, Inc., is a private, nonprofit, non-stock
membership corporation which was organized in 1982 under the provisions of the
General Corporation Law of the State of Delaware. Loan Services is an affiliate
of USA Group, Inc., a nonprofit corporation which is also affiliated with United
Student Aid Funds, Inc., a student loan guarantee agency and one of the issuer's
guarantee agencies. As of September 30, 1999 (Loan Services' fiscal year end),
Loan Services provided loan servicing for student and parent loans with
outstanding balances of over $15.5 billion for approximately 130 different
lenders and secondary market corporations. Loan Services' principal office is
located in Indianapolis, Indiana, where, as of September 30, 1999, it had nearly
859 full-time employees.
Loan Services is aware of concerns relating to the functional effectiveness and
usage of computer systems beyond December 31, 1999 known as year 2000. Loan
Services is dedicated to resolving the potential impact of the year 2000 on the
ability of Loan Services' computerized information systems to accurately process
information that may be date sensitive. Loan Services is seeking to assure
itself that both the internal systems and the systems of third parties, which
include but are not limited to the U.S. Department of Education, which provide
services to Loan Services or on whose computer software and operating systems
Loan Services may rely are taking sufficient actions to avoid year 2000 related
problems. No representation or warranty is made with respect to whether third
parties are or will be year 2000 compliant. Loan Services is planning to be
ready to perform normal business functions and intends to meet its obligations
both before and after January 1, 2000. However, Loan Services is unable to give
any assurances at this time that all year 2000 related problems will be avoided.
More information relating to Loan Services, particularly with respect to year
2000 readiness, may be obtained from Loan Services' site located on the world
wide web at http://www.usagroup.com.
(Source: Loan Services)
THE GUARANTEE AGENCIES
Great Lakes Higher Education Guaranty Corporation, Pennsylvania Higher Education
Assistance Agency and United Student Aid Funds, Inc. are the principal guarantee
agencies for the financed student loans. These guarantee agencies collectively
guarantee in excess of 95% of the initial financed student loans. Set forth
below is certain current and historical information with respect to each of
these guarantee agencies. No such
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information is provided with respect to other guarantors because the aggregate
principal amount of financed student loans guaranteed by these other guarantors
is less than 5% of the financed student loans.
Guaranty Volume. The following table sets forth the approximate aggregate
principal amount of federally reinsured education loans (net of cancellations
and after transfers and refinanced loans) that have first become guaranteed by
each guarantee agency and by all guarantee agencies in each of the last five
federal fiscal years:*
<TABLE>
<CAPTION>
STAFFORD, SLS AND PLUS LOANS GUARANTEED
(DOLLARS IN MILLIONS)
----------------------------------------------------------------------
FEDERAL FISCAL GREAT LAKES USA ALL
YEAR GUARANTY PHEAA FUNDS GUARANTORS
---- -------- ----- ----- ----------
<S> <C> <C> <C> <C>
1994 $1,544.0 $1,809.1 $ 4,711.7 $13,931.1
1995 1,027.6 2,009.6 10,129.6 25,470.9
1996 3,927.8 2,259.7 9,805.0 26,468.2
1997 4,851.0 2,327.5 6,510.4 23,389.5
1998 3,519.9 1,991.3 6,371.6 25,170.5
</TABLE>
* The information set forth in this table has been obtained from the
Joseph Boyd & Associates, Guaranty Agency Report for the applicable
year.
Reserve Ratio. Each guarantee agency's reserve ratio is expressed as the dollar
amount potentially payable for each dollar reserve. The following table sets
forth for each of Great Lakes Guaranty, PHEAA and USA Funds, their respective
reserve ratios and the national average reserve ratio for all federal guarantors
for the last five federal fiscal years:*
<TABLE>
<CAPTION>
RESERVE RATIO
----------------------------------------------------------------------
FEDERAL FISCAL GREAT LAKES USA NATIONAL
YEAR GUARANTY PHEAA FUNDS AVERAGE
---- -------- ----- ----- -------
<S> <C> <C> <C> <C>
1994 $ 111.21 $ 84.33 $ 74.99 $ 79.56
1995 103.54 81.95 79.70 83.92
1996 155.96 78.47 71.71 78.72
1997 165.30 96.32 73.96 88.18
1998 167.01 99.70 82.21 98.23
</TABLE>
* The information set forth in this table has been obtained from the
Joseph Boyd & Associates, Guaranty Agency Report for the applicable
year.
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Recovery Rates. A guarantee agency's recovery rate, which provides a measure of
the effectiveness of the collection efforts against defaulting borrowers after
the guarantee claim has been satisfied, is determined by dividing the amount
recovered from borrowers by the guarantee agency by the aggregate amount of
default claims paid by the guarantee agency during the applicable federal fiscal
year with respect to borrowers. The table below sets forth the recovery rates
for each of Great Lakes Guaranty, PHEAA and USA Funds for the last five federal
fiscal years:*
<TABLE>
<CAPTION>
RECOVERY RATE
----------------------------------------------------------------------
FEDERAL GREAT LAKES USA NATIONAL
FISCAL YEAR GUARANTY PHEAA FUNDS AVERAGE
----------- -------- ----- ----- -------
<S> <C> <C> <C> <C>
1994 35.24% 52.89% 29.29% 39.25%
1995 35.79 53.29 34.91 40.69
1996 39.82 55.04 39.21 43.44
1997 43.86 54.83 40.89 45.03
1998 42.88 59.18 44.29 48.64
</TABLE>
* The information set forth in this table has been obtained from the
Joseph Boyd & Associates, Guaranty Agency Report for the
applicable year.
Claims Rate. For each of the past five federal fiscal years, the lender's
default claims percentages for each of Great Lakes Guaranty, PHEAA and USA Funds
are presented below along with the national average.*
<TABLE>
<CAPTION>
CLAIMS RATE
----------------------------------------------------------------------
FEDERAL GREAT LAKES USA NATIONAL
FISCAL YEAR GUARANTY PHEAA FUNDS AVERAGE
----------- -------- ----- ----- -------
<S> <C> <C> <C> <C>
1994 13.50% 11.88% 14.71% 15.18%
1995 15.49 12.06 15.25 15.14
1996 10.33 11.29 16.40 15.82
1997 8.19 11.08 16.81 15.44
1998 9.35 11.19 16.74 15.53
</TABLE>
* The information set forth in this table has been obtained from the
Joseph Boyd & Associates, Guaranty Agency Report for the
applicable year.
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Loss Rate. A guarantee agency's loss rate is determined by comparing its write
offs to its mature paper (student loans in repayment). The loss rates for each
of Great Lakes Guaranty, PHEAA and USA Funds for the last five federal fiscal
years are presented in the table below:*
<TABLE>
<CAPTION>
LOSS RATE
----------------------------------------------------------------------
FEDERAL GREAT LAKES USA NATIONAL
FISCAL YEAR GUARANTY PHEAA FUNDS AVERAGE
----------- -------- ----- ----- -------
<S> <C> <C> <C> <C>
1994 .02% .18% .62% .29%
1995 .03 .22 .70 .31
1996 .04 .23 .72 .39
1997 .04 .19 .73 .31
1998 .08 .19 .73 .33
</TABLE>
* The information set forth in this table has been obtained from the
Joseph Boyd & Associates, Guaranty Agency Report for the
applicable year.
The most recent national default rate reported by the Department of Education
was 9.6% for the federal fiscal year 1996. As recently as federal fiscal year
1990, this national default rate was over 22%. This trend, coupled with the
claims and recovery information listed above, shows improvement in the repayment
of student loans by borrowers. The claims rate of each of the three guarantee
agencies described in this section for the financed student loans is lower than
5% resulting in the maximum reimbursement for reinsurance claims. The depositor
is not aware of any circumstances which would cause the reimbursement levels for
those guarantors to be less than the maximum levels permitted.
EXCHANGE AGREEMENTS
Under the indenture, the issuer has the right to enter into one or more interest
rate exchange agreements with one or more exchange counterparties. Any exchange
counterparty must have a rating of its long-term debt securities of at least Aa1
(or its equivalent) from a rating agency. Payments by the issuer under any
exchange agreement may be on a parity with the Series 1999A Notes, a senior
exchange agreement, or on a parity with the Series 1999B-1 Notes, a subordinate
exchange agreement. If the issuer enters into an agreement with an exchange
counterparty, the exchange counterparty will agree to pay the indenture trustee
on each applicable auction payment date a fixed or variable exchange rate on a
notional amount, which may be equal to, greater or less than the principal
amount of any series of the notes. The issuer will agree to have the indenture
trustee pay to the exchange counterparty a fixed or variable exchange rate on
the notional amount. The issuer expects that any exchange agreement will provide
that the payment obligations of the issuer and an exchange counterparty to each
other will be netted on the applicable payment date and only one payment will be
made by one party to the other. The exchange counterparty will deposit any
payment to the collection account under the agreement. Payments made under
exchange agreements on a parity with the Series 1999A Notes issued
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<PAGE> 43
under the indenture are senior exchange payments. Payments made under exchange
agreements on a parity with the Series 1999B-1 Notes issued under the indenture
are subordinate exchange payments.
If the exchange counterparty's exchange rate is greater than the issuer's
exchange rate, the indenture trustee's ability to make principal and interest
payments on the notes will be affected by the exchange counterparty's ability to
meet its net payment obligation to the indenture trustee. In addition, under
some circumstances, the issuer's failure to make an issuer exchange payment may
constitute an event of default under the indenture. See "Risk Factors" in this
prospectus supplement and "The Indentures -- Events of Default" in the
prospectus. Prior to the date the issuer enters into an exchange agreement, the
issuer must obtain written evidence from each rating agency then rating any of
the notes that the execution and delivery of the exchange agreement will not
adversely affect that rating agency's rating on those notes.
DESCRIPTION OF THE NOTES
The notes will be issued under the terms of the indenture. The following summary
describes the material terms of the notes as described in the indenture. Other
terms of the notes are set forth in the prospectus. See "Description of the
Notes" in the prospectus. This summary does not restate the entire indenture. We
encourage you to read the indenture because it, not this summary, defines your
rights as holders. We filed a copy of the form of the indenture as an exhibit to
the registration statement of which this prospectus summary is part.
The notes will be offered in minimum denominations of $50,000 and integral
multiples of $50,000 in book-entry form only. The notes will initially be
represented by one or more notes registered in the name of DTC's nominee, the
security depository. Unless definitive notes are issued under the limited
circumstances described under "Description of the Notes -- Definitive Notes" in
the prospectus, no holder will be entitled to receive a physical certificate
representing a note. All references to actions by holders refer to actions taken
by DTC on instructions from its participating organizations and all references
to distributions, notices, reports and statements to holders refer to
distributions, notices, reports and statements to DTC or its nominee, as the
registered holder of the notes, for distribution to holders under DTC's
procedures. See "Description of the Notes -- Book-entry Registration" in the
prospectus.
INTEREST
Interest Accrual Period
Interest will accrue during each interest accrual period on the principal
balance of each series of notes at a rate equal to the related series interest
rate calculated as described below. Interest on the auction rate notes will be
payable to the applicable holders on the business day following the expiration
of each auction period, an auction payment date. The auction payment date is
subject to change as described under the heading "Determination of the Auction
Rate."
Record Date
The record date for each series of the notes is the business day immediately
preceding a related auction payment date. Interest accrued as of any auction
payment date for a series of notes but not paid on the applicable auction
payment date will be payable on the next applicable auction payment date for
that series,
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together with interest on that series at the applicable series interest rate.
Interest will be paid pro rata to the holders of each series of outstanding
notes.
The first interest accrual period for a series of notes will begin on the
closing date. All later interest accrual periods shall begin on the preceding
auction payment date for that series and end on the day preceding the next
succeeding auction payment date.
Interest Determination Date
The interest determination date for each series of notes is as follows:
- the Series 1999A-1 Notes interest determination date is ______ and
every _________ after that date;
- the Series 1999A-2 Notes interest determination date is ______ and
every _________ after that date;
- the Series 1999A-3 Notes interest determination date is ______ and
every fourth _______ after that date;
- the Series 1999A-4 Notes interest determination date is ______ and
every fourth _______ after that date;
- the Series 1999A-5 Notes interest determination date is ______ and
every fourth _______ after that date;
- the Series 1999A-6 Notes interest determination date is ______ and
every fourth _______ after that date; and
- the Series 1999B-1 Notes interest determination date is ______ and
every fourth _______ after that date.
Determination of Interest Rates
The series interest rate for each series of notes for each interest accrual
period will equal the formula rate, subject to a cap of the net loan rate for
the applicable interest accrual period.
The formula rate for each interest accrual period for each series of notes will
equal the auction rate for the interest accrual period, but never greater than
17%. Interest on each series of the notes will be calculated on the basis of
actual number of days elapsed in each interest accrual period divided by 360.
See "Determination of the Auction Rate."
Net Loan Rate
The net loan rate will be calculated by the administrator. The series interest
rate for each series of the notes will be determined by the auction agent which
initially is Bankers Trust Company, New York, New York, as described under the
heading "-- Determination of the Auction Rate."
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Information concerning the current series interest rates will be available by
telephoning the indenture trustee at (513) 762-8870 between the hours of 9 a.m.
and 5 p.m. Eastern time on any day on which the Cincinnati Corporate Trust
Office of the indenture trustee is open for business and will also be available
through Dow Jones Telerate Service of Bloomberg L.P.
The net loan rate for any interest accrual period is equal to the annualized
percentage rate determined by multiplying (a) the ratio of 360 to the actual
number of days in the interest accrual period, and (b) the ratio of (1) expected
interest collections for the applicable monthly collection period less program
operating expenses for that monthly collection period, to (2) the pool balance
as of the first day of that monthly collection period. The applicable monthly
collection period for each series of the notes is the second preceding monthly
collection period prior to the first business day of each month.
Expected interest collections mean, with respect to any monthly collection
period, the sum of:
(1) the amount of interest accrued, net of amounts required to be
paid to the Department of Education or to be repaid to
guarantee agencies, with respect to the financed student loans
in the trust for the applicable monthly collection period
(whether or not the interest is actually paid);
(2) interest subsidy payments and special allowance payments under
claims submitted for the monthly collection period (whether or
not actually received), net of amounts required to be paid to
the Department of Education, with respect to financed FFELP
loans in the trust, to the extent not included in (1) above;
(3) plus or minus the net of any counterparty exchange payments
less any issuer exchange payments to be made on any auction
payment date during that calendar month; and
(4) investment earnings on the amounts on deposit allocable to the
trust with respect to the applicable monthly collection period
prior to any auction payment date during that calendar month.
Carryover Interest
If interest at the formula rate for any series of the notes for any interest
accrual period exceeds interest at the net loan rate, carryover interest
consisting of the excess interest, together with interest on the notes at the
applicable formula rate will be paid on subsequent distribution dates only to
the extent funds are available after other required payments on the notes. See
"The Indenture-- Collection Fund." Carryover interest will continue to be so
payable although the principal amount of the applicable series of notes is paid
until (1) no notes remain outstanding and (2) the balances in the indenture
funds and accounts have been reduced to zero. The ratings of the notes do not
address the likelihood of payment of carryover interest. Any reference in this
prospectus supplement or the prospectus to interest excludes carryover interest.
DETERMINATION OF THE AUCTION RATE
The auction rate for each series of notes will be determined by the auction
agent under the auction procedures described under "Auction Procedures" in the
prospectus and in Appendix B on each interest determination date for each
interest accrual period, initially based on a: (a) 7-day auction period for the
Series 1999A-1 Notes
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<PAGE> 46
and the Series 1999A-2 Notes and (b) 28-day auction period for the Series
1999A-3 Notes, the Series 1999A-4 Notes, the Series 1999A-5 Notes, the Series
1999A-6 Notes and the Series 1999B-1 Notes, each generally beginning:
- for the Series 1999A-1 Notes, on ______, 1999 and each ________ after
that date;
- for the Series 1999A-2 Notes, on ______, 1999 and each ________ after
that date;
- for the Series 1999A-3 Notes, on ______, 1999 and each fourth _________
after that date;
- for the Series 1999A-4 Notes, on ______, 1999 and each fourth
___________ after that date;
- for the Series 1999A-5 Notes, on ______, 1999 and each fourth
___________ after that date;
- for the Series 1999A-6 Notes, on ______, 1999 and each fourth
___________ after that date; and
- for the Series 1999B-1 Notes, on ______, 1999 and each fourth
___________ after that date;
subject to adjustment as described below.
If you are the current holder of an auction rate note, the possible results of
an auction may be:
- you submit an order to hold your note at any rate, so you will continue
to hold the note and will be notified of the interest rate after the
auction, or
- you submit any order to hold your note at a specified interest rate, so
if the rate set by the auction is equal to or higher than the rate you
specified you will continue to hold your note at that rate and if the
rate is lower you will have sold your note in the auction, or
- you submit an order to sell your note and your note is sold at the
auction.
If there are ever insufficient buy orders and the auction is not successful,
holders may not be able to sell their notes in the auction and the interest rate
for the next auction period will be the lower on the net loan rate and the
maximum auction rate.
If you are not a current holder and wish to purchase notes in an auction, or are
a current holder and wish to purchase additional notes, the basic outcomes of an
auction are:
- you submit an order to buy at a specified rate and the interest rate
set in the auction is equal to or higher than the rate you specified,
so you will have purchased the note and the interest rate will be the
rate set by the auction, or
- you submit an order to buy at a specified rate and the interest rate
set in the auction is lower than the rate you specified, so your bid
order will be unsuccessful.
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The outcomes described might vary slightly in some cases, as when only part of
an order can be filled from available notes or if an auction is not successful,
as described under "Auction Procedures," in the prospectus and in Appendix B.
AUCTION PERIOD ADJUSTMENT
With respect to each series of auction rate notes, the issuer may, subject to
the indenture, change, the length of one or more auction periods in order to
conform with then current market practice or to accommodate other economic or
financial factors that may affect or be relevant to the length of the auction
period or the auction rate (as hereinafter described, an auction period
adjustment). An auction period adjustment may be made to change an auction
period to a period of between 7 and 91 days (a short auction period) or to a
period of between 92 days and the legal final maturity of the auction rate notes
(a long auction period). For auction rate notes with a short auction period, no
auction period adjustment may result in an auction period of less than 7 nor
more than 91 days. For auction rate notes with a long auction period, no auction
period adjustment may result in an auction period that is more than three months
shorter or longer than the auction period established on the issuance of a
series of auction rate notes or auction period conversion of these auction rate
notes. For any auction period adjustment, specific prescribed conditions must be
satisfied. See Appendix B, "Auction Procedures."
AUCTION PERIOD CONVERSION OF AND MANDATORY TENDER OF THE AUCTION RATE NOTES
The issuer may, from time to time, change the length of one or more auction
periods for any series of auction rate notes under an auction period conversion.
An auction period conversion means a change in the length of an auction period
for any series of the auction rate notes as follows:
- - from an auction period between 7 and 91 days, inclusive, to an auction
period between 92 days and the legal final maturity for these series,
inclusive,
- - from an auction period between 92 days and the legal final maturity for
these series, inclusive, to an auction period between 7 and 91 days,
inclusive, or
- - from an auction period between 92 days and the legal final maturity for
these series inclusive, to an auction period between 92 days and the legal
final maturity for these series, inclusive, if the latter auction period is
at least 3 months shorter or at least 3 months longer than the auction
period established on the initial issuance of these series or under an
auction period conversion.
All auction rate notes subject to auction period conversion are subject to
mandatory tender to the indenture trustee on the auction period conversion date
at the purchase price of par plus accrued interest plus accrued and unpaid
carryover interest, if any.
The holders of auction rate notes that are subject to mandatory tender do not
have the right to elect to retain the auction rate notes. If, however, any
auction rate notes of a series so tendered are not remarketed, or the indenture
trustee does not receive the purchase price for that series of auction rate
notes subject to the auction period conversion, none of the auction rate notes
of that series tendered will be converted. The series interest rate for that
series of auction rate notes will equal the lesser of the net loan rate or the
maximum auction rate, but never greater than 17%, as of the date of the failed
auction period conversion, as applicable, for the auction
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period commencing on that date. The length of the auction period will remain the
same as it was prior to the failed auction. See Appendix B, "Auction
Procedures."
PRINCIPAL
Unless an event of default has occurred,
- - no principal will be paid on the Series 1999A-2 Notes until the Series
1999A-1 Notes have been paid;
- - no principal will be paid on the Series 1999A-3 Notes until the Series
1999A-1 Notes and the Series 1999A-2 Notes have been paid;
- - no principal will be paid on the Series 1999A-4 Notes until the Series
1999A-1 Notes, the Series 1999A-2 Notes and the Series 1999A-3 Notes have
been paid;
- - no principal will be paid on the Series 1999A-5 Notes until the Series
1999A-1 Notes, the Series 1999A-2 Notes, the Series 1999A-3 Notes and the
Series 1999A-4 Notes have been paid;
- - no principal will be paid on the Series 1999A-6 Notes until the Series
1999A-1 Notes, the Series 1999A-2 Notes, the Series 1999A-3 Notes, the
Series 1999A-4 Notes and the Series 1999A-5 Notes have been paid; and
- - except as described under the caption " -- Series 1999B-1 Notes," no
principal will be paid on the Series 1999B-1 Notes until the Series 1999A
Notes have been paid.
Following the occurrence of an event of default, principal payments on the
Series 1999A Notes will be made pro rata, without preference or priority, and
prior to any principal payments on the Series 1999B-1 Notes.
In any case, we will make principal payments on the notes only in integral
multiples of $50,000.
Series 1999A-1 Notes
Principal payments on the Series 1999A-1 Notes will be made on the first auction
payment date occurring after the first business day of a month for which timely
notice of a payment of principal can be given, in an amount generally equal to
the Series 1999A Holders' Principal Distribution Amount for the auction payment
date less the amount of principal, if any, paid or provided for on the Series
1999B-1 Notes until the principal balance of the Series 1999A-1 Notes is paid.
Series 1999A-2 Notes
After the Series 1999A-1 Notes have been paid, principal payments on the Series
1999A-2 Notes will be made on the first auction payment date occurring after the
first business day of a month for which timely notice of a payment of principal
can be given, in an amount generally equal to the Series 1999A Holders'
Principal Distribution Amount for the auction payment date less the amount of
principal, if any, paid or provided for on the Series 1999B-1 Notes until the
principal balance of the Series 1999A-2 Notes is paid.
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Series 1999A-3 Notes
After the Series 1999A-2 Notes have been paid, principal payments on the Series
1999A-3 Notes will be made on the first auction payment date occurring after the
first business day of a month for which timely notice of a payment of principal
can be given, in an amount generally equal to the Series 1999A Holders'
Principal Distribution Amount for the auction payment date less the amount of
principal, if any, paid or provided for on the Series 1999B-1 Notes until the
principal balance of the Series 1999A-3 Notes is paid.
Series 1999A-4 Notes
After the Series 1999A-3 Notes have been paid, principal payments on the Series
1999A-4 Notes will be made on the first auction payment date occurring after the
first business day of a month for which timely notice of a payment of principal
can be given, in an amount generally equal to the Series 1999A Holders'
Principal Distribution Amount for the auction payment date less the amount of
principal, if any, paid or provided for on the Series 1999B-1 Notes until the
principal balance of the Series 1999A-4 Notes is paid.
Series 1999A-5 Notes
After the Series 1999A-4 Notes have been paid, principal payments on the Series
1999A-5 Notes will be made on the first auction payment date occurring after the
first business day of a month for which timely notice of a payment of principal
can be given, in an amount generally equal to the Series 1999A Holders'
Principal Distribution Amount for the auction payment date less the amount of
principal, if any, paid or provided for on the Series 1999B-1 Notes until the
principal balance of the Series 1999A-5 Notes is paid.
Series 1999A-6 Notes
After the Series 1999A-5 Notes have been paid, principal payments on the Series
1999A-6 Notes will be made on the first auction payment date occurring after the
first business day of a month for which timely notice of a payment of principal
can be given, in an amount generally equal to the Series 1999A Holders'
Principal Distribution Amount for the auction payment date less the amount of
principal, if any, paid or provided for on the Series 1999B-1 Notes until the
principal balance of the Series 1999A-6 Notes is paid.
Series 1999B-1 Notes
While any Series 1999A Notes are outstanding, principal will be paid in the
Series 1999B-1 Notes before principal on the Series 1999A Notes is paid, but
only to the extent that after the payment of principal on the Series 1999B-1
Notes the parity percentage is not less than 101% and the senior parity
percentage is not less than 109% and the outstanding principal amount of Series
1999B-1 Notes is at least equal to 5.75% of the total principal amount of
outstanding notes.
After the Series 1999A Notes have been paid, principal payments on the Series
1999B-1 Notes will be made on the first auction payment date occurring after the
first business day of a month for which timely notice of a payment of principal
can be given, in an amount generally equal to the Series 1999B-1 Holders'
Principal Distribution Amount for the auction payment date until the principal
balance of the Series 1999B-1 Notes is paid.
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After receiving the monthly information regarding the receipt of principal
payments on the financed student loans for the relevant collection period, the
issuer must give 15 days' notice of any payment of principal prior to making the
payment of principal.
Parity Percentage Payments
In addition, subject to available funds in the collection account, parity
percentage payments will be payable on each date on which principal payments are
made (to the series of Series 1999A Notes then receiving principal payments and
afterwards to the Series 1999B-1 Notes) until the parity percentage equals 101%.
Final Maturities
The final payment of principal and interest will be made no later than:
- December 1, 2020 for the Series 1999A-1 Notes,
- December 1, 2020 for the Series 1999A-2 Notes,
- December 1, 2020 for the Series 1999A-3 Notes,
- December 1, 2020 for the Series 1999A-4 Notes,
- December 1, 2020 for the Series 1999A-5 Notes,
- December 1, 2020 for the Series 1999A-6 Notes and
- December 1, 2027 for the Series 1999B-1 Notes
(each, a legal final maturity). The actual maturity of one or more series of
notes is expected to occur sooner as a result of a variety of factors. See
"Maturity and Prepayment Considerations" in this prospectus supplement and in
the prospectus.
Principal Shortfall
If available funds are insufficient to pay the Series 1999A Principal
Distribution Amount or the Series 1999B-1 Principal Distribution Amount on an
applicable auction payment date, this shortfall will be added to the principal
payable to these holders on subsequent auction payment dates, as applicable, AND
(EXCEPT WITH RESPECT TO THE LEGAL FINAL MATURITY OF A SERIES OF NOTES) THIS
SHORTFALL WILL NOT CONSTITUTE AN EVENT OF DEFAULT. Additionally, on the legal
final maturity for a series of notes and on any date the notes are to be
redeemed in whole, amounts in the reserve fund will be available to pay the
principal balance of the series of notes. See "The Indenture -- Reserve Fund."
SUBORDINATION OF THE SERIES 1999B-1 NOTES
The rights of the holders of the Series 1999B-1 Notes to receive principal and
interest payments will be subordinated to the same rights of the holders of the
Series 1999A Notes and to exchange counterparties under senior exchange
agreements to the extent described in this prospectus supplement. This
subordination is intended to enhance the likelihood of regular receipt of
principal and interest by the holders of the Series 1999A Notes and the payment
of any senior issuer exchange payments. See "The Indenture -- Collection Fund."
The rights of the holders of the Series 1999A Notes are on a parity with the
rights of any exchange counterparty under any senior exchange agreement. The
rights of the holders of the Series 1999A Notes and
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exchange counterparties under any senior exchange agreements are superior to the
rights of the holders of the Series 1999B-1 Notes and the rights of any exchange
counterparty under any subordinate exchange agreement with respect to the trust.
The rights of the holders of the Series 1999B-1 Notes are on a parity with the
rights of exchange counterparties under any subordinate exchange agreements with
respect to the trust.
REDEMPTION
The notes will be subject to redemption prior to maturity only as described
below.
OPTIONAL REDEMPTION
The Series 1999A Notes are subject to redemption in whole at any time or in part
on any auction payment date at the option of the issuer at a price equal to the
principal balance of the notes to be redeemed plus accrued interest and unpaid
carryover interest, except that in the case of any redemption in part, the
redemption is permitted only if the rating agencies rating the notes confirm
that the redemption will not result in the withdrawal or reduction of any rating
on notes remaining outstanding.
While any Series 1999A Notes are outstanding, the Series 1999B-1 Notes will be
subject to redemption in whole or in part on any auction payment date at the
option of the issuer, to the extent that after any redemption, the parity
percentage is not less than 101% and the senior parity percentage is not less
than 109% and the outstanding principal amount of Series 1999B-1 Notes is at
least equal to 5.75% of the total principal amount of outstanding notes.
After the Series 1999A Notes have been paid, the Series 1999B-1 Notes will be
subject to redemption in part if after any redemption, the parity percentage is
not less than 100%, or in whole at any time.
If only a part of a series is redeemed, the notes redeemed will be selected by
lot by the indenture trustee. No notes will be subject to redemption in part in
an amount less than an authorized denomination, and no portion of the notes is
to be retained by a holder in an amount less than an authorized denomination.
In connection with the optional redemption of any notes, all unpaid carryover
interest on the series must be paid on or before the date of optional redemption
of the series.
NOTICE OF REDEMPTION
The indenture trustee must give written notice of redemption of the notes to the
holders not less than 15 days prior to the redemption date. Each note must be
surrendered to the indenture trustee in exchange for payment of the redemption
price. If the indenture trustee gives notice of redemption as provided above,
and on deposit with the indenture trustee of moneys for payment of the
redemption price, including accrued interest, to the redemption date, the notes
so called for redemption will become due and payable at the redemption price
specified in the notice. On the redemption date, interest on these notes will
cease to accrue, and interest on any unpaid carryover interest also will cease
to accrue.
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THE INDENTURE
The notes will be issued under an Indenture of Trust, as supplemented from time
to time, and a related Terms Supplement, each dated as of October 1, 1999 (known
together as the indenture), among the issuer, the eligible lender trustee and
the indenture trustee. On the closing date, the issuer and the eligible lender
trustee will pledge the financed student loans and other moneys received from
the net proceeds of the notes to the indenture trustee under the indenture.
INDENTURE TRUSTEE
Firstar Bank, National Association, a national banking association organized
under the laws of the United States, is the indenture trustee for the notes. The
indenture trustee's corporate trust office is located at 425 Walnut Street,
ML5125, Cincinnati, Ohio 45202, and its telephone number is (513) 762-8870. The
indenture trustee is also acting as the initial eligible lender trustee under
the indenture, as a co-owner trustee of the trust and may serve from time to
time as trustee under other indentures or eligible lender trust agreements with
the depositor or its affiliates relating to other issues of securities. In
addition, the issuer, the depositor, the administrator or their affiliates may
maintain other banking relationships with Firstar Bank, National Association and
its affiliates from time to time.
ELIGIBLE LENDER TRUSTEE
Firstar Bank, National Association also is the initial eligible lender trustee
for the issuer under the Eligible Lender Trust Agreement, dated as of October 1,
1999, between the issuer and the eligible lender trustee. The office of the
eligible lender trustee is located at 425 Walnut Street, Cincinnati, Ohio 45202.
The eligible lender trustee, on behalf of the issuer, will hold legal title to
the financed FFELP loans in the trust. The eligible lender trustee on behalf of
the issuer has entered or will enter into a guarantee agreement with each of the
guarantee agencies with respect to each financed FFELP loan. The eligible lender
trustee is qualified as an eligible lender for all purposes under the Higher
Education Act and the guarantee agreements with respect to the financed FFELP
loans. Failure of the financed FFELP loans to be owned by an eligible lender
would result in the loss of guarantee payments, interest subsidy payments and
special allowance payments with respect to financed FFELP loans. See
"Description of the FFEL Program."
The issuer, the depositor, the administrator and their affiliates may maintain
other banking relationships with Firstar Bank, National Association, its
affiliates, any other eligible lender trustees and their affiliates from time to
time.
REPORTS TO HOLDERS
The indenture trustee will provide by each applicable distribution date to
rating agencies and the applicable holders of record as of the related record
date, a statement setting forth substantially the information set forth under
the heading "The Indentures -- Reports to Holders" in the prospectus.
ACQUISITION FUND
In connection with the issuance of the notes, the indenture trustee will
establish an acquisition fund under the indenture. See "The Indentures -- Funds
and Accounts" in the prospectus. On the closing date, the indenture trustee will
deposit $________ in cash or eligible investments into the acquisition fund. See
"Use of
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Proceeds." The trust will use this amount to acquire the financed student loans
described under the heading "The Financed Student Loans" on or about October 28,
1999, acting on its own behalf or through the eligible lender trustee. No
pre-funding account will be established under the indenture.
Any balance of the acquisition fund not used to acquire financed student loans
prior to January 25, 2000 will be transferred to the collection account.
STUDENT LOAN PORTFOLIO FUND
In connection with the issuance of the notes, the indenture trustee will
establish a student loan portfolio fund. All financed student loans will be
included in the balances of the student loan portfolio fund. Financed student
loans may also be disposed of:
- as provided in the applicable student loan purchase agreements with
respect to rejections and repurchases of financed student loans;
- as provided in the applicable servicing agreements;
- as provided for defeasance of the indenture;
- as required to obtain the benefits of a guarantee in case of default on
that financed student loan; and
- in connection with the consolidation of that financed student loan by
the borrower.
To the extent necessary or appropriate, the issuer and the indenture trustee may
establish accounts within the student loan portfolio fund and subaccounts within
these accounts.
The indenture trustee shall permit the sale of financed student loans selected
by the issuer only:
(1) to avoid an event of default or, if an event of default has occurred,
as may be required or appropriate under the indenture, and
(2) in an exchange of financed student loans as described below.
The issuer may at any time and from time to time instruct the indenture trustee
to exchange financed student loans for other student loans having the same
characteristics including:
- an aggregate principal amount no less than the aggregate principal
amount of the financed student loans being exchanged;
- the same rate of interest;
- eligible, after exchange, for the same special allowance payments; and
- the same status, whether interim, grace or repayment.
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Any sale, exchange or other disposition of financed student loans will be only
to or with one or more eligible lenders under the Higher Education Act so long
as the Higher Education Act requires the owner or holder of FFELP loans to be an
eligible lender.
COLLECTION FUND
In connection with the issuance of the notes, the following accounts will be
established in the collection fund: a collection account, a capitalized interest
account, a note payment account, an expense account and an excess surplus
account.
Collection Account
The issuer will, and will cause each seller and servicer under the applicable
student loan purchase agreement or servicing agreement to, transfer all
available funds received by it to the indenture trustee. The indenture trustee
will, on receipt of any available funds with respect to the financed student
loans held in the student loan portfolio fund, immediately deposit and credit
the available funds to the collection account.
The indenture trustee will also deposit to the credit of the collection account
the amount of any related counterparty exchange payment received by the
indenture trustee from an exchange counterparty under the provisions of its
exchange agreement.
Expenses relating to the notes may be paid from time to time from available
funds in the collection account by transfers to the expense account for payment
of these expenses. See "-- Expense Account."
On the first business day of each month, as described below, from funds on
deposit at the end of the second preceding monthly collection period, the
indenture trustee will apply or set aside to be applied on applicable auction
payment dates occurring during that month or, in the case of principal payments,
during the next succeeding month in some cases, funds from the collection
account the following amounts in the following priority:
(1) to the expense account, to the extent required to increase the
balance of the account to the program expense requirement
calculated as of the applicable distribution date;
(2) to the note payment account:
(a) an amount up to the Series 1999A-1 Holders' Interest
Distribution Amount for payment on each auction
payment date during the calendar month to the holders
of the Series 1999A-1 Notes;
(b) an amount up to the Series 1999A-2 Holders' Interest
Distribution Amount for payment on each auction
payment date during the calendar month to the holders
of the Series 1999A-2 Notes;
(c) an amount up to the Series 1999A-3 Holders' Interest
Distribution Amount for payment on each auction
payment date during the calendar month to the holders
of the Series 1999A-3 Notes;
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(d) an amount up to the Series 1999A-4 Holders' Interest
Distribution Amount for payment on each auction
payment date during the calendar month to the holders
of the Series 1999A-4 Notes;
(e) an amount up to the Series 1999A-5 Holders' Interest
Distribution Amount for payment on each auction
payment date during the calendar month to the holders
of the Series 1999A-5 Notes;
(f) an amount up to the Series 1999A-6 Holders' Interest
Distribution Amount for payment on each auction
payment date during the calendar month to the holders
of the Series 1999A-6 Notes; and
(g) an amount up to any senior issuer exchange payment
for payment to the senior exchange counterparty,
including any early termination payment resulting
from a default by the issuer;
(3) to the note payment account,
(a) an amount up to the Series 1999B-1 Holders' Interest
Distribution Amount for payment on each auction
payment date during the calendar month to the holders
of the Series 1999B-1 Notes; and
(b) an amount up to any subordinate issuer exchange
payment for payment to the subordinate exchange
counterparty, including any early termination payment
resulting from a default by the issuer;
(4) to the note payment account, an amount up to the Series
1999B-1 Holders' Principal Distribution Amount for payment on
the first auction payment date occurring after the first
business day of that month for which timely notice of payment
of principal can be given to the holders of the Series 1999B-1
Notes;
(5) to the note payment account:
(a) an amount up to the Series 1999A Holders' Principal
Distribution Amount for payment on the first auction
payment date occurring after the first business day
of that month for which timely notice of payment of
principal can be given to the holders of the Series
1999A-1 Notes until the principal balance is paid,
less the amount paid pursuant to item (4) above; then
(b) once the Series 1999A-1 Notes are no longer
outstanding, an amount up to the Series 1999A
Holders' Principal Distribution Amount for payment on
the first auction payment date occurring after the
first business day of that month for which timely
notice of payment of principal can be given to the
holders of the Series 1999A-2 Notes until the
principal balance is paid, less the amount paid
pursuant to item (4) above; then
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(c) once the Series 1999A-1 Notes and the Series 1999A-2
Notes are no longer outstanding, an amount up to the
Series 1999A Holders' Principal Distribution Amount
for payment on the first auction payment date
occurring after the first business day of that month
for which timely notice of payment of principal can
be given to the holders of the Series 1999A-3 Notes
until the principal balance is paid, less the amount
paid pursuant to item (4) above; then
(d) once the Series 1999A-1 Notes, the Series 1999A-2
Notes and the Series 1999A-3 Notes are no longer
outstanding, an amount up to the Series 1999A
Holders' Principal Distribution Amount for payment on
the first auction payment date occurring after the
first business day of that month for which timely
notice of payment of principal can be given to the
holders of the Series 1999A-4 Notes until the
principal balance is paid, less the amount paid
pursuant to item (4) above; then
(e) once the Series 1999A-1 Notes, the Series 1999A-2
Notes, the Series 1999A-3 Notes and the Series
1999A-4 Notes are no longer outstanding, an amount up
to the Series 1999A Holders' Principal Distribution
Amount for payment on the first auction payment date
occurring after the first business day of that month
for which timely notice of payment of principal can
be given to the holders of the Series 1999A-5 Notes
until the principal balance is paid, less the amount
paid pursuant to item (4) above; then
(f) once the Series 1999A-1 Notes, the Series 1999A-2
Notes, the Series 1999A-3 Notes, the Series 1999A-4
Notes and the Series 1999A-5 Notes are no longer
outstanding, an amount up to the Series 1999A
Holders' Principal Distribution Amount for payment on
the first auction payment date occurring after the
first business day of that month for which timely
notice of payment of principal can be given to the
holders of the Series 1999A-6 Notes until the
principal balance is paid, less the amount paid
pursuant to item (4) above.
(6) to the reserve fund, the amount, if any, required to increase
the balance to the specified reserve fund balance as described
under the heading "-- Reserve Fund;"
(7) to the note payment account, the amount of parity percentage
payments to the extent then required:
(a) for payment to the holders of the Series 1999A-1
Notes on the same date as other payments of principal
on the Series 1999A-1 Notes are made; then
(b) for payment to the holders of the Series 1999A-2
Notes on the same date as other payments of principal
on the Series 1999A-2 Notes are made; then
(c) for payment to the holders of the Series 1999A-3
Notes on the same date as other payments of principal
on the Series 1999A-3 Notes are made; then
(d) for payment to the holders of the Series 1999A-4
Notes on the same date as other payments of principal
on the Series 1999A-4 Notes are made; then
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(e) for payment to the holders of the Series 1999A-5
Notes on the same date as other payments of principal
on the Series 1999A-5 Notes are made; then
(f) for payment to the holders of the Series 1999A-6
Notes on the same date as other payments of principal
on the Series 1999A-6 Notes are made; then
(g) for payment to the holders of the Series 1999B-1
Notes on the same date as other payments of principal
on the Series 1999B-1 Notes are made;
(8) to the note payment account, an amount up to any carryover
interest:
(a) ratably to the holders of the Series 1999A Notes for
payment on the first auction payment date during that
calendar month; then
(b) to the holders of the Series 1999B-1 Notes for
payment on the first auction payment date during that
calendar month;
(9) to the note payment account, an amount up to the amount, if
any, owed an exchange counterparty in respect of an early
termination payment or damages for early termination resulting
from any event other than a default by the issuer;
(10) at the option of the issuer, to pay redeem the Series 1999B-1
Notes but only if after that redemption, the parity percentage
is not less than 101% and the senior parity percentage is not
less than 109% and the outstanding principal amount of Series
1999B-1 Notes is at least equal to 5.75% of the total
principal amount of outstanding notes; and
(11) to transfer any remainder to the depositor if after giving
effect to the transfer the parity percentage is not less than
102% and the senior parity percentage is not less than 109%;
if these parity requirements are not met, then any remainder
shall be retained in the collection account.
When any principal payment is to be made on the notes, it will be made on the
first auction payment date for which the notice of redemption, as required by
the indenture, can be given. If, at the time interest on the notes is to be set
aside, the interest rate is unknown, the interest to be set aside will be
calculated at the net loan rate. In any case, principal payments on the notes
will be made only in integral multiples of $50,000.
If, on the first business day of any month, following all payments to be made on
any auction payment date in that month, either:
(A) the aggregate principal amount of the Series 1999A Notes would
exceed the sum of the principal amount of the financed student
loans (including capitalized interest) plus accruals of
special allowance payments and interest subsidies payable with
respect to the financed student loans as of the end of the
preceding monthly collection period plus the balance of the
reserve fund as of the computation date, or
(B) a payment event of default has occurred (but prior to the
acceleration of the maturity of the notes),
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then, until the applicable conditions described in clauses (A) and (B) above no
longer exist, the Series 1999B-1 Holders' Interest Distribution Amount and the
Series 1999B-1 Holders' Principal Distribution Amount will not be paid to the
holders of the Series 1999B-1 Notes under clauses (3) and (4) above and no
subordinate issuer exchange payments will be made. As long as any Series 1999A
Notes remain outstanding, a deferral in the payment of the Series 1999B-1
Holders' Interest Distribution Amount, Series 1999B-1 Holders' Principal
Distribution Amount or subordinate issuer exchange payments (except with respect
to the legal final maturity of the Series 1999B-1 Notes) will not constitute an
event of default under the indenture. In addition, as long as the applicable
conditions described in clause (B) above exist, the Series 1999A Holders'
Principal Distribution Amount will be allocated and paid pro rata among each
series of Series 1999A Notes. See "The Indentures -- Event of Default" in the
prospectus.
Principal payments will be made to the holders of the notes only in amounts
equal to $50,000 and integral multiples in excess of $50,000. If the amount in
the note payment account otherwise required to be applied as a payment of
principal either (1) is less than $50,000 or (2) exceeds an even multiple of
$50,000, then, in the case of (1), the entire amount or, in the case of (2), the
excess amount, will not be paid as principal on the upcoming auction payment
date, but will be retained in the note payment account until the amount therein
available for payment of principal equals $50,000.
For any series of auction rate notes entitled to receive payments of principal,
the indenture trustee will select the actual notes of the series that will
receive payments of principal on each applicable auction payment date no later
than 15 business days prior to the related auction payment date. The indenture
trustee will make the selection by lot in a manner it determines and which will
provide for the selection for payment of principal in minimum denominations of
$50,000, and integral multiples in excess of $50,000.
The indenture trustee will give notice of the specific notes to receive payments
of principal by first-class mail, postage prepaid, mailed to the address of the
applicable holder appearing on the registration books not less than 15 days
before the applicable auction payment date. Any defect in or failure to give the
mailed notice shall not affect the validity of proceedings for the payment of
any other notes not affected by failure or defect. All notices of payment are to
state:
(1) the applicable auction payment date;
(2) the amount of principal to be paid, and
(3) the series of the auction rate notes to be paid.
Capitalized Interest Account
A portion of the proceeds from the sale of the notes will be deposited into the
capitalized interest account. See "Use of Proceeds." On each auction payment
date, funds in the capitalized interest account will be used to pay interest on
the notes if there is a deficiency in the collection account prior to any
transfer from the reserve fund. On January 5, 2000, any funds remaining in the
capitalized interest account will be transferred into the acquisition fund.
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Note Payment Account
On each auction payment date, following the transfers to the note payment
account described above, the indenture trustee will distribute to the applicable
holders as of the related record date and exchange counterparties, if any, the
amounts transferred to the note payment account, together with any amounts
transferred from the reserve fund and any advances, as described under the
heading "-- Collection Account."
Expense Account
A portion of the proceeds from the sale of the notes will be deposited into the
expense account. See "Use of Proceeds." Funds will also be deposited into the
expense account from the collection account and from the reserve fund. See "--
Collection Account" and "-- Reserve Fund." Funds in the expense account will be
applied to pay costs of issuance of the notes and expenses to operate the
program, as described in the indenture. In addition, expenses relating to the
notes may be paid from time to time from available funds on deposit in the
collection account by transfers to the expense account for payment of expenses.
RESERVE FUND
In connection with the issuance of the notes, the indenture trustee will
establish a reserve fund for the notes. See "Description of the Notes -- Credit
Enhancement" in the prospectus. On the closing date, the indenture trustee will
deposit $3,937,500 in cash or eligible investments into the reserve fund which
is equal to its specified reserve fund balance.
The specified reserve fund balance on the first business day of each month for
the reserve fund is equal to the greater of 0.75% of the outstanding principal
balance of the notes after giving effect to any payments of principal or
redemptions of the notes on that date, or $500,000], but not in excess of the
outstanding principal balance of the notes.
At any time the balance of the reserve fund is below the specified reserve fund
balance, the indenture trustee will restore the reserve fund to the specified
reserve fund balance by transfers on the first business day of each month from
the collection account after making or providing for all applicable
distributions as described under "-- Collection Fund."
The indenture trustee will continue to transfer funds in the order of priority
from the collection account as they become available and under the instructions
for transfers from the account as described under the heading "-- Collection
Fund," until the deficiency in the reserve fund has been eliminated. Also, if
amounts were transferred from the reserve fund to cover any unpaid principal
balance (a realized loss) on a financed student loan, any subsequent payments of
principal received on or with respect to the financed student loan will be
deposited into the reserve fund.
On the first business day of each month, the indenture trustee will transfer any
excess over the related specified reserve fund balance in the reserve fund to
the collection account. After the transfer of any excess balance, the reserve
fund will be used solely for the following purposes in the following order of
priority:
FIRST, to make up any deficiency in the expense account
immediately following the transfer of moneys into the
account under the indenture;
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SECOND, to increase the amount in the note payment account to the
amount required to pay interest on the notes and any
related issuer exchange payment (other than carryover
interest, interest on the Series 1999B-1 Notes or any
subordinate issuer exchange payment when the payment of
the interest or subordinate issuer exchange payment is
deferred as described under the heading "--Collection
Fund") on any auction payment date or on any other date on
which interest is due on redemption in whole or payment of
the notes or on any other date on which any related issuer
exchange payment is due and payable (other than any
subordinate issuer exchange payments when their payment is
deferred as described under the heading "--Collection
Fund"), by transfer and deposit by the indenture trustee
to the credit of the note payment account; and
THIRD, to provide for payment of the principal of any series of
notes at the legal final maturity of any series of notes
or for the payment of the principal of the series being
redeemed in whole as described under the heading
"Redemption," by transfer and deposit by the indenture
trustee to the credit of the note payment account on the
legal final maturity of the series of notes or the date of
any redemption, as the case may be.
The reserve fund:
- enhances the likelihood of timely receipt by the holders of the
full amount of interest due them on each auction payment date,
- enhances the likelihood of timely receipt by the holders of the
full amount of the principal due them on the legal final maturity
of the notes or a date when the notes are to be redeemed in whole,
and
- decreases the likelihood that the notes will experience losses.
However, the reserve fund could be depleted. If the amount required to be
withdrawn from the reserve fund to cover shortfalls in the amount of available
funds exceeds the amount of cash in the reserve fund, a temporary shortfall in
the amount of principal and interest distributed to the holders of the notes
could result. This shortfall could, in turn, increase the average life of the
notes. In addition, amounts on deposit in the reserve fund, other than amounts
in excess of the specified reserve fund balance, will not be available to cover
any aggregate unpaid carryover interest.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement dated
October 27, 1999, among the issuer, the depositor, the master servicer and
Salomon Smith Barney Inc. and Banc of America Securities LLC (known as the
underwriters), the issuer has agreed to sell to the underwriters, and the
underwriters have agreed to purchase from the issuer, the principal balance of
each series of notes set forth below its name on the following chart:
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<TABLE>
<CAPTION>
Series of Notes Salomon Smith Banc of America
- --------------- Barney Inc. Securities LLC
<S> <C> <C>
Series 1999A-1 Notes ................. $ 75,000,000
Series 1999A-2 Notes ................. 75,000,000
Series 1999A-3 Notes ................. 75,000,000
Series 1999A-4 Notes ................. $100,000,000
Series 1999A-5 Notes ................. 75,000,000
Series 1999A-6 Notes ................. 95,000,000
Series 1999B-1 Notes ................. 30,000,000
------------- ------------
Total ........................... $ 425,000,000 $100,000,000
</TABLE>
In the underwriting agreement, the underwriters have agreed severally, subject
to the terms and conditions set forth therein, that if they purchase any of the
notes they will purchase all of them. The underwriting agreement provides that,
in specific circumstances, if any underwriter defaults, purchase commitments of
any non-defaulting underwriter may be increased or purchase commitments of all
underwriters may be terminated. The underwriters have advised the issuer that
the underwriters propose initially to offer the notes to the public at the
public offering price with respect to each series set forth on the cover page of
this prospectus supplement. After the initial public offering, the public
offering price may be changed.
The underwriting agreement provides that the issuer, the depositor and the
master servicer will indemnify the underwriters against certain liabilities
(including liabilities under applicable securities laws), or contribute to
payments the underwriters may be required to make as a result of these
liabilities.
The notes are new issues of securities with no established trading market. The
underwriters intend to make a market in the notes but they do not have to do so
and may discontinue market making activities at any time without notice. We
cannot assure you that you will be able to sell your notes.
The underwriters and some of their affiliates have in the past, and may in the
future, engage in commercial and investment banking activities with the issuer,
the depositor, the master servicer, the administrator and their affiliates.
The issuer may, from time to time, invest the funds in the funds and accounts in
eligible investments acquired from the underwriters.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids under Regulation M under the
Securities Exchange Act of 1934, as amended. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the underwriters to reclaim a selling concession from a
syndicate member when the notes originally sold by the syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. The stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the notes to be higher than it would
otherwise be in the absence of the transactions.
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LEGAL MATTERS
Legal matters relating to the issuer, the depositor, the master servicer, the
administrator, the notes and federal income tax matters will be passed on by
Thompson Hine & Flory LLP. Specific legal matters relating to the perfection of
the transfers of the student loan notes will be passed on for the depositor by
Calfee, Halter & Griswold LLP. Certain legal matters will be passed upon for the
underwriters by Squire, Sanders & Dempsey L.L.P. Each of these firms has
performed legal services for the depositor and/or its affiliates in the past,
and it is expected that they will continue to perform these services in the
future.
RATING
It is a condition to the sale of each series of Series 1999A Notes that they
each be rated "AAA" by Fitch and "Aaa" by Moody's. It is a condition to the sale
of the Series 1999B-1 Notes that they be rated at least "A" by Fitch and at
least "A2" by Moody's. A securities rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or withdrawal at any time by
the assigning rating agency. The ratings of the notes address the likelihood of
the ultimate payment of principal of and interest on the notes under their
terms. The rating agencies do not evaluate the likelihood of prepayments on the
notes or the likelihood of payment of carryover interest.
The issuer has furnished and will furnish to the rating agencies information and
materials, some of which have not been included in this prospectus supplement or
the prospectus. Generally, a rating agency bases its rating on this information
and materials, investigations, studies and assumptions obtained by the rating
agency. There is no assurance that any the rating will apply for any given
period of time or that it will not be lowered or withdrawn entirely by the
rating agency.
Each rating is subject to change or withdrawal at any time and any change or
withdrawal may affect the market price or marketability of the notes. The
underwriters undertake no responsibility either to bring to the attention of the
holders any proposed change in or withdrawal of any rating of the notes or to
oppose any change or withdrawal.
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APPENDIX A
GLOSSARY OF PRINCIPAL DEFINITIONS
Set forth below is a glossary of the principal defined terms used in this
prospectus supplement.
"MONTHLY COLLECTION PERIOD" means the period from the closing date
through and including November 30, 1999 and then any calendar month.
"PROGRAM OPERATING EXPENSES" means all items of expense allocable
to the operation of the program, including
(1) fees and expenses of and any other amounts payable to the
indenture trustee, the owner trustee, the co-owner trustee and
the authenticating agent, if any, and any fees charged by a
depository,
(2) the fees and expenses of and any other amounts payable to the
calculation agent or other agent in connection with the notes
issued under the indenture,
(3) fees and expenses of and any other amounts payable to the
servicers, the eligible lender trustee and any bank providing
lock-box or similar services in connection with financed student
loans and servicing development fees,
(4) the fees and expenses incurred by or on behalf of the issuer,
including fees and expenses payable to the master servicer and
the administrator in the administration of the program under the
Higher Education Act.
"SERIES 1999A HOLDERS' PRINCIPAL DISTRIBUTION AMOUNT" means, with
respect to an applicable auction payment date for a series of Series 1999A
Notes, the Series 1999A Principal Distribution Amount for the auction payment
date plus the Series 1999A Principal Shortfall as of the close of the preceding
auction payment date; provided that the Series 1999A Holders' Principal
Distribution Amount will not exceed the outstanding principal balance of the
Series 1999A Notes. In addition,
(1) on the legal final maturity of the Series 1999A-1 Notes, the
principal required to be distributed will include the amount
required to pay in full the outstanding principal balance of the
Series 1999A-1 Notes,
(2) on the legal final maturity of the Series 1999A-2 Notes, the
principal required to be distributed will include the amount
required to pay in full the outstanding principal balance on the
Series 1999A-2 Notes;
(3) on the legal final maturity of the Series 1999A-3 Notes, the
principal required to be distributed will include the amount
required to pay in full the outstanding balance of the Series
1999A-3 Notes;
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(4) on the legal final maturity of the Series 1999A-4 Notes, the
principal required to be distributed will include the amount
required to pay in full the outstanding balance of the Series
1999A-4 Notes;
(5) on the legal final maturity of the Series 1999A-5 Notes, the
principal required to be distributed will include the amount
required to pay in full the outstanding balance of the Series
1999A-5 Notes; and
(6) on the legal final maturity of the Series 1999A-6 Notes, the
principal required to be distributed will include the amount
required to pay in full the outstanding balance of the Series
1999A-6 Notes.
"SERIES 1999A NOTES" means the Series 1999A-1 Notes, the Series 1999A-2
Notes, the Series 1999A-3 Notes, the Series 1999A-4 Notes, the Series 1999A-5
Notes and the Series 1999A-6 Notes.
"SERIES 1999A PRINCIPAL DISTRIBUTION AMOUNT" means
(1) with respect to the Series 1999A-1 Notes, an amount equal to the
decline in the pool balance between the end of the third monthly
collection period preceding the first business day of the month
and the end of the second preceding monthly collection period
preceding the first business day of the month;
(2) with respect to the Series 1999A-2 Notes on and after the
principal balance of the Series 1999A-1 Notes has been paid, an
amount equal to the decline in the pool balance between the end
of the third monthly collection period preceding the first
business day of the month and the end of the second preceding
monthly collection period preceding the first business day of
the month;
(3) with respect to the Series 1999A-3 Notes on and after the
principal balance of the Series 1999A-1 Notes and the Series
1999A-2 Notes has been paid, an amount equal to the decline in
pool balance between the end of the third monthly collection
period preceding the first business day of the month and the end
of the second preceding monthly collection period preceding the
first business day of the month;
(4) with respect to the Series 1999A-4 Notes on and after the
principal balance of the Series 1999A-1 Notes, the Series
1999A-2 Notes and the Series 1999A-3 Notes has been paid, an
amount equal to the decline in pool balance between the end of
the third monthly collection period preceding the first business
day of the month and the end of the second preceding monthly
collection period preceding the first business day of the month;
(5) with respect to the Series 1999A-5 Notes on and after the
principal balance of the Series 1999A-1 Notes, the Series
1999A-2 Notes, the Series 1999A-3 Notes and the Series 1999A-4
Notes has been paid, an amount equal to the decline in pool
balance between the end of the third monthly collection period
preceding the first business day of the month and the end of the
second preceding monthly collection period preceding the first
business day of the month; and
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<PAGE> 65
(6) with respect to the Series 1999A-6 Notes on and after the
principal balance of the Series 1999A-1 Notes, the Series
1999A-2 Notes, the Series 1999A-3 Notes, the Series 1999A-4
Notes and the Series 1999A-5 Notes has been paid, an amount
equal to the decline in pool balance between the end of the
third monthly collection period preceding the first business day
of the month and the end of the second preceding monthly
collection period preceding the first business day of the month.
"SERIES 1999A PRINCIPAL SHORTFALL" means, as of the first business day
of each month for a series of Series 1999A Notes, the excess of the Series 1999A
Principal Distribution Amount on the applicable auction payment date over the
amount of principal actually distributed to the holders of Series 1999A Notes on
the applicable auction payment date.
"SERIES 1999A-1 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with
respect to any auction payment date, the sum of:
(1) the amount of interest accrued at the series interest rate for
the related interest accrual period on the aggregate outstanding
principal balance of the Series 1999A-1 Notes on the immediately
preceding auction payment date after giving effect to all
principal distributions to holders of Series 1999A-1 Notes on
the preceding auction payment date (or, in the case of the first
auction payment date, on the closing date) plus
(2) the Series 1999A Interest Shortfall for the auction payment
date; provided that the Series 1999A-1 Holders' Interest
Distribution Amount will not include any carryover interest on
the Series 1999A-1 Notes.
"SERIES 1999A-1 INTEREST SHORTFALL" means, with respect to any auction
payment date, the excess of the Series 1999A-1 Holders' Interest Distribution
Amount on the preceding auction payment date over the amount of interest
actually distributed to the holders of Series 1999A-1 Notes on the preceding
auction payment date; plus interest on the amount of the excess interest due to
the holders of Series 1999A-1 Notes, to the extent permitted by law, at the
series interest rate borne by the Section 1999A-1 Notes from the preceding
auction payment date to the current auction payment date.
"SERIES 1999A-1 NOTES" means the Student Loan Senior Auction Rate
Callable Asset-Backed Notes, Series 1999A-1 issued and outstanding.
"SERIES 1999A-2 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with
respect to any auction payment date, the sum of:
(1) the amount of interest accrued at the related series interest
rate for the related interest accrual period on the aggregate
outstanding principal balance of the Series 1999A-2 Notes on the
immediately preceding auction payment date after giving effect
to all principal distributions to holders of the Series 1999A-2
Notes on the preceding auction payment date (or, in the case of
the first auction payment date, on the closing date) plus
(2) the Series 1999A-2 Interest Shortfall for the auction payment
date; provided that the Series 1999A-2 Holders' Interest
Distribution Amount will not include any carryover interest on
the Series 1999A-2 Notes.
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<PAGE> 66
"SERIES 1999A-2 INTEREST SHORTFALL" means, with respect to any auction
payment date, the excess of the Series 1999A-2 Holders' Interest Distribution
Amount on the preceding auction payment on date over the amount of interest
actually distributed to the holders of Series 1999A-2 Notes on the preceding
auction payment date; plus interest on the amount of the excess interest due to
the holders of Series 1999A-2 Notes, to the extent permitted by law, at the
related series interest rate from the preceding auction payment date to the
current auction payment date.
"SERIES 1999A-2 NOTES" means the Student Loan Senior Auction Rate
Callable Asset-Backed Notes, Series 1999A-2 issued and outstanding.
"SERIES 1999A-3 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with
respect to any auction payment date, the sum of:
(1) the amount of interest accrued at the related series interest
rate for the related interest accrual period on the aggregate
outstanding principal balance of the Series 1999A-3 Notes on the
immediately preceding auction payment date after giving effect
to all principal distributions to holders of the Series 1999A-3
Notes on the preceding auction payment date (or, in the case of
the first auction payment date, on the closing date) plus
(2) the Series 1999A-3 Interest Shortfall for the auction payment
date; provided that the Series 1999A-3 Holders' Interest
Distribution Amount will not include any carryover interest on
the Series 1999A-3 Notes.
"SERIES 1999A-3 INTEREST SHORTFALL" means, with respect to any auction
payment date, the excess of the Series 1999A-3 Holders' Interest Distribution
Amount on the preceding auction payment date over the amount of interest
actually distributed to the holders of Series 1999A-3 Notes on the preceding
auction payment date; plus interest on the amount of the excess interest due to
the holders of Series 1999A-3 Notes, to the extent permitted by law, at the
related series interest rate from the preceding auction payment date to the
current auction payment date.
"SERIES 1999A-3 NOTES" means the Student Loan Senior Auction Rate
Callable Asset-Backed Notes, Series 1999A-3 issued and outstanding.
"SERIES 1999A-4 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with
respect to any auction payment date, the sum of:
(1) the amount of interest accrued at the related series interest
rate for the related interest accrual period on the aggregate
outstanding principal balance of the Series 1999A-4 Notes on the
immediately preceding auction payment date after giving effect
to all principal distributions to holders of the Series 1999A-4
Notes on the preceding auction payment date (or, in the case of
the first auction payment date, on the closing date) plus
(2) the Series 1999A-4 Interest Shortfall for the auction payment
date; provided that the Series 1999A-4 Holders' Interest
Distribution Amount will not include any carryover interest on
the Series 1999A-4 Notes.
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"SERIES 1999A-4 INTEREST SHORTFALL" means, with respect to any auction
payment date, the excess of the Series 1999A-4 Holders' Interest Distribution
Amount on the preceding auction payment on date over the amount of interest
actually distributed to the holders of Series 1999A-4 Notes on the preceding
auction payment date; plus interest on the amount of the excess interest due to
the holders of Series 1999A-4 Notes, to the extent permitted by law, at the
related series interest rate from the preceding auction payment date to the
current auction payment date.
"SERIES 1999A-4 NOTES" means the Student Loan Senior Auction Rate
Callable Asset-Backed Notes, Series 1999A-4 issued and outstanding.
"SERIES 1999A-5 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with
respect to any auction payment date, the sum of:
(1) the amount of interest accrued at the related series interest
rate for the related interest accrual period on the aggregate
outstanding principal balance of the Series 1999A-5 Notes on the
immediately preceding auction payment date after giving effect
to all principal distributions to holders of the Series 1999A-5
Notes on the preceding auction payment date (or, in the case of
the first auction payment date, on the closing date) plus
(2) the Series 1999A-5 Interest Shortfall for the auction payment
date; provided that the Series 1999A-5 Holders' Interest
Distribution Amount will not include any carryover interest on
the Series 1999A-5 Notes.
"SERIES 1999A-5 INTEREST SHORTFALL" means, with respect to any auction
payment date, the excess of the Series 1999A-5 Holders' Interest Distribution
Amount on the preceding auction payment date over the amount of interest
actually distributed to the holders of Series 1999A-5 Notes on the preceding
auction payment date; plus interest on the amount of the excess interest due to
the holders of Series 1999A-5 Notes, to the extent permitted by law, at the
related series interest rate from the preceding auction payment date to the
current auction payment date.
"SERIES 1999A-5 NOTES" means the Student Loan Senior Auction Rate
Callable Asset-Backed Notes, Series 1999A-5 issued and outstanding.
"SERIES 1999A-6 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with
respect to any auction payment date, the sum of:
(1) the amount of interest accrued at the related series interest
rate for the related interest accrual period on the aggregate
outstanding principal balance of the Series 1999A-6 Notes on the
immediately preceding auction payment date after giving effect
to all principal distributions to holders of the Series 1999A-6
Notes on the preceding auction payment date (or, in the case of
the first auction payment date, on the closing date) plus
(2) the Series 1999A-6 Interest Shortfall for the auction payment
date; provided that the Series 1999A-6 Holders' Interest
Distribution Amount will not include any carryover interest on
the Series 1999A-6 Notes.
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<PAGE> 68
"SERIES 1999A-6 INTEREST SHORTFALL" means, with respect to any auction
payment date, the excess of the Series 1999A-6 Holders' Interest Distribution
Amount on the preceding auction payment date over the amount of interest
actually distributed to the holders of Series 1999A-6 Notes on the preceding
auction payment date; plus interest on the amount of the excess interest due to
the holders of Series 1999A-6 Notes, to the extent permitted by law, at the
related series interest rate from the preceding auction payment date to the
current auction payment date.
"SERIES 1999A-6 NOTES" means the Student Loan Senior Auction Rate
Callable Asset-Backed Notes, Series 1999A-6 issued and outstanding.
"SERIES 1999B-1 HOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with
respect to any auction payment date, the sum of
(1) the amount of interest accrued at the related series interest
rate for the related interest accrual period on the aggregate
outstanding principal balance of the Series 1999B-1 Notes on the
immediately preceding auction payment date after giving effect
to all principal distributions to Series 1999B-1 Notes on the
preceding auction payment date (or, in the case of the first
auction payment date, on the closing date) plus
(2) the Series 1999B-1 Interest Shortfall for the auction payment
date, provided that the Series 1999B-1 Holders' Interest
Distribution Amount will not include any carryover interest on
the Series 1999B-1 Notes.
"SERIES 1999B-1 HOLDERS' PRINCIPAL DISTRIBUTION AMOUNT" means, with
respect to an applicable auction payment date, the Series 1999B-1 Principal
Distribution Amount for the auction payment date plus the Series 1999B-1
Principal Shortfall as of the close of the preceding auction payment date;
provided that the Series 1999B-1 Holders' Principal Distribution Amount will not
exceed the outstanding principal balance of the Series 1999B-1 Notes. In
addition, on the legal final maturity of the Series 1999B-1 Notes, the principal
required to be distributed to the holders of Series 1999B-1 Notes will include
the amount required to pay in full the outstanding principal balance on the
Series 1999B-1 Notes.
"SERIES 1999B-1 INTEREST SHORTFALL" means, with respect to any auction
payment date, the excess of the Series 1999B-1 Holders' Interest Distribution
Amount on the preceding auction payment date over the amount of interest
actually distributed to the holders of Series 1999B-1 Notes on the preceding
auction payment date; plus interest on the amount of the excess interest due to
the holders of Series 1999B-1 Notes, to the extent permitted by law, at the
related series interest rate from the preceding auction payment date to the
current auction payment date.
"SERIES 1999B-1 NOTES" means the Student Loan Subordinate Auction Rate
Callable Asset-Backed Notes Series 1999B-1 issued and outstanding.
"SERIES 1999B-1 PRINCIPAL DISTRIBUTION AMOUNT" means(1) while any
Series 1999A Notes are outstanding, on the first business day of the month an
amount equal to the decline in the pool balance between the end of the third
monthly collection period preceding the first business day of the month and the
end of the second preceding monthly collection period preceding the first
business day of the month, but only to the extent that after the payment of
principal on the Series 1999B-1 Notes the parity percentage is not less than
101% and the senior parity percentage, is not less than 109% and the outstanding
principal amount of Series
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<PAGE> 69
1999B-1 Notes is at least equal to 5.75% of the total principal amount of
outstanding notes and (2) for any period on and after which the principal
balance of the Series 1999A Notes has been paid, on the first business day of
the month an amount equal to the decline in the pool balance between the end of
the third monthly collection period preceding the first business day of the
month and the end of the second preceding monthly collection period preceding
the first business day of the month (reduced with respect to the first auction
payment date on which principal is to be paid on the Series 1999B-1 Notes by the
Series 1999A Holders' Principal Distribution Amount on the auction payment
date).
"SERIES 1999B-1 PRINCIPAL SHORTFALL" means, as of the first business
day of each month on and after which the principal balance of the Series 1999A
Notes has been paid, the excess of the Series 1999B-1 Principal Distribution
Amount on the applicable auction payment date over the amount of principal
actually distributed to the holders of Series 1999B-1 Notes on the applicable
auction payment date.
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APPENDIX B
AUCTION PROCEDURES
GENERAL
The following description of the Auction Procedures applies separately to each
series of Auction Rate Notes. The term "note," as used in this Appendix B,
refers to each series of Auction Rate Notes, and the term "holder" refers to
holders holding Auction Rate Notes.
AUCTION PARTICIPANTS
EXISTING HOLDERS AND POTENTIAL HOLDERS. Participants in each Auction
will include: (i) "Existing Holders," which will mean, for purposes of dealing
with the Auction agent in connection with an Auction, a Person who is a
Broker-Dealer listed in the Existing Holder Registry at the close of business on
the business day preceding the Auction, and, for purposes of dealing with the
Broker-Dealer in connection with an Auction, a Person who is a beneficial owner
of Auction Rate Notes and (ii) "Potential Holders," which will mean any Person
(including an Existing Holder) that is a Broker-Dealer for purposes of dealing
with the Auction Agent, and a potential beneficial owner for purposes of dealing
with a Broker-Dealer, who may be interested in acquiring Auction Rate Notes.
By purchasing the Auction Rate Notes, whether in an Auction or
otherwise, each prospective purchaser of the Auction Rate Notes or its
Broker-Dealer must agree and will be deemed to have agreed: (i) to participate
in Auctions on the terms described in the indenture; (ii) so long as the
beneficial ownership of the Auction Rate Notes is maintained in book-entry form
to sell, transfer or otherwise dispose of Auction Rate Notes, only under a Bid
(as defined below) or a Sell Order (as defined below) in an Auction, or to or
through a Broker-Dealer, provided that in the case of all transfers other than
those under an Auction, the Existing Holder of Auction Rate Notes so
transferred, its Participant or Broker-Dealer advises the Auction Agent of the
transfer; (iii) to have its beneficial ownership of Auction Rate Notes
maintained at all times in book-entry form for the account of its Participant,
which in turn will maintain records of beneficial ownership, and to authorize
the participant to disclose to the Auction Agent information with respect to
beneficial ownership as the Auction Agent may request; (iv) that a Sell Order
placed by an Existing Holder will constitute an irrevocable offer to sell the
principal amount of Auction Rate Notes specified in the Sell Order; (v) that a
Bid placed by an Existing Holder will constitute an irrevocable offer to sell
the principal amount of Auction Rate Notes specified in the Bid if the rate
specified in the Bid is greater than, or in some cases equal to, the interest
rate, determined as described in this Appendix B; (vi) that a Bid placed by a
Potential Holder will constitute an irrevocable offer to purchase the principal
amount, or a lesser principal amount, of the Auction Rate Notes specified in the
Bid if the rate specified in the Bid is, respectively, less than or equal to the
Auction Rate, determined as described in this Appendix B; and (vii) to tender
its Auction Rate Notes for purchase at 100% of the principal amount of the note,
plus accrued but unpaid interest and unpaid carryover interest, if any, and
interest accrued, on an Auction Period Conversion Date.
The principal amount of the Auction Rate Notes purchased or sold may be
subject to proration procedures on the Interest Determination Date. Each
purchase or sale of the Auction Rate Notes on the Interest Determination Date
will be made for settlement on the first day of the Interest Accrual Period
immediately following the Interest Determination Date at a price equal to 100%
of the principal amount plus
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accrued interest, if any. The Auction Agent is entitled to rely on the terms of
any Order submitted to it by a Broker-Dealer.
AUCTION AGENT. Bankers Trust Company is appointed in the indenture as
Initial Auction Agent to serve as agent for the issuer in connection with
Auctions. The indenture trustee was directed by the depositor to enter into the
Initial Auction Agent Agreement with Bankers Trust Company, as the Initial
Auction Agent. Any Substitute Auction Agent will be (i) a bank, national banking
association or trust company duly organized under the laws of the United States
of America or any state or territory having its principal place of business in
the Borough of Manhattan, New York, or other location as approved by the
indenture trustee and the Calculation Agent in writing and having a combined
capital stock or surplus of at least $50,000,000, or (ii) a member of the
National Association of Securities Dealers, Inc. having a capitalization of at
least $50,000,000, and, in either case, authorized by law to perform all the
duties imposed on it under the indenture and under the Auction Agent Agreement.
The Auction Agent may at any time resign and be discharged of the duties and
obligations created by the indenture by giving at least 90 days' notice to the
indenture trustee, the issuer and the Calculation Agent. The Auction Agent may
be removed at any time by the indenture trustee on the written direction of the
issuer, or the holders of at least 66-2/3 % of the aggregate principal amount of
the Auction Rate Notes then outstanding, by an instrument signed by the holders
or their attorneys and filed with the Auction Agent, the issuer, the indenture
trustee and the Calculation Agent on at least 90 days' notice. Neither
resignation nor removal of the Auction Agent under the preceding two sentences
will be effective until and unless a substitute Auction Agent has been appointed
and has accepted the appointment. If required by the issuer or the Calculation
Agent, a Substitute Auction Agent Agreement will be entered into with a
Substitute Auction Agent. However, the Auction Agent may terminate the Auction
Agent Agreement if, within 15 days after notifying the indenture trustee, the
issuer and the Calculation Agent in writing that it has not received payment of
any Auction Agent Fee due it under the terms of the Auction Agent Agreement, the
Auction Agent does not receive payment.
If the Auction Agent should resign or be removed or be dissolved, or if
the property or affairs of the Auction Agent will be taken under the control of
any state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the indenture trustee, at the direction of
the issuer (after receipt of a certificate from the Calculation Agent confirming
that any proposed substitute Auction Agent meets the requirements described in
the preceding paragraph above), shall use its best efforts to appoint a
Substitute Auction Agent.
The Auction Agent is acting as agent for the issuer in connection with
Auctions. In the absence of bad faith, negligent failure to act or negligence on
its part, the Auction Agent will not be liable for any action taken, suffered or
omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The indenture trustee will pay the Auction Agent the Auction Agent Fee
on each Auction Payment Date for the Auction Rate Notes and will reimburse the
Auction Agent on its request for all reasonable expenses, disbursements and
advances incurred or made by the Auction Agent under any provision of the
Auction Agent Agreement or the Broker-Dealer Agreements (including the
reasonable compensation and the expenses and disbursements of its agents and
counsel). The amounts are payable as provided in the indenture. The issuer will
indemnify and hold harmless the Auction Agent for and against any loss,
liability or expense incurred without negligence or bad faith on the Auction
Agent's part, arising out of or in connection with the acceptance or
administration of its agency under the Auction Agent Agreement and the
Broker-Dealer
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Agreements including the reasonable costs and expenses (including the reasonable
fees and expenses of its counsel) of defending itself against any claim or
liability in connection with its exercise or performance of any of its duties
under the indenture, the Auction Agent Agreement and the Broker-Dealer Agreement
and of enforcing this indemnification provision; provided that the issuer will
not indemnify the Auction Agent as described in this paragraph for any fees and
expenses incurred by the Auction Agent in the normal course of performing its
duties under the Auction Agent Agreement and under the Broker-Dealer Agreements,
these fees and expenses being payable as described above.
BROKER-DEALER. Existing Holders and Potential Holders may participate
in Auctions only by submitting orders (in the manner described below) through a
"Broker-Dealer," including Salomon Smith Barney Inc. as the sole initial
Broker-Dealer for the Series 1999A-1 Notes, the Series 1999A-2 Notes, the Series
1999A-3 Notes, the Series 1999A-5 Notes, the Series 1999A-6 Notes and the Series
1999B-1 Notes and Banc of America Securities LLC as the sole initial
Broker-Dealer for the Series 1999A-4 Notes or any other broker or dealer (each
as defined in the Securities Exchange Act of 1934, as amended), commercial bank
or other entity permitted by law to perform the functions required of a
Broker-Dealer set forth below which (i) is a Participant or an affiliate of a
Participant, (ii) has been selected by the issuer and (iii) has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective, in which
the Broker-Dealer agrees to participate in Auctions as described in the Auction
Procedures, as from time to time amended or supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is
payable by the Auction Agent from moneys received from the indenture trustee, on
each Auction Payment Date. The Broker-Dealer Fee is payable as provided in the
indenture and the Broker-Dealer Agreement. Broker-Dealers may submit Orders in
Auctions for their own accounts. Any Broker-Dealer submitting an Order for its
own account in any Auction might have an advantage over other Bidders in that it
would have knowledge of other Orders placed through it in that Auction, but it
would not have knowledge of Orders submitted by other Broker-Dealers. The
Broker-Dealer Agreements provide that a Broker-Dealer shall handle its
customers' Orders under their respective duties under applicable securities laws
and rules. Any entity that is an affiliate of the issuer and becomes a
Broker-Dealer must submit a Sell Order covering any Auction Rate Notes held for
its own account.
CALCULATION AGENT. Under the Calculation Agent Agreement, and in
connection with the Auction Rate Notes, the "Calculation Agent," initially
Salomon Smith Barney Inc., will act solely as agent of the issuer and will not
assume any obligation or relationship of agency or trust for or with any of the
holders or book-entry interest owners of the Auction Rate Notes. The Calculation
Agent will receive nominal compensation for the performance of its duties under
the Calculation Agent Agreement.
AUCTION PROCEDURES
GENERAL. Under the indenture, Auctions to establish the Auction Rate
for the Auction Rate Notes will be held on each Interest Determination Date,
except as described below under the heading "Determination of the Auction Rate",
by application of the Auction Procedures described in this Appendix B and in the
indenture.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold
Rate and the Applicable LIBOR Rate on each Interest Determination Date. The
administrator will calculate and, no later than the business day preceding each
Interest Determination Date, will report to the Auction Agent in writing, the
net loan rate. On receipt of notice from the indenture trustee of a failed
Auction Period Conversion as described
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in the indenture, the Auction Agent will calculate the Maximum Auction Rate, and
the administrator will report to the Auction Agent in writing the net loan rate,
for the Auction Rate Notes as of the failed Auction Period Conversion Date and
give notice as provided and to the parties specified in the Auction Agent
Agreement. If the ownership of the Auction Rate Notes is no longer maintained in
book-entry form, the indenture trustee will calculate the Maximum Auction Rate,
and the administrator will report to the indenture trustee in writing the net
loan rate, for the Auction Rate Notes on the business day immediately preceding
the first day of each Interest Accrual Period commencing after delivery of the
note certificates. If a payment default has occurred, the indenture trustee will
calculate the non-payment rate on the Interest Determination Date for (i) each
Interest Accrual Period commencing on or after the occurrence and during the
continuance of the payment default and (ii) any Interest Accrual Period
commencing less than two business days after the cure of any payment default.
The Auction Agent will determine the Applicable LIBOR Rate for each Interest
Accrual Period other than the initial period; provided, that if the ownership of
the Auction Rate Notes is no longer maintained in book-entry form, or if a
payment default has occurred, then the indenture trustee will determine the
Applicable LIBOR Rate for each Interest Accrual Period. The determination by the
indenture trustee or the Auction Agent, as the case may be, of the Applicable
LIBOR Rate will (in the absence of manifest error) be final and binding on the
holders and all other parties. If calculated or determined by the Auction Agent,
the Auction Agent will promptly advise the indenture trustee of the Applicable
LIBOR Rate.
DETERMINATION OF THE AUCTION RATE. The Auction Rate for each series of
the Auction Rate Notes for each Auction Period after the initial period will be
determined on each Interest Determination Date in accordance with the Auction
Procedures. Each such Auction Period will commence on the first business day
following each Interest Determination Date (the "Auction Period Commencement
Date") and will terminate on and include the day preceding the next Auction
Period Commencement Date, subject to adjustment as described below in the event
that there are fewer than three business days in a week during which this
Auction Period would otherwise be scheduled to expire.
At the option of the issuer, the length of the Auction Period for a
series of the Auction Rate Notes may be adjusted pursuant to an Auction Period
Adjustment to an Auction Period of not less than 7 nor more than 91 days in
length. See "Description of the Notes -- Auction Period Adjustment" in the
prospectus supplement and "Changes in Auction Terms" below. In addition, at the
option of the issuer and as described in the prospectus supplement under the
caption "Description of the Notes -- Auction Period Conversion of and Mandatory
Tender of the Auction Rate Notes," the length of the Auction Period is subject
to an Auction Period Conversion on the first day of any Interest Accrual Period
(an "Auction Period Conversion Date") from a short Auction Period to a long
Auction Period, or vice versa, or to a long Auction Period that is more than
three months shorter or longer than the initial long Auction Period. On any
Auction Period Conversion, the Auction Rate Notes are subject to mandatory
tender. The Calculation Agent, with the consent of the issuer, may change the
Interest Determination Date to conform with prevailing market practice.
SUBMISSION OF ORDERS. So long as the ownership of the Auction Rate
Notes is maintained in book-entry form, an Existing Holder may sell, transfer or
otherwise dispose of Auction Rate Notes only under a Bid or Sell Order (as
hereinafter defined) placed in an Auction or through a Broker-Dealer, provided
that, in the case of all transfers other than under Auctions, the Existing
Holder, its Broker-Dealer or its Participant advises the Auction Agent of the
transfer. Except with respect to the Interest Determination Date immediately
preceding an Auction Period Conversion Date, Auctions will be conducted on each
Interest Determination Date, if there is an Auction Agent on the Interest
Determination Date, in the following manner (the procedures will apply to
separately to each series of Auction Rate Notes).
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Prior to the Submission Deadline (defined as 12:30 P.M., eastern time,
on any Interest Determination Date or other time on any Interest Determination
Date by which Broker-Dealers are required to submit Orders to the Auction Agent
as specified by the Auction Agent from time to time) on each Interest
Determination Date:
(a) each Existing Holder of Auction Rate Notes may submit to a
Broker-Dealer by telephone or otherwise information as to: (i) the principal
amount of outstanding Auction Rate Notes, if any, held by the Existing Holder
which the Existing Holder desires to continue to hold without regard to the
series interest rate for the next succeeding Auction Period (a "Hold Order");
(ii) the principal amount of outstanding Auction Rate Notes, if any, which the
Existing Holder offers to sell if the series interest rate for the next
succeeding Auction Period will be less than the rate per annum specified by the
Existing Holder (a "Bid"); and/or (iii) the principal amount of outstanding
Auction Rate Notes, if any, held by the Existing Holder which the Existing
Holder offers to sell without regard to the series interest rate for the next
succeeding Auction Period (a "Sell Order"); and
(b) one or more Broker-Dealers may contact Potential Holders to
determine the principal amount of Auction Rate Notes which each Potential Holder
offers to purchase, if the series interest rate for the next succeeding Auction
Period will not be less than the rate per annum specified by the Potential
Holder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Holder and each Potential Holder placing an Order is referred to as a "Bidder."
Subject to the provisions described below under "Validity of Orders," a
Bid by an Existing Holder will constitute an irrevocable offer to sell: (i) the
principal amount of outstanding Auction Rate Notes specified in the Bid if the
series interest rate will be less than the rate specified in the Bid, (ii) the
principal amount or a lesser principal amount of outstanding Auction Rate Notes
to be determined as described below in "Acceptance and Rejection of Orders," if
the series interest rate will be equal to the rate specified in the Bid or (iii)
the principal amount or a lesser principal amount of outstanding Auction Rate
Notes to be determined as described below under "Acceptance and Rejection of
Orders," if the rate specified therein will be higher than the series interest
rate and Sufficient Clearing Bids (as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders," a
Sell Order by an Existing Holder will constitute an irrevocable offer to sell:
(i) the principal amount of outstanding Auction Rate Notes specified in the Sell
Order or (ii) the principal amount or a lesser principal amount of outstanding
Auction Rate Notes as described below under "Acceptance and Rejection of
Orders," if Sufficient Clearing Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a
Bid by a Potential Holder will constitute an irrevocable offer to purchase: (i)
the principal amount of outstanding Auction Rate Notes specified in the Bid if
the series interest rate will be higher than the rate specified in the Bid or
(ii) the principal amount or a lesser principal amount of outstanding Auction
Rate Notes as described below in "Acceptance and Rejection of Orders," if the
series interest rate is equal to the rate specified in the Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior to
the Submission Deadline on each Interest Determination Date all Orders obtained
by the Broker-Dealer and will specify with respect to each Order: (i) the name
of the Bidder placing the Order; (ii) the aggregate principal amount of Auction
Rate
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Notes that are the subject of the Order; (iii) to the extent that the Bidder is
an Existing Holder: (a) the principal amount of Auction Rate Notes, if any,
subject to any Hold Order placed by the Existing Holder; (b) the principal
amount of Auction Rate Notes, if any, subject to any Bid placed by the Existing
Holder and the rate specified in the Bid; and (c) the principal amount of
Auction Rate Notes, if any, subject to any Sell Order placed by the Existing
Holder; and (iv) to the extent the Bidder is a Potential Holder, the rate
specified in the Potential Holder's Bid.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round the rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering all outstanding Auction Rate Notes held
by any Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent will deem a Hold Order to have been
submitted on behalf of the Existing Holder covering the principal amount of
outstanding Auction Rate Notes held by the Existing Holder and not subject to an
Order submitted to the Auction Agent.
Neither the issuer, the indenture trustee nor the Auction Agent will be
responsible for any failure of a Broker-Dealer to submit an Order to the Auction
Agent on behalf of any Existing Holder or Potential Holder.
An Existing Holder may submit multiple Orders, of different types and
specifying different rates, in an Auction with respect to Auction Rate Notes
then held by the Existing Holder. An Existing Holder that offers to purchase
additional Auction Rate Notes is, for purposes of the offer, treated as a
Potential Holder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i)
be treated as a Sell Order if submitted by a Existing Holder and (ii) not be
accepted if submitted by a Potential Holder.
VALIDITY OF ORDERS. If any Existing Holder submits through a
Broker-Dealer to the Auction Agent one or more Orders covering in the aggregate
more than the principal amount of outstanding Auction Rate Notes held by the
Existing Holder, these Orders will be considered valid as follows and in the
order of priority described below.
HOLD ORDERS. All Hold Orders will be considered valid, but only up to
the aggregate principal amount of outstanding Auction Rate Notes held by the
Existing Holder, and if the aggregate principal amount of Auction Rate Notes
subject to the Hold Orders exceeds the aggregate principal amount of Auction
Rate Notes held by the Existing Holder, the aggregate principal amount of
Auction Rate Notes subject to each the Hold Order will be reduced pro rata so
that the aggregate principal amount of Auction Rate Notes subject to all the
Hold Orders equals the aggregate principal amount of outstanding Auction Rate
Notes held by the Existing Holder.
BIDS. Any Bid will be considered valid up to the amount of the excess
of the principal amount of outstanding Auction Rate Notes held by the Existing
Holder over the aggregate principal amount of Auction Rate Notes subject to any
Hold Orders referred to above. Subject to the preceding sentence, if multiple
Bids with the same rate are submitted on behalf of the Existing Holder and the
aggregate principal amount of outstanding Auction Rate Notes subject to these
Bids is greater than the excess, these Bids will be considered valid up to the
amount of the excess. Subject to the two preceding sentences, if more than one
Bid with different rates are submitted on behalf of the Existing Holder, these
Bids will be considered valid first in the ascending order of their respective
rates until the highest rate is reached at which the excess exists and then
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at the rate up to the amount of the excess. In any event, the aggregate
principal amount of outstanding Auction Rate Notes, if any, subject to Bids not
valid under the provisions described above will be treated as the subject of a
Bid by a Potential Holder at the rate therein specified.
SELL ORDERS. All Sell Orders will be considered valid up to the amount
of the excess of the principal amount of outstanding Auction Rate Notes held by
the Existing Holder over the aggregate principal amount of Auction Rate Notes
subject to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for Auction Rate Notes is submitted on behalf of
any Potential Holder, each Bid submitted will be a separate Bid with the rate
and principal amount therein specified. Any Bid or Sell Order submitted by an
Existing Holder covering an aggregate principal amount of Auction Rate Notes not
equal to an Authorized Denomination will be rejected and will be deemed a Hold
Order. Any Bid submitted by a Potential Holder covering an aggregate principal
amount of Auction Rate Notes not equal to an Authorized Denomination will not be
rejected. Any Order submitted in an Auction by a Broker-Dealer to the Auction
Agent prior to the Submission Deadline on any Interest Determination Date will
be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid
under the procedures described above is referred to as a "Submitted Hold Order."
a "Submitted Bid" and a "Submitted Sell Order," respectively (collectively,
"Submitted Orders").
DETERMINATION OF SUFFICIENT CLEARING BIDS AND BID AUCTION RATE. Not
earlier than the Submission Deadline on each Interest Determination Date, the
Auction Agent will assemble all valid Submitted Orders and will determine:
(a) the excess of the total principal amount of outstanding Auction
Rate Notes over the sum of the aggregate principal amount of outstanding Auction
Rate Notes subject to Submitted Hold Orders (this excess being hereinafter
referred to as the "Available Auction Rate Notes"); and
(b) from the Submitted Orders whether the aggregate principal amount of
outstanding Auction Rate Notes subject to Submitted Bids by Potential Holders
specifying one or more rates equal to or lower than the Maximum Auction Rate
exceeds or is equal to the sum of (i) the aggregate principal amount of
outstanding Auction Rate Notes subject to Submitted Bids by Existing Holders
specifying one or more rates higher than the Maximum Auction Rate and (ii) the
aggregate principal amount of outstanding Auction Rate Notes subject to
Submitted Sell Orders (in the event the excess or the equality exists other than
because all of the outstanding Auction Rate Notes are subject to Submitted Hold
Orders, the Submitted Bids by Potential Holders above will be hereinafter
referred to collectively as "Sufficient Clearing Bids"); and
(c) if Sufficient Clearing Bids exist, the "Bid Auction Rate" which
will be the lowest rate specified in the Submitted Clearing Bids so that if:
(i) each Submitted Bid from Existing Holders specifying the
lowest rate and all other Submitted Bids from Existing Holders specifying lower
rates were rejected (thus entitling the Existing Holders to continue to hold the
principal amount of Auction Rate Notes subject to the Submitted Bids); and
(ii) each Submitted Bid from Potential Holders specifying the
lowest rate and all other Submitted Bids from Potential Holders specifying lower
rates, were accepted, the result would be that the Existing Holders described in
subparagraph (i) above would continue to hold an aggregate principal amount
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of outstanding Auction Rate Notes which, when added to the aggregate principal
amount of outstanding Auction Rate Notes to be purchased by the Potential
Holders described in subparagraph (ii) above, would equal not less than the
Available Auction Rate Notes.
NOTICE OF AUCTION RATE AND SERIES INTEREST RATE. Promptly after the
Auction Agent has made the determinations described above, the Auction Agent
will advise the indenture trustee of the net loan rate for the Auction Rate
Notes, the Maximum Auction Rate, the All Hold Rate and the components on the
Interest Determination Date, and based on determinations, the Auction Rate for
the next succeeding Interest Accrual Period as follows:
(a) if Sufficient Clearing Bids exist, that the Auction Rate for the
next succeeding Interest Accrual Period will be equal to the Bid Auction Rate so
determined;
(b) if Sufficient Clearing Bids do not exist (other than because all of
the outstanding Auction Rate Notes are subject to Submitted Hold Orders), that
the Auction Rate for the next succeeding Interest Accrual Period will be equal
to the Maximum Auction Rate; or
(c) if all outstanding Auction Rate Notes are subject to Submitted Hold
Orders, that the Auction Rate for the next succeeding Interest Accrual Period
will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the indenture trustee of the series
interest rate, which rate will be the lesser of (a) the formula rate and (b) the
net loan rate for the Auction Rate Notes. In no event shall the series interest
rate exceed 17%.
ACCEPTANCE AND REJECTION OF ORDERS. Existing Holders will continue to
hold the principal amount of Auction Rate Notes that are subject to Submitted
Hold Orders. If the net loan rate for the Auction Rate Notes is equal to or
greater than the Bid Auction Rate and if Sufficient Clearing Bids, as described
above under "Determination of Sufficient Clearing Bids and Bid Auction Rate,"
have been received by the Auction Agent, the Bid Auction Rate will be the
Auction Rate, and Submitted Bids and Submitted Sell Orders will be accepted or
rejected and the Auction Agent will take other action as set forth below.
If the net loan rate for the Auction Rate Notes is greater than the
Auction Rate, the series interest rate shall be the Auction Rate. If the net
loan rate for the Auction Rate Notes is less than the Auction Rate, the series
interest rate will be the net loan rate for the Auction Rate Notes. If the
Auction Rate and the net loan rate for the Auction Rate Notes are both greater
than 17%, the series interest rate shall be equal to 17%. If the Auction Agent
has not received Sufficient Clearing Bids as described above under
"Determination of Sufficient Clearing Bids and Bid Auction Rate" (other than
because all of the outstanding Auction Rate Notes are subject to Submitted Holds
Orders), the series interest rate will be the lesser of the Maximum Auction Rate
or the net loan rate for the Auction Rate Notes, but in no event greater than
17%. In any of the cases described above in this paragraph, Submitted Orders
will be accepted or rejected and the Auction Agent will take other action as
described below under "Insufficient Bids."
SUFFICIENT CLEARING BIDS. If Sufficient Clearing Bids have been made
and the net loan rate for the Auction Rate Notes is equal to or greater than the
Bid Auction Rate (in which case the series interest rate will be the Bid Auction
Rate), all Submitted Sell Orders will be accepted and, subject to the
denomination requirements described below, Submitted Bids will be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids will be rejected:
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(a) Existing Holders' Submitted Bids specifying any rate that is higher
than the series interest rate will be accepted, thus requiring each Existing
Holder to sell the aggregate principal amount of Auction Rate Notes subject to
the Submitted Bids;
(b) Existing Holders' Submitted Bids specifying any rate that is lower
than the series interest rate will be rejected, thus entitling each Existing
Holder to continue to hold the aggregate principal amount of Auction Rate Notes
subject to the Submitted Bids;
(c) Potential Holders' Submitted Bids specifying any rate that is lower
than the series interest rate will be accepted;
(d) Each Existing Holder's Submitted Bid specifying a rate that is
equal to the series interest rate will be rejected, thus entitling the Existing
Holder to continue to hold the aggregate principal amount of Auction Rate Notes
subject to the Submitted Bid, unless the aggregate principal amount of Auction
Rate Notes subject to the Submitted Bids will be greater than the principal
amount of Auction Rate Notes (the "remaining principal amount") equal to the
excess of the Available Auction Rate Notes over the aggregate principal amount
of Auction Rate Notes subject to Submitted Bids described in subparagraphs (b)
and (c) above, in which event the Submitted Bid of the Existing Holder will be
rejected in part and the Existing Holder will be entitled to continue to hold
the principal amount of Auction Rate Notes subject to the Submitted Bid, but
only equal to the aggregate principal amount of Auction Rate Notes obtained by
multiplying the remaining principal amount by a fraction, the numerator of which
will be the principal amount of outstanding Auction Rate Notes held by the
Existing Holder subject to the Submitted Bid and the denominator of which will
be the sum of the principal amount of outstanding Auction Rate Notes subject to
the Submitted Bids made by all the Existing Holders that specified a rate equal
to the series interest rate;
(e) Each Potential Holder's Submitted Bid specifying a rate that is
equal to the series interest rate will be accepted, but only equal to the
principal amount of Auction Rate Notes obtained by multiplying the excess of the
aggregate principal amount of Available Auction Rate Notes over the aggregate
principal amount of Auction Rate Notes subject to Submitted Bids described in
subparagraphs (b), (c) and (d) above by a fraction, the numerator of which will
be the aggregate principal amount of outstanding Auction Rate Notes subject to
the Submitted Bid and the denominator of which will be the sum of the principal
amount of outstanding Auction Rate Notes subject to Submitted Bids made by all
Potential Holders that specified a rate equal to the series interest rate; and
(f) Each Potential Holder's Bid specifying a rate that is higher than
the series interest rate will be rejected.
INSUFFICIENT BIDS. If Sufficient Clearing Bids have not been made
(other than because all of the outstanding Auction Rate Notes are subject to
Submitted Hold Orders) or if the net loan rate for the Auction Rate Notes is
less than the Bid Auction Rate (in which case the series interest rate shall be
the net loan rate for the Auction Rate Notes) or if the series interest rate
would be greater than 17%, subject to the denomination requirements described
below, Submitted Orders will be accepted or rejected as follows in the following
order of priority:
(a) Existing Holders' Submitted Bids specifying any rate that is equal
to or lower than the series interest rate will be rejected, thus entitling
Existing Holders to continue to hold the aggregate principal amount of Auction
Rate Notes subject to the Submitted Bids,
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(b) Potential Holders' Submitted Bids specifying (i) a rate that is
equal to or lower than the series interest rate will be accepted, and (ii) a
rate that is higher than the series interest rate will be rejected, and
(c) Each Existing Holder's Submitted Bid specifying any rate that is
higher than the series interest rate and the Submitted Sell Order of each
Existing Holder will be accepted, thus entitling each Existing Holder that
submitted any Submitted Bid or Submitted Sell Order to sell the Auction Rate
Notes subject to the Submitted Bid or Submitted Sell Order, but in both cases
only equal to the aggregate principal amount of Auction Rate Notes obtained by
multiplying the aggregate principal amount of Auction Rate Notes subject to
Submitted Bids described in subparagraph (b) above by a fraction, the numerator
of which will be the aggregate principal amount of outstanding Auction Rate
Notes held by the Existing Holder subject to the Submitted Bid or Submitted Sell
Order and the denominator of which will be the aggregate principal amount of
outstanding Auction Rate Notes subject to all Submitted Bids and Submitted Sell
Orders.
ALL HOLD ORDERS. If all outstanding Auction Rate Notes are subject to
Submitted Hold Orders, all Submitted Bids will be rejected.
AUTHORIZED DENOMINATIONS REQUIREMENT. If, as a result of the procedures
described above regarding Sufficient Clearing Bids and Insufficient Bids, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a principal amount of Auction Rate
Notes that is not equal to an Authorized Denomination, the Auction Agent will,
in a manner as in its sole discretion it will determine, round up or down the
principal amount of Auction Rate Notes to be purchased or sold by any Existing
Holder or Potential Holder so that the principal amount of Auction Rate Notes
purchased or sold by each Existing Holder or Potential Holder will be equal to
an Authorized Denomination. If, as a result of the procedures described above
regarding Insufficient Bids, any Potential Holder would be entitled or required
to purchase less than a principal amount of Auction Rate Notes equal to an
Authorized Denomination or any integral multiple of, the Auction Agent will, in
a manner as in its sole discretion it will determine, allocate Auction Rate
Notes for purchase among Potential Holders so that only Auction Rate Notes in an
Authorized Denomination are purchased by any Potential Holder, even if
allocation results in one or more of the Potential Holders not purchasing any
Auction Rate Notes.
Based on the results of each Auction, the Auction Agent will determine
the aggregate principal amount of Auction Rate Notes to be purchased and the
aggregate principal amount of Auction Rate Notes to be sold by Potential Holders
and Existing Holders on whose behalf each Broker-Dealer submitted Bids or Sell
Orders and, with respect to each Broker-Dealer, to the extent that the aggregate
principal amount of Auction Rate Notes to be sold differs from the aggregate
principal amount of Auction Rate Notes to be purchased, determine to which other
Broker-Dealer or Broker-Dealers acting for one or more purchasers the
Broker-Dealer will deliver, or from which Broker-Dealers acting for one or more
sellers the Broker-Dealer will receive, as the case may be, Auction Rate Notes.
Neither the issuer nor any affiliate of the issuer may submit an Order
in any Auction.
Any calculation by the Auction Agent (or the administrator or the
indenture trustee, if applicable) of the series interest rate, the Applicable
LIBOR Rate, the Maximum Auction Rate, the All Hold Rate, the net loan rate for
the Auction Rate Notes and the non-payment rate will, in the absence of manifest
error, be binding on all other parties.
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OTHER APPLICABLE INTEREST RATES AND ADJUSTMENTS. In any event, for
each series of Auction Rate Notes:
(A) if the ownership of the Auction Rate Notes is no longer maintained
in book-entry form, the Auction Rate for any Auction Period commencing after the
delivery of certificates representing the Auction Rate Notes will equal the
lesser of the Maximum Auction Rate and the net loan rate for the Auction Rate
Notes on the business day immediately preceding the first day of the subsequent
Auction Period; or
(B) if a Payment Default has occurred, the Auction Rate for the Auction
Period commencing on or during the Payment Default and for each Auction Period
afterwards, to and including the Auction Period, if any, during which, or
commencing less than two business days after, such Payment Default is cured in
accordance with the indenture, will equal the Non-Payment Rate on the first day
of each such Auction Period; or
(C) if a proposed Auction Period Conversion has failed, as described in
the prospectus supplement under the caption "Description of the Notes -- Auction
Period Conversion of and Mandatory Tender of the Auction Rate Notes," the
Auction Rate on the Auction Rate Notes subject to the failed Auction Period
Conversion will be equal to the Maximum Auction Rate as of the date of the
failed Auction Period Conversion for the Auction Period commencing on this date,
and the length of the Auction Period commencing upon the failed Auction Period
Conversion Date will be the same as was in effect immediately preceding the
failed Auction Period Conversion Date; or
(D) the Auction Rate for an Auction Period that commences on an Auction
Period Conversion Date will equal the lesser of (i) the interest rate necessary
to enable the Auction Agent to sell all of these Auction Rate Notes at par plus
accrued interest to the Auction Period Conversion Date or (ii) the Maximum
Auction Rate as of the Auction Period Conversion Date, subject to the net loan
rate.
The Auction Agent will promptly give written notice to the indenture
trustee and the issuer of the series interest rate (unless the series interest
rate is the Non-Payment Rate, in which case the indenture trustee will determine
the Non-Payment Rate and give written notice thereof to the issuer) and either
the Auction Rate or the net loan rate, as the case may be, when this rate is not
the series interest rate, applicable to the Auction Rate Notes. The indenture
trustee will notify the holders of the Auction Rate Notes of the series interest
rate applicable to the Auction Rate Notes for each Auction Period on the second
business date of such Auction Period.
In the event that there are fewer than three business days in any week
during which the Auction Period would otherwise be scheduled to expire, the
expiration date and Auction Payment Date for this Auction Period then in effect,
and the Interest Determination Date and commencement date for the immediately
following Auction Period, may be adjusted to fall on these dates as the
Calculation Agent, with the consent of the issuer, may determine to be
appropriate under these circumstances. The Calculation Agent will promptly
notify the indenture trustee and the Auction Agent in writing of any such
determination. The indenture trustee, upon receipt of this notice, will
immediately give written notification of this determination to the holders of
the Auction Rate Notes.
In the event that the Auction Agent no longer determines, or fails to
determine, when required, the series interest rate with respect to the Auction
Rate Notes, or, if for any reason such manner of determination shall be held to
be invalid or unenforceable, the series interest rate for the next succeeding
Auction Period for
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the Auction Rate Notes will be the net loan rate as determined by the
administrator for this Auction Period, and if the administrator fails or refuses
to determine the net loan rate, the net loan rate will be determined by a
securities dealer appointed by the issuer and capable, in the reasonable
judgment of the issuer, of making this determination in accordance with the
provisions of the indenture, and written notice of this determination will be
given by this securities dealer to the indenture trustee.
SETTLEMENT PROCEDURES. The Auction Agent is required to advise each
Broker-Dealer that submitted an Order in an Auction of the series interest rate
for the next Interest Accrual Period and, if the Order was a Bid or Sell Order,
whether the Bid or Sell Order was accepted or rejected, in whole or in part, by
telephone not later than 3:00 p.m., eastern time, on the Interest Determination
Date, if the series interest rate is the Auction Rate, or 4:00 p.m., eastern
time, on the Interest Determination Date, if the series interest rate is the net
loan rate for the Auction Rate Notes. Each Broker-Dealer that submitted an Order
on behalf of a Bidder is required to then advise the Bidder of the series
interest rate for the next Interest Accrual Period and, if the Order was a Bid
or a Sell Order, whether the Bid or Sell Order was accepted or rejected, in
whole or in part, confirm purchases and sales with each Bidder purchasing or
selling Auction Rate Notes as a result of the Auction and advise each Bidder
purchasing or selling Auction Rate Notes as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
the Auction Rate Notes or to deliver the Auction Rate Notes against payment
therefor, as appropriate. Under the Auction Agent Agreement, the Auction Agent
will record each transfer of Auction Rate Notes on the Existing Holders Registry
to be maintained by the Auction Agent.
Under DTC's normal procedures, on the business day after the Interest
Determination Date, the transactions described above will be executed through
DTC, so long as DTC is the Depository, and the accounts of the respective
Participants at DTC will be debited and credited and Auction Rate Notes
delivered as necessary to effect the purchases and sales of Auction Rate Notes
as determined in the Auction. Purchasers are required to make payment through
their Participants in same-day funds to DTC against delivery through their
Participants. DTC will make payment under its normal procedures, which now
provide for payment against delivery by its Participants in immediately
available funds
If any Existing Holder selling Auction Rate Notes in an Auction fails
to deliver the Auction Rate Notes, the Broker-Dealer of any Person that was to
have purchased Auction Rate Notes in the Auction may deliver to the Person a
principal amount of Auction Rate Notes that is less than the principal amount of
Auction Rate Notes that otherwise was to be purchased by the Person but in any
event equal to an Authorized Denomination. In that event, the principal amount
of Auction Rate Notes to be delivered will be determined by the Broker-Dealer.
Delivery of the lesser principal amount of Auction Rate Notes will constitute
good delivery. Neither the indenture trustee nor the Auction Agent will have any
responsibility or liability with respect to the failure of a Potential Holder,
Existing Holder or their respective Broker-Dealer or Participant to deliver the
principal amount of Auction Rate Notes or to pay for the Auction Rate Notes
purchased or sold under an Auction or otherwise. For a further description of
the settlement procedures, see Appendix C, "Settlement Procedures."
INDENTURE TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, CALCULATION AGENT AND
BROKER-DEALERS
The indenture trustee will not be liable or responsible for the actions
of or failure to act by the Auction Agent, Calculation Agent or any
Broker-Dealer under the indenture or under the Auction Agent Agreement, the
Calculation Agent Agreement or any Broker-
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Dealer Agreement. The indenture trustee may conclusively rely on any information
required to be furnished by the Auction Agent, the Calculation Agent or any
Broker-Dealer without undertaking any independent review or investigation of the
truth or accuracy of the information.
CHANGES IN AUCTION TERMS
CHANGES IN AUCTION PERIOD OR PERIODS. The issuer may change, from time
to time, the length of the one or more Auction periods in order to conform with
then current market practice with respect to similar securities or to
accommodate economic and financial factors that may affect or be relevant to the
length of the Auction Period and the interest rate borne by the Auction Rate
Notes (an "Auction Period Adjustment"). The issuer will not initiate a change in
the length of the Auction Period unless it has received the written consent of
the Calculation Agent, which consent shall not be unreasonably withheld, not
less than fifteen days nor more than 20 days prior to the effective date of an
Auction Period Adjustment. The issuer will initiate an Auction Period Adjustment
by giving written notice to the indenture trustee, the Auction Agent, the
Calculation Agent, the Depository and each rating agency then rating the Auction
Rate Notes subject to the Auction Period Adjustment, in substantially the form
of, or containing substantially the information contained in, the indenture at
least 10 days prior to the Interest Determination Date for the Auction period.
No Auction Period Adjustment may result in an Auction Period of less
than 7 nor more than 91 days, with respect to Auction Rate Notes with a short
Auction Period, or in an Auction period that is more than three months shorter
or longer than the Auction Period established on the issuance or Auction Period
Conversion of the Auction Rate Notes, with respect to Auction Rate Notes with a
long Auction Period. An Auction Period Adjustment will not be allowed unless
Sufficient Clearing Bids existed at both the Auction preceding the date on which
the notice of the proposed change was given as described above and the Auction
preceding the proposed change.
An Auction Period Adjustment will take effect only if (A) the indenture
trustee and the Auction Agent receive, by 11:00 A.M., eastern time, on the
business day before the Interest Determination Date for the first Auction
Period, a certificate from the issuer authorizing an Auction Period Adjustment
specified in the certificate and the written consent of the Calculation Agent
described above and (B) Sufficient Clearing Bids exist at the Auction on the
Interest Determination Date for the first Auction Period. If the condition
referred to in (A) is not met, the Auction Rate applicable for the next Auction
Period will be determined under the Auction Procedures and the length of the
Auction Period will remain the same. If the condition referred to in (A) is met,
but the condition referred to in (B) above is not met. the series interest rate
applicable for the next Auction Period will be the lesser of the Maximum Auction
Rate and the net loan rate for the Auction Rate Notes, but in no event greater
than 17%, and the length of the Auction Period will remain the same.
The issuer, with the written consent of the rating agencies then rating
the outstanding Notes, may, from time to time, change the length of one or more
Auction Periods under an Auction Period Conversion. In the event of a failed
Auction period conversion, the series interest rate for the Auction period for
which the proposed Auction Period Conversion was to have been effective will be
the lesser of the Maximum Auction Rate and the net loan rate for the Auction
Rate Notes. but in no event greater than 17%, and the length of the Auction
Period will remain the same.
CHANGES IN THE INTEREST DETERMINATION DATE. The Calculation Agent may
specify an earlier Interest Determination Date than the Interest Determination
Date that would otherwise be determined under the definition of "Interest
Determination Date" with respect to one or more specified Auction Periods in
order to conform with then current market practice with respect to similar
securities or to accommodate economic and
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financial factors that may affect or be relevant to the day of the week
constituting an Interest Determination Date and the interest rate borne on the
Auction Rate Notes. The authorized officer of the issuer will not consent to the
change in the Interest Determination Date unless the issuer shall have received
from the Calculation Agent not less than 15 days nor more than 20 days prior to
the effective date of the change a written request for consent. The Calculation
Agent will provide notice of its determination to specify an earlier Interest
Determination Date for one or more Auction Periods by means of a written notice
delivered at least 10 days prior to the proposed changed Interest Determination
Date to the indenture trustee, the Auction Agent, the issuer and the Depository.
This notice will be substantially in the form of, or contain substantially the
information contained in, the indenture.
The changes in Auction terms described above may be made with respect
to any of the series of Auction Rate Notes (but in the latter case separate
notices will be prepared and delivered as provided above and, with respect to
changes in the length of Auction Periods, the conditions specified above will be
applied to each series separately). In connection with any change in Auction
terms described above, the Auction Agent will provide further notice to the
parties as is specified in the Auction Agent Agreement.
USAGE OF TERMS
As used in this Appendix B, the following terms shall have the meanings
set forth below.
The term "All Hold Rate" means eighty-five percent (85%) of the
Applicable LIBOR Rate.
The term "Applicable LIBOR Rate" means, (a) for Auction Periods of 35
days or less, One -Month LIBOR, (b) for Auction Periods of more than 35 days but
less than 91 days, Three-Month LIBOR, (c) for Auction Periods of more than 90
days but less than 181 days, Six-month LIBOR, and (d) for Auction Periods of
more than 180 days, One-Year LIBOR. The terms One-Month LIBOR, Three-Month
LIBOR, Six-Month LIBOR or One-Year LIBOR, mean the rate of interest per annum
equal to the rate per annum with respect to United States dollar deposits in the
London interbank market having a maturity of one month, three months, six months
or one year, respectively.
The term "Auction" means the implementation of the Auction Procedures
on an Interest Determination Date.
The term "Auction Agent" means, with respect to the Auction Rate Notes,
the Initial Auction Agent unless a Substitute Auction Agent Agreement is entered
into, after which Auction Agent means the Substitute Auction Agent.
The term "Auction Agent Agreement" means, with respect to a series of
Auction Rate Notes, the Initial Auction Agent Agreement unless a Substitute
Auction Agent Agreement is entered into, after which Auction Agent Agreement
means the Substitute Auction Agent Agreement.
The term "Auction Agent Fee" has the meaning set forth in the Auction
Agent Agreement.
The term "Auction Payment Date" means, with respect to a series of
Auction Rate Notes, the business day immediately following the expiration of
each Auction Period; provided, however, that in connection with any Auction
Period Adjustment or Auction Period Conversion, the Auction Payment Date may be
changed.
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The term "Auction Period" means with respect to the Series 1999A-1
Notes and the Series 1999A-2 Notes, a period generally consisting of seven (7)
days and with respect to the Series 1999A-3 Notes, the Series 1999A-4 Notes, the
Series 1999A-5 Notes, the Series 1999A-6 Notes and the Series 1999B-1 Notes, a
period generally consisting of twenty-eight (28) days.
The term "Auction Period Adjustment" means with respect to a series of
Auction Rate Notes, the change, from time to time, in the length of an Auction
Period and, specifically, (i) with respect to an Auction Period between seven
(7) and ninety-one (91) days, inclusive, from such an Auction Period to any
other Auction Period between seven (7) and ninety-one (91) days inclusive, or
(ii) with respect to an Auction Period between ninety-two (92) days and the
legal final maturity of a series of Auction Rate Notes, inclusive, from such an
Auction Period to an Auction Period between ninety-two (92) days and the legal
final maturity of a series of Auction Rate Notes, inclusive, if such latter
Auction Period is no more than three (3) months shorter or no more than three
(3) months longer than the Auction Period for such series of Auction Rate Notes
established either at the initial issuance of the series of Auction Rate Notes
or pursuant to an Auction Period Conversion, whichever has occurred most
recently.
The term "Auction Period Commencement Date" means that each Auction
Period will commence on the first business day following each Interest
Determination Date.
The term "Auction Period Conversion" means with respect to a series of
Auction Rate Notes, the change in the length of an Auction Period (i) from an
Auction Period between seven (7) and ninety-one (91) days, inclusive, to an
Auction Period between ninety-two (92) days and the legal final maturity of such
series of Auction Rate Notes, inclusive, (ii) from an Auction Period between
ninety-two (92) days and the legal final maturity of such series of Auction Rate
Notes, inclusive, to an Auction Period between seven (7) and ninety-one (91)
days, inclusive, or (iii) from an Auction Period between ninety-two (92) days
and the legal final maturity of a series of Auction Rate Notes, inclusive, to an
Auction Period between ninety-two (92) and the legal final maturity of such
series of Auction Rate Notes, inclusive, if such latter Auction Period is at
least three (3) months shorter or at least three (3) months longer than the
Auction Period for such series of Auction Rate Notes established either upon
initial issuance of such series of Auction Rate Notes or pursuant to an Auction
Period Conversion, whichever has occurred most recently.
The term "Auction Period Conversion Date" means the date on which an
Auction Period Conversion is effective which is an Auction Payment Date with
respect to the related series of Auction Rate Notes.
The term "Auction Procedures" means the Auction Procedures that will be
used in determining the interest rates on the Auction Rate Notes, as set forth
in the prospectus supplement and in this appendix to the prospectus supplement
relating to a series of Auction Rate Notes.
The term "Auction Rate" shall mean the interest rate that results from
the implementation of the Auction Procedures.
The term "Auction Rate Notes" means the Series 1999A-1 Notes, the
Series 1999A-2 Notes, the Series 1999A-3 Notes, the Series 1999A-4 Notes, the
Series 1999A-5 Notes, the Series 1999A-6 Notes and the Series 1999B-1 Notes.
The term "Authorized Denomination" means $50,000 or any integral
multiple of $50,000.
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The term "Broker-Dealer" means Salomon Smith Barney Inc. as the sole
initial broker-dealer for the Series 1999A-1 Notes, the Series 1999A-2 Notes,
the Series 1999A-3 Notes, the Series 1999A-5 Notes, the Series 1999A-6 Notes and
the Series 1999B-1 Notes and Banc of America Securities LLC as the sole initial
broker-dealer for the Series 1999A-4 Notes or any other broker or dealer (each
as defined in the Securities Exchange Act of 1934, as amended), commercial bank
or other entity permitted by law to perform the functions required of a
broker-dealer set forth below which (i) is a Participant or an affiliate of a
Participant, (ii) has been selected by the issuer and (iii) has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective.
The term "Broker-Dealer Agreement" means each agreement between the
Auction Agent and a Broker-Dealer, approved by the issuer, pursuant to which the
Broker-Dealer agrees to participate in Auctions as set forth in the Auction
Procedures, as from time to time amended or supplemented.
The term "Broker-Dealer Fee" has the meaning set forth in the Auction
Agent Agreement.
The term "Calculation Agent" means Salomon Smith Barney Inc. as
Calculation Agent under the terms of the Calculation Agent Agreement, or any
successor to it as agent under the Calculation Agent Agreement.
The term "Calculation Agent Agreement" means the Calculation Agent
Agreement dated as of October 1, 1999 between the issuer, the indenture trustee
and the Calculation Agent.
The term "Existing Holder" means, (i) with respect to and for the
purpose of dealing with the Auction Agent in connection with the Auction, a
Person who is a Broker-Dealer listed in the Existing Holder Registry at the
close of business on the business day immediately preceding the Auction, and
(ii) with respect to and for the purpose of dealing with the Broker-Dealer in
connection with an Auction, a Person who is a beneficial owner of Auction Rate
Notes.
The term "Existing Holder Registry" means the registry of Persons who
are holders of Auction Rate Notes maintained by the Auction Agent as provided in
the Auction Agent Agreement.
The term "Initial Auction Agent" means Bankers Trust Company, New York,
New York.
The term "Initial Auction Agent Agreement" means the Auction Agent
Agreement dated as of October 1, 1999, by and among the issuer, the indenture
trustee, and the Initial Auction Agent relating to the Auction Rate Notes.
The term "Initial Auction Payment Date" means (i) for the Series
1999A-1 Notes ________, ____, (ii) for the Series 1999A-2 Notes ________, ____,
(iii) for the Series 1999A-3 Notes ________, ____, (iv) for the Series 1999A-4
Notes ________, ____, (v) for the Series 1999A-5 Notes ________, _____, (vi) for
the Series 1999A-6 Notes ________, ______ and (vii) for the Series 1999B-1 Notes
________, ____.
The term "Initial Interest Determination Date" means (i) for the Series
1999A-1 Notes ________, 1999, (ii) for the Series 1999A-2 Notes ________, ____,
(iii) for the Series 1999A-3 Notes ________, ____, (iv) for the Series 1999A-4
Notes ________, ____, (v) for the Series 1999A-5 Notes ________, ____, (vi) for
the Series 1999A-6 Notes ________, ____ and (vii) for the Series 1999B-1 Notes
________, ____.
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The term "Interest Accrual Period" means with respect to each series of
notes, the period of time in which interest may accrue commencing on the date of
issuance for each series of notes and ending on the day before the Initial
Auction Payment Date for each series, and after that date, on each Auction
Payment Date for each series of notes and ending on the day before the next
Auction Payment Date for the series of notes.
The term "Interest Determination Date" means (i) the Initial Interest
Determination Date and after that date (ii) with respect to the Auction Rate
Notes, the business day on which the Auction Rate is Determined by an Auction
and that immediately preceded the first day of each Interest Accrual Period,
other than (1) an Interest Accrual Period which commences on an Auction Period
Conversion Date or an Auction Period Adjustment Date; (2) each Interest Accrual
Period commencing after the ownership of the Auction Rate Notes is no longer
maintained in book-entry form; (3) each Interest Accrual Period commencing after
the occurrence and during the continuance of a payment default; provided however
that if such day is not a business day, then the next succeeding business day.
The term "LIBOR" means the rate of interest per annum equal to the rate
per annum at which United States dollar deposits having a particular maturity
are offered to prime banks in the London interbank market which appears on the
Telerate Page 3750 as of approximately 11:00 a.m., Greenwich mean time, on the
Interest Determination Date. If such rate does not appear on Telerate Page 3750,
the rate for that day will be determined on the basis on the Reuters Screen
LIBOR page. If at least two such quotations appear, LIBOR shall be the
arithmetic mean (rounded to the nearest one-hundredth of one percent (.01%)) of
such offered rates. If fewer than two such quotes appear, LIBOR with respect to
an Interest Accrual period will be determined at approximately 11:00 a.m.,
London time, on such applicable Interest Determination Date on the basis of the
rate at which deposits in United States dollars having such particular maturity
are offered to prime banks in the London interbank market by four major banks in
the London interbank market selected by the Calculation Agent and in a principal
amount of not less than U.S. $1,000,000 and that is representative for a single
transaction in such market at such time. The Calculation Agent will request the
principal London office of each of such banks to provide a quotation of its
rate. If at least two quotations are provided, LIBOR shall be the arithmetic
mean (rounded to the nearest one-hundredth of one percent (.01%)) of such
offered rates. If fewer than two quotations are provided, LIBOR with respect to
such Interest Accrual period shall be the arithmetic mean (rounded to the
nearest one-hundredth of one percent (.01%)) of the rates quoted at
approximately 11;00 a.m., New York City time on such applicable Interest
Determination Date by three major banks in New York, New York selected by the
Calculation Agent for loans in United States dollars to leading European banks
having such particular maturity and in a principal amount equal to an amount of
not less than U.S. $1,000,000 and that is representative for a single
transaction in such market at such time; provided, however, that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, LIBOR in
effect for the applicable Interest Accrual Period shall be LIBOR in effect for
the immediately preceding Interest Accrual Period.
The term "Maximum Auction Rate" means (i) prior to an Action Period
Conversion, (a) the Applicable LIBOR Rate plus 1.50% (if both of the ratings
assigned by the Rating Agencies to the Auction Rate Notes are "Aa3", "AA-" or
better) or (b) the Applicable LIBOR Rate plus 2.5% (if any one of the ratings
assigned by the Rating Agencies to the Auction Rate Notes is less than "Aa3" or
"AA-" but at least "A") or (c) the Applicable LIBOR Rate plus 3.50% (if any one
of the ratings assigned by the Rating Agencies to the Auction Rate Notes is less
than "A" and (ii) after an Auction Period Conversion, the rate set forth in the
Supplemental Indenture executed in connection with the Auction period
Conversion. For purposes of the Auction Agent and the Auction Procedures, the
ratings referred to in this definition shall be the last ratings of which the
Auction Agent has been given notice pursuant to the Auction Agent Agreement.
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The term "Non-Payment Rate" with respect to each series of the Auction
Rate Notes will be One-Month LIBOR plus 1.5%.
The term "Participants" means the participating organizations that
utilize the services of the depository.
The term "Payment Default" means with respect to any series of Auction
Rate Notes (a) a default in the due and punctual payment of any installment of
interest on such series or (b) a default in the due and punctual payment of any
interest on or principal of such series at their legal final maturity.
The term "Person" means firms, associations, partnerships, limited
liability companies, joint ventures, societes, estates, trusts, corporation,
public or government bodies, other legal entities and natural persons.
The term "Potential Holder" means any Person (including an Existing
Holder that is (i) a Broker-Dealer when dealing with the Auction Agent and (ii)
a potential beneficial owner when dealing with a Broker-Dealer), who may be
interested in acquiring Auction Rate Notes (or, in the case of an Existing
Holder thereof, an additional principal amount of Auction Rate Notes).
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APPENDIX C
SETTLEMENT PROCEDURES
If not otherwise defined below, capitalized terms used below will have
the meanings given the terms in the Indenture. These Settlement procedures apply
separately to each series of auction rate notes.
(a) Not later than (1) 3:00 P.M., eastern time, if the series interest
rate is the auction rate or (2) 4:00 P.M., eastern time, if the series interest
rate is the net loan rate for the auction rate notes, on each interest
determination date, the auction agent will notify by telephone each
broker-dealer that participated in the auction held on the interest
determination date and submitted an Order on behalf of an Existing Holder or
Potential Holder of:
(i) the series interest rate fixed for the next interest accrual
period;
(ii) whether there were Sufficient Clearing Bids in the auction;
(iii) if the broker-dealer (a "Seller's Broker-Dealer") submitted Bids
or Sell Orders on behalf of an Existing Holder, whether the Bid or Sell Order
was accepted or rejected, in whole or in part, and the principal amount of
auction rate notes, if any, to be purchased or sold by the Existing Holder;
(iv) if the broker-dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Holder, whether the Bid was accepted or rejected, in
whole or in part, and the principal amount of auction rate notes, if any, to be
purchased by the Potential Holder;
(v) if the aggregate amount of auction rate notes to be sold by all
Existing Holders on whose behalf the Seller's Broker-Dealer submitted Bids or
Sell Orders exceeds the aggregate principal amount of auction rate notes to be
purchased by all Potential Holders on whose behalf the Buyer's Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's Broker-Dealers (and
the name of the participant, if any, of each the Buyer's Broker-Dealer) acting
for one or more purchasers of excess principal amount of auction rate notes and
the principal amount of auction rate notes to be purchased from one or more
Existing Holders on whose behalf the Seller's Broker-Dealer acted by one or more
Potential Holders on whose behalf each of the Buyer's Broker-Dealers acted;
(vi) if the principal amount of auction rate notes to be purchased by
all Potential Holders on whose behalf the Buyer's Broker-Dealer submitted a Bid
exceeds the amount of auction rate notes to be sold by all Existing Holders on
whose behalf the Seller's Broker-Dealer submitted a Bid or a Sell Order, the
name or names of one or more Seller's Broker-Dealers (and the name of the
participant, if any, of each the Seller's Broker-Dealer) acting for one or more
sellers of the excess principal amount of auction rate notes and the principal
amount of auction rate notes to be sold to one or more Potential Holders on
whose behalf the Buyer's Broker-Dealer acted by one or more Existing Holders on
whose behalf each of the Seller's Broker-Dealers acted; and
(vii) the interest determination date for the next succeeding auction.
(b) On each interest determination date, each broker-dealer that submitted
an Order on behalf of any Existing Holder or Potential Holder will:
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<PAGE> 89
(i) advise each Existing Holder and Potential Holder on whose behalf
the broker-dealer submitted a Bid or Sell Order in the auction on the interest
determination date whether the Bid or Sell Order was accepted or rejected, in
whole or in part;
(ii) in the case of a broker-dealer that is a Buyer's Broker-Dealer,
advise each Potential Holder on whose behalf the Buyer's Broker-Dealer submitted
a Bid that was accepted, in whole or in part, to instruct the Potential Holder's
participant to pay to the Buyer's Broker-Dealer (or its participant) through the
Depository the amount necessary to purchase the principal amount of the auction
rate notes to be purchased under the Bid against receipt of the auction rate
notes;
(iii) in the case of a broker-dealer that is a Seller's Broker-Dealer,
instruct each Existing Holder on whose behalf the Seller's Broker-Dealer
submitted a Sell Order that was accepted, in whole or in part, or a Bid that was
accepted, in whole or in part, to instruct the Existing Holder's participant to
deliver to the Seller's Broker-Dealer (or its participant) through the
Depository the principal amount of auction rate notes to be sold under the Order
against payment therefor;
(iv) advise each Existing Holder on whose behalf the broker-dealer
submitted an Order and each Potential Holder on whose behalf the broker-dealer
submitted a Bid of the series interest rate for the next interest accrual
period;
(v) advise each Existing Holder on whose behalf the broker-dealer
submitted an Order of the next interest determination date; and
(vi) advise each Potential Holder on whose behalf the broker-dealer
submitted a Bid that was accepted, in whole or in part, of the next interest
determination date.
(c) On the basis of the information provided to it under paragraph (a)
above, each broker-dealer that submitted a Bid or Sell Order in an auction is
required to allocate any funds received by it in connection with the auction
under paragraph (b)(ii) above, and any auction rate notes received by it in
connection with the auction under paragraph (b)(iii) above, among the Potential
Holders, if any, on whose behalf the broker-dealer submitted Bids, the Existing
Holders, if any on whose behalf the broker-dealer submitted Bids or Sell Orders
in the auction, and any broker-dealers identified to it by the auction agent
following the auction under paragraph (a)(v) or (a)(vi) above.
(d) On each interest determination date:
(i) each Potential Holder and Existing Holder with an Order in the
auction on the interest determination date will instruct its participant as
provided in (b)(ii) or (b)(iii) above, as the case may be:
(ii) each Seller's broker-dealer that is not a participant of the
Depository will instruct its participant to (A) pay through the Depository to
the participant of the Existing Holder delivering auction rate notes to the
broker-dealer following the auction under paragraph (b)(ii) above the amount
necessary to purchase the auction rate notes against receipt of the auction rate
notes and (B) deliver the auction rate notes through the Depository to a Buyer's
Broker-Dealer (or its participant) identified to the Seller's Broker-Dealer
under (a)(v) above against payment therefor; and
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<PAGE> 90
(iii) each Buyer's Broker-Dealer that is not a participant in the
Depository will instruct its participant to pay through the Depository to
Seller's Broker-Dealer (or its participant) identified following the auction
under (a)(vi) above the amount necessary to purchase the auction rate notes to
be purchased under (b)(ii) above against receipt of the auction rate notes.
(e) On the business day following each interest determination date:
(i) each participant for a Bidder in the auction on the interest
determination date referred to in (d)(i) above will instruct the Depository to
execute the transactions described under (b)(ii) or (b)(iii) above for the
auction, and the Depository will execute these transactions;
(ii) each Seller's Broker-Dealer or its participant will instruct the
Depository to execute the transactions described in (d)(ii) above for the
auction, and the Depository will execute these transactions; and
(iii) each Buyer's Broker-Dealer or its participant will instruct the
Depository to execute the transactions described in (d)(iii) above for the
auction, and the Depository will execute these transactions.
If an Existing Holder selling auction rate notes in an auction fails to
deliver the auction rate notes (by authorized book-entry), a broker-dealer may
deliver to the Potential Holder on behalf of which it submitted a Bid that was
accepted a principal amount of auction rate notes that is less than the
principal amount of auction rate notes that otherwise was to be purchased by the
Potential Holder. In this event, the principal amount of auction rate notes to
be so delivered will be determined solely by the broker-dealer. Delivery of the
lesser principal amount of auction rate notes will constitute good delivery. In
addition to the terms of paragraph (f), any delivery or nondelivery of auction
rate notes which will represent any departure from the results of an auction, as
determined by the auction agent, will be of no effect unless and until the
auction agent will have been notified of the delivery or nondelivery under the
provisions of the Auction Agent Agreement and the Broker-Dealer Agreements.
Neither the indenture trustee nor the auction agent shall have any
responsibility or liability with respect to the failure of a Potential Holder,
Existing Holder or their respective broker-dealer or participant to take
delivery of or deliver, as the case may be, the principal amount of the auction
rate notes or to pay for the auction rate notes purchased or sold under an
auction or otherwise.
C-3
<PAGE> 91
PROSPECTUS
STUDENT LOAN FUNDING TRUSTS
STUDENT LOAN FUNDING RIVERFRONT LLC
DEPOSITOR
STUDENT LOAN FUNDING RESOURCES, INC.
MASTER SERVICER AND ADMINISTRATOR
STUDENT LOAN ASSET-BACKED NOTES
Notes Offered
- - asset backed notes
- - may include senior and subordinated notes
- - rated in one of four highest rating categories by at least one
nationally recognized rating organization
- - not listed on any trading exchange
- - obligations only of the related trust
Assets
- - student loans
- - may include one or more forms of credit enhancement
---------------------------------
YOU SHOULD CAREFULLY CONSIDER
THE RISK FACTORS IN THE
ACCOMPANYING PROSPECTUS
SUPPLEMENT.
THE NOTES ARE OBLIGATIONS ONLY
OF THE RELATED TRUST AND ARE
PAYABLE SOLELY FROM THE STUDENT
LOANS AND OTHER ASSETS OF THAT
TRUST.
THIS PROSPECTUS MUST BE
ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT FOR THE PARTICULAR
SERIES.
---------------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE NOTES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
OCTOBER 21, 1999
<PAGE> 92
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
The issuer provides information to you about the notes in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to a particular series
of notes, including your series, and (b) the accompanying prospectus supplement,
which will describe the specific terms of your series of notes, including:
- the timing of interest and principal payments;
- financial and other information about the financed student loans;
- information about credit enhancement;
- the ratings; and
- the method for selling the notes.
IF THE TERMS OF A PARTICULAR SERIES OF NOTES VARY BETWEEN THIS
PROSPECTUS AND THE PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN
THE PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and
the accompanying prospectus supplement, including the information incorporated
by reference. The issuer has not authorized anyone to provide you with different
information. The notes are not offered in any state where the offer is not
permitted.
The issuer has included cross-references in this prospectus and in the
accompanying prospectus supplement to captions in these materials where you can
find further related discussions. The following table of contents and the table
of contents included in the accompanying prospectus supplement provide the pages
on which these captions are located.
____________________
<PAGE> 93
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORMATION OF THE TRUSTS ...................................................... 1
The Trusts ................................................................. 1
The Administrator and Master Servicer ...................................... 1
Directors of Resources ..................................................... 2
Officers of Resources ...................................................... 3
THE DEPOSITOR ................................................................ 3
Depositor as Bankruptcy Remote Entity ...................................... 4
THE FINANCED STUDENT LOAN POOL ............................................... 5
MATURITY AND PREPAYMENT CONSIDERATIONS ....................................... 7
DESCRIPTION OF THE FFEL PROGRAM .............................................. 8
Loan Terms ................................................................. 12
Contracts with Guarantee Agencies .......................................... 22
Federal Special Allowance Payments ......................................... 27
Education Loans Generally Not Subject to Discharge in Bankruptcy ........... 28
Direct Loans ............................................................... 28
DESCRIPTION OF THE GUARANTEE AGENCIES ........................................ 29
Federal Agreements ......................................................... 30
Effect of Annual Claims Rate ............................................... 32
THE PRIVATE LOAN PROGRAMS .................................................... 32
TRANSFER AND SALE AGREEMENTS ................................................. 33
Conveyance of Financed Student Loans; Representations and Warranties ....... 33
Repurchase of Financed Student Loans ....................................... 34
Subsequent Finance Period and Subsequent Financed Student Loans ............ 35
Amendment .................................................................. 36
SERVICING .................................................................... 36
Master Servicer ............................................................ 36
Servicing Procedures ....................................................... 38
Servicer Covenants ......................................................... 38
Servicing Compensation ..................................................... 39
DESCRIPTION OF THE NOTES ..................................................... 39
Payment of Available Funds ................................................. 40
Interest ................................................................... 43
Principal .................................................................. 45
Determination of LIBOR ..................................................... 45
Determination of the Treasury Bill Rate Index .............................. 46
Determination of Auction Rate .............................................. 46
Auction Procedures ......................................................... 47
Credit Enhancement ......................................................... 49
Book-entry Registration .................................................... 50
Definitive Notes ........................................................... 55
List of Holders ............................................................ 56
Reports to Holders ......................................................... 56
REDEMPTION ................................................................... 57
</TABLE>
ii
<PAGE> 94
<TABLE>
<S> <C>
SECURITY FOR THE NOTES ....................................................... 57
The Trust Assets ........................................................... 57
Exchange Agreements ........................................................ 59
Proceedings Affecting Eligible Lender Trustee .............................. 60
THE INDENTURES ............................................................... 60
Indenture Trustee .......................................................... 60
Eligible Lender Trustee .................................................... 60
Funds and Accounts ......................................................... 61
Acquisition Fund ........................................................... 61
Student Loan Portfolio Fund ................................................ 62
Collection Fund ............................................................ 63
Advances ................................................................... 64
Investment ................................................................. 64
Covenants of the Issuer .................................................... 66
Events of Default .......................................................... 66
Amendment and Supplemental Indentures ...................................... 72
Defeasance ................................................................. 74
Nonpresentment ............................................................. 75
Removal of an Indenture Trustee; Resignation; Successors ................... 76
FEDERAL INCOME TAX CONSEQUENCES .............................................. 76
Payments Received on Notes ................................................. 77
Subordination .............................................................. 77
Characterization of the Notes as Indebtedness .............................. 77
Characterization of the Trust .............................................. 78
Original Issue Discount .................................................... 79
Variable Rate Notes ........................................................ 84
Anti-Abuse Rule ............................................................ 87
Market Discount ............................................................ 87
Amortizable Premium ........................................................ 89
Gain or Loss on Disposition ................................................ 90
Backup Withholding, Foreign Holders, and Other Tax Matters ................. 91
STATE TAX CONSIDERATIONS ..................................................... 92
USE OF PROCEEDS .............................................................. 92
ERISA CONSIDERATIONS ......................................................... 92
WHERE YOU CAN FIND MORE INFORMATION .......................................... 93
REPORTS TO HOLDERS ........................................................... 94
INCORPORATION OF DOCUMENTS BY REFERENCE ...................................... 94
PLAN OF DISTRIBUTION ......................................................... 94
RATING ....................................................................... 95
APPENDIX A - GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES ................................................. A-1
</TABLE>
iii
<PAGE> 95
FORMATION OF THE TRUSTS
THE TRUSTS
Each trust will be formed under the laws of the jurisdiction set forth in the
related prospectus supplement under a trust agreement for the transactions
described in this prospectus and each prospectus supplement. Each trust will be
a common law trust. A trust will not engage in any activity other than:
(1) acquiring, holding, selling and managing the financed student
loans and the other assets of the trust and proceeds from the
financed student loans;
(2) issuing one or more classes of its certificates and notes;
(3) making payments on its certificates and notes; and
(4) engaging in other activities related to the activities listed
in (1) through (3) above.
A trust initially will be capitalized with a nominal cash payment for the trust
certificate. The right to receive any amounts remaining after payment of the
notes will be represented by the trust certificate which initially will be held
by the depositor. The equity of the trust, together with the proceeds from the
sale of each series of notes, will be used by the trust, acting on its own
behalf or through an eligible lender trustee to acquire financed student loans
from the depositor under any transfer and sale agreement. The assets of the
trust will include:
(1) the pool of financed student loans;
(2) all funds related to the financed student loans collected
after the applicable cut-off date;
(3) all moneys and investments on deposit in the collection
account, capitalized interest account, note payment account,
expense account, reserve fund and excess surplus account; and
(4) any other property specified in the prospectus supplement.
All of the accounts in (3) above are held in the name of the indenture trustee.
To facilitate servicing and to minimize administrative burden and expense, the
servicers will be appointed custodians of the promissory notes representing the
financed FFELP loans by the eligible lender trustee.
A trust's principal offices will be located at the address of the applicable
eligible lender trustee, owner trustee or co-owner trustee set forth in the
prospectus supplement. For information regarding the eligible lender trustee,
see "The Indentures - Eligible Lender Trustee."
THE ADMINISTRATOR AND MASTER SERVICER
Student Loan Funding Resources, Inc., an Ohio corporation, offers a broad range
of educational related financial services, including student loan secondary
market services for lenders, education information outreach, and technical and
other assistance to colleges and universities. Resources is a wholly-owned
subsidiary of the Thomas L. Conlan Education Foundation (formerly known as The
Student Loan Funding
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<PAGE> 96
Corporation), an Ohio nonprofit corporation. The principal executive offices of
Resources are located at One West Fourth Street, Suite 200, Cincinnati, Ohio
45202. Its telephone number is (513) 352-0222.
Resources will undertake some responsibilities of the co-owner trustee, on
behalf of the issuer, under the indenture. Under an administration agreement
between Resources and the co-owner trustee, on behalf of the issuer, Resources,
as administrator, will provide management and administrative services to the
issuer. The administrator will receive an administration fee as compensation for
the performance of its obligations and as reimbursement for its expenses related
to its duties as administrator.
Under a master servicing agreement between Resources, as master servicer, and
the co-owner trustee, on behalf of the issuer, Resources will provide for the
servicing of the financed student loans. The master servicer will receive a
master servicing fee as compensation for the performance of the obligations and
the reimbursement for its expenses related to its duties as master servicer.
However, the notes are neither obligations of nor guaranteed or insured by
Resources in its capacity as the administrator or the master servicer.
DIRECTORS OF RESOURCES
Resources is governed by a board of directors that is currently authorized to
have seven members. The following table sets forth some information with respect
to the directors of Resources:
<TABLE>
<CAPTION>
BOARD
JOINED TERM POSITIONS PRINCIPAL ADDRESS OCCUPATION (PAST
DIRECTOR AGE BOARD ENDING AND OFFICES FIVE YEARS)
<S> <C> <C> <C> <C> <C> <C>
Susan E. Arnold 45 1998 2002 One Procter & Gamble Vice President &
Plaza General Manager,
Cincinnati, Ohio 45201 Procter & Gamble
North America
Ronald D. Brown 45 1998 2002 4701 Marburg Avenue Senior Vice
Cincinnati, Ohio 45209 President & CFO,
Milacron, Inc.
Lawrence A. Leser 63 1998 2001 Chairman P.O. Box 5380 Chairman, The E.W.
Cincinnati, Ohio 45201 Scripps Company
Chairman & CEO
(1994-96)
Serves as Director of:
----------------------
The E.W. Scripps
Company, Union
Central Life
Insurance Company &
AK Steel Holding
Company
William S. Newcomb, 55 1998 2001 Vice Chairman 52 East Gay Street Partner, Vorys
Jr. Columbus, Ohio 43215 Sater, Seymour &
Pease LLP
Michael H. Shaut 49 1999 2002 President & One West 4th Street Previously:
CEO Suite 200 President, Education
Cincinnati, Ohio 45202 Planning Services,
Inc.
Previously:
Executive Vice
President and Chief
Operating Officer,
the Student Loan
Funding Corporation
</TABLE>
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<PAGE> 97
<TABLE>
<CAPTION>
BOARD
JOINED TERM POSITIONS PRINCIPAL ADDRESS OCCUPATION (PAST
DIRECTOR AGE BOARD ENDING AND OFFICES FIVE YEARS)
<S> <C> <C> <C> <C> <C> <C>
Patricia Mann Smitson 53 Ex-Officio Ex-Officio Secretary 312 Walnut Street Partner, Thompson
Suite 1400 Hine & Flory LLP
Cincinnati, Ohio 45202
Walker J. Wallace 55 1998 2002 1017 Choctawhatchee Drive Retired, Vice
Niceville, FL 32578 President, Procter &
Gamble
</TABLE>
OFFICERS OF RESOURCES
The principal executive officers of Resources are:
Michael H. Shaut, 49, is President and Chief Executive Officer of Resources. Mr.
Shaut assumed that position on May 18, 1999. Mr. Shaut has 19 years of
diversified financial services industry experience including student and
consumer lending and corporate development. From December, 1995 through June,
1997, Mr. Shaut was Executive Vice President and Chief Operating Officer of the
Foundation (then known as The Student Loan Funding Corporation). Mr. Shaut holds
a Bachelor of Arts from Colgate University and a Juris Doctorate from Georgetown
University Law Center. Mr. Shaut is a member of the Bar Associations of Arizona,
Ohio, Pennsylvania, Virginia and the District of Columbia.
Perry D. Moore, 36, is Senior Vice President and Chief Financial Officer of
Resources. Mr. Moore has over 10 years of financial management experience. He
has also been employed by a major public accounting firm where he participated
in the audits of numerous financial institutions including The Student Loan
Funding Corporation. Mr. Moore has over 7 years experience in the student loan
industry in the areas of accounting, finance, product development and
operations. He holds a Bachelor of Science in Accounting from Bowling Green
State University and is a member of the American Institute of Certified Public
Accountants, Ohio Society of Certified Public Accountants and Institute of
Management Accountants.
James H. Eickhoff, Jr., 37, is Senior Vice President of Business Development and
Marketing Services of Resources. Mr. Eickhoff has 14 years of sales and
marketing leadership experience within the health care and education fields. He
has served on several state and national committees promoting literacy and
school-to-work initiatives. He holds a Bachelor of Arts from Hope College,
Holland, Michigan.
THE DEPOSITOR
Student Loan Funding Riverfront LLC, a Delaware limited liability company
organized as a bankruptcy remote special purpose entity, is the depositor. The
sole member of the depositor is Student Loan Funding Holdings LLC, a Delaware
limited liability company. The members of Student Loan Funding Holdings LLC are
Resources (99% ownership) and SLF Enterprises, Inc. (1% ownership), an Ohio
corporation and wholly-owned subsidiary of Resources.
The depositor is governed by a five-member management committee, which consists
of the following individuals: Daniel R. Bley, Perry D. Moore, Michael H. Shaut,
Kathryn A. Widdoes and Sandra K. Zimmerman. Mr. Bley, Mr. Moore and Mr. Shaut
are officers and/or employees of Resources and Ms. Widdoes and Ms. Zimmerman are
independent members of the management committee. The depositor has no full-time
employees. The principal executive offices of the depositor are located at One
West Fourth Street, Suite 310, Cincinnati, Ohio 42502. The telephone number of
the offices is (513) 352-0570.
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<PAGE> 98
Under the depositor's limited liability company agreement, the depositor will
not engage in any activity other than:
(1) acquiring, holding, selling and managing student loans and
other assets (consisting of moneys and investment securities
on deposit in the funds and accounts under its indentures and
the depositor's rights under particular contracts) in any of
the trusts established by the depositor;
(2) issuing one or more series of notes or other debt obligations
under one or more indentures of the depositor;
(3) making payments on the notes or other debt obligations of the
depositor; and
(4) engaging in other activities that are related to those
activities.
DEPOSITOR AS BANKRUPTCY REMOTE ENTITY
Resources structured the depositor to prevent any voluntary or involuntary
application for relief by Resources under insolvency laws from resulting in
consolidation of the assets and liabilities of the depositor with those of
Resources. The depositor was created as a separate, special purpose subsidiary
under a limited liability company agreement containing limitations (including
restrictions on the nature of the depositor's business and a restriction on the
depositor's ability to commence a voluntary proceeding under insolvency laws
without the unanimous affirmative vote of its management committee, including
the independent members). There can be no assurance that the activities of the
depositor will not result in a court concluding that the assets and the
liabilities of the depositor should be consolidated with those of Resources in a
proceeding under any insolvency laws.
The depositor has received the advice of its counsel to the effect that, subject
to specified facts, assumptions and qualifications, it would not be a proper
exercise by a court of its equitable discretion to disregard the separate legal
existence of the depositor and to require the consolidation of the assets and
liabilities of the depositor with the assets and liabilities of Resources in the
event of the application of any insolvency laws to Resources. Among other
things, it is assumed by counsel that the depositor will follow some procedures
in the conduct of its affairs, including:
- maintaining records and books of accounts separate from those
of Resources;
- refraining from commingling its assets with those of
Resources; and
- refraining from holding itself out as having agreed to pay, or
being liable for, the debts of Resources.
The depositor intends to follow these and other procedures related to
maintaining its separate identity.
There can be no assurance that a court would not conclude that the assets and
liabilities of the depositor should be consolidated with those of Resources. If
a court were to reach that conclusion, or a filing were made under any
insolvency laws by or against the depositor, or if an attempt were made to
litigate any of the above issues, delays in distributions on the notes could
occur or reductions in the amounts of these distributions could result. See
"Risk Factors" in the related prospectus supplement.
4
<PAGE> 99
After the occurrence of any event of bankruptcy or insolvency of the depositor,
the financed student loans and other assets of a trust may be liquidated. The
proceeds from that liquidation would be treated as collections on these assets
and deposited under the indenture. There can be no assurance that the proceeds
from the liquidation of these assets and amounts (if any) on deposit in the
funds and accounts held under the indenture would be sufficient to pay the
notes.
THE FINANCED STUDENT LOAN POOL
The notes are secured by and payable solely from the assets of the trust issuing
the notes. The trust will include:
(1) a pool of financed student loans and moneys payable with
respect to these loans after their respective dates of
acquisition or origination from moneys under the indenture;
(2) money and investment securities in the funds and accounts held
by the indenture trustee under the indenture; and
(3) all rights of the issuer and the eligible lender trustee in
and to specific contracts. See "Security for the Notes- The
Trust."
Financed student loans are student loans made or acquired by the trust, on its
own behalf or through the eligible lender trustee, with the proceeds of the
notes or moneys in the acquisition fund or the collection account. The pool of
financed student loans will include the student loans to be financed by the
issuer or the eligible lender trustee of the issuer.
The financed student loans will include FFELP loans and private loans that meet
several criteria, including the following. Each financed student loan:
(1) was originated in the United States or its territories or
possessions under the FFEL Program to or on behalf of a
student who has graduated or is expected to graduate from an
accredited institution of higher education within the meaning
of the Higher Education Act;
(2) bears interest at the maximum interest rate permitted under
the Higher Education Act, or a lesser rate of interest as is
approved by the rating agencies under the related indenture;
(3) contains terms required by the FFEL Program, the guarantee
agreements, private loan programs and other applicable
requirements; and
(4) is not more than 120 days past due as of the date that
financed student loan is acquired. See "Description of the
FFEL Program" and "Description of the Guarantee Agencies."
The relative percentages of each type of financed student loan to be included in
the pool of financed student loans will be determined from time to time under
the related indenture. See "Description of the FFEL Program," "Description of
the Guarantee Agencies" and "The Private Loan Programs."
In addition to the criteria described in the preceding paragraphs, a provider of
credit enhancement may require other characteristics for additional financed
student loans in the related trust. However, following each
5
<PAGE> 100
acquisition of additional financed student loans into a trust by the issuer or
an eligible lender trustee on behalf of the issuer, the aggregate
characteristics of the entire pool of financed student loans in the trust,
including the composition and type of the financed student loans, the
distribution by weighted average interest rate and the distribution by principal
amount to be described in tables included in each prospectus supplement, may
vary significantly from those of the financed student loans, if any, acquired by
the issuer or the eligible lender trustee on behalf of the issuer and
constituting a portion of the trust as of the applicable cut-off date. In
addition, the distribution by weighted average interest rate applicable to the
financed student loans in the trust on any date following the related cut-off
date may vary significantly from that set forth in the tables included in the
related prospectus supplement as a result of variation in the effective rates of
interest applicable to the financed student loans. The information included in
the related prospectus supplement with respect to the original term to maturity
and remaining term to maturity of financed student loans as of the related
cut-off date may vary significantly from the actual term to maturity of any of
the financed student loans as a result of the granting of deferral and
forbearance periods.
Each prospectus supplement will set forth information regarding the initial
financed student loans in the related trust, including the following:
- the composition of the financed student loans,
- the distribution by loan type,
- the distribution by interest rates,
- the distribution by outstanding principal balance,
- the distribution by geography,
- the distribution by insurance or guarantee level,
- the distribution by school type,
- the distribution by guarantee agency or private loan program,
- the distribution by remaining term to scheduled maturity and
- the distribution by borrower payment status.
See "The Financed Student Loans" in the related prospectus supplement. Each
prospectus supplement also will contain information with respect to other
financed student loans constituting the related trust.
Each of the FFELP loans provides or will provide for the amortization of the
outstanding principal balance of the financed student loan over a series of
regular payments. Each regular payment consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of the
financed student loan multiplied by the applicable interest rate and further
multiplied by the period elapsed (as a fraction of a calendar year) since the
preceding payment of interest was made. As payments are received for the
financed student loan, the amount received is applied first to outstanding late
fees, if collected, then to interest accrued to the date of payment and the
balance is applied to reduce the unpaid principal balance.
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Accordingly, if a borrower pays a regular installment before its scheduled due
date, the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. Conversely, if a
borrower pays a monthly installment after its scheduled due date, the portion of
the payment allocable to interest for the period since the preceding payment was
made will be greater than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly less. In either case, subject to any applicable
grace periods, deferment periods or forbearance periods, the borrower pays a
regular installment until the final scheduled payment date, at which time the
amount of the final installment is increased or decreased as necessary to repay
the then outstanding principal balance of a financed student loan. Private loans
may contain different amortization provisions.
MATURITY AND PREPAYMENT CONSIDERATIONS
The rate of payment of principal of the notes and the yield on the notes will be
affected by:
(1) prepayments of the financed student loans that may occur as
described below;
(2) the sale by the issuer of financed student loans;
(3) parity percentage payments; and
(4) deferrals or delays in payment on the financed student loans
resulting from defaults, grace periods, deferment periods and,
under some circumstances, forbearance periods or as a result
of refinancing through consolidation loans.
All the financed student loans are prepayable in whole or in part by the
borrowers at any time (including by means of consolidation loans as discussed
below) and may be prepaid as a result of:
(1) borrower default, death, disability or bankruptcy;
(2) a closing of false certification by the borrower's school;
(3) subsequent liquidation or collection of guarantee payments
(including for the purpose payments by any guarantor or escrow
fund under a private loan program); and
(4) financed student loans being repurchased by the seller as a
result of a breach of a representation and warranty.
The rate of the prepayments by borrowers cannot be predicted and may be
influenced by a variety of economic, social and other factors, including those
described below. In general, the rate of prepayments may tend to increase to the
extent that alternative financing becomes available at prevailing interest rates
which fall significantly below the interest rates applicable to the financed
student loans. However, because many of the financed student loans bear interest
at a rate that either actually or effectively is floating, it is impossible to
determine whether changes in prevailing interest rates will be similar to or
vary from changes in the interest rates on the financed student loans.
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Scheduled payments with respect to the financed student loans and maturities of,
the financed student loans may be extended, due to grace periods, deferment
periods and, under some circumstances, forbearance periods. The payments and
maturities may also be extended as a result of refinancing through consolidation
loans to the extent the consolidation loans are sold to the applicable eligible
lender trustee on behalf of the issuer as described above. If that happens, the
fact that the consolidation loans will likely have longer maturities than the
financed student loans they are replacing may lengthen the remaining term of the
financed student loans in the related trust and the average life of the related
notes. The rate of payment of principal of the notes and the yield on the notes
may also be affected by the rate of defaults resulting in losses on financed
student loans, by the severity of those losses and by the timing of those
losses, which may affect the ability of guarantee agencies to make guarantee
payments with respect to financed student loans.
The rate of prepayment on the financed student loans cannot be predicted and any
reinvestment risks resulting from a faster or slower incidence of prepayment of
financed student loans will be born entirely by the holders of the notes. These
reinvestment risks may include the risk that interest rates and the relevant
spreads above particular interest rate bases are lower at the time the holders
of the notes receive payments from the related trust than the interest rates and
the spreads would otherwise have been had the prepayments not been made or had
the prepayments been made at a different time.
DESCRIPTION OF THE FFEL PROGRAM
The Higher Education Act sets forth provisions establishing the FFEL Program,
under which state agencies or private nonprofit corporations administering
student loan insurance programs (referred to as guarantee agencies) are
reimbursed for losses sustained in the operation of their programs, and holders
of some loans made under the programs are paid subsidies for owning the loans.
The Higher Education Act currently authorizes FFELP loans to be originated under
the FFEL Program through June 30, 2003. Congress has extended similar
authorization dates in prior versions of the Higher Education Act; however,
there can be no assurance that the current authorization dates will again be
extended or that the other provisions of the Higher Education Act will be
continued in their present form.
Various amendments to the Higher Education Act have revised the FFEL Program
from time to time. These amendments include, but are not limited to the
following:
- the Higher Education Amendments of 1998 (the 1998 Reauthorization
Bill);
- the Intermodal Surface Transportation Efficiency Act of 1998;
- the 1997 Budget Reconciliation Act (P.L. 105-33);
- the Emergency Student Loan Consolidation Act of 1997;
- the Higher Education Technical Amendments Act of 1993;
- the Omnibus Budget Reconciliation Act of 1993 (the 1993 Amendments);
- the Higher Education Amendments of 1992, which reauthorized the FFEL
Program;
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- the Omnibus Budget Reconciliation Acts of 1990, 1989, 1987;
- the Higher Education Technical Amendments Act of 1987;
- the Higher Education Amendments of 1986, which reauthorized the FFEL
Program;
- the Consolidated Omnibus Budget Reconciliation Act of 1985;
- the Postsecondary Student Assistance Amendments of 1981; and
- the Education Amendments of 1980.
Omnibus Budget Reconciliation Act of 1993. Under the 1993 Amendments, Congress
made a number of changes that may adversely affect the financial condition of
the guarantee agencies, as these changes reduce financial benefits previously
enjoyed by guarantee agencies and give the Department of Education broad powers
over guarantee agencies and their reserves. See "- Contracts with Guarantee
Agencies" and "The Guarantee Agencies" for a more detailed description of the
impact of this legislation on guarantee agencies. The changes create a
significant risk that the resources available to the guarantee agencies to meet
their guarantee obligations will be substantially reduced.
In addition, this legislation sought to greatly expand the loan volume under the
direct lending program of the Department of Education known as the Federal
Direct Student Loan Program, to a target of approximately 60% of student loan
demand in academic year 1998-1999. Only about 35% of the loan demand is
currently being met under the direct lending program. The expansion of this
program in the future could result in increasing reductions in the volume of
loans made under the FFEL Program.
Under the Federal Direct Student Loan Program, the Department of Education
directly originates and holds student loans without the involvement of private
lenders. If the Federal Direct Student Loan Program expands, the master servicer
or the servicers may experience increased costs due to reduced economies of
scale or other adverse effects on their business to the extent the volume of
loans serviced by the servicers is reduced. The consequences could occur from
reductions in either:
- the volume of new loans made under the FFEL Program; or
- the consolidation of existing loans under the Federal Direct Student
Loan Program.
These cost increases could affect the ability of the master servicer or the
servicers to satisfy their obligations to service the financed student loans or
to purchase financed student loans in the event of breaches of the servicers'
covenants. See "Servicing- Servicer Covenants."
Volume reductions could further reduce revenues received by the guarantee
agencies available to pay claims on defaulted financed FFELP loans. Finally, the
level of competition currently in existence in the secondary market for loans
made under the FFEL Program could be reduced, resulting in fewer potential
buyers of the financed FFELP loans and lower prices available in the secondary
market for those loans.
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Emergency Student Loan Consolidation Act of 1997. On November 13, 1997,
President Clinton signed into law the Emergency Student Loan Consolidation Act
of 1997, which made significant changes to the Federal Consolidation Loan
Program. These changes include:
(1) providing that federal direct student loans are eligible to be
included in a consolidation loan;
(2) changing the borrower interest rate on new consolidation
loans, previously a fixed rate based on the weighted average
of the loans consolidated, rounded up to the nearest whole
percent, to the annually variable rate applicable to Stafford
loans (i.e., the bond equivalent rate at the last auction in
May of 91-day Treasury bills plus 3.10%, not to exceed 8.25%);
(3) providing that the portion of a consolidation loan that is
comprised of subsidized Stafford loans retains its subsidy
benefits during periods of deferment; and
(4) establishing prohibitions against various forms of
discrimination in the making of consolidation loans.
Except for the last of the above changes, all of these provisions expired on
September 30, 1998. The combination of the change to a variable rate and the
8.25% interest cap reduced the lender's yield in most cases below the rate that
would have been applicable under the previous weighted average formula.
FY 1998 Budget. In the 1997 Budget Reconciliation Act (P.L. 105-33), several
changes were made to the Higher Education Act that impact the FFEL Program.
These provisions include, among other things, requiring guarantee agencies to
return $1 billion of their reserves to the U.S. Treasury by September 1, 2002,
to be paid in annual installments, greater restrictions on use of reserves by
guarantee agencies and a continuation of the administrative cost allowance
payable to guarantee agencies (which is a fee paid to federal guarantors equal
to 0.85% of new loans guaranteed). See "- Contracts with Guarantee Agencies."
1998 Amendments. On May 22, 1998, Congress passed, and on June 9, 1998,
President Clinton signed into law, a temporary measure relating to the Higher
Education Act and FFELP loans as part of the Intermodal Surface Transportation
Efficiency Act of 1998, known as the 1998 Amendments, that revised interest rate
changes under the FFEL Program that were scheduled to become effective on July
1, 1998. For loans made during the period July 1, 1998 through September 30,
1998, the borrower interest rate for Stafford loans and unsubsidized Stafford
loans is reduced to a rate of 91-day Treasury bill rate plus 2.30% (1.70% during
school, grace and deferment), subject to a maximum rate of 8.25%. As described
below, the formula for special allowance payments on Stafford loans and
unsubsidized Stafford loans is calculated to produce a yield to the loan holder
of 91-day Treasury bill rate plus 2.80% (2.20% during school, grace and
deferment).
1998 Reauthorization Bill. On October 7, 1998, President Clinton signed into law
the 1998 Reauthorization Bill, which enacted significant reforms in the FFEL
Program. The major provisions of the 1998 Reauthorization Bill include the
following:
- All references to a "transition" to full implementation of the
Federal Direct Student Loan Program were deleted from the FFEL
Program statute.
- Guarantee agency reserve funds were restructured so that
guarantee agencies are provided with additional flexibility in
choosing how to spend the funds they receive.
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- - Additional recall of reserve funds by the Secretary of Education was
mandated, amounting to $85 million in fiscal year 2002, $82.5 million
in fiscal year 2006, and $82.5 million in fiscal year 2007. However,
some minimum reserve levels are protected from recall.
- - The administrative cost allowance was replaced by two new payments, a
student loan processing and issuance fee equal to 65 basis points (40
basis points for loans made on or after October 1, 2003) paid at the
time a loan is guaranteed, and an account maintenance fee of 12 basis
points (10 basis points for fiscal years 2001-2003) paid annually on
outstanding guaranteed student loans.
- - The percentage of collections on defaulted student loans a guarantee
agency is permitted to retain is reduced from 27% to 24% plus the
complement of the reinsurance percentage applicable at the time a claim
was paid to the lender of the student loan. This percentage will be
further reduced to 23% beginning on October 1, 2003.
- - Federal reinsurance provided to guarantee agencies is reduced from 98%
to 95% for student loans first disbursed on or after October 1, 1998.
- - The delinquency period required for a loan to be declared in default is
increased from 180 days to 270 days for loans on which the first day of
delinquency occurs on or after the date of enactment of the 1998
Reauthorization Bill.
- - Interest rates charged to borrowers on Stafford loans, and the yield
for Stafford loan holders established by the 1998 Amendments, were made
permanent.
- - Consolidation loan interest rates were revised to equal the weighted
average of the loans consolidated rounded up to the nearest one-eighth
of 1%, capped at 8.25%. When the 91-day Treasury bill rate plus 3.1%
exceeds the borrower's interest rate, special allowance payments are
made to make up the difference.
- - The lender-paid offset fee on consolidation loans of 1.05% is reduced
to .62% for loans made under applications received on or after October
1, 1998 and on or before January 31, 1999.
- - The consolidation loan interest rate calculation was revised to reflect
the rate of consolidation loans, and will be effective for loans on
which applications are received on or after October 1, 1998 and before
July 1, 2003.
- - Lenders are required to offer extended repayment schedules to new
borrowers after the enactment of the 1998 Reauthorization Bill who
accumulate after this date outstanding loans under the FFEL Program
totaling more than $30,000; under these extended schedules the
repayment period may extend up to 25 years subject to minimum repayment
amounts.
- - The Secretary of Education is authorized to enter into six voluntary
flexible agreements with guarantee agencies under which various
statutory and regulatory provisions can be waived.
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- - Consolidation loan lending restrictions are revised to allow lenders
who do not hold one of the borrower's underlying FFELP loans to issue a
consolidation loan to a borrower whose underlying FFELP loans are held
by multiple holders.
- - Inducement restrictions were revised to permit guarantee agencies and
lenders to provide assistance to schools comparable to that provided to
schools by the Secretary of Education under the Federal Direct Student
Loan Program.
- - The Secretary of Education is now required to pay off student loan
amounts owed by borrowers due to failure of the borrower's school to
make a tuition refund allocable to the student loan.
- - Discharge of FFELP loans and some other student loans in bankruptcy is
now limited to cases of undue hardship regardless of whether the
student loan has been due for more than seven years prior to the
bankruptcy filing.
The new recall of reserves and reduced reinsurance for guarantee agencies
increase the risk that resources available to the guarantee agencies to meet
their guarantee obligations will be significantly reduced.
There can be no assurance that relevant federal laws, including the Higher
Education Act, will not be changed in a manner that may adversely affect the
receipt of funds by the guarantee agencies or by the issuer or the eligible
lender trustee with respect to financed FFELP loans.
This is only a summary of specific provisions of the Higher Education Act.
Reference is made to the text of the Higher Education Act for full and complete
statements of its provisions.
LOAN TERMS
Four types of loans are currently available under the FFEL Program:
- Stafford loans;
- Unsubsidized Stafford loans;
- PLUS loans; and
- Consolidation loans.
These loan types vary as to eligibility requirements, interest rates, repayment
periods, loan limits, eligibility for interest subsidies and special allowance
payments. Some of these loan types have had other names in the past. References
herein to the various loan types include, where appropriate, predecessors to
these loan types.
The primary loan under the FFEL Program is the Stafford loan. Students who are
not eligible for Stafford loans based on their economic circumstances may be
able to obtain unsubsidized Stafford loans. Parents of students may be able to
obtain PLUS loans. Consolidation loans are available to borrowers with existing
loans made under the FFEL Program and specific other federal programs to
consolidate repayment of these existing loans. For periods of enrollment
beginning prior to July 1, 1994, SLS loans were available to
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students with costs of education that were not met by other sources and that
exceeded the Stafford or unsubsidized Stafford loan limits.
Eligibility
General. A student is eligible for loans made under the FFEL Program only if he
or she:
- - has been accepted for enrollment or is enrolled in good standing at an
eligible institution of higher education, which includes some
vocational schools;
- - is carrying or planning to carry at least one-half the normal full-time
workload for the course of study the student is pursuing as determined
by the institution, which, in the case of a loan to cover the cost of a
period of enrollment beginning on or after July 1, 1987, must either
lead to a recognized educational credential or be necessary for
enrollment in a course of study that leads to a credential;
- - has agreed to notify promptly the holder of the loan concerning any
change of address;
- - if presently enrolled, is maintaining satisfactory progress in the
course of study he or she is pursuing;
- - does not owe a refund on, and is not, except as specifically permitted
under the Higher Education Act, in default under, any loan or grant
made under the Higher Education Act;
- - has filed with the eligible institution a statement of educational
purpose;
- - meets the citizenship requirements; and
- - except in the case of a graduate or professional student, has received
a preliminary determination of eligibility or ineligibility for a Pell
Grant.
Stafford Loans. Stafford loans generally are made only to student borrowers who
meet specific needs tests. The educational institution must provide the lender
with a statement evidencing a determination of need for a loan, and the amount
of the need, calculated by subtracting from the estimated cost of attendance the
sum of the expected family contribution with respect to the student plus the
estimated financial assistance available to the student. The amounts of the
expected family contribution, estimated available financial assistance, and
estimated costs of attendance are to be computed under standards set forth in
the Higher Education Act.
Unsubsidized Stafford Loans. A student borrower meeting the requirements set
forth under "- General" above is eligible for an unsubsidized Stafford loan
without regard to need. Unsubsidized Stafford loans were not available before
October 1, 1992.
PLUS Loans. PLUS loans are made only to borrowers who are parents, some legal
guardians and, under some circumstances, spouses of remarried parents of
dependent undergraduate students. For PLUS loans made on or after July 1, 1993,
the parent borrower must not have an adverse credit history, as determined under
criteria established by the Department of Education. Prior to the Higher
Education Amendments of 1986, the Higher Education Act did not distinguish
between PLUS loans and SLS loans. Student borrowers were eligible for PLUS
loans; however, parents of graduate and professional students were ineligible.
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SLS Loans. Eligible borrowers for SLS loans were limited to:
(a) graduate or professional students;
(b) independent undergraduate students; and
(c) under some circumstances, dependent undergraduate students, if
that student's parents were unable to obtain a PLUS loan and
were also unable to provide the student's expected family
contribution.
Except as described in clause (c), eligibility was determined without regard to
need.
Consolidation Loans. To be eligible for a consolidation loan a borrower must:
- have outstanding indebtedness on student loans made under the
FFEL Program and/or other federal student loan programs; and
- be in repayment status or in a grace period, or be a defaulted
borrower who has made arrangements to repay the defaulted
loan(s) satisfactory to the holder of the defaulted loan(s).
A married couple, each of whom has outstanding loans under the FFEL Program, and
agrees to be jointly liable on a consolidation loan, for which the application
is received on or after January 1, 1993, may be treated as an individual for
purposes of obtaining a consolidation loan. For consolidation loans disbursed
prior to July 1, 1994, the borrower was required to have outstanding student
loan indebtedness of at least $7,500. Prior to the adoption of the Higher
Education Technical Amendments Act of 1993, PLUS loans could not be included in
the consolidation loan. For consolidation loans for which the applications were
received prior to January 1, 1993, the minimum student loan indebtedness was
$5,000 and the borrower could not be delinquent more than 90 days in the payment
of this indebtedness.
Interest Rates
The Higher Education Act establishes maximum interest rates for each of the
various types of loans. These rates vary not only among loan types, but also
within loan types depending on when the loan was made or when the borrower first
obtained a loan under the FFEL Program. The Higher Education Act allows lesser
rates of interest to be charged. Many lenders, including the depositor, have
offered repayment incentives or other programs that involve reduced interest
rates on specific loans made under the FFEL Program.
Stafford Loans. A new borrower is one who does not have an outstanding balance
on a previous loan made under the FFEL Program. For a Stafford loan made before
July 1, 1994, the applicable interest rate for a new borrower:
(1) is 7% for a loan covering a period of instruction beginning
before January 1, 1981;
(2) is 9% for a loan covering a period of instruction beginning on
or after January 1, 1981, but before September 13, 1983;
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(3) is 8% for a loan covering a period of instruction beginning on
or after September 13, 1983, but before July 1, 1988;
(4) for a loan made prior to October 1, 1992, covering a period of
instruction beginning on or after July 1, 1988, is 8% for the
period from the disbursement of the loan to the date which is
four years after the loan enters repayment, and after is
adjusted annually, and for any 12-month period commencing on a
July 1 is equal to the bond equivalent rate of 91-day Treasury
bills auctioned at the final auction prior to the preceding
June 1, plus 3.25%, not to exceed 10%; or
(5) for a loan made on or after October 1, 1992 is adjusted
annually, and for any 12-month period commencing on a July 1
is equal to the bond equivalent rate of 91-day Treasury bills
auctioned at the final auction prior to the preceding June 1,
plus 3.1%, not to exceed 9%.
A repeat borrower is one who does have an outstanding balance on a previous loan
made under the FFEL Program. For a Stafford loan made before July 1, 1994, the
applicable interest rate for a repeat borrower is:
(6) for a loan made prior to July 23, 1992, is the applicable
interest rate on the previous loan or, if the previous loan is
not a Stafford loan, 8%, or
(7) for a loan made on or after July 23, 1992, is adjusted
annually, and for any twelve month period commencing on a July
1, is equal to the bond equivalent rate of 91-day Treasury
bills auctioned at the final auction prior to the preceding
June 1, plus 3.1% but not to exceed:
(a) 7% in the case of a Stafford loan made to a borrower
who has a loan described in clause (1) above;
(b) 8% in the case of:
(A) a Stafford loan made to a borrower who has a
loan described in clause (3) above;
(B) a Stafford loan which has not been in
repayment for four years and which was made
to a borrower who has a loan described in
clause (4) above;
(C) a Stafford loan for which the first
disbursement was made prior to December 20,
1993 to a borrower whose previous loans do
not include a Stafford loan or an
unsubsidized Stafford loan;
(c) 9% in the case of:
(A) a Stafford loan made to a borrower who has a
loan described in clauses (2) or (5) above;
or
(B) a Stafford loan for which the first
disbursement was made on or after December
20, 1993 to a borrower whose previous loans
do not include a Stafford loan or an
unsubsidized Stafford loan; and
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(d) 10% in the case of a Stafford loan which has
been in repayment for four years or more and
which was made to a borrower who has a loan
described in clause (4) above.
The interest rate on all Stafford loans made on or after July 1, 1994 but before
July 1, 1998, regardless of whether the borrower is a new borrower or a repeat
borrower, is the rate described in clause (7) above, but the rate shall not
exceed 8.25%. For any Stafford loan made on or after July 1, 1995, the interest
rate is further reduced prior to the time the loan enters repayment and during
any deferment periods. During these periods, the formula described in clause (7)
above is applied, except that 2.5% is substituted for 3.1%, and the rate shall
not exceed 8.25%.
For Stafford loans made on or after July 1, 1998 but before July 1, 2003, the
applicable interest rate shall be adjusted annually, and for any twelve month
period commencing on a July 1 shall be equal to the bond equivalent rate of
91-day Treasury bills auctioned at the final auction prior to the proceeding
June 1, plus (x) 1.7% prior to the time the loan enters repayment and during any
deferment periods, and (y) 2.3% during repayment, but not to exceed 8.25%.
Unsubsidized Stafford Loans. Unsubsidized Stafford loans are subject to the same
interest rate provisions as Stafford loans.
PlUS Loans. The applicable interest rate on a PLUS loan:
(1) made on or after January 1, 1981, but before October 1, 1981,
is 9%;
(2) made on or after October 1, 1981, but before November 1, 1982,
is 14%;
(3) made on or after November 1, 1982, but before July 1, 1987, is
12%;
(4) made on or after July 1, 1987, but before October 1, 1992
shall be adjusted annually, and for any 12-month period
beginning on July 1 shall be equal to the bond equivalent rate
of 52-week Treasury bills auctioned at the final auction prior
to the preceding June 1, plus 3.25%, not to exceed 12%;
(5) made on or after October 1, 1992, but before July 1, 1994,
shall be adjusted annually, and for any 12-month period
beginning on July 1 shall be equal to the bond equivalent rate
of 52-week Treasury bills auctioned at the final auction prior
to the preceding June 1, plus 3.1%, not to exceed 10%;
(6) made on or after July 1, 1994, but before July 1, 1998, is the
same as that described in clause (e) above, except that this
rate shall not exceed 9%; or
(7) made on or after July 1, 1998, but before July 1, 2003, shall
be adjusted annually, and for any 12-month period beginning on
July 1 shall be equal to the bond equivalent rate of 91-day
Treasury bills auctioned at the final auction prior to the
proceeding June 1, plus 3.1%, not to exceed 9%.
If requested by the borrower, an eligible lender may consolidate SLS or PLUS
loans of the same borrower held by the lender under a single repayment schedule.
The repayment period for each included loan shall be
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based on the commencement of repayment of the most recent loan. The consolidated
loan shall bear interest at a rate equal to the weighted average of the rates of
the included loans. This consolidation shall not be treated as the making of a
new loan. In addition, at the request of the borrower, a lender may refinance an
existing fixed rate SLS or PLUS loan. This includes an SLS or PLUS loan held by
a different lender who has refused so to refinance this loan at a variable
interest rate. If this happens, proceeds of the new loan are used to discharge
the original loan.
SLS Loans. The applicable interest rates on SLS loans made prior to October 1,
1992 are identical to the applicable interest rates on PLUS loans made at the
same time. For SLS loans made on or after October 1, 1992, the applicable
interest rate is the same as the applicable interest rate on PLUS loans, except
that the ceiling is 11% instead of 10%.
Consolidation Loans. The interest rate on a consolidation loan made prior to
July 1, 1994 is the weighted average of the rates on the loans retired, rounded
to the nearest whole percent, but not less than 9%. A consolidation loan made on
or after July 1, 1994 and before November 13, 1997, bears interest at a rate
equal to the weighted average of the interest rates on the loans retired,
rounded upward to the nearest whole percent, but with no minimum rate.
Consolidation loans made on or after November 13, 1997 and before October 1,
1998 bear interest at the annual variable rate for Stafford loans. Consolidation
loans for which applications are received on or after October 1, 1998 bear
interest at a rate equal to the weighted average rate of the loans consolidated
rounded to the nearest one-eighth of 1%, but not to exceed 8.25%.
In addition, the portion, if any, of a consolidation loan that repaid a loan
made under Title VII, Section 700-721 of the Public Health Services Act, as
amended, has a different variable interest rate. This portion is adjusted on
July 1 of each year, but is the sum of the average of the Treasury bill rates
auctioned for the quarter ending on the preceding June 30, plus 3.0%, without
any cap on the interest rate. For a discussion of required payments that reduce
the return on consolidation loans, see "- Fees- Rebate Fees on Consolidation
Loans."
Loan Limits
Every type of loan other than consolidation loans, is subject to limits as to
the maximum principal amount, both with respect to a given year and in the
aggregate. All of the loans are limited to the difference between the cost of
attendance and the other aid available to the student. Stafford loans are also
subject to limits based on the needs analysis as described in "- Eligibility-
Stafford Loans." Additional limits are described below.
Stafford and Unsubsidized Stafford Loans. Stafford and Unsubsidized Stafford
loans are generally treated as one loan type for loan limit purposes. A student
who has not successfully completed the first year of a program of undergraduate
education may borrow up to $2,625 in an academic year. A student who has
successfully completed the first year, but who has not successfully completed
the second year may borrow up to $3,500 per academic year. An undergraduate
student who successfully completes the first and second year, but who has not
successfully completed the remainder of a program of undergraduate education,
may borrow up to $5,500 per academic year. For students enrolled in programs of
less than an academic year in length, the limits are generally reduced in
proportion to the amount by which these programs are less than one year in
length.
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A graduate or professional student may borrow up to $8,500 in an academic year.
The maximum aggregate amount of Stafford and unsubsidized Stafford loans
(including that portion of a consolidation loan used to repay these loans) which
an undergraduate student may have outstanding is $23,000. The maximum aggregate
amount for a graduate and professional student, including loans for
undergraduate education, is $65,500. The Secretary of Education is authorized to
increase the limits applicable to graduate and professional students who are
pursuing programs which the Secretary of Education determines to be
exceptionally expensive.
At the time that SLS loans were eliminated, the loan limits for unsubsidized
Stafford loans to independent students, or dependent students whose parents
cannot borrow a PLUS loan, were increased by amounts equal to the prior SLS loan
limits.
Prior to the enactment of the Higher Education Amendments of 1992, an
undergraduate student who had not successfully completed the first and second
year of a program of undergraduate education could borrow Stafford loans in
amounts up to $2,625 in an academic year. An undergraduate student who had
successfully completed the first and second years, but who had not successfully
completed the remainder of a program of undergraduate education could borrow up
to $4,000 per academic year. The maximum for graduate and professional students
was $7,500 per academic year. The maximum aggregate amount of Stafford loans
which a borrower could have outstanding, including that portion of a
consolidation loan used to repay these loans, was $17,250. The maximum aggregate
amount for a graduate or professional student, including loans for undergraduate
education, was $54,750. Prior to the 1986 changes, the annual limits were
generally lower.
PLUS Loans. For PLUS loans made on or after July 1, 1993, the amounts of PLUS
loans are limited only by the student's unmet need. Prior to that time PLUS
loans were subject to limits similar to those to which SLS loans were then
subject (see "- SLS Loans"), applied with respect to each student on behalf of
whom the parent borrowed.
SLS Loans. A student who had not successfully completed the first and second
year of a program of undergraduate education could borrow an SLS loan in an
amount of up to $4,000. A student who had successfully completed the first and
second years, but who had not successfully completed the remainder of a program
of undergraduate education could borrow up to $5,000 per year. Graduate and
professional students could borrow up to $10,000 per year. SLS loans were
subject to an aggregate maximum of $23,000 for undergraduate students and
$73,000 for graduate and professional students. Prior to the 1992 changes, SLS
loans were available in amounts of $4,000 per academic year, up to a $20,000
aggregate maximum. Prior to the 1986 changes, a graduate or professional student
could borrow $3,000 of SLS loans per academic year, up to a $15,000 maximum, and
an independent undergraduate student could borrow $2,500 of SLS loans per
academic year minus the amount of all other FFEL Program loans to that student
for that academic year, up to a maximum amount of all FFEL Program loans to that
student of $12,500. In 1989, the amount of SLS loans for students enrolled in
programs of less than an academic year in length were limited similarly to the
limits of Stafford loans.
Repayment
Loans, other than consolidation loans, made under the FFEL Program must provide
for repayment of principal in periodic installments over a period of not less
than five nor more than ten years. A consolidation loan must be repaid during a
period not more than 30 years, agreed to by the borrower and lender, subject to
maximum repayment periods which vary depending on the principal amount of the
borrower's outstanding student loans.
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For consolidation loans for which the application was received prior to January
1, 1993, the repayment period could not exceed 25 years. The repayment period
commences:
(1) not more than twelve months after the borrower ceases to
pursue at least a half-time course of study with respect to
Stafford loans for which the applicable rate of interest is
7%;
(2) not more than six months after the borrower ceases to pursue
at least a half-time course of study with respect to other
Stafford loans and unsubsidized Stafford loans (the six month
or twelve month periods are the grace periods); and
(3) on the date of final disbursement of the loan in the case of
SLS, PLUS and consolidation loans, except that the borrower of
an SLS loan who also has a Stafford or unsubsidized Stafford
loan may defer repayment of the SLS loan to coincide with the
commencement of repayment of the Stafford or unsubsidized
Stafford loan.
During periods in which repayment of principal is required, payments of
principal and interest must in general be made at a rate of not less than the
greater of $600 per year or the interest that accrues during the year, except
that a borrower and lender may agree at any time before or during the repayment
period, that repayment may be at a lesser rate. A borrower may agree, with
concurrence of the lender, to repay the loan in less than five years with the
right subsequently to extend his minimum repayment period to five years.
Borrowers may accelerate, without penalty, the repayment of all or any part of
the loan.
In addition, since 1992, lenders of consolidation loans have been required to
establish graduated or income-sensitive repayment schedules and lenders of
Stafford and SLS loans have been required to offer borrowers the option of
repaying under graduated or income-sensitive repayment schedules. The depositor
may implement graduated repayment schedules and income-sensitive repayment
schedules. Use of income-sensitive repayment schedules may extend the ten-year
maximum term for up to five years. In addition, if the repayment schedule on a
loan that has been converted to a variable interest rate does not provide for
adjustments to the amount of the monthly installment payments, the ten-year
maximum term may be extended for up to three years.
No principal repayments need be made during some deferment periods prescribed by
the Higher Education Act. For loans to a borrower who first obtained a loan
which was disbursed before July 1, 1993, deferments are available:
(1) during a period not exceeding three years while the borrower
is a member of the armed forces, an officer in the
Commissioned Corps of the Public Health Service or, with
respect to a borrower who first obtained a student loan
disbursed on or after July 1, 1987, or a student loan to cover
the cost of instruction for a period of enrollment beginning
on or after July 1, 1987, an active duty member of the
National Oceanic and Atmospheric Administration Corps;
(2) during a period not in excess of three years while the
borrower is a volunteer under the Peace Corps Act;
(3) during a period not in excess of three years while the
borrower is a full-time volunteer under the Domestic Volunteer
Act of 1973;
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(4) during a period not exceeding three years while the borrower
is in service, comparable to the service referred to in
clauses (2) and (3), as a full-time volunteer for an
organization which is exempt from taxation under Section
501(c)(3) of the code;
(5) during a period not exceeding two years while the borrower is
serving an internship, the successful completion of which is
required to receive professional recognition required to begin
professional practice or service, or a qualified internship or
residency program;
(6) during a period not exceeding three years while the borrower
is temporarily totally disabled, as established by sworn
affidavit of a qualified physician, or while the borrower is
unable to secure employment by reason of the care required by
a dependent who is so disabled;
(7) during a period not to exceed 24 months while the borrower is
seeking and unable to find full-time employment;
(8) during any period that the borrower is pursuing a full-time
course of study at an eligible institution (or, with respect
to a borrower who first obtained a student loan disbursed on
or after July 1, 1987, or a student loan to cover the cost of
instruction for a period of enrollment beginning on or after
July 1, 1987, is pursuing at least a half-time course of study
for which the borrower has obtained a loan under the FFEL
Program), or is pursuing a course of study in a graduate
fellowship program or a rehabilitation training program for
disabled individuals approved by the Secretary of Education;
(9) during a period, not in excess of six months, while the
borrower is on parental leave; and
(10) only with respect to a borrower who first obtained a student
loan disbursed on or after July 1, 1987, or a student loan to
cover the cost of instruction for a period of enrollment
beginning on or after July 1, 1987;
(A) during a period not in excess of three years while
the borrower is a full-time teacher in a public or
nonprofit private elementary or secondary school in a
"teacher shortage area" (as prescribed by the
Secretary of Education), and
(B) during a period not in excess of 12 months for
mothers, with preschool age children, who are
entering or re-entering the work force and who are
compensated at a rate not exceeding $1 per hour in
excess of the federal minimum wage.
For loans to a borrower who first obtains a loan on or after July 1, 1993,
deferments are available:
(1) during any period that the borrower is pursuing at least a
half-time course of study at an eligible institution or a
course of study in a graduate fellowship program or
rehabilitation training program approved by the Secretary,
(2) during a period not exceeding three years while the borrower
is seeking and unable to find full-time employment, and
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(3) during a period not in excess of three years for any reason which
the lender determines, under regulations under the Higher
Education Act, has caused or will cause the borrower economic
hardship. Economic hardship includes working full time and
earning an amount not in excess of the greater of the minimum
wage or the poverty line for a family of two. Additional
categories of economic hardship are based on the relationship
between a borrower's educational debt burden and his or her
income.
Prior to the 1992 changes, only the deferment periods described above in clauses
(6) and (7) (with respect to the parent borrower) and the deferment period
described in clause (8) (with respect to the parent borrower or a student on
whose behalf the parent borrowed) were available to PLUS loan borrowers, and
only the deferment periods described above in clauses (6), (7) and (8) were
available to consolidation loan borrowers. Prior to the 1986 changes, PLUS loan
borrowers were not entitled to deferment periods. Deferment periods extend the
ten-year maximum repayment term.
The Higher Education Act also provides for forbearance periods during which the
borrower, in case of temporary financial hardship, may defer any payments. A
borrower is entitled to forbearance for a period not to exceed three years while
the borrower's debt burden under Title IV of the Higher Education Act, which
includes the FFEL Program, equals or exceeds 20% of the borrower's gross income,
and also is entitled to forbearance while he or she is serving in a qualifying
medical or dental internship program or in a "national service position" under
the National and Community Service Trust Act of 1993.
In addition, mandatory administrative forbearances are provided when exceptional
circumstances such as a local or national emergency or military mobilization
exist; or when the geographical area in which the borrower or endorser resides
has been designated a disaster area by the President of the United States or
Mexico, the Prime Minister of Canada, or by the governor of a state. In other
circumstances, forbearance is at the lender's option. The forbearance also
extends the ten year maximum term.
As described under the heading "-- Contracts with Guarantee Agencies -- Federal
Interest Subsidy Payments," the Secretary of Education makes interest payments
on behalf of the borrower of specific eligible loans while the borrower is in
school and during grace and deferment periods. Interest that accrues during
forbearance periods and, if the loan is not eligible for interest subsidy
payments, while the borrower is in school and during the grace and deferment
periods, may be paid monthly or quarterly or capitalized (added to the principal
balance) not more frequently than quarterly.
Disbursement
All loans, except consolidation loans, made under the FFEL Program generally
must be disbursed in two or more installments, none of which may exceed 50% of
the total principal amount of the loan.
Fees
Guarantee Fee. A guarantee agency is authorized to charge a premium, or
guarantee fee, of up to 1% of the principal amount of the loan, which must be
deducted proportionately from each installment payment of the proceeds of the
loan to the borrower. Guarantee fees may not currently be charged to borrowers
of consolidation loans. However, lenders may be charged an insurance fee to
cover the costs of increased or extended liability with respect to consolidation
loans. For loans made prior to July 1, 1994, the maximum
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guarantee fee was 3% of the principal amount of the loan, but no guarantee fee
was authorized to be charged with respect to unsubsidized Stafford loans.
Origination Fee. An eligible lender is authorized to charge the borrower of a
Stafford or unsubsidized Stafford loan an origination fee in an amount not to
exceed 3% of the principal amount of the loan, and is required to charge the
borrower of a PLUS loan an origination fee in the amount of 3% of the principal
amount of the loan. These fees must be deducted proportionately from each
installment payment of the loan proceeds prior to payment to the borrower and
are not retained by the lender, but must be passed on to the Secretary of
Education. For loans made prior to July 1, 1994, the maximum authorized fee for
Stafford, PLUS and SLS loans was 5% and the required fee for unsubsidized
Stafford loans was 6.5% of the principal amount of the loan.
Lender Origination Fee. The lender of any loan under the FFEL Program made on or
after October 1, 1993 is required to pay to the Secretary of Education an
origination fee equal to 0.5% of the initial principal amount of that loan.
Rebate Fee on Consolidation Loans. The holder of any consolidation loan is
required to pay to the Secretary of Education a monthly fee at an annualized
rate of 1.05% (.62% for applications received between October 1, 1998 and
January 31, 1999) of the principal amount of, and accrued interest on, that
consolidation loan.
Loan Guarantees
Under the FFEL Program, guarantee agencies are required to guarantee the payment
of not less than 100% of the principal amount of loans made prior to October 1,
1993 and covered by their respective guarantee programs. For a description of
the requirements for loans to be covered by these guarantees, see "The Guarantee
Agencies." For loans made on or after October 1, 1993, the minimum percentage of
the principal amount of loans which a guarantee agency must pay is 98% and the
Department of Education has taken the position that a guarantee agency may not
pay more than 98% of the principal amount of and accrued interest on that loan.
The 1998 Reauthorization Bill further reduces the maximum reinsurance rate to
guarantee agencies from 98% to 95% for loans made on or after October 1, 1998.
Under some circumstances, guarantees may be assumed by the Secretary of
Education or another guarantee agency. See "-- Contracts with Guarantee
Agencies."
CONTRACTS WITH GUARANTEE AGENCIES
Under the FFEL Program, the Secretary of Education is authorized to enter into
guaranty and interest subsidy agreements with guarantee agencies. The FFEL
Program provides for reimbursements to guarantee agencies for default claims
paid by guarantee agencies, support payments to guarantee agencies for
administrative and other expenses, advances for a guarantee agency's reserve
funds, and interest subsidy payments and special allowance payments to the
holders of qualifying student loans made under the FFEL Program.
The Secretary of Education has specific oversight powers over guarantee
agencies. Guarantee agencies are required to maintain their reserves at levels
based on the amount of outstanding loans that they have guaranteed. If a
guarantee agency falls below the required level in two consecutive years, or its
claims rate exceeds 5% in any year, or if the Secretary of Education determines
that the guarantee agency's administrative or financial condition jeopardizes
its ability to meet its obligations, the Secretary of Education can require the
guarantee agency to submit and implement a plan by which it will correct the
problem(s). If a guarantee
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agency fails to timely submit an acceptable plan or fails to improve its
condition, or if the Secretary of Education determines that the guarantee agency
is in danger of financial collapse, the Secretary of Education may terminate the
guarantee agency's reimbursement contract. The circumstances under which the
Secretary of Education may terminate these reimbursement contracts also includes
a determination that this action is necessary to protect the federal fiscal
interest or to ensure continued availability of student loans. See "-- Direct
Loans."
The Secretary of Education is authorized to assume the guarantee obligations of
a guarantee agency. The Higher Education Act now provides that, if the Secretary
of Education terminates a guarantee agency's agreements under the FFEL Program,
the Secretary of Education shall assume responsibility for all functions of the
guarantee agency under its program. To that end, the Secretary of Education is
authorized to, among other options, transfer the guarantees to another guarantee
agency or assume the guarantees. It also provides that in the event the
Secretary of Education has determined that a guarantee agency is unable to meet
its guarantee obligations, holders of loans guaranteed by a guarantee agency may
submit claims directly to the Secretary of Education for payment, unless the
Secretary of Education has provided for the assumption of these guarantees by
another guarantee agency.
Federal Reimbursement
A guarantee agency's right to receive federal reimbursements for various
guarantee claims paid by a guarantee agency is governed by the Higher Education
Act and various contracts entered into between guarantee agencies and the
Secretary of Education. See "Description of the Guarantee Agencies -- Federal
Agreements." Under the Higher Education Act and the federal reimbursement
contracts, the Secretary of Education currently agrees to reimburse a guarantee
agency for the amounts expended by the guarantee agency in the discharge of its
guarantee obligation (i.e., the unpaid principal balance of and accrued interest
on loans guaranteed by the guarantee agency as a result of the default of the
borrower).
With respect to loans made prior to October 1, 1993, the Secretary of Education
currently agrees to reimburse the guarantee agency for up to 100% of the amounts
so expended. For loans made on or after October 1, 1993, the Secretary of
Education currently agrees to reimburse the guarantee agency for a maximum of
98% of the amount expended with respect to guaranteed loans. The 1998
Reauthorization Bill further reduced the maximum reinsurance rate to guarantee
agencies from 98% to 95% for loans made on or after October 1, 1998. Depending
on the claims rate experience of a guarantee agency, 100%, 98% or 95%
reimbursement may be reduced as discussed in the formula described below.
The Secretary of Education also agrees to repay 100% of the unpaid principal
plus applicable accrued interest expended by a guarantee agency in discharging
its guarantee obligation as a result of the bankruptcy, death, or total and
permanent disability of a borrower, and in the case of a PLUS loan, the death of
the student on behalf of whom the loan was borrowed. In the instance of school
closures, reimbursements are not to be included in the calculations of the
guarantee agency's claims rate experience for the purpose of federal
reimbursement under the federal reimbursement contracts.
The formula for computing the percentage of federal reimbursement under the
federal reimbursement contracts is not accumulated over a period of years, but
is measured by the amount of federal reimbursement payments in any one federal
fiscal year as a percentage of the original principal amount of loans under the
FFEL Program guaranteed by the guarantee agency and in repayment at the end of
the preceding fiscal year. Under the formula, federal reimbursement payments to
a guarantee agency in any one fiscal year not exceeding 5%
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of the original principal amount of loans in repayment at the end of the
preceding fiscal year, are to be paid by the Secretary of Education at 100% (or
98% for loans made on or after October 1, 1993 or 95% for loans made on or after
October 1, 1998).
Beginning at any time during any fiscal year that federal reimbursement payments
exceed 5%, and until they may exceed 9%, of the original principal amount of
loans in repayment at the end of the preceding fiscal year, then reimbursement
payments on claims submitted during that period are to be paid at 90% or 88% for
loans made on or after October 1, 1993, or 85% for loans made on or after
October 1, 1998. Beginning at any time during any fiscal year that federal
reimbursement payments exceed 9% of the original principal amount of loans in
repayment at the end of the preceding fiscal year, then these payments for the
balance of that fiscal year will be paid at 80%. This amount is 78% for loans
made on or after October 1, 1993 and 75% for loans made on or after October 1,
1998. The original principal amount of loans in repayment for purposes of
computing reimbursement payments to a guarantee agency means the original
principal amount of all loans guaranteed by the guarantee agency less:
(1) guarantee payments on these loans;
(2) the original principal amount of these loans that have been
fully repaid; and
(3) the original principal amount of these loans for which the
first principal installment payment has not become due or the
first installment need not be paid because of a deferment
period.
Under present practice, after the Secretary of Education reimburses a guarantee
agency for a default claim paid on a guaranteed loan, the guarantee agency
continues to seek repayment from the borrower. The guarantee agency returns to
the Secretary of Education payments that it receives from a borrower after
deducting and retaining:
(1) a percentage amount equal to the complement of the
reimbursement percentage in effect at the time the loan was
reimbursed; and
(2) an amount equal to 24% (23% beginning October 1, 2003) or
18-1/2% in the case of a payment from the proceeds of a
consolidation loan of the payments for administrative costs.
The Secretary of Education may require the assignment to the Secretary of
Education of defaulted guaranteed loans, in which event no further collections
activity need be undertaken by the guarantee agency, and no amount of any
recoveries shall be paid to the guarantee agency. Prior to the 1998 changes, the
percentage of collections which guarantee agencies could retain was 27%.
A guarantee agency may enter into an addendum to its interest subsidy agreement,
which addendum provides for the guarantee agency to refer to the Secretary of
Education specific defaulted guaranteed loans. The loans are then reported to
the IRS to offset any tax refunds which may be due any defaulted borrower. To
the extent that the guarantee agency has originally received less than 100%
reimbursement from the Secretary of Education with respect to a referred loan,
the guarantee agency will not recover any amounts subsequently collected by the
federal government which are attributable to that portion of the defaulted loan
for which the guarantee agency has not been reimbursed.
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Rehabilitation of Defaulted Loans
Under Section 428F of the Higher Education Act, each guarantee agency must enter
into an agreement with the Secretary of Education under which the guarantee
agency must sell defaulted loans that are eligible for rehabilitation to an
eligible lender. The guarantee agency must repay the Secretary of Education an
amount equal to 81.5% of the then current principal balance of the loan,
multiplied by the reimbursement percentage in effect at the time the loan was
reimbursed. The amount of the repayment shall be deducted from the amount of
federal reimbursement payments for the fiscal year in which repayment occurs,
for purposes of determining the reimbursement rate for that fiscal year.
For a loan to be eligible for rehabilitation, the guarantee agency must have
received consecutive payments for 12 months of amounts owed on that loan. Once
rehabilitated, a loan is eligible for all the benefits under the Higher
Education Act for which it would have been eligible had no default occurred.
Eligibility for Federal Reimbursement
To be eligible for federal reimbursement payments, guaranteed loans must be made
by an eligible lender under the applicable guarantee agency's guarantee program,
which must meet requirements prescribed by the rules and regulations promulgated
under the Higher Education Act. These rules and regulations include borrower
eligibility, loan amount, disbursement, interest rate, repayment period and
guarantee fee provisions described herein and the other requirements set forth
in Section 428(b) of the Higher Education Act.
Under the Higher Education Act, a guaranteed loan must be delinquent for 180
days (or 270 days for loans on which the first day of delinquency occurs on or
after October 7, 1998) if it is repayable in monthly installments or 330 days if
it is payable in less frequent installments before a lender may obtain payment
on a guarantee from the guarantee agency. The guarantee agency must pay the
lender for the defaulted loan prior to submitting a claim to the Secretary of
Education for reimbursement. The guarantee agency must submit a reimbursement
claim to the Secretary of Education within 45 days after it has paid the
lender's default claim.
A lender must have exercised reasonable care and diligence in making, servicing
and collecting the guaranteed loan for the loan to be eligible for guarantee
payments and reimbursement by the Secretary of Education. Generally, these
procedures require that:
(1) completed loan applications be processed;
(2) a determination of whether an applicant is an eligible
borrower attending an eligible institution under the Higher
Education Act be made;
(3) the borrower's responsibilities under the loan be explained to
him or her;
(4) the promissory note evidencing the loan be executed by the
borrower; and
(5) the loan proceeds be disbursed by the lender in a specified
manner.
After the loan is made, the lender must establish repayment terms with the
borrower, properly administer deferments and forbearances and credit the
borrower for payments made. If a borrower becomes delinquent in repaying a loan,
a lender must perform specific collection procedures that vary depending on the
length of time a loan is delinquent.
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Federal Interest Subsidy Payments
Interest subsidy payments are interest payments paid with respect to an eligible
loan during the period prior to the time that the loan enters repayment and
during grace and deferment periods. The Secretary of Education and the guarantee
agencies entered into the interest subsidy agreements as described in
"Description of the Guarantee Agencies -- Federal Agreements," whereby the
Secretary of Education agrees to pay interest subsidy payments to the holders of
eligible guaranteed loans for the benefit of students meeting specific
requirements, subject to the holders' compliance with all requirements of the
Higher Education Act. Only Stafford loans, and consolidation loans for which the
application was received on or after January 1, 1993, are eligible for interest
subsidy payments.
Consolidation loans made after August 10, 1993 are eligible for interest subsidy
payments only if all loans consolidated thereby are Stafford loans. However,
consolidation loans for which the application is received by an eligible lender
on or after November 13, 1997 and before October 1, 1998, are eligible for
interest subsidy payments on that portion of the consolidation loan that repays
Stafford loans or similar subsidized loans made under the direct loan program.
In addition, to be eligible for interest subsidy payments, guaranteed loans must
be made by an eligible lender under the applicable guarantee agency's guarantee
program, and must meet requirements prescribed by the rules and regulations
promulgated under the Higher Education Act, including the borrower eligibility,
loan amount, disbursement, interest rate, repayment period and guarantee fee
provisions described in this prospectus and the other requirements set forth in
Section 428(b) of the Higher Education Act.
The Secretary of Education makes interest subsidy payments quarterly on behalf
of the borrower to the holder of a guaranteed loan in a total amount equal to
the interest which accrues on the unpaid principal amount prior to the
commencement of the repayment period of the loan or during any deferment period.
A borrower may elect to forego interest subsidy payments, in which case the
borrower is required to make interest payments.
Federal Administrative Expense Allowances
Prior to the adoption of the 1993 Amendments, each guarantee agency was entitled
to receive from the Secretary of Education an administrative cost allowance
equal to 1% of the total principal amount of the loans other than consolidation
loans guaranteed by the guarantee agency in any fiscal year, for the purposes of
administrative costs of pre-claims assistance for default prevention and
collection of defaulted guaranteed loans, administrative costs of promoting
commercial lender participation, administrative costs of monitoring the
enrollment and repayment status of students, and for other costs related to the
guarantee agency's guarantee program. The 1993 Amendments repealed entitlement,
effective October 1, 1993. The 1993 Amendments, however, authorized payments for
transition support to guarantee agencies, in connection with the transition to
direct lending. See "Direct Loans."
Budget legislation adopted since that time has provided for the payment to
guarantee agencies of an administrative expense allowance equal to 0.85% of the
agency's annual new guarantee volume, which has been extended through the fiscal
year ending September 30, 2002. After the fiscal year ending September 30, 1997,
these amounts are subject to decreasing aggregate limits.
Under the 1998 Reauthorization Bill, the administrative cost allowance was
replaced by two new payments:
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(1) a student loan processing fee equal to 65 basis points (40
basis points for loans made on or after October 1, 2003) paid
at the time a loan is guaranteed, and
(2) an account maintenance fee of 12 basis points (10 basis points
for fiscal years 2001-2003) paid annually on outstanding
guaranteed student loans.
Federal Advances
Under agreements entered into between the guarantee agencies and the Secretary
of Education under Sections 422 and 422(c) of the Higher Education Act, the
Secretary of Education was authorized to advance moneys from time to time to the
guarantee agencies for the purpose of establishing and strengthening the
guarantee agencies' reserves. Section 422(c) currently authorizes the Secretary
of Education to make advances to guarantee agencies in various circumstances, on
terms and conditions satisfactory to the Secretary of Education, including if
the Secretary of Education is seeking to terminate the guarantee agency's
reimbursement contract or assume the guarantee agency's functions, to assist the
guarantee agency in meeting its immediate cash needs or to ensure the
uninterrupted payment of claims.
FEDERAL SPECIAL ALLOWANCE PAYMENTS
The Higher Education Act provides for the payment by the Secretary of Education
of additional subsidies, called special allowance payments, to holders of
qualifying student loans. The amount of the special allowance payments, which
are made on a quarterly basis, is computed by reference to the average of the
bond equivalent rates of the 91-day Treasury bills auctioned during the
preceding quarter. This average is considered the Treasury bill rate. The
quarterly rate for special allowance payments for student loans made on or after
October 1, 1981, and generally before November 16, 1986, is computed by
subtracting the applicable interest rate on these loans from the Treasury bill
rate, adding 3.5% to the resulting per centum, and dividing the resulting per
centum by four. For loans disbursed on or after November 16, 1986, or loans to
cover the costs of instruction for periods of enrollment beginning on or after
November 16, 1986, 3.25% has been substituted for 3.5% in the above formula. For
loans disbursed on or after October 1, 1992, 3.1% has been substituted for 3.5%
in that formula. For Stafford and unsubsidized Stafford loans made on or after
July 1, 1995, 2.5% has been substituted for 3.1% in that formula prior to the
time these loans enter repayment and during any deferment periods. For Stafford
and unsubsidized Stafford loans made on or after July 1, 1998, the 1998
amendments to the Higher Education Act substitute 2.2% for 3.1% in that formula
prior to the time these loans enter repayment and during any deferment periods,
and substitute 2.8% for 3.1% in that formula while these loans are in repayment.
For PLUS and SLS loans which bear interest at rates adjusted annually, special
allowance payments are made only in years during which the interest rate ceiling
on these loans operates to reduce the rate that would otherwise apply based on
the applicable formula. See "-- Loan Terms -- Interest Rates -- PLUS Loans" and
"-- SLS Loans." Special allowance payments are paid with respect to PLUS loans
made on or after July 1, 1994 only if the rate that would otherwise apply
exceeds 10%, although the interest rate ceiling on these loans is 9%. Special
allowance payments are made on consolidation loans whenever the bond equivalent
rate of 91-day Treasury bills plus 3.1% exceeds the borrower's interest rate.
The portion, if any, of a consolidation loan that repaid a loan made under Title
VII, secs. 700-721 of the Public Health Services Act, as amended, is ineligible
for special allowance payments.
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The Higher Education Act provides that if special allowance payments or interest
subsidy payments have not been made within 30 days after the Secretary of
Education receives an accurate, timely and complete request therefor, the
special allowance payable to that holder shall be increased by an amount equal
to the daily interest accruing on the special allowance and interest subsidy
payments due the holder.
Special allowance payments and interest subsidy payments are reduced by the
amount which the lender is authorized or required to charge the borrower as an
origination fee, as described above under "-- Loan Terms -- Fees -- Origination
Fee." In addition, the amount of the lender origination fee described above
under "-- Loan Terms -- Fees -- Lender Origination Fees" is collected by offset
to special allowance payments and interest subsidy payments.
EDUCATION LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Under the United States Bankruptcy Code, educational loans are not generally
dischargeable. Title 11 of the United States Code at Section 523(a)(8) provides
as follows:
(a) A discharge under Section 727, 1141, 1228(a), 1228(b), or
1328(b) of this title does not discharge an individual debtor
from any debt;
(8) for an educational benefit overpayment or loan made,
insured, or guaranteed by a governmental unit or made
under any program funded in whole or in part by a
governmental unit or a nonprofit institution, or for
an obligation to repay funds received as an
educational benefit, scholarship or stipend unless
excepting the debt from discharge under this
paragraph will impose an undue hardship on the debtor
and the debtor's dependents.
DIRECT LOANS
The 1993 Amendments authorized a program of direct loans, to be originated by
schools with funds provided by the Secretary of Education. Under the Federal
Direct Student Loan Program, the Secretary of Education is directed to enter
into agreements with schools, or origination agents in lieu of schools, to
disburse loans with funds provided by the Secretary of Education. Participation
in the program by schools is voluntary. The goals set forth in the 1993
Amendments call for the Federal Direct Student Loan Program to constitute 5% of
the total volume of loans made under the FFEL Program and the Federal Direct
Student Loan Program for academic year 1994-1995, 40% for academic year
1995-1996, 50% for academic years 1996-1997 and 1997-1998 and 60% for academic
year 1998-1999. No provision is made for the size of the Federal Direct Student
Loan Program after academic year 1998-1999. Based on available information,
participation by schools in the Federal Direct Student Loan Program has not been
sufficient to meet the goals for the 1995-1996, 1996-1997, 1997-1998 or
1998-1999 academic years.
The loan terms are generally the same under the Federal Direct Student Loan
Program as under the FFEL Program, though more flexible repayment provisions are
available under the Federal Direct Student Loan Program. At the discretion of
the Secretary of Education, students attending schools that participate in the
Federal Direct Student Loan Program, or their parents, may still be eligible for
participation in the FFEL Program, though no borrower could obtain loans under
both programs.
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It is difficult to predict the impact of the Federal Direct Student Loan
Program. There is no way to accurately predict the number of schools that will
participate in future years, or, if the Secretary of Education authorizes
students attending participating schools to continue to be eligible for FFELP
loans, how many students will seek loans under the Federal Direct Student Loan
Program instead of the FFEL Program. In addition, it is impossible to predict
whether future legislation will eliminate, limit or expand the Federal Direct
Student Loan Program or the FFEL Program.
DESCRIPTION OF THE GUARANTEE AGENCIES
The financed student loans in a trust may be guaranteed by any one or more
guarantee agencies identified in the related prospectus supplement. The
following discussion relates to guarantee agencies under the FFEL Program. The
particular arrangements of a guarantor or escrow fund with respect to a private
loan program will be described in the prospectus supplement for that issuance,
as applicable.
A guarantee agency guarantees loans made to students or parents of students by
lending institutions such as banks, credit unions, savings and loan
associations, schools, pension funds and insurance companies. A guarantee agency
generally purchases defaulted student loans which it has guaranteed from its
cash and reserves, considered its guarantee fund. A lender may submit a default
claim to the guarantee agency after the student loan has been delinquent for at
least 180 days, or 270 days for loans made on or after October 7, 1998. However,
lenders are strongly encouraged not to file a claim until a loan is at least 210
days delinquent.
The default claim package must include all information and documentation
required under the FFEL Program regulations and the guarantee agency's policies
and procedures. Under the guarantee agencies' current procedures, assuming that
the default claim package complies with the guarantee agency's loan procedures
manual or regulations, the guarantee agency pays the lender for a default claim
within 90 days of the lender's filing the claim with the guarantee agency.
Generally, the lender is expected to be reimbursed within 300 days following the
date a loan becomes delinquent. The guarantee agency will pay the lender
interest accrued on the loan for up to 360 days after delinquency. The guarantee
agency must file a reimbursement claim with the Department of Education within
45 days after the guarantee agency has paid the lender for the default claim.
In general, a guarantee agency's guarantee fund has been funded principally by
administrative cost allowances paid by the Secretary of Education, guarantee
fees paid by lenders, investment income on moneys in the guarantee fund, and a
portion of the moneys collected from borrowers on guaranteed loans that have
been reimbursed by the Secretary of Education to cover the guarantee agency's
administrative expenses.
Various changes to the Higher Education Act have adversely affected the receipt
of revenues by the guarantee agencies and their ability to maintain their
guarantee funds at previous levels, and may adversely affect their ability to
meet their guarantee obligations. These changes include the various recalls of
reserves by the Department of Education, the reduction in reinsurance payments
from the Secretary of Education because of reduced reimbursement percentages;
the reduction in maximum permitted guarantee fees from 3% to 1% for loans made
on or after July 1, 1994; and the reduction in retention by a guarantee agency
of collections on defaulted loans from 27% to 24%. Additionally, the adequacy of
a guarantee agency's guarantee fund to meet its guarantee obligations with
respect to existing student loans depends, in significant part, on its ability
to collect revenues generated by new loan guarantees.
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The Federal Direct Student Loan Program may adversely affect the volume of new
loan guarantees. Pending legislation and future legislation may make additional
changes to the Higher Education Act that would significantly affect the revenues
received by guarantee agencies and the structure of the guarantee agency
program. For a more complete description of provisions of the Higher Education
Act that relate to payments described in this paragraph or affect the funding of
a guarantee fund, see "Description of the FFEL Program."
The Higher Education Act gives the Secretary of Education various oversight
powers over guarantee agencies. These include requiring a guarantee agency to
maintain its guarantee fund at a required level and taking various actions
relating to a guarantee agency if its administrative and financial condition
jeopardizes its ability to meet its obligations. These actions include, among
others, providing advances to the guarantee agency, terminating the guarantee
agency's federal reimbursement contracts, assuming responsibility for all
functions of the guarantee agency, and transferring the guarantee agency's
guarantees to another guarantee agency or assuming these guarantees. The Higher
Education Act provides that a guarantee agency's guarantee fund shall be
considered to be the property of the United States to be used in the operation
of the FFEL Program or the Federal Direct Student Loan Program, and, under some
circumstances, the Secretary of Education may demand payment of amounts in the
guarantee fund.
Under the 1997 Budget Reconciliation Act (P.L. 105-33), the Secretary of
Education is required to demand payment on September 1, 2002 of a total of one
billion dollars from all the guarantee agencies participating in the FFEL
Program. The 1998 Reauthorization Bill mandates additional recall of reserve
funds by the Secretary of Education amounting to $85 million in fiscal year
2002, $82.5 million in fiscal year 2006, and $82.5 million in fiscal year 2007.
However, minimum reserve levels are protected from recall. The amounts to be
demanded of each guarantee agency shall be determined by formulas included in
the Higher Education Act. Each guarantee agency will be required to deposit
funds in a restricted account in installments, beginning in the federal fiscal
year ending September 30, 1998, to provide for the payment. The Secretary of
Education has made the determinations, and advised the guarantee agencies, of
the amounts required to be so transferred by the guarantee agencies. There can
be no assurance that relevant federal laws, including the Higher Education Act,
will not be further changed in a manner that may adversely affect the ability of
a guarantee agency to meet its guarantee obligations. See "Description of the
FFEL Program."
Under Section 432(o) of the Higher Education Act, if the Department of Education
has determined that a guarantee agency is unable to meet its insurance
obligations, the holders of loans guaranteed by this guarantee agency must
submit claims directly to the Department of Education, and the Department of
Education is required to pay the full guarantee payment due with respect these
loans under guarantee claims processing standards no more stringent than those
applied by the guarantee agency. See "Description of the FFEL Program."
There are no assurances as to the Secretary of Education's actions if a
guarantee agency encounters administrative or financial difficulties or that the
Secretary of Education will not demand that a guarantee agency transfer
additional portions or all of its guarantee fund to the Secretary of Education.
FEDERAL AGREEMENTS
Each guarantee agency and the Secretary of Education have entered into federal
reimbursement contracts under Section 428(c) of the Higher Education Act. These
include, for older guarantee agencies, a supplemental contract under former
Section 428A of the Higher Education Act. The reimbursement contracts provide
for the guarantee agency to receive 75% to 100% reimbursement of insurance
payments that the guarantee agency
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makes to eligible lenders with respect to loans guaranteed by the guarantee
agency prior to the termination of the federal reimbursement contracts or the
expiration of the authority of the Higher Education Act. The 1998
Reauthorization Bill reduced the reimbursement percentages referred to above
with respect to claims on most loans made on or after October 1, 1998. See "--
Effect of Annual Claims Rate." The federal reimbursement contracts provide for
termination under some circumstances and also provide for specific actions short
of termination by the Secretary of Education to protect the federal interest.
See "Description of the FFEL Program -- Contracts with Guarantee Agencies --
Federal Reimbursement."
In addition to guarantee benefits, qualified student loans acquired under the
FFEL Program benefit from specific federal subsidies. Each guarantee agency and
the Secretary of Education have entered into an interest subsidy agreement under
Section 428(b) of the Higher Education Act. These entitle the holders of
eligible loans guaranteed by the guarantee agency to receive interest subsidy
payments from the Secretary of Education on behalf of some students while the
student is in school, during a six to twelve month grace period after the
student leaves school, and during some deferment periods, subject to the
holders' compliance with all requirements of the Higher Education Act. See
"Description of the FFEL Program -- Contracts with Guarantee Agencies -- Federal
Interest Subsidy Payments" for a more detailed description of the interest
subsidy payments.
United States Courts of Appeals have held that the federal government, through
subsequent legislation, has the right unilaterally to amend the contracts
between the Secretary of Education and the guarantee agencies described herein.
Amendments to the Higher Education Act in 1986, 1987, 1992, 1993, 1997 and 1998,
respectively:
(1) revoked some rights of guarantee agencies under contracts with
the Secretary of Education relating to the repayment of advances
from the Secretary of Education;
(2) authorized the Secretary of Education to withhold reimbursement
payments otherwise due to specific guarantee agencies until
specified amounts of these guarantee agencies' reserves had been
eliminated;
(3) added new reserve level requirements for guarantee agencies and
authorized the Secretary of Education to terminate the federal
reimbursement contracts under circumstances that did not
previously warrant a termination; and
(4) expanded the Secretary of Education's authority to terminate
these contracts and to seize guarantee agencies' reserves.
There can be no assurance that future legislation will not further adversely
affect the rights of the guarantee agencies, or holders of loans guaranteed by a
guarantee agency under these contracts.
There are no assurances as to the Secretary of Education's actions if a
guarantee agency encounters administrative or financial difficulties or that the
Secretary of Education will not demand that a guarantee agency transfer
additional portions or all of its guarantee fund to the Secretary of Education.
Information relating to the particular guarantee agencies guaranteeing the
financed student loans will be set forth in the related prospectus supplement.
This information is included in the reports referred to in the related
prospectus supplement will not be verified by or independently confirmed by the
guarantors, the issuer, the
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depositor, the administrator, the master servicer, the purchasers or their
respective counsel, and will comprise all information provided for each
guarantee agency by the issuer.
EFFECT OF ANNUAL CLAIMS RATE
A guarantee agency's ability to meet its obligation to pay default claims on
financed student loans will depend on the adequacy of its guarantee fund and,
under the current federal reinsurance arrangement, the default experience of all
lenders under the guarantee agency's guarantee program. A high default
experience among lenders participating in a guarantee agency's guarantee program
may cause the guarantee agency's claims rate for its guarantee program to exceed
the 5% and 9% levels described below, and result in the Secretary of Education
reimbursing the guarantee agency at lower percentages of default claims payments
made by the guarantee agency.
In general, guarantee agencies are currently entitled to receive reimbursement
payments under the federal reimbursement contracts in amounts that vary
depending on the claims rate experience of the guarantee agency. The claims rate
is computed by dividing total default claims since the previous September 30 by
the total original principal amount of the guarantee agency's guaranteed loans
in repayment on September 30. On October 1 of each year the claims rate begins
at zero, regardless of the experience in preceding years. For loans made on or
after October 1, 1993, if the claims rate remains equal to or below 5% within a
given federal fiscal year (October 1 through September 30), the Secretary of
Education is obligated to provide 98% reimbursement; if and when the claims rate
exceeds 5% and until this time, if any, as it exceeds 9% during the fiscal year,
the reimbursement rate is at 88%. If and when the claims rate exceeds 9% during
the fiscal year, the reimbursement rate for the remainder of the fiscal year is
at 78%. For loans made on or after October 1, 1993, each guarantee agency is
entitled to at least 78% reimbursement from the Secretary of Education on
default claims that it purchases, regardless of its claims rate. The
reimbursement percentages for loans made on or after October 1, 1998 are reduced
from 98%, 88% and 78% to 95%, 85% and 75%, respectively. See "Description of the
FFEL Program."
THE PRIVATE LOAN PROGRAMS
To the extent described in the related prospectus supplement for a series, a
trust may include financed private loans issued under one or more private loan
programs. The private loan programs will be specifically identified and
described in the prospectus supplement for that series. The prospectus
supplement for a series may specify a maximum percentage of financed private
loans that may comprise part of the related trust. This summary identifies
characteristics common to most private loan programs but is qualified by the
specific disclosure set forth in the related prospectus supplement.
Private loans made under most private loan programs are based on the credit of
the borrower or his or her parents or co-borrowers. In general, applicants are
required to have a minimum annual income and a monthly debt burden, including
the financed student loan, of no greater than a specified percentage of their
monthly income. In determining whether a student or co-borrower is creditworthy,
a credit bureau report is obtained for each applicant, including the student.
The various private loan programs have different standards as to what
constitutes a satisfactory credit history.
Eligible post-secondary borrowers of a private loan often are required to be
engaged in a course of study at a qualifying educational institution, which may
include two-year colleges, four-year colleges and for-profit schools. Some
private loan programs are specifically designed for graduate or professional
students, or for
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students attending elementary or secondary private schools. The institutions
generally must be located in the United States or Canada. Often, the borrower
(or a co-applicant) must be a citizen or resident of the United States. Some
private loans may be a consolidation of existing private loans.
The amount that may be borrowed under a private loan program varies based on the
private loan program. Typically, borrowers must borrow at least a minimum amount
with respect to any academic year, and may not borrow more than a maximum amount
per academic year, or a maximum amount under the private loan program. However,
the amount of the private plan plus other financial aid received by a student,
normally may not exceed the cost of education, as determined by the school.
A guarantee fee or origination fee typically is deducted from the private loan
proceeds. Depending on the private loan program, all or a portion of this fee is
either paid to the agency that has established the private loan program and that
guarantees the repayment of all or a substantial portion of the private loan
under specified circumstances or deposited into an escrow fund to repay all or a
substantial portion of the private loan under specified circumstances. The
obligation to guarantee or the right to receive payment from an escrow fund is
typically dependent on the proper servicing of the private loan by the servicer
of the private loan.
The interest rate on a private loan varies based on the private loan program and
can either be fixed or variable. Floating rates may be based on the prime rate,
the Treasury bill rate index, or some other objective standard. Interest
typically accrues at a rate equal to the index plus a margin, but subject to a
maximum rate per annum, with the interest rate being adjusted periodically.
Repayment of a private loan usually is required to commence within 45 to 90 days
following the borrowing. However, some private loan programs permit a borrower
to defer the repayment of principal while the student is in school (often up to
a maximum number of years). In this event, principal repayments typically begin
promptly following graduation. Most private loan programs permit prepayment of
the private loan at any time without penalty. Borrowers typically may schedule
repayment over a 10 to 25-year period, subject to a minimum monthly payment
obligation.
TRANSFER AND SALE AGREEMENTS
On the closing date for any series of notes, the depositor and its eligible
lender trustee will transfer, without recourse, the financed student loans
described in the transfer and sale agreement and all collections received and to
be received for the period on or after the cut-off date to the trust.
CONVEYANCE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
Under the transfer and sale agreement the depositor will sell the financed
student loans to the trust. A court could decide that the financed student loans
were not sold to the trust and continue to be the property of the depositor. If
this happens, the transfer and sale agreement says that the transfer is a
conveyance by the depositor of a lien on and a security interest in the financed
student loans to the trust.
The depositor will make representations and warranties with respect to the
financed student loans to the trust, including, among other things, that:
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(1) it and its eligible lender trustee are the sole owners and holders of
each financed student loan and have full right and authority to transfer
the loans free and clear of all liens, pledges or encumbrances (except
for the lien and security interest of the indenture trustee) and to the
best of the depositor's knowledge, no counterclaim, offset, defense or
right to rescission exists with respect to any financed student loan,
with notice, lapse of time, or the occurrence or failure to occur of any
act or event;
(2) the information provided by the depositor about the financed student
loans is true and correct in all material respects;
(3) to the best of the depositor's knowledge, each financed student loan
complies in all material respects with applicable federal and state laws
(including, without limitation, the Higher Education Act, consumer
credit, truth-in-lending, equal credit opportunity and disclosure laws);
and
(4) to the best of the depositor's knowledge, each financed student loan
complies in all material respects with:
(a) the FFEL Program or under any guarantee agreement with respect to
FFELP loans, and
(b) any related private loan program with respect to private loans.
REPURCHASE OF FINANCED STUDENT LOANS
If the Secretary of Education or a guarantee agency refuses to honor all or part
of a claim filed with respect to a financed student loan:
(1) because of something that occurred after the depositor took title
to that financed student loan but prior to the transfer to the
trust, at the request of the trust, the depositor is obligated to
repurchase that financed student loan, or
(2) because something that occurred prior to the date on which the
depositor took title to that financed student loan, the depositor
is obligated to repurchase that financed student loan, but only
after the depositor has had reasonable time to exercise its rights
under the applicable student loan purchase agreement to require
the seller of that financed student loan to repurchase it.
In either case, the repurchase price will be the sum of:
(1) the same percentage of the then-outstanding principal balance of
that financed student loan as the depositor originally paid;
(2) interest payable by the obligor accrued and unpaid with respect to
that financed student loan including the date of repurchase;
(3) an amount equal to any special allowance payments or interest
subsidy payments, if applicable, in respect of that financed
student loan for the same period as the financed student loan was
held
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by or on behalf of the depositor to which the depositor was not
entitled due to ineligibility of that financed student loan; and
(4) any attorneys' fees, legal expenses, court costs, servicing fees
or other expenses incurred by the trust or the appropriate
successors or assigns in connection with that financed student
loan and arising out of the reasons for the repurchase.
The depositor is required to repurchase that financed student loan after
receiving notice form the co-owner trustee requesting repurchase by depositor
and setting forth the reason for the repurchase. Any financed student loan
returned to the depositor which has been endorsed to the co-owner trustee will
be endorsed by the trust's eligible lender trustee to the depositor's eligible
lender trustee on the form supplied by the trust's eligible lender trustee.
Under some circumstances, the depositor also has the right to repurchase, or
transfer a subsequent financed student loan in exchange for, a financed student
loan if it has a repurchase obligation as described above. The repurchase and
reimbursement obligations of the depositor will constitute, together with the
right to receive some amounts from credit enhancement, if any, the sole remedy
available to or on behalf of the trust, the holders of the notes for any uncured
breach. The depositor's repurchase and reimbursement obligations are contractual
obligations under the transfer and sale agreement that may be enforced against
the depositor, but the breach of which will not constitute an event of default
under the indenture.
SUBSEQUENT FINANCE PERIOD AND SUBSEQUENT FINANCED STUDENT LOANS
During a period from the closing date to a subsequent date identified in the
related prospectus supplement, the depositor may, at its option but subject to
the conditions set forth in the transfer and sale agreement, transfer to the
eligible lender trustee, subsequent financed student loans. The depositor may
also direct the eligible lender trustee and the indenture trustee to apply
consolidation prepayments on deposit in the collection account to pay the
purchase price for the subsequent financed student loans. Subsequent financed
student loans that may be transferred by the depositor include:
(1) consolidation loans, provided, however, that in no event shall the
aggregate amount of subsequent financed student loans that are
consolidation loans transferred into the related trust exceed any
maximum amount identified in the prospectus supplement;
(2) loans that are serial (i.e., made to the same borrower under the
same loan program and guaranteed by the same guarantee agency) to
an existing financed student loan owned by the related trust, if
each subsequent financed student loan entitles the holder to
receive interest based on the same interest rate index as the
financed student loan to which it is serial, and also in no event
will the aggregate amount of subsequent financed student loans
that are serial loans transferred into the related trust exceed
any maximum amount identified in the related prospectus
supplement; and
(3) similar consolidation or serial loans under applicable private
loan programs.
During the subsequent finance period for any series, the depositor may choose
not to reimburse lost interest payments and special allowance payments or
depositing into the collection account the purchase amount of a financed student
loan which has become ineligible for lost interest payments or special allowance
payments.
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See "Transfer and Sale Agreements -- Conveyance of Financed Student Loans;
Representations and Warranties." The depositor may instead transfer to the
eligible lender trustee on behalf of the related trust, a subsequent financed
student loan which satisfies the following criteria (or other criteria as may be
set forth in the prospectus supplement for a series):
(1) the subsequent financed student loan was originated under the same
loan program as the financed student loan for which it is being
exchanged and entitles the holder to receive interest based on the
same interest rate index as the financed student loan for which it
is being exchanged;
(2) the subsequent financed student loan will not, at any level of the
interest rate index, have an interest rate that is less than the
financed student loan for which it is being exchanged; and
(3) the average principal balance per borrower of the subsequent
financed student loans that are being transferred into the related
trust and the existing financed student loans for which they are
being exchanged is within 10% (plus or minus) of the average
principal balance per borrower of the financed student loans being
transferred to the depositor.
If the aggregate outstanding principal balance of the subsequent financed
student loans is less than that of the financed student loans for which they are
being exchanged, the depositor shall deposit the difference in the collection
account concurrently with the transfer. If the aggregate outstanding principal
of the subsequent financed student loans is greater than that of the financed
student loans for which they are being exchanged, the depositor shall be
entitled to the difference from amounts on deposit in the collection account.
The trust may not acquire subsequent financed student loans at any time that an
event of default under the indenture or an administrator default under the
administration agreement has occurred and is continuing.
AMENDMENT
Each transfer and sale agreement may be amended by the parties, with the consent
of the indenture trustee, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of a transfer and
sale agreement or of modifying in any manner the rights of holders; but no
amendment may:
(1) increase or reduce in any manner the amount of, or accelerate or
delay the timing of, collections of payments with respect to the
financed student loans or distributions that are required to be
made for the benefit of the holders; or
(2) reduce the percentage of the notes which are required to consent
to any amendment, without the consent of the holders of all the
outstanding notes affected.
SERVICING
MASTER SERVICER
Resources, in its capacity as the master servicer, will arrange for the
servicing of the financed student loans under a master servicing agreement
between the issuer and the master servicer. The following is a summary
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of the servicing arrangements entered, or to be entered, into with the master
servicer and various approved servicers to arrange for the servicing of the
financed student loans.
Under the terms of the master servicing agreement between the master servicer
and the issuer, the master servicer has agreed to provide, arrange for and
maintain the continuous servicing and administration of the financed student
loans with one or more approved servicers. The master servicer has full
authority to do anything it deems reasonably necessary in providing for,
arranging and maintaining servicing relationships with servicers. The master
servicer is obligated to assure that adequate arrangements exist at all times to
provide for servicing of the financed student loans.
The master servicer and the issuer have entered or will enter into one or more
servicing agreements under which the related servicer will agree to service, and
perform all other related tasks with respect to, all or a portion of the
financed student loans.
The master servicer will not have any liability for any act, error or omission
on the part of any servicer under a servicing agreement but will have liability
for its own willful misfeasance, bad faith or negligence in the performance of
its duties under the master servicing agreement. The master servicer will not be
liable for servicing errors or interruptions as a result of year 2000 failures.
The occurrence of any of the following will constitute a default by the master
servicer:
(1) failure to observe or perform in any material respect any
covenants or agreements set forth in the master servicing
agreement, which materially affects the rights of holders and
which continues for 60 days after written notice of the failure;
(2) judgment in bankruptcy, defaulting on debts, or making creditor
assignment; or
(3) appointing a custodian or similar official for the master servicer
or any substantial part of its property.
The master servicer will be entitled to receive a fee as compensation for its
services under the master servicing agreement. This fee is payable out of
available funds as part of the program operating expenses. The master servicing
agreement may be terminated by either party with at least 95 days' notice. This
summary of the master servicing agreement is not complete. We filed a copy of
the master servicing agreement as an exhibit to the registration statement of
which this prospectus is part. We suggest that you read the master servicing
agreement because it, not this summary, governs the relationship between the
issuer and the master servicer.
As provided in the master servicing agreement, the master servicer and the
issuer have entered or will enter into servicing agreements with various
approved servicers to service the financed student loans. The servicers will
have actual possession of the notes evidencing, and other documents relating to,
the financed student loans.
Information relating to the initial servicers for a particular pool of financed
student loans will be set forth in the related prospectus supplement. The
information, which is particularly within each servicer's knowledge, will be
provided by the respective servicers. The information and information included
in the reports referred to in the prospectus supplement will not be verified by
or independently confirmed by the issuer, the
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depositor, the administrator, the master servicer, the underwriters or each of
their counsel, and will comprise all information in respect of each servicer
that the issuer obtains after a reasonable request and inquiry.
SERVICING PROCEDURES
Under each servicing agreement, the related servicer will agree to service, and
perform all other related tasks with respect to, all or a portion of the
financed student loans. Each servicer is obligated to perform all services and
duties customary to the servicing of financed student loans, including all
collection practices, and to do so with reasonable care and in compliance with
all standards and procedures provided for in the Higher Education Act, the
guarantee agreements, private loan programs and all other applicable federal and
state laws.
The duties of the servicer include:
- - collecting and depositing all payments with respect to the financed student
loans, including any guarantee payments, interest subsidy payments and
special allowance payments;
- - responding to inquiries from borrowers on the financed student loans;
- - investigating delinquencies; and
- - sending out statements, payment coupons and tax reporting information to
borrowers.
In addition, the servicer will keep ongoing records with respect to these
financed student loans and collections on these loans and will furnish monthly
and annual statements to the related indenture trustee with respect to this
information, under the customary standards and as otherwise required in the
indenture.
A servicer's failure to properly service financed student loans or otherwise to
comply may result in the refusal of the United States Department of Education to
make reimbursement payments to a guarantee agency on these loans or in a
guarantee agency's refusal to honor its guarantee or make a guarantee payment on
these loans to the issuer and/or in the limitation, suspension or termination of
the servicer's eligibility to contract to service financed student loans.
SERVICER COVENANTS
In each servicing agreement, the related servicer covenants that:
(1) it will duly satisfy or cause to be duly satisfied all
obligations on its part to be fulfilled under or in connection
with the financed student loans, maintain in effect all
qualifications required to service the financed student loans
and, if applicable, comply in all material respects with all
requirements of law in connection with servicing the financed
student loans; and
(2) it will not permit any rescission or cancellation of a financed
student loan except as ordered by a court of competent
jurisdiction or other government authority or as otherwise
consented to by the issuer.
Following the discovery by or notice to the servicer of a breach of any
obligations with respect to any financed student loan that results in the
failure of a guarantee agency to make a guarantee payment, the servicer is
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<PAGE> 133
obligated to purchase that financed student loan and reimburse the issuer for
specific payments, all on the terms of the applicable servicing agreement. The
servicer's purchase and reimbursement obligations are contractual obligations
under the servicing agreement that may be enforced against the servicer, but the
breach of contractual obligations will not constitute an event of default under
the notes.
SERVICING COMPENSATION
Each servicer will be paid a servicing fee for the servicing of the financed
student loans. The servicing fee is payable out of available funds as part of
the program operating expenses.
The servicing fee is intended to compensate the servicers for performing the
functions of a third party servicer of student loans as an agent for their
beneficial owner, including collecting and posting all payments, responding to
inquiries of borrowers on the financed student loans, investigating
delinquencies, pursuing, filing and collecting any guarantee payments, including
litigation costs, accounting for collections and furnishing monthly and annual
statements to the administrator. The servicing fee also will reimburse the
servicers for taxes, accounting fees, outside auditor fees, data processing
costs and other costs incurred in connection with administering the financed
student loans.
The financed student loans will be serviced by servicers as may be selected by
the master servicer from time to time, subject to the approval of the rating
agencies, and servicers may be replaced or added from time to time by the master
servicer. Information regarding the initial servicers of student loans relating
to each series of notes may be found in the related prospectus supplement.
DESCRIPTION OF THE NOTES
The notes are payable solely from the assets of a trust. A separate trust will
be established for each issuance of notes under an indenture entered into in
connection with that issuance of notes. The notes of any series will be issued
under the terms of an indenture. Each indenture will be substantially in the
form filed as an exhibit to the registration statement of which this prospectus
is part. The following description is a summary of the material terms of the
notes as described in the indenture. It does not restate the entire indenture.
We urge you to read the indenture because it, not this description, defines your
right as holders.
It is expected that each series of the notes will initially be represented by
one or more notes registered in the name of the nominee of DTC. Notes generally
will be available for purchase in denominations of $1,000 and integral multiples
of $1,000 in book-entry form. The authorized denominations of each series of
notes in an issuance will be set forth in the related prospectus supplement. The
issuer has been informed by DTC that DTC's nominee will be Cede & Co. Cede & Co.
is expected to be the holder of record of the notes. Unless and until definitive
notes are issued under the limited circumstances described in this prospectus or
in the accompanying prospectus supplement, no holder will be entitled to receive
a physical certificate representing his note. All references in this prospectus
or in the accompanying prospectus supplement to actions by holders refer to
actions taken by DTC on instructions from its participating organizations and
all references to distributions, notices, reports and statements to holders
refer to distributions, notices, reports and statements to DTC or Cede & Co., as
the registered holder of the notes, for distribution to holders under DTC's
procedures. See "-- Book-entry Registration" and "--Definitive Notes."
Each series of notes will evidence the interests specified in the related
prospectus supplement, which may:
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<PAGE> 134
(1) include the right to receive payments allocable only to
principal, only to interest or to any combination of principal
and interest;
(2) include the right to receive payments only of prepayments of
principal during the lives of the notes or during specified
periods;
(3) be subordinated in its right to receive distributions of
scheduled payments of principal, prepayments or principal,
interest or any combination to one or more other series of notes
and any exchange counterparties under any senior exchange
agreement, during the lives of the notes or during specified
periods or may be subordinated with respect to some losses or
delinquencies;
(4) include the right to receive payments only after the occurrence
of events specified in the prospectus supplement;
(5) include the right to receive payments under a schedule or formula
or on the basis of collections from designated portions of the
assets in the related trust;
(6) include, as to notes entitled to payments allocable to interest,
the right to receive interest at a fixed rate or an adjustable
rate;
(7) include the right to have interest accrue but not be paid until
the occurrence of a specified event or the passing of time; and
(8) include, as to notes entitled to payments allocable to interest,
the right to payments allocable to interest only after the
occurrence of events specified in the related prospectus
supplement.
One or more series of notes of a trust may be subordinated to other series of
notes of that trust. Principal payments on any subordinate notes generally will
not begin until the related senior notes are paid. In addition, interest
payments on any distribution date on subordinate notes generally will be made
only after each related series of senior notes has received its interest
entitlement on that distribution date and after each senior exchange payment to
be made under a senior exchange agreement, if any, is made, and sometimes will
be made only after each related series of senior notes has received its
principal distribution amount on the distribution date. See "-- Payment of
Available Funds" and "Security for the Notes -- The Trust Assets." The specific
terms of any senior notes and subordinate notes in an issuance will be described
in the related prospectus supplement.
PAYMENT OF AVAILABLE FUNDS
On each distribution date with respect to an issuance of notes, moneys in the
related collection account will be disbursed by the related indenture trustee
from available funds for each collection period as set forth in the related
prospectus supplement.
Available funds for each issuance of notes means, with respect to any collection
period, the excess of:
(A) the sum, without duplication, of the following amounts with
respect to any collection period:
(1) all collections received by the indenture trustee on the
financed student loans during the collection period
(including any guarantee payments (including payments
received from
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<PAGE> 135
any guarantor or escrow fund under any private loan program)
received with respect to the financed student loans);
(2) any payments, including without limitation interest subsidy
payments and special allowance payments, received by the
eligible lender trustee on the financed student loans during
the collection period;
(3) all proceeds from any sales of financed student loans during
the collection period;
(4) any interest payments received by the indenture trustee
during the collection period with respect to a financed
student loan for which a realized loss was previously
allocated;
(5) the aggregate purchase amounts received for those financed
student loans purchased by the indenture trustee during the
related collection period;
(6) the aggregate amounts, if any, received from the issuer or
the indenture trustee as reimbursed of non-guaranteed or
uninsured interest amounts (which shall not include, with
respect to financed FFELP loans, the portion of the interest
amounts for which the guarantee agency did not have an
obligation to make a guarantee payment), or lost interest
subsidy payments and special allowance payments, with
respect to the financed student loans;
(7) counterparty exchange payments;
(8) advances received;
(9) investment earnings for the collection period; and
(10) any other sums identified in the related prospectus
supplement over (B) amounts received by the issuer in
connection with balance reconciliations required by virtue
of student loan consolidations for the collection period;
(B) provided, however, that available funds will exclude:
(1) all payments and proceeds of any financed student loans the
purchase amount of which has been included in available
funds for a prior collection period, which payments and
proceeds will be paid to the issuer;
(2) amounts used to reimburse the depositor for advances or any
other amounts advanced by the depositor on a voluntary basis
with respect to guarantee payments (including payments from
any guarantor or escrow fund under any private loan program)
or interest subsidy payments applied for but not received as
of the end of the collection period immediately preceding
the date the advance is made;
(3) payments by a bond insurance company or other surety, credit
enhancer or guarantor who is obligated to pay debt service
on a particular series of notes; and
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<PAGE> 136
(4) amounts which are paid to the issuer under the indenture.
Prior to making payments to the note payment account established under the
indenture, the indenture trustee will, as described in the prospectus supplement
for a series, transfer from the collection account established under the
indenture to the expense account funds to pay the program expense requirement
calculated as of each distribution date. On each distribution date for a series
of notes (other than those relating to accrual notes during the related accrual
period), the indenture trustee will, subject to the amount of available funds,
transfer from the collection account to the note payment account the holders'
interest distribution amount for the series and any related issuer exchange
payment including an early termination payment as a result of a default by the
issuer, as described in the related prospectus supplement. For each distribution
date during the related accrual period relating to a series of accrual notes,
the related holders' interest distribution amount will be added to the principal
amount of the series of notes and any related issuer exchange payment including
an early termination payment as a result of a default by the issuer will be
transferred to the note payment account. On each distribution date when a
principal distribution is to be made on the notes, the indenture trustee will,
subject to the amount of available funds, transfer from the collection account
to the note payment account an amount equal to the appropriate holders'
principal distribution amount, as described in the related prospectus
supplement. The order and priority and timing for payment of interest, principal
distributions and issuer exchange payments as between each series of senior
notes and senior exchange agreements and each series of subordinate notes and
subordinate exchange agreements in an issuance will be described in the related
prospectus supplement for the issuance.
Following the payment of all required amounts due on the notes on any
distribution date (and deposit of any required amounts in any reserve fund), the
indenture trustee will, as provided in the prospectus supplement for a series,
transfer from the collection account to the note payment account, to the extent
of available funds, the parity percentage payments, if any, to be made on each
distribution date. If any available funds are available after the transfer, the
indenture trustee will, as provided in the prospectus supplement for a series,
transfer from the collection account to the note payment account, to the extent
of available funds any carryover interest.
Following the payment of all required amounts as described above, the indenture
trustee will, as provided in the prospectus supplement for a series, transfer
from the collection account to an exchange counterparty the amount, if any, owed
an exchange counterparty in respect of an early termination payment or damages
for early termination other than an early termination resulting from a default
by the issuer under any exchange agreement.
On each applicable distribution date as described in the related prospectus
supplement, if and to the extent specified in the related prospectus supplement,
the indenture trustee will, after making all required transfers to the expense
account, note payment account, the reserve fund and to any exchange
counterparties as described above, transfer to the excess surplus account
established under the indenture any remaining available funds. Any amounts
withdrawn by the issuer from the excess surplus account will not be available to
make payments on the notes. See "The Indentures -- Funds and Accounts."
On each distribution date, the indenture trustee will pay to the holders of the
applicable series as of the related record date and any related exchange
counterparties all amounts transferred to the note payment account as set forth
above and in the related prospectus supplement.
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<PAGE> 137
However, if:
(a) the outstanding principal amount of all senior notes issued under
the indenture would exceed the sum of the related pool balance
plus the aggregate balance on deposit in the funds and accounts
under the indenture (exclusive of the balance of the student loan
portfolio fund) at the end of the immediately preceding collection
period less all distributions to be made on the distribution date,
or
(b) a payment event of default has occurred (but prior to the
acceleration of the maturity of the notes issued under the
indenture),
then, until the applicable conditions described in clauses (a) and (b) above no
longer exist, holders of subordinate notes issued under the indenture will not
be entitled to any payments of principal or interest and no subordinate issuer
exchange payments will be made. As long as any related senior notes are
outstanding, any deferral in the payment of principal or interest on the
subordinate notes or in the payment of subordinate issuer exchange payments
(except on the legal final maturity of a related series of subordinate notes)
will not constitute an event of default under the indenture.
INTEREST
Interest Accrual Period
Interest will accrue on the principal balance of each series of notes at a rate
(calculated as provided below or in the related prospectus supplement) equal to
the related series interest rate. The first interest period will begin on the
closing date on which the related series was issued under the related prospectus
supplement for periods consisting of:
<TABLE>
<CAPTION>
TYPE OF NOTE INTEREST ACCRUAL PERIOD
<S> <C>
LIBOR rate notes generally a one-month or three-month period
beginning and ending on the dates in the
related prospectus supplement
auction rate notes the period set forth in the related prospectus
supplement
fixed rate notes or notes accruing the period set forth in the related prospectus
interest based on some other method supplement
</TABLE>
Interest on each series of notes will be payable to the applicable holders on
the distribution dates described in the applicable prospectus supplement.
Generally, the series interest rate on each series of notes will equal the
lesser of:
(1) the interest rate and applicable margin, if any, or
(2) a cap specified in the related prospectus supplement; as long as it
will not exceed the net loan rate for the series, if any, when it is
required to be determined.
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<PAGE> 138
If on any interest determination date, an auction for a series of auction rate
notes is not held, then the series interest rate for this series of notes will
be the net loan rate or another rate under the applicable prospectus supplement.
The series interest rate on each series of notes bearing interest based on a
method other than LIBOR rate, Treasury bill rate index or auction rate will be
described in the related prospectus supplement.
For auction rate notes, the issuer may, from time to time, change the length of
one or more auction periods to conform with then current market practice or
accommodate other economic or financial factors that may affect the length of
the auction period or any series interest rate. An auction period adjustment
will not cause an auction period to be less than 7 days nor more than one year
and will not be allowed unless the conditions described in the auction
procedures in an appendix to the related prospectus supplement are satisfied. If
an auction period adjustment is made, the intervals between distribution dates
will be adjusted accordingly.
Payment of Interest
Payments of interest will be made on each applicable distribution date, as
specified in the accompanying prospectus supplement. Interest payments may
include interest accrued during one or more interest accrual periods. Interest
payments on the notes generally will be funded from available funds and advances
(and, when applicable, amounts on deposit in any reserve fund, capitalized
interest account or other account as described in a prospectus supplement)
remaining after the deposit of the program expense requirement in the expense
account, as specified in the related prospectus supplement. If provided in the
related prospectus supplement, if sufficient funds are not available to pay the
applicable series interest rate on a distribution date, this shortfall will be
paid from draws on the applicable forms of credit enhancement as described in
the related prospectus supplement. If this is the case, interest payments on
subordinate notes and subordinate issuer exchange payments may be deferred or
otherwise affected in some circumstances. As long as any related senior notes
are outstanding, any deferral in the payment of interest on the subordinate
notes (except on the legal final maturity of any subordinate notes) or in the
payment of subordinate issuer exchange payments will not constitute an event of
default under the related indenture.
Carryover Interest
If under a prospectus supplement, interest at the formula rate for any series of
notes for any interest accrual period exceeds the net loan rate, carryover
interest consisting of the excess interest, together with interest on the notes
at the applicable formula rate will be paid on subsequent distribution dates
only to the extent funds are available after other required payments on the
notes. Carryover interest will continue to be so payable although the principal
amount of the applicable series is paid until:
(1) no notes issued under the related indenture remain outstanding,
and
(2) the balances in the funds and accounts relating to the notes are
zero.
The ratings of the applicable series of notes do not address the likelihood of
payments of carryover interest. Any reference to interest in this prospectus or
the applicable prospectus supplement excludes carryover interest.
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PRINCIPAL
All payments of principal of notes of a series will be made in an aggregate
amount determined as set forth in the related prospectus supplement and will be
paid at the times and will be allocated among the series of notes in an issuance
in the order and amounts, all as specified in the related prospectus supplement.
Principal will be paid to the holders of any series of notes pro rata within
each maturity of notes in that series, as described in the related prospectus
supplement.
Several series of notes may be issued by a trust under an indenture. Any
issuance of notes may contain one or more series of senior notes that will get
paid principal and interest before any series of subordinate notes or any
exchange counterparties under any subordinate exchange agreement. If this
happens, then the series of subordinate notes may receive limited or no payments
of principal until each related series of senior notes and other parties with a
higher payment priority have been paid as explained in the applicable prospectus
supplement.
The aggregate outstanding principal amount of each series of notes will be
payable in full on the distribution date identified in the related prospectus
supplement. The actual date on which the aggregate outstanding principal and
accrued interest of any series of notes are paid may be, and in some cases will
be expected to be, earlier than its legal final maturity, based on a variety of
factors, including those described under "Maturity and Prepayment
Considerations."
DETERMINATION OF LIBOR
Under the related prospectus supplement for a series of LIBOR rate notes, for
each interest accrual period after the initial interest accrual period, the
calculation agent will determine the applicable LIBOR rate for purposes of
calculating the series interest rate on the LIBOR rate notes for each given
interest accrual period on the date which is two London banking days preceding
the commencement of each interest accrual period. London banking day means a
business day on which dealings in deposits in United States dollars are
transacted in the London interbank market.
LIBOR means the rate equal to the rate at which U.S. dollar deposits having a
particular maturity are offered to prime banks in the London interbank market
which appear on Telerate Page 3750 as of approximately 11:00 a.m., Greenwich
Mean Time, on the interest determination date. If the rate does not appear on
Telerate Page 3750, the rate for that day will be determined on the basis of the
Reuters Screen LIBOR Page. If at least two quotations appear, LIBOR will be the
arithmetic mean (rounded to the nearest .01%) of these offered rates. If fewer
than two quotations appear, LIBOR for the interest accrual period will be
determined at approximately 11:00 A.M., London time, on the interest
determination date. LIBOR will be based on the rate at which deposits in a
principal amount of not less than U.S. $1,000,000 in United States dollars
having a particular maturity are offered to prime banks in the London interbank
market by four major banks in the London interbank market selected by the
calculation agent. These rates will be representative for a single transaction
in the market at this time. The calculation agent will request the principal
London office of each representative bank to provide a quotation of its rate. If
at least two quotations are provided, LIBOR will be the arithmetic mean (rounded
to the nearest .01% of the offered rates). If fewer than two quotations are
provided, LIBOR for the interest accrual period will be the arithmetic mean
(rounded to the nearest .01%) of the rates quoted at approximately 11:00 A.M.,
New York City time on the interest determination date by three major banks in
New York, New York selected by the calculation agent for loans in United States
dollars to leading European banks having a particular maturity and in a
principal amount equal to not less than U.S.
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<PAGE> 140
$1,000,000, this amount being representative for a single transaction in the
market at this time. If the banks selected are not quoting, LIBOR in effect for
the applicable interest accrual period will be LIBOR in effect for the previous
interest accrual period.
DETERMINATION OF THE TREASURY BILL RATE INDEX
Under the related prospectus supplement for a series of Treasury bill rate notes
for each interest accrual period after the initial interest accrual period, the
calculation again will determine the Treasury bill rate index for purposes of
calculating the series interest rate on each series of Treasury bill rate index
notes for each given interest accrual period on the related interest
determination date.
Treasury bill rate index means, on any day, the weighted average per annum
discount rate (expressed on a bond equivalent basis and applied on a daily
basis) for direct obligations of the United States with a maturity of thirteen
weeks sold at the most recent 91-day Treasury bill auction prior to this date,
as reported by the U.S. Department of Treasury. If the results of the auctions
of 91-day Treasury bills cease to be reported as provided above, or that no
auction is held in a particular week, then the Treasury bill rate index in
effect as of the last publication or report will remain in effect until the
results of auctions of 91-day Treasury bills are reported or an auction is held,
as the case may be. The Treasury bill rate index will be subject to a lock-in
period.
DETERMINATION OF AUCTION RATE
Under the related prospectus supplement for a series of auction rate notes for
each interest accrual period after the initial interest accrual period, the
auction rate for each series of auction rate notes will be determined by the
auction agent under the auction procedures described under the heading "Auction
Procedures" in the related prospectus supplement on each interest determination
date for each interest accrual period.
If you are the holder of an auction rate note, the possible results of an
auction may be:
- you submit an order to hold your note at any rate, so you will
continue to hold the note and will be notified of the interest rate
after the auction; or
- you submit an order to hold your note at a specified interest rate, so
if the rate set by the auction is equal to or higher than the rate you
specified you will continue to hold your note at that rate and if the
rate is lower you will have sold your note in the auction; or
- you submit an order to sell your note and your note is sold at the
auction.
If there are ever insufficient buy orders and the auction is not successful,
holders may not be able to sell their notes in the auction and the interest rate
for the next auction period will be the lower of the net loan rate and the
maximum auction rate.
If you are not a current holder and wish to purchase notes in an auction, or are
a current holder and wish to purchase additional notes, the basic outcomes of an
auction are:
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<PAGE> 141
- you submit an order to buy at a specified rate and the interest rate
set in the auction is equal to or higher than the rate you specified,
so you will have purchased the note and the interest rate will be the
rate set by the auction; or
- you submit an order to buy at a specified rate and the interest rate
set in the auction is lower than the rate you specified, so your bid
order will be unsuccessful.
The outcomes described might vary slightly, as described under "Auction
Procedures," in the related prospectus supplement as when only part of an order
can be filled from available notes or if an auction is not successful.
AUCTION PROCEDURES
Any issuance of notes may contain one or more series of auction rate notes. This
discussion summarizes some procedures that will be used in determining the
interest rates on the auction rate notes. If any auction rate notes are issued,
the related prospectus supplement will contain a more detailed description of
these procedures. Prospective investors in the auction rate notes should read
carefully the following summary, along with the more detailed description in the
related prospectus supplement.
The interest rate on each series of auction rate notes will be determined
periodically (generally, for periods ranging from seven days to one year) by
means of a dutch auction. In this dutch auction, investors and potential
investors submit orders through an eligible broker/dealer as to the principal
amount of auction rate notes the investors wish to buy, hold or sell at various
interest rates or at any rate. The broker/dealers submit their clients' orders
to the auction agent, who processes all orders submitted by all eligible
broker/dealers and determines the interest rate for the upcoming interest
period. The broker/dealers are notified by the auction agent of the interest
rate for the upcoming interest period and are provided with settlement
instructions relating to purchases and sales of auction rate notes. The
indenture trustee pays the auction agent fee from the program operating
expenses.
In the auction procedures, the following types of orders may be submitted:
(1) bid/hold orders - the minimum interest rate that a current
investor is willing to accept in order to continue to HOLD some or
all of its auction rate notes for the upcoming interest period
(which can also be an order to hold regardless of the upcoming
interest rate);
(2) sell orders - an order by a current investor to SELL a specified
principal amount of auction rate notes, regardless of the upcoming
interest rate; and
(3) potential bid orders - the minimum interest rate that a potential
investor (or a current investor wishing to purchase additional
auction rate notes) is willing to accept in order to BUY a
specified principal amount of auction rate notes.
If an existing investor does not submit orders with respect to all its auction
rate notes of the applicable series, the investor will be deemed to have
submitted a hold order at the new interest rate for that portion of the auction
rate notes for which no order was received.
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<PAGE> 142
Example of Auction
In connection with each auction, auction rate notes will be purchased and sold
between investors and potential investors at a price equal to their then
outstanding principal balance (i.e., par) plus any accrued interest. The
following example helps illustrate how the above-described procedures are used
in determining the interest rate on the auction rate notes.
(a) Assumptions:
1. Denominations (units) = $50,000
2. Interest period = 28 Days
3. Principal amount outstanding = $25 million (500 units)
(b) Summary of All Orders Received For The Auction
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
10 units at 2.90% 50 units Sell 20 units at 2.95%
30 units at 3.02% 50 units Sell 30 units at 3.00%
60 units at 3.05% 100 units Sell 50 units at 3.05%
100 units at 3.10% 50 units at 3.10%
100 units at 3.12% 50 units at 3.11%
50 units at 3.14%
100 units at 3.15%
Total units under existing bid/hold orders and sell orders must always equal
issue size (in this case 500 units).
(c) Auction Agent Organizes Orders In Ascending Order
<TABLE>
<CAPTION>
Order Number Cumulative Order Number Cumulative
Number of Units Total (Units) % Number of Units Total (Units) %
<S> <C> <C> <C> <C> <C> <C> <C>
1 10(W) 10 2.90% 7 100(W) 300 3.10%
2 20(W) 30 2.95% 8 50(W) 350 3.10%
3 30(W) 60 3.00% 9 50(W) 400 3.11%
4 30(W) 90 3.02% 10 100(W) 500 3.12%
5 50(W) 140 3.05% 11 50(L) 3.14%
6 60(W) 200 3.05% 12 100(L) 3.15%
<FN>
- ------------------------------
(W) Winning Order
(L) Losing Order
</TABLE>
Order #10 is the order that clears the market of all available units. All
winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next interest accrual period. Multiple orders at
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<PAGE> 143
the winning rate are allocated units on a pro rata basis. In any case, the
interest rate will never exceed the lesser of the net loan rate or the maximum
auction rate.
The above example assumes that a successful auction has occurred (i.e., all sell
orders and all bid/hold orders below the new interest rate were fulfilled). In
some circumstances, there may be insufficient potential bid orders to purchase
all the auction rate notes of the applicable series offered for sale. In these
circumstances, the interest rate for the upcoming interest accrual period will
equal the lesser of the net loan rate and the maximum auction rate. Also, if all
the auction rate notes of the applicable series are subject to hold orders
(i.e., each holder of a series of auction rate notes wishes to continue holding
its auction rate notes, regardless of the interest rate) the interest rate for
the upcoming interest accrual period will equal the lesser of the net loan rate
and the rate at which all investors are willing to hold the series of auction
rate notes.
CREDIT ENHANCEMENT
The amounts and types of credit enhancement arrangements and the provider, if
applicable, with respect to any issuance or series of notes will be set forth in
the related prospectus supplement. If specified in the applicable prospectus
supplement, credit enhancement for any series of notes may cover one or more
other series of notes, and may be exhausted for the benefit of a particular
series and afterwards be unavailable to the other series. More information
regarding any provider of credit enhancement, including financial information
when material, will be included in the related prospectus supplement.
Reserve Fund
A reserve fund may be created with respect to any series of notes, and on each
closing date the depositor may deposit cash or eligible investments in an
amount, if any, equal to or less than the specified reserve fund balance
identified in the related prospectus supplement. The issuer and the indenture
trustee may establish accounts in the reserve fund and subaccounts within these
accounts. The reserve fund may be added to on some distribution dates, as
explained in the related prospectus supplement, by deposit of any funds
necessary to make the balance of the reserve fund equal to the specified reserve
fund balance from the amount of available funds remaining after making all
required distributions. Also, if amounts were transferred from the reserve fund
to cover a realized loss on a financed student loan, any subsequent payments of
principal received on or with respect to that financed student loan will be
deposited into the reserve fund or, if provided in the related prospectus
supplement, applied as an additional principal distribution. Amounts on deposit
in the reserve fund exceeding the specified reserve fund balance will be
distributed as explained in the related prospectus supplement.
A reserve fund is intended to enhance the likelihood of timely receipt by the
holders of the full amount of interest due them on each distribution date and
principal due them on the legal final maturity of the related notes or a date
when the related notes are to be redeemed in whole and to decrease the
likelihood that the holders will experience losses. In some circumstances,
however, a reserve fund could be depleted. Also, amounts otherwise required to
be deposited into a reserve fund may, with the consent of any provider of credit
enhancement for the related series of notes be applied as additional principal
distributions on the related series of notes. If the amount required to be
withdrawn from a reserve fund to cover shortfalls in the amount of available
funds exceeds the amount of cash in the reserve fund, a temporary shortfall in
the amount of principal and interest distributed to the holders could result.
This shortfall could increase the average life of the notes. Amounts on deposit
in a reserve fund other than amounts in excess of the related specified reserve
fund balance will not be available to cover any aggregate unpaid carryover
interest.
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Subordination
The rights of the holders of a series of notes may be subordinated to the rights
of more senior holders and to exchange counterparties under any senior exchange
agreement, as described in this prospectus and the related prospectus
supplement. In some instances, the rights of the holders of a series of notes
also may be subordinated to the rights of holders of other subordinate notes,
and to exchange counterparties under any subordinate exchange agreement, as
described in this prospectus and the related prospectus supplement.
Surety Bonds
A surety bond with respect to one or more series of notes may be obtained by the
issuer in favor of the indenture trustee solely on behalf of the holders of the
related issuance. As provided below or in a prospectus supplement, a surety bond
may provide for coverage of timely payment of all interest and ultimate payment
of all principal due on the related series of notes; if that surety bonds will
not ensure payment of any carryover interest.
The amount required to be paid to the issuer of each surety bond will be
described in the applicable prospectus supplement.
Other Forms of Credit Enhancement
If specified in the related prospectus supplement, credit enhancement for any
issuance or series of notes may also include overcollateralization, letters of
credit, liquidity facilities, interest rate cap agreements, exchange agreements,
currency swap agreements, insurance policies, spread accounts, one or more
series of subordinate securities, derivative products or other forms of credit
enhancement including but not limited to third party guarantees. The credit
enhancement for any series of notes may be structured to provide protection
against delinquencies and/or losses on the financed student loans, against
changes in interest rates, or other risks, under the conditions specified in the
related prospectus supplement. Any form of credit enhancement will have some
limitations and exclusions from coverage, which will be described in the related
prospectus supplement.
BOOK-ENTRY REGISTRATION
The description which follows of the procedures and record keeping with respect
to beneficial ownership interests in a series of notes, payment of principal of
and interest on the notes to DTC participants, Cedel participants and Euroclear
participants or to purchasers of the notes, confirmation and transfer of
beneficial ownership interests in the notes, and other securities-related
transactions by and between DTC, Cedel, Euroclear, DTC participants, Cedel
participants, Euroclear participants and note owners, is based solely on
information furnished by DTC, Cedel and Euroclear and has not been independently
verified by the issuer, the depositor, the administrator, the master servicer or
the underwriters.
Holders may hold their certificates through DTC (in the United States) or Cedel
or Euroclear (in Europe) directly if the holders are participants of these
systems, or indirectly through organizations that are participants in these
systems.
DTC will hold the global notes. Cedel and Euroclear will hold omnibus positions
on behalf of the Cedel participants and the Euroclear participants,
respectively, through customers' securities accounts in Cedel's
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and Euroclear's names on the books of their respective depositories which in
turn will hold these positions in customers' securities accounts in the
depositories' names on the books of DTC.
DTC is a limited purpose trust company organized under the New York Banking Law,
a banking organization within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a clearing corporation within the meaning of the
New York Uniform Commercial Code, and a clearing agency registered under the
provisions of Section 17A of the Exchange Act. DTC holds securities for its
participants and facilitates the clearance and settlement among DTC participants
of securities transactions, such as transfers and pledges, in deposited
securities through electronic book-entry changes in DTC participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
DTC participants include securities brokers and dealers, banks, trust companies,
clearing corporations and other organizations. Indirect access to the DTC system
is also available to indirect participants such as securities brokers and
dealers, banks, and trust companies that clear through or maintain a custodial
relationship with a DTC participant, either directly or indirectly. The rules
applicable to DTC and its DTC participants are on file with the SEC.
DTC management is aware that some computer applications, systems, and the like
for processing dates that are dependent on calendar dates, including dates
before, on, and after January 1, 2000, may encounter year 2000 problems. DTC has
informed the industry, which consists of its participants and other members of
the financial community, that it has developed and is implementing a program so
that its computer systems, as they relate to DTC services such as the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also dependent on
other parties, including but not limited to issuers and their agents, as well as
third party vendors from whom DTC licenses software and hardware, and third
party vendors on whom DTC relies for information or the provision of services,
including telecommunication and electrical utility service providers, among
others. DTC has informed its participants and other members of the financial
community that it is contacting (and will continue to contact) third party
vendors from whom DTC acquires services to: (1) impress on them the importance
of these services being year 2000 compliant; and (2) determine the extent of
their efforts for year 2000 remediation (and, as appropriate, testing) of their
services. In addition, DTC is in the process of developing contingency plans as
it deems appropriate.
According to DTC, the information set forth in the preceding two paragraphs
about DTC has been provided to its participants and other members of the
financial community by DTC for informational purposes only and is not intended
to serve as a representation, warranty or contract modification of any kind.
Transfers between DTC participants will occur under DTC rules. Transfers between
Cedel participants and Euroclear participants will occur in the ordinary way
under their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through Cedel participants or
Euroclear participants, on the other, will be effected in DTC under DTC rules on
behalf of the relevant European international clearing system by its depository.
The cross-market transactions will, however, require delivery of instructions to
the relevant European international clearing system by the counterparty in this
system under its rules and procedures and within its established
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deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver instructions
to its depository to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment under
normal procedures for same-day funds settlement applicable to DTC. Cedel
participants and Euroclear participants may not deliver instructions directly to
the depositories.
Because of time-zone differences, credits of securities in Cedel or Euroclear as
a result of a transaction with a DTC participant will be made during the
subsequent securities settlement processing, dated the business day following
the DTC settlement date. These credits or any transactions in these securities
settled during the processing will be reported to the relevant Cedel participant
or Euroclear participant on this business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel participant
or a Euroclear participant to a DTC participant will be received with value on
the DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC. For
additional information regarding clearance and settlement procedures for the
notes, see Appendix A.
Day traders that use Cedel or Euroclear and that purchase the globally offered
new notes from DTC participants for delivery to Cedel participants or Euroclear
participants should note that these trades may fail on the sale side unless
affirmative actions are taken. Participants should consult with their clearing
system to confirm that adequate steps have been taken to assure settlement.
A buyer may purchase notes under the DTC system only by or through DTC
participants. DTC participants will receive a credit for the notes on DTC's
records. The ownership interest of each actual owner of a note is in turn to be
recorded on the DTC participants' and indirect participants' records. Note
owners will not receive written confirmation from DTC of their purchase, but
note owners are expected to receive written confirmations providing details of
the transaction, as well as periodic statements of their holdings, from the DTC
participant or indirect participant through which the note owner entered into
the transaction. Transfers of ownership interests in the notes are to be
accomplished by entries made on the books of DTC participants acting on behalf
of note owners. Note owners will receive certificates representing their
ownership interest in notes, only if use of the book-entry system for the notes
is discontinued.
To facilitate subsequent transfers, all notes deposited by DTC participants with
DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of notes
with DTC and their registration in the name of Cede & Co. effects no change in
beneficial ownership. DTC has no knowledge of the actual owners of the notes;
DTC's records reflect only the identity of the DTC participants to whose
accounts these notes are credited, which may or may not be the note owners. The
DTC Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC participants, by
DTC participants to indirect participants, and by DTC participants and indirect
participants to note owners will be governed by arrangements among them, subject
to any statutory or regulatory requirements as may be in effect from time to
time.
Neither DTC nor Cede & Co. will consent or vote with respect to the notes. Under
its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede & Co.'s consenting or voting
rights to those DTC participants to whose accounts the notes are credited on the
record date (identified in a listing attached to the proxy).
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The indenture trustee will make principal and interest payments on the notes to
DTC. DTC's practice is to credit DTC participants' accounts on the applicable
distribution date under their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on the distribution
date. Payments by DTC participants to note owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in street name and will
be the responsibility of the DTC participant and not of DTC, the indenture
trustee or the issuer, subject to any statutory or regulatory requirements as
may be in effect from time to time. The indenture trustee is responsible for
payment of principal and interest to DTC. DTC is responsible for disbursement of
these payments to DTC participants. DTC participants and indirect participants
are responsible for disbursement of these payments to note owners.
DTC may discontinue providing its services as securities depository with
respect to the notes at any time by giving reasonable notice to the issuer or
the indenture trustee. Under these circumstances, if a successor securities
depository is not obtained, definitive notes are required to be printed and
delivered. The issuer may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
definitive notes will be delivered to holders. See "Definitive Notes."
Cedel is incorporated under the laws of Luxembourg as a professional depository.
Cedel holds securities for its participating organizations and facilitates the
clearance and settlement of securities transactions between Cedel participants
through electronic book-entry changes in accounts of Cedel participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in Cedel in numerous currencies, including United States dollars. Cedel
provides to its Cedel participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedel interfaces with domestic
markets in several countries. As a professional depository, Cedel is regulated
by the Luxembourg Monetary Institute. Cedel participants are recognized
financial institutions around the world, including initial purchasers,
securities brokers and dealers, banks, trust companies, clearing corporations
and other organizations and may include the initial purchasers of any series of
new notes. Indirect access to Cedel is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Cedel participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participants of
the Euroclear System and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of certificates and
any risk from lack of simultaneous transfers of securities and cash.
Transactions may be settled in numerous currencies, including United States
dollars. The Euroclear System includes various other services, including
securities lending and borrowing and interfaces with domestic markets in several
countries generally similar to the arrangements for cross-market transfers with
DTC described above. The Euroclear System is operated by Morgan Guaranty Trust
Company of New York, Brussels, Belgium office, under contract with Euroclear
Clearance System, and Societe Cooperative, a Belgian cooperative corporation.
All operations are conducted by the Euroclear operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear operator, not Societe Cooperative. The Societe Cooperative Board
establishes policy for the Euroclear System. Euroclear participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries and may include the initial purchasers of
any series of notes. Indirect access to the Euroclear System is also available
to other firms that maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
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The Euroclear operator is the Belgian branch of a New York banking corporation
which is a member bank of the Federal Reserve System. Thus, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear operator are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System. The Terms and Conditions together
with the Operating Procedures govern transfers of securities and cash within the
Euroclear System, withdrawal of securities and cash from the Euroclear System,
and receipts of payments with respect to securities in the Euroclear System. All
securities in the Euroclear System are held on a fundable basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear operator acts under the Terms and Conditions and Operating
Procedures only on behalf of Euroclear participants and has no record of or
relationship with persons holding through Euroclear participants.
The Euroclear operator has advised as follows: Under Belgian law, investors
that are credited with securities on the records of the Euroclear operator have
a co-property right in the fungible pool of interests in securities on deposit
with the Euroclear operator equal to the amount of interests in securities
credited to their accounts. If the Euroclear operator becomes insolvent,
Euroclear participants would have a right under Belgian law to the return of
the amount and type of interests in securities credited to their accounts with
the Euroclear operator. If the Euroclear operator did not have a sufficient
amount of interests in securities on deposit of a particular type to cover the
claims of all Euroclear participants credited with these interests in
securities on the Euroclear operator's records, all Euroclear participants
having an amount of interests in securities of this type credited to their
accounts with the Euroclear operator would have the right under Belgian law to
the return of their pro-rata share of the amount of interests in securities
actually on deposit. Under Belgian law, the Euroclear operator is required to
pass on the benefits of ownership in any interests in securities on deposit
with it (such as dividends, voting rights and other entitlements) to any person
credited with these interests in securities on its records.
Distributions with respect to notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel participants or Euroclear participants
under the relevant system's rules and procedures, to the extent received by its
depository. These distributions will be subject to tax reporting under relevant
United States tax laws and regulations. See "Federal Income Tax Consequences."
Cedel or the Euroclear operator, as the case may be, will take any other action
permitted to be taken by a holder under the Agreement on behalf of a Cedel
participant or Euroclear participant only under its relevant rules and
procedures and subject to its depository's ability to effect the actions on its
behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to these procedures to facilitate
transfers of notes among participants of DTC, Cedel and Euroclear, they are
under no obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
Neither the issuer, the underwriters nor the indenture trustee will have any
responsibility or obligation to participants, to indirect participants or to any
note owner with respect to:
(1) the accuracy of any records maintained by DTC, Cedel or Euroclear, any
participant or any indirect participant;
(2) the payment by DTC or any participant or any indirect participant of any
amount with respect to the principal and purchase price of, or interest or
carryover interest, if any, on the notes;
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(3) any notice which is permitted or required to be given to note owners under
the indenture;
(4) the selection by DTC or any direct or indirect participant of any person to
receive payment in the event of a partial distribution of principal of the
new notes; or
(5) any consent given or other action taken by DTC as note owner.
In reading this prospectus, you should understand that while the notes are in
book-entry system, references in other sections of this prospectus to holders
includes the person for whom the participant acquires an interest in the notes,
but (1) owners of the notes must exercise all rights of ownership through DTC
and the book-entry system and (2) the issuer and the indenture trustee will give
notices that are to be given to holders only to DTC.
DEFINITIVE NOTES
If set forth in the accompanying prospectus supplement, notes of any series will
be issued in fully registered, certificated form to note owners or their
nominees rather than to DTC or its nominee, if:
(1) the issuer advises the indenture trustee for the series of notes in writing
that DTC is no longer willing or able to discharge its responsibilities as
depository for the series of notes, and the issuer is unable to locate a
qualified successor;
(2) the issuer, at its option, advises the indenture trustee for the series of
notes in writing that it elects to terminate the book-entry system through
DTC or successor securities depository; or
(3) after the occurrence of an event of default under an indenture, holders
representing not less than 50% of the outstanding principal balance of the
directing notes advise the indenture trustee and DTC through DTC
participants in writing that the continuation of a book-entry system
through DTC (or a successor) is no longer in the best interest of the
holders, or as set forth in the prospectus supplement.
On the occurrence of any of the events described in the immediately preceding
paragraph, the indenture trustee will cause DTC to notify all DTC participants
of the availability through DTC of definitive notes. On surrender by DTC of the
definitive certificate representing the notes and instructions for registration,
the indenture trustee will issue the notes as definitive notes, and afterwards
the indenture trustee will recognize the holders of the definitive notes as
holders under the indenture.
Distribution of principal of and interest on the notes will be made by the
indenture trustee directly to holders of definitive notes under the procedures
set forth in the related indenture. Interest payments and any principal payments
on each distribution date will be made to holders in whose names the definitive
notes were registered at the close of business on the related record date. The
final payment on any note (whether definitive notes or the notes registered in
the name of Cede & Co. representing the notes), will be made only on
presentation and surrender of the note at the office or agency specified in the
notice of final distribution to holders. The indenture trustee will provide the
notice to registered holders prior to the distribution date on which it expects
the final distributions to occur.
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Definitive notes will be transferable and exchangeable at the offices of the
indenture trustee. No service charges will be imposed for any registration of
transfer or exchange.
LIST OF HOLDERS
By written request to the related indenture trustee, a holder may obtain the
list of all holders of notes issued under the related indenture as maintained by
the indenture trustee for the purpose of communicating with other holders
regarding their rights under the indenture or the notes. The indenture trustee
may elect not to give the requesting holder access to the list of holders if it
agrees to mail the desired communication or proxy, on behalf and at the expense
of the requesting holder, to all holders of notes issued under the related
indenture.
REPORTS TO HOLDERS
For each trust, on the dates as set forth in the related prospectus supplement,
the indenture trustee will provide to the rating agencies and applicable holders
of record as of the related record date, a statement setting forth at least the
following information regarding the notes with respect to the preceding
collection period or collection periods:
(1) if applicable for a series of notes, the principal factor for each
series of notes;
(2) the amount of the payment allocable to principal of each series of
notes;
(3) the amount of the payment allocable to interest on each series of
notes in the related issuance together with the interest rates
applicable (indicating, whether the interest rates are based on the
formula rate or on the net loan rate with respect to each series of
notes, and specifying what each interest rate would have been if it
had been calculated using the alternate basis);
(4) the amount of the payment, if any, allocable to any carryover
interest for one or more series of notes, together with the
outstanding amount, if any, after giving effect to any distribution;
(5) the pool balance for the related trust as of the close of business
on the last day of the preceding collection period;
(6) the aggregate outstanding principal amount of each series of notes
as of the applicable distribution date after making distributions
allocated to principal on the applicable distribution date;
(7) the estimated amount to be allocated to program operating expenses
on the upcoming distribution date;
(8) the amount of the aggregate realized losses, if any, for the
preceding collection period and the aggregate amount, if any,
received (stated separately for interest and principal) during the
collection period relating to financed student loans in the related
trust for which a realized loss was previously allocated;
(9) the amount of the distribution attributable to amounts in any
reserve fund, acquisition fund, pre-funding account or other account
identified in the related prospectus supplement, the amount
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of any other withdrawals from these funds or accounts for the
related distribution date, the balance of these funds or accounts on
the distribution date, after making changes in these funds or
accounts on the distribution date, the then applicable parity
percentage, and the amount of the distribution, if any, attributable
to parity percentage payments;
(10) the aggregate amount, if any, paid for financed student loans
purchased from the related trust during the preceding collection
period;
(11) the following information as reported to the indenture trustee by
the issuer or servicer: the number and principal amount of financed
student loans, as of the end of the preceding collection period,
that are:
(a) 31 to 60 days delinquent,
(b) 61 to 90 days delinquent,
(c) 91 to 120 days delinquent,
(d) more than 120 days delinquent and
(e) for which claims have been filed with the appropriate
guarantee agency, guarantor or escrow fund and which are
awaiting payment; and
(12) any other information specified in the related prospectus
supplement.
Within the prescribed period of time for tax reporting purposes after the end of
each calendar year during the term of the indenture, the indenture trustee will
mail to each person who at any time during the calendar year was a holder and
received any payment, a statement containing some information for the purposes
of the holder's preparation of federal income tax returns. See "Federal Income
Tax Consequences."
REDEMPTION
Each series of notes may be subject to optional or mandatory redemption and
optional and mandatory tender in whole or in part. Each prospectus supplement
will set forth various information with respect to the redemption provisions for
each series of notes.
SECURITY FOR THE NOTES
THE TRUST ASSETS
Each issuance of notes, together with all related exchange agreements and
carryover interest, if any, on these notes are secured by and payable solely
from the assets of the related trust. The property of each trust includes:
- all available funds derived from amounts in that trust;
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- the balances of all funds and accounts established under the
related indenture, whether derived from proceeds of sale of
the notes, from available funds, or from any other source;
- all rights of the issuer and the related eligible lender
trustee in and to the financed student loans, the guarantee
agreements with respect to the financed student loans
(including any agreements with a guarantor or relating to an
escrow fund under a private loan program);
- any spread guaranty agreement;
- the eligible investments, any exchange agreement and any
exchange counterparty guarantee, the student loan purchase
agreements, the master servicing agreement and the servicing
agreements with respect to financed student loans, including
all rights of the issuer under the warranties of each seller,
master servicer or servicer, as the case may be; and
- any proceeds from the above.
Any subordinate notes in a trust will be secured on a basis junior and
subordinate to any senior notes in the trust.
To secure payment of principal, interest and carryover interest, if any, on an
issuance of notes and payment of any related issuer exchange payment, the
issuer and each eligible lender trustee in the related indenture, subject to
the lien of the indenture trustee and each eligible lender trustee, each grants
a first priority perfected security interest in, and pledges and assigns to the
related indenture trustee all of the issuer's and the eligible lender trustee's
rights in, the related trust for the equal and ratable benefit:
FIRST, of the holders of the senior notes issued under the indenture and the
exchange counterparties under any related senior exchange agreement subject
to the provisions of the indenture permitting their application for the
purposes and on the terms and conditions set forth in the indenture, and
SECOND, to the holders of any subordinate notes issued under the indenture
and the exchange counterparties under any related subordinate exchange
agreement.
Because the payment obligations of the issuer under any senior exchange
agreements would be on a parity with payment of the senior notes, an event of
default with respect to the senior exchange agreements could result in an event
of default causing the acceleration of the notes and other potentially adverse
effects on the payment of the notes.
Each indenture provides for the above-described pledge of and grant of a lien on
and security interest in the related trust; however, this pledge, lien or
security interest will only be effective to the extent that:
(1) the trust consists of assets as to which a pledge, lien or
security interest can be created or perfected under law by
either:
(a) the due filing of appropriate Uniform Commercial Code
financing statements, or
(b) the related indenture trustee's possession or
constructive possession of assets;
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(2) either the filing or the possession is sufficient under law to
create and continue a pledge, lien or security interest which
is prior to all other pledges, liens or security interests;
and
(3) either act of filing or act of possession, as applicable, has
in fact been taken by the related indenture trustee.
In order to create, perfect and maintain a security interest in the related
trust, the indenture trustee intends:
(1) to file appropriate duly executed financing statements
(including continuation statements) with respect to the
applicable trust among the appropriate records maintained by
the appropriate state and local filing officers under the
applicable Uniform Commercial Code;
(2) to possess or to constructively possess through bailees those
assets in the applicable trust as to which a pledge, lien or
security interest may be created and perfected by possession;
and
(3) to take or cause to be taken any and all other action
necessary to create or perfect the pledge of, lien on or
security interest in the applicable trust.
EXCHANGE AGREEMENTS
Under an indenture, the issuer will have the right to enter into one or more
interest rate exchange agreements with one or more exchange counterparties. Any
exchange counterparty must have a rating of its long-term debt securities of at
least Aa1 (or its equivalent) from a rating agency. Payments by the issuer under
exchange agreements may be on a parity with any senior or subordinate notes
issued under the indenture. If the issuer enters into one of these agreements
with an exchange counterparty, the exchange counterparty will agree to pay the
related indenture trustee on each applicable distribution date a fixed or
variable exchange rate on a notional amount, which may be equal to, greater or
less than the principal amount of any series of notes issued under the
indenture. The issuer will agree to pay on each applicable distribution date to
the exchange counterparty, a fixed or variable exchange rate on the notional
amount. The issuer expects that any exchange agreement will provide that the
payment obligations of the issuer and an exchange counterparty to each other
will be netted on the distribution date and only one payment will be made by one
party to the other. Any payment from an exchange counterparty to the indenture
trustee under the exchange agreement will be deposited to the collection
account.
When the exchange rate being paid by the exchange counterparty is greater than
the exchange rate being paid by the issuer, the indenture trustee's ability to
make principal and interest payments on the notes will be affected by the
exchange counterparty's ability to meet its net payment obligation to the
indenture trustee. In addition, under some circumstances, the failure by the
issuer to make an issuer exchange payment may constitute an event of default.
See "Risk Factors" in the applicable prospectus supplement and "The Indentures
- -- Events of Default" in this prospectus. Each indenture requires that, prior to
the date that the issuer enters into an exchange agreement, the issuer must
obtain written evidence from each rating agency rating any of the notes issued
under the indenture that the execution and delivery of the exchange agreement
will not adversely affect a rating agency's rating on the notes.
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PROCEEDINGS AFFECTING ELIGIBLE LENDER TRUSTEE
The eligible lender trustee is a national banking association. The United States
Bankruptcy Code would not apply to the eligible lender trustee because a
national banking association cannot be a debtor under the United States
Bankruptcy Code. However, the FDIC may be appointed as receiver for a national
bank. Generally, to the extent that the indenture trustee has a valid and
perfected security interest in the financed student loans, this security
interest should be enforceable regardless of the insolvency of or the
appointment of a receiver for the eligible lender trustee.
THE INDENTURES
Each issuance of notes will be issued under a separate indenture entered into by
and among the issuer, one or more eligible lender trustees and the related
indenture trustee, as supplemented from time to time. Provisions applicable to,
including but not limited to, any event of default under any indenture are not
applicable to and will not constitute or cause an event of default under any
other indenture.
The following is a summary of material provisions of each indenture. It does not
restate the entire indenture. We urge you to read the indenture because it, not
this description, defines your rights as holders. We have filed a copy of the
form of indenture as an exhibit to the registration statement of which this
prospectus is part.
INDENTURE TRUSTEE
The indenture trustee for an issuance of notes will be the entity named in the
related prospectus supplement. On the closing date for an issuance of notes, the
issuer and the eligible lender trustee will pledge the financed student loans
and other moneys received from the net proceeds of the notes to the indenture
trustee under the related indenture. The indenture trustee may serve from time
to time as an trustee under indentures or eligible lender trust agreements with
the issuer or its affiliates relating to other issues of their securities. In
addition, the issuer, the depositor, the administrator or their affiliates may
maintain other banking relationships with any indenture trustee and its
affiliates
ELIGIBLE LENDER TRUSTEE
The eligible lender trustee for be the entity or entities named in the
applicable prospectus supplement and will acquire and hold on behalf of the
issuer legal title to all financed FFELP loans (and, if so provided in the
related prospectus supplement, all financed private loans) acquired by the
related trust under one or more related eligible lender trust agreements. The
eligible lender trustee on behalf of the issuer will enter into a guarantee
agreement with each of the guarantee agencies with respect to the financed FFELP
loans. One or more additional eligible lender trustees may be added or
substituted for one or more of the initial eligible lender trustees from time to
time subject to some conditions described in the related Indenture. Each
eligible lender trustee qualifies, or prior to taking title to the financed
FFELP loans for which additional qualifications are necessary, will qualify, as
an eligible lender and owner of financed FFELP loans for all purposes under the
Higher Education Act and the guarantee agreements with respect to the financed
FFELP loans. Failure of the financed FFELP loans to be owned by an eligible
lender would result in the loss of guarantee payments, interest subsidy payments
and special allowance payments with respect to financed FFELP loans. See
"Description of the FFEL Program."
The issuer, the depositor, the administrator or their affiliates may maintain
other banking relationships with any eligible lender trustee and its affiliates.
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FUNDS AND ACCOUNTS
Each indenture will establish several funds and accounts to be held by the
related indenture trustee for the benefit of the holders. Any funds and accounts
to be established with respect to a trust, including any reserve fund, will be
described in the related prospectus supplement. Each indenture will provide for
the balances of these funds and accounts to be applied as described in the
related prospectus supplement.
ACQUISITION FUND
An acquisition fund will be established for each trust. The issuer and the
indenture trustee may establish accounts within the acquisition fund and
subaccounts within these accounts. On the closing date for an issuance of notes,
there will be deposited into the acquisition fund the amount specified in the
related prospectus supplement. Moneys transferred to the acquisition fund shall
be used to finance the initial financed student loans as described in the
related prospectus supplement.
If a pre-funding account has been established with respect to a trust, on the
closing date, the indenture trustee will make deposits to the related
pre-funding account a portion of the proceeds of the notes as described in the
prospectus supplement. From the related closing date until a specified date set
forth in the related prospectus supplement, moneys in the pre-funding account
will be applied by the indenture trustee as described in the related prospectus
supplement for the financing by the issuer, directly or indirectly through the
eligible lender trustee, of student loans. The financed student loans may
include FFELP loans and/or private loans in the amounts as may be set forth in
the indenture and satisfying any conditions imposed by the rating agencies and
any provider of credit enhancement, if applicable. Any amounts remaining in the
pre-funding account at the end of this pre-funding period will be distributed to
the holders as an additional principal distribution.
The moneys to be applied from the acquisition fund or a pre-funding account for
the financing of student loans will be:
- the full remaining unpaid principal amount of these student
loans that have been fully disbursed,
- PLUS the full remaining unpaid principal amount of these
student loans that have not been fully disbursed,
- PLUS the amount of accrued and unpaid interest on the student
loans payable by the borrowers,
- LESS a discount or plus a premium,
and when directed by the issuer:
- PLUS reasonable transfer fees payable to or on behalf of the
sellers with respect to the student loans under the applicable
student loan purchase agreements,
- PLUS any interest paid by the indenture trustee to a seller on
the amount of principal and accrued interest on the student
loans being financed, from the date of transfer of the student
loans until the date funds are actually paid to the seller at
an interest rate not to exceed the current yield on funds in
the related expense account, in any case not exceeding the
amount permitted by law, and
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- LESS any accrued but unpaid interest on the student loans.
At the request of the issuer, moneys in the acquisition fund or a pre-funding
account also may be applied for the financing, directly or indirectly through
the eligible lender trustee, of student loans from the indenture trustee under
another indenture of trust between the depositor or its affiliates and the
indenture trustee or from the depositor or its affiliates for student loans
financed by the depositor or its affiliates with funds not subject to an
indenture of trust, in either case at a price not in exceeding the full
remaining unpaid principal amount of the student loans, plus the amount of
accrued and unpaid interest on the student loans payable by the borrowers, plus
any unamortized premium and plus reasonable transfer fees not exceeding the
amount permitted by law. In addition to any other requirements set forth for the
use of proceeds from the acquisition fund or a pre-funding account, the issuer
may only finance student loans serviced by servicers and guaranteed by guarantee
agencies (including for this purpose any guarantor or escrow fund under a
private loan program) that have been approved by each rating agency at the time
of purchase.
On the date specified in the related prospectus supplement with respect to the
acquisition fund, or at the end of the pre-funding period with respect to the
pre-funding account, any portion of the balances of the acquisition fund or
pre-funding account which is not, or which the issuer at any time determines
cannot for any reason be, used to finance student loans shall, at the written
direction of the issuer, be transferred to the collection account and used to
pay principal.
STUDENT LOAN PORTFOLIO FUND
A student loan portfolio fund will be established for each trust. The issuer and
the indenture trustee may establish accounts within the student loan portfolio
fund and subaccounts within these accounts. All financed student loans in the
related trust shall be included in the balances of that indenture's student loan
portfolio fund, as described in the prospectus supplement. Financed student
loans also may be applied:
- as provided in the applicable student loan purchase agreements
with respect to rejections and repurchases,
- as provided in the applicable servicing agreements,
- as provided for defeasance of the related indenture,
- as required to obtain the benefits of a guarantee in case of
default on the financed student loan, and
- in connection with the consolidation of the financed student
loan by the borrower.
The indenture trustee may permit the sale or exchange of financed student loans
selected by the issuer in the student loan portfolio fund subject to any
conditions imposed under the related indenture as set forth in the related
prospectus supplement.
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COLLECTION FUND
The collection fund consists of specific accounts established for an issuance of
notes as described in the related prospectus supplement. To the extent necessary
or appropriate, the issuer and the indenture trustee may establish accounts
within the collection fund and subaccounts within these accounts. The issuer
will transfer, and will cause each seller and servicer under the applicable
student loan purchase agreement and servicing agreement to transfer, all
available funds received by it to the indenture trustee. The indenture trustee
will, on receipt of any available funds, immediately deposit and credit these
available funds to the collection fund as described in the related prospectus
supplement.
Some issuances of notes may permit the application of principal payments or
prepayments of financed student loans to be used for the financing of additional
financed student loans for a specified period of time before the payments are
distributed to the holders of the issuance.
Collection Account. A collection account will be established in the collection
fund. On each applicable distribution date for a series of notes, moneys in the
collection account will be disbursed by the indenture trustee from available
funds for each collection period as set forth in the related prospectus
supplement. The order and priority for moneys to be disbursed from the
collection account will be described in the related prospectus supplement.
Capitalized Interest Account. A capitalized interest account may be established
in the collection fund. On each applicable distribution date for a series of
notes, funds in the capitalized interest account will be used to pay interest if
there is a deficiency in the collection account prior to depleting the reserve
fund. Any funds remaining in the capitalized interest account after a date
specified in the related prospectus supplement will be deposited into the
collection account.
Note Payment Account. A note payment account will be established in the
collection fund. On each applicable distribution date for a series of notes,
following the transfers to the note payment account from the collection
account, the indenture trustee will distribute to the related holders as of the
related record date and exchange counterparties, if any, the amounts
transferred to the note payment account, together with any amounts transferred
from any reserve fund and any advances, all as described in the related
prospectus supplement.
Expense Account. An expense account will be established in the collection fund.
Funds will be deposited into the expense account as described in the related
prospectus supplement. Funds in the expense account will be applied to pay
program operating expenses and costs of issuance, as described in the indenture.
Excess Surplus Account. An excess surplus account will be established in the
collection fund. If and to the extent provided in the related prospectus
supplement for a series of notes, on some distribution dates, any available
funds remaining after all required distributions are made on the distribution
date will be deposited to the credit of the excess surplus account. Amounts on
deposit in the excess surplus account may be withdrawn by the issuer at any time
on written request to the indenture trustee to be used for any lawful purpose;
provided that after the withdrawal the parity percentage is at a specified level
as set forth in the related prospectus supplement. Any available funds
distributed to the issuer from the excess surplus account will not be available
to make payments on the notes. Until withdrawal by the issuer, amounts on
deposit in the excess surplus account, if provided in the related prospectus
supplement, will be available for transfer by the indenture trustee to the
reserve fund, if any, if, and to the extent that, a deficiency in the reserve
fund remains after transfers from the collection account. The issuer may also
direct in writing that the indenture
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trustee transfer amounts on deposit in the excess surplus account as described
in the related prospectus supplement.
ADVANCES
If the issuer or the eligible lender trustee on behalf of the issuer has applied
for a guarantee payment from a guarantee agency (including for this purpose a
payment from a guarantor or escrow fund under a private loan program) or an
interest subsidy payment or a special allowance payment from the Department of
Education, and the issuer or the eligible lender trustee, as applicable, has not
received the related payment prior to the end of the collection period
immediately preceding the distribution date on which the amount would be
required to be distributed as a payment of interest, the depositor may, no later
than the third business day before the distribution date, deposit into the note
payment account an amount up to the amount of these payments applied for but not
received. The advances are recoverable by the issuer, first, from the source for
which the advance was made and second, from payments received from the financed
student loans. Funds used to reimburse the depositor for prior advances are
excluded from available funds and, accordingly, repayment of advances have
priority over all other payments under the related indenture. Neither the issuer
nor the depositor will have any obligation, legal or otherwise, to make any
advance, and a determination by the issuer or the depositor to make an advance
will not create any obligation of the issuer or the depositor, legal or
otherwise, to make any future advances.
INVESTMENT
Pending application of moneys in the funds and accounts under an indenture, the
moneys will be invested in eligible investments. Eligible investments include
the following:
(1) Direct obligations of (including obligations issued or held in
book entry form on the books of) the Department of the
Treasury of the United States of America;
(2) Obligations of any of the following federal agencies which
obligations represent the full faith and credit of the United
States of America, including:
- Export-Import Bank
- Farm Credit System Financial Assistance Corporation
- Rural Economic Community Development Administration
(formerly the Farmers Home Administration)
- General Services Administration
- U.S. Maritime Administration
- Small Business Administration
- Government National Mortgage Association (GNMA)
- U.S. Department of Housing & Urban Development (PHA's)
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- Federal Housing Administration;
(3) Senior debt obligations rated "AAA" or "Aaa" by each rating
agency issued by the Federal National Mortgage Association or
the Federal Home Loan Mortgage Corporation, and senior debt
obligations of other federal government-sponsored agencies
approved by each rating agency;
(4) U.S. dollar denominated deposit accounts, federal funds and
banker's acceptance with domestic commercial banks which have
a rating of their short term certificates of deposit on the
date of purchase of "A-1", "F-1" or "P-1" by each rating
agency and maturing no more than 360 days after the date of
purchase (ratings on holding companies are not considered as
the rating on the bank);
(5) Commercial paper which is rated at the time of purchase in the
single highest classification, "A-1", "F-1" or "P-1" by each
rating agency and which matures not more than 270 days after
the date of purchase;
(6) Investments in a money market fund rated in the highest
applicable rating category by (1) a nationally recognized
rating service acceptable to each rating agency, or (2) each
rating agency;
(7) Pre-refunded municipal obligations defined as follows: Any
bonds or other obligations of any state of the United States
of America or of any agency, instrumentality or local
governmental unit of any state which are not callable at the
option of the obligor prior to maturity or as to which
irrevocable instructions have been given by the obligor to
call on the date specified in the notice;
(a) which are rated, based on an irrevocable escrow account
or fund, in the highest rating category of each rating
agency, or
(b) (i) which are fully secured as to principal and interest
and redemption premium, if any, by an escrow consisting
only of cash or obligations described in paragraph (a)
above, which escrow may be applied only to the payment
of the principal of and interest and redemption premium,
if any, on the bonds or other obligations on the
maturity date or dates or the specified redemption date
or dates under irrevocable instructions, as appropriate,
and
(ii) which escrow is sufficient, as verified by a
nationally recognized independent certified public
accountant, to pay principal of and interest and
redemption premium, if any, on the bonds or other
obligations described in this paragraph on the maturity
date or dates specified in the irrevocable instructions
referred to above, as appropriate;
(8) Investment agreements approved in writing by each rating
agency and supported by appropriate opinions of counsel for
the investment agreement provider; and
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(9) Other forms of investments (including repurchase agreements)
approved in writing by each rating agency.
Moneys are required to be invested in eligible investments with respect to which
payments of principal and interest are scheduled or otherwise payable not later
than the date on which it is estimated that these moneys will be required by the
related indenture trustee for the purposes intended. Except as otherwise
provided in an indenture, any earnings on or income from these eligible
investments will be treated as collections of interest on the related financed
student loans and will be deposited in the collection account.
COVENANTS OF THE ISSUER
The issuer covenants under each indenture that:
- it will require the depositor to administer the depositor's
program of financing student loans under the indenture under
the Higher Education Act, to the extent applicable;
- it will maintain or cause to be maintained proper books of
record and account and will permit those to be inspected by
the indenture trustee and by holders of more than 10% of the
aggregate principal amount of the notes issued under the
indenture, as provided in the indenture;
- it will diligently cause to be collected all principal and
interest payments on each financed student loan and any
grants, subsidies, donations, guarantee payments (including
for this purpose payments from any guarantor or escrow fund
under a private loan program), interest subsidy payments and
special allowance payments with respect to each financed
student loan;
- it will diligently cause to be taken all reasonable steps to
enforce all financed student loans, the master servicing
agreement, the servicing agreements and the student loan
purchase agreements; and
- it will not create, or permit the creation of, any pledge,
lien, charge or encumbrance on the trust except as provided in
or permitted by the indenture.
The issuer also covenants that it will file with the related indenture trustee a
projection of program operating expenses for each calendar year within the
limits provided in the indenture and that it will not, in any calendar quarter,
exceed those projected for the calendar quarter except on some conditions
described in the related indenture. If the issuer fails to file a report for any
calendar year, the report filed for the preceding calendar year will apply.
EVENTS OF DEFAULT
Under an indenture, the following constitute an event of default:
(1) Failure in the due and punctual payment of:
(a) principal or interest on any note issued under the
indenture when due, either at legal final maturity or on
redemption or otherwise, excluding:
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- any shortfall on a distribution date other than
the legal final maturity of any series of notes if
available funds are insufficient to pay the
related principal distribution amount on this
date,
- for so long as any senior notes are outstanding
under the indenture, any shortfall on a
distribution date other than the legal final
maturity of any series of subordinate notes if
available funds are insufficient to pay the
holders' interest distribution amount of the
series of subordinate notes on this date, and
- for so long as any senior notes are outstanding
under the indenture, any deferral in the payment
of interest on the subordinate notes on a
distribution date other than the legal final
maturity of any series of subordinate notes; or
(b) any issuer exchange payment when due, excluding:
- payment in respect of an early termination of the
exchange agreement,
- for so long as any senior notes are outstanding
under the indenture, any shortfall on a
distribution date other than the legal final
maturity of any series of subordinate notes if
available funds are insufficient to pay any
subordinate issuer exchange payments relating to
the series of subordinate notes on this date, and
- for so long as any senior notes are outstanding
under the indenture, any deferral in the payment
of subordinate issuer exchange payments;
(2) Failure by the issuer in the observance and performance of any
covenants or agreements made in the indenture and the
continuation of failure for a period of 30 days after written
notice is given to the issuer from the indenture trustee or
from the holders of at least a majority of the aggregate
principal amount of the outstanding notes;
(3) Some events of bankruptcy, insolvency, receivership or
liquidation with respect to the issuer; and
(4) The entry of a final judgment against the issuer if judgment
will not be discharged within 60 days from the entry, or if an
appeal will not be taken therefrom, or from the order or
decree on which the judgment was granted or entered in the
manner as to conclusively set aside the execution under the
judgment or order or the enforcement, if the judgment
constitutes or could result in:
(a) a lien or charge on the available funds or the trust
equal or superior to the lien granted under the
indenture for the benefit of the holders of the senior
notes,
(b) if no senior notes are outstanding under the indenture,
a lien or charge on the available funds or the trust
equal or superior to the lien granted under the
indenture for the benefit of the holders of the
subordinate notes, or
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(c) which materially and adversely affects the ownership,
control or operation of the program.
Acceleration of the Notes
If an event of default described in clause (1) above occurs and is continuing,
the indenture trustee may, and on written direction by the holders of at least a
majority of the aggregate principal amount of the outstanding directing notes,
the indenture trustee must declare all outstanding notes to be immediately due
and payable, by written notice to the issuer.
If an event of default described in clause (2) above occurs and is continuing,
the indenture trustee may, and on written direction by all of the holders of
directing notes, the indenture trustee must declare all outstanding notes to be
immediately due and payable, by written notice to the issuer.
If an event of default described in clause (3) above occurs and is continuing,
all outstanding notes will become immediately due and payable without notice or
any action by the indenture trustee and a declaration of acceleration will be
deemed to have been made.
If an event of default described in clause (4) above occurs and is continuing,
the indenture trustee may, and on written direction by the holders of at least a
majority of the aggregate principal amount of the outstanding directing notes,
the indenture trustee must declare all outstanding notes to be immediately due
and payable, by written notice to the issuer.
If, after this declaration, but before any judgment or decree for the payment of
moneys due will have been obtained or entered unless the same has been
discharged:
(1) all defaults under the indenture (other than the payment of
principal and interest due and payable solely by reason of the
declaration) will be cured to the satisfaction of the
indenture trustee or provision deemed by the indenture trustee
to be adequate will be made; and
(2) the following amounts will either be paid by or for the
account of the issuer or provision satisfactory to the
indenture trustee will be made for the payment:
(a) all overdue installments of interest on:
- the senior notes if senior notes are outstanding,
or
- the subordinate notes if no senior notes are
outstanding, and
(b) the reasonable and proper charges, expenses and
liabilities of the indenture trustee, any exchange
counterparty and the holders and their respective agents
and attorneys, and all other sums then payable by the
issuer under the indenture (except the principal of and
interest accrued since the next preceding distribution
date on the notes due and payable solely by virtue of
this declaration);
then, the holders of at least a majority of the aggregate principal amount of
the outstanding directing notes, by written notice to the issuer and to the
indenture trustee, may rescind the declaration and annul an event of
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default, or, if the indenture trustee has acted with respect to the notes
without a direction from the holders of at least a majority in aggregate
principal amount of the outstanding directing notes and has not received written
direction to the contrary by the holders of at least a majority in aggregate
principal amount of the outstanding directing notes, then the indenture trustee
may annul a declaration and any default by written notice to the issuer. No
rescission and annulment will extend to or affect any subsequent event of
default or impair or exhaust any right or power with respect to the outstanding
directing notes.
On any declaration of acceleration of the notes, the indenture trustee will give
notice of the declaration and its consequences to the holders and to any related
exchange counterparty as described in the indenture. Interest and carryover
interest will cease to accrue on these notes from and after the date set forth
in the notice (which will be not more than five days from the date of a
declaration).
Prior to a declaration accelerating the maturity of the notes as provided above,
the holders of at least two-thirds in aggregate principal amount of the
outstanding directing notes and each exchange counterparty that is not in
default or their attorneys-in-fact duly authorized may on behalf of the holders
of all notes issued under the indenture and each exchange counterparty waive any
past failure under the indenture and its consequences with respect to the notes,
except a failure in payment of the principal of or interest on any of the notes.
Application of Moneys
If (A) an event of default has occurred and is continuing, and (B) at any time
the moneys held by the indenture trustee is insufficient for the payment of
principal and interest then due on the notes or for the payment of any issuer
exchange payment, then these moneys and all available funds received or
collected by the indenture trustee from the trust or otherwise for the benefit
or for the account of holders or an exchange counterparty (other than moneys
held for the payment or redemption of particular notes, which shall be applied
solely to the payment of principal and interest to holders other than the
issuer, the depositor, the administrator or their affiliates) will be applied
first to the payment of the reasonable and proper fees and expenses of the
indenture trustee and other expenses as are necessary in the judgment of the
indenture trustee to prevent loss of available funds and to protect the
interests of the holders and/or each exchange counterparty, and as follows:
(1) If the principal of all of the notes issued under the indenture has
not become or been declared due and payable:
FIRST, to the payment of all installments of interest then due on
the senior notes, with interest on overdue principal at the rates
borne by the senior notes, and to all senior issuer exchange
payments then due, in the order that the installments and/or senior
issuer exchange payments will have become due, and, if the amounts
available are not sufficient to pay all installments and senior
issuer exchange payments coming due on the same date, then these
payments to be made ratably to the parties entitled to these
payments without discrimination or preference;
SECOND, to the payment of the unpaid holders' principal distribution
amount and/or principal due and unpaid on the senior notes at the
time of the payment, these payments to be made ratably to the
parties entitled to these payments without discrimination or
preference;
THIRD, to the payment of all installments of interest then due on
the subordinate notes, with interest on overdue principal at the
rates borne by the subordinate notes, and to all
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subordinate issuer exchange payments then due, in the order that the
installments and/or subordinate issuer exchange payments will have
become due, and, if the amounts available are not sufficient to pay
all installments of interest and subordinate issuer exchange
payments coming due on the same date, then these payments to be made
ratably to the parties entitled to these payments without
discrimination or preference; and
FOURTH, to the payment of the unpaid holders' principal distribution
amount and/or principal due and unpaid on the subordinate notes at
the time of the payment, these payments to be made ratably to the
parties entitled to these payments without discrimination or
preference.
Payment of carryover interest will be paid only in accordance with
the priority of payments as described in the related prospectus
supplement, following FIRST through FOURTH. See "The Indenture --
Collection Fund" in the related prospectus supplement.
(2) If the principal of all of the notes issued under the indenture has
become or has been declared due and payable:
FIRST, to the payment of all principal and interest then due and
unpaid on the senior notes and all senior issuer exchange payments
then due, these payments to be made ratably to the parties entitled
to these payments without discrimination or preference;
SECOND, to the payment of all principal and interest then due and
unpaid on the subordinate notes and all subordinate issuer exchange
payments then due, these payments to be made ratably to the parties
entitled to these payments without discrimination or preference;
THIRD, to the payment of all carryover interest due and unpaid on
the senior notes, these payments to be made ratably to the parties
entitled to these payments without discrimination or preference; and
FOURTH, to the payment of all carryover interest due and unpaid on
the subordinate notes, these payments to be made ratably to the
parties entitled to these payments without discrimination or
preference.
Remedies on Default
Whenever moneys are to be applied as above, regardless of whether other
authorized remedies have been pursued, the indenture trustee may sell, with or
without entry, all or part of the trust and all right, title, interest, claim
and demand to the assets of the applicable trust and the right of redemption
these assets, at any place or places, and at the time or times and notice and
terms as may be required by law. On a sale, the indenture trustee may make and
deliver to the purchaser or purchasers a good and sufficient assignment or
conveyance for the same, which sale shall be a perpetual bar both at law and in
equity against the issuer and all parties claiming these properties. No
purchaser at any sale shall be bound to see to the application of the purchase
money or to inquire as to the authorization, necessity, expediency or regularity
of any sale. The issuer and the eligible lender trustee, if so requested by the
indenture trustee, shall ratify and confirm any sale or sales by executing and
delivering to the indenture trustee or to the purchaser or purchasers all
instruments as may be necessary, or in the judgment of the indenture trustee
and/or the eligible lender trustee, proper for the purpose which may be
designated in a request. The indenture trustee shall not sell or permit the sale
or
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assignment of any financed student loan or any interest in any financed student
loan as a part of the trust to any party who is not an eligible lender under the
Higher Education Act.
If an event of default has occurred and is continuing, then the indenture
trustee, either in its own name, as trustee of an express trust, as
attorney-in-fact for the related holders and/or each exchange counterparty or in
any one or more of the capacities by its agents and attorneys, is entitled and
empowered:
- to institute proceedings at law or in equity for the
collection of all sums due in connection with the notes and
any issuer exchange payment and
- to protect and enforce its rights and the rights of the
holders and/or each exchange counterparty under the indenture,
whether for any specific performance of any covenant contained
in the indenture, in aid of the execution of any power therein
granted, for an accounting as trustee of any express trust, or
in the enforcement or any legal or equitable right as the
indenture trustee, being advised by counsel, deems most
effectual to enforce any of its rights or to perform any of
its duties.
The indenture trustee is entitled and empowered either in its own name, as a
trustee of an express trust, or as attorney-in-fact for the holders and each
exchange counterparty, or in any one or more capacity, to file proof of debt,
claim, petition or other document as may be necessary or advisable in order to
have the claims of the indenture trustee, the holders and any related exchange
counterparty allowed in any equity, receivership, insolvency, bankruptcy,
liquidation, readjustment, reorganization or other similar proceedings.
An indenture trustee, at the written request of holders of at least a majority
in aggregate principal amount of the outstanding directing notes and when
furnished with reasonable security and indemnity, will take steps and institute
suits, actions or proceedings for the protection and enforcement of the rights
of any exchange counterparty or the holders, as the case may be, to collect any
amount due and owing from the issuer or by injunction or other appropriate
proceeding in law or in equity to obtain other appropriate relief.
No holder or exchange counterparty, if any, will have the right to institute any
proceeding with respect to the indenture unless:
(1) the holder or exchange counterparty previously shall have
given to the indenture trustee written notice of a continuing
event of default;
(2) with respect to any exchange counterparty, the exchange
counterparty is not in default of its obligations under its
exchange agreement, all obligations of all of the parties to
the agreement have not been satisfied, and the agreement has
not been terminated;
(3) the holders of not less than a majority in aggregate principal
amount of the outstanding directing notes have requested in
writing that the indenture trustee institute proceeding in its
own name as indenture trustee;
(4) the holders have offered the indenture trustee reasonable
indemnity;
(5) the indenture trustee has for a period of 30 days after notice
failed to institute a proceeding; and
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(6) no direction inconsistent with the written request has been
given to the indenture trustee during a 30-day period by the
holders of a majority in aggregate principal amount of the
outstanding directing notes.
Remedies Not Exclusive
The remedies conferred on or reserved to the indenture trustee, the noteholders
or any exchange counterparty in the indenture are not intended to be exclusive
of any other remedy, but each and every remedy will be cumulative and will be in
addition to every other remedy given under the indenture or existing at law or
in equity or by statute on or after the date of adoption of the indenture.
AMENDMENT AND SUPPLEMENTAL INDENTURES
Without Consent of Holders. The issuer, the eligible lender trustee and the
indenture trustee, and, except with respect to item (14) below, with written
confirmation from each rating agency then rating the notes that execution of the
proposed supplemental indenture will not adversely affect the rating of any
rating agency on the notes, from time to time and at any time without the
consent or concurrence of any holder, may execute a supplemental indenture for
any one or more of the following purposes:
(1) To make any changes or corrections in the indenture as are
required for the purpose of curing or correcting any ambiguity
or defective or inconsistent provision or omission or mistake
or manifest error contained in the indenture or to insert in
the indenture provisions clarifying matters or questions
arising under the indenture as are necessary or desirable;
(2) To add additional covenants and agreements of the issuer for
the purpose of further securing the payment of the notes;
(3) To surrender any right, power or privilege reserved to or
conferred on the issuer by the terms of the indenture,
(4) To confirm as further assurance any lien, pledge, security
interest, assignment or charge, or the subjection to any lien,
pledge, security interest, assignment or charge, created or to
be created by the provisions of the indenture;
(5) To grant to or confer on the holders any additional rights,
remedies, powers, authority or security that lawfully may be
granted to or conferred on them, or to grant to or to confer
on the indenture trustee for the benefit of the holders or any
exchange counterparty any additional rights, duties, remedies,
powers or authority;
(6) To make amendments to the indenture as are required to permit
the issuer fully to comply with the Higher Education Act or as
required in order for the indenture, as amended by
supplemental indenture, not to be contrary to the terms of the
Higher Education Act;
(7) To make amendments to the indenture as may be necessary or
convenient to provide for issuance of the notes in coupon form
or issuance and registration of the notes in book-entry form
and to provide for other related provisions of the notes:
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(8) To modify, amend or supplement the indenture or any supplement
to the indenture in this manner as to permit the qualification
of the indenture under the Trust Indenture Act of 1939 or any
similar federal statute hereafter in effect, and, if the
issuer and the indenture trustee so determine, to add to the
indenture or any supplement to indenture, other terms,
conditions and provisions as may be permitted by said Trust
Indenture Act of 1939 or similar federal statute, and which
will not materially adversely affect the interests of the
holders of the notes;
(9) To authorize the establishment of agreements providing for the
pledge of specific funds to other indentures, and for the
pledge of specific funds under other indentures to the
indenture;
(10) To permit any changes or modifications of the indenture
required by (a) a rating agency to maintain the outstanding
rating on the notes or (b) by the issuer of (A) a policy of
bond insurance or (B) any similar financial guaranty insuring
the payment of the principal of and interest on any notes to
obtain an internal rating of at least investment grade or as a
condition of the issuance of insurance or guaranty;
(11) To make the terms and provisions of the indenture, including
the lien and security interest granted therein, applicable to
an interest rate exchange agreement;
(12) To make amendments to the indenture as may be necessary to
permit the issuer to make loans under the Higher Education
Act;
(13) To provide for the issuance of credit enhancement, including,
but not limited to, a policy or policies of bond insurance
with respect to the notes;
(14) To add any additional eligible lender trustee or replace any
existing eligible lender trustee; and
(15) To make any other amendment which, in the judgment of the
indenture trustee, is not to the material prejudice of the
indenture trustee, the holders or any exchange counterparty.
The issuer, each eligible lender trustee and the indenture trustee, from time to
time and at any time without the consent or concurrence of any holder may
execute a supplemental indenture, if the issuer determines that the provisions
of a supplemental indenture are necessary or desirable to maximize available
funds.
With Consent of Holders and Exchange Counterparties. The issuer, each eligible
lender trustee and the indenture trustee from time to time and at any time may
execute a supplemental indenture, with the prior written consent of the holders
of not less than a majority in aggregate principal amount of the outstanding
directing notes under the indenture (or, with respect to any change affecting
only specific series of notes, the holders of a majority in aggregate principal
amount of the outstanding notes of this series) for the purpose of adding any
provisions to, or changing in any manner or eliminating any of the provisions
of, the indenture, or modifying or amending the rights and obligations of the
issuer, or modifying or amending in any manner the rights of an exchange
counterparty or the holders of outstanding notes; provided, however, that,
without the specific consent of the holder of each note which would be affected
thereby, no supplemental indenture amending or supplementing the provisions of
the indenture may:
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(1) change the legal final maturity for the payment of the
principal of any note or any date for the payment of interest
on the notes, or reduce the principal amount of any note or,
except on an interest determination date, the interest rate on
the notes;
(2) reduce the aforesaid proportion of notes the holders of which
are required to consent to any supplemental indenture amending
or supplementing the provisions of the indenture;
(3) except as shall otherwise be provided in the indenture, give
to any note any preference over any other note secured
thereby; or
(4) except as shall otherwise be provided in the indenture,
authorize the creation of any pledge of the assets of the
trust prior, superior or equal to, or deprive the holders or
any exchange counterparty of, the pledge, lien, security
interest and assignment created in the indenture for the
payment of the notes or any issuer exchange payment.
DEFEASANCE
The obligations of the issuer under the indenture and the liens, pledges,
security interests, charges, trusts, assignments, covenants and agreements of
the issuer and each eligible lender trustee therein made or provided for, will
be fully discharged and satisfied as to (a) any note issued under the indenture,
when either of items (1) or (2) below shall have occurred; (b) any program
operating expenses, when item (3) shall have occurred; (c) any related interest
rate exchange agreement, when item (4) shall have occurred; (d) carryover
interest, when item (5) below shall have occurred, and the note, program
operating expense, interest rate exchange agreement, or carryover interest will
no longer be deemed to be outstanding thereunder (provided, however, that the
indenture will not be deemed to be defeased until all of the following have
occurred):
(1) when the note has been canceled;
(2) as to any note not canceled, when payment of the principal of
this note, plus interest on the principal to the due date of
the note (whether the due date is by reason of maturity or on
redemption, or otherwise), either:
(a) has been made or caused to be made under the terms of
the note; or
(b) has been provided for by an irrevocable deposit with the
indenture trustee or the authenticating agent, which is
irrevocably appropriated and set aside exclusively for
this payment, and which is derived from a source which
is not a transfer of property voidable under Sections
544 or 547 of the United States Bankruptcy Code, should
the issuer be a debtor under this code, (accompanied by
an opinion of counsel experienced in bankruptcy matters
to that effect) of,
- moneys sufficient to make this payment, and/or
- eligible investments (which for this purpose shall
include only those obligations which are described
in item (a) of the definition of eligible
investments and which are not subject to call for
redemption prior to maturity), maturing as to
principal and interest in these amounts and at
times as will insure the availability of
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sufficient moneys to make this payment, the
sufficiency of said moneys or eligible investments
to be verified in writing by a firm of independent
certified public accountants;
(3) all program operating expenses then owed by the issuer,
including related necessary and proper fees, compensation and
expenses of the indenture trustee, each eligible tender
trustee and the authenticating agent when they have been paid
or the payment of program operating expenses provided for to
the satisfaction of the indenture trustee;
(4) in the case of payment of any issuer exchange payment and the
applicable interest rate exchange agreement, when payment of
all issuer exchange payments due and payable to each exchange
counterparty under its respective interest rate exchange
agreement has been made or duly provided for to the
satisfaction of each exchange counterparty and each interest
rate exchange agreement has been terminated; and
(5) in the case of payment of any amount of carryover interest,
when the first of the following occurs:
(a) payment of all carryover interest that has accrued and
remains unpaid has been made or duly provided for to the
satisfaction of the indenture trustee, or
(b) all amounts held in the related funds and accounts under
the indenture which are available under the provisions
of the indenture to pay carryover interest have been
paid out, and no further amounts, or assets the proceeds
of which could be used to pay carryover interest, are so
available under the indenture to make payment of
carryover interest.
NONPRESENTMENT
The issuer will have no liability for payment if a holder does not present any
note for payment when the principal of the note becomes due, whether at maturity
or at the date fixed for the redemption of the note, or otherwise, if the
indenture trustee holds on the due date moneys and/or eligible investments, in
trust sufficient and available to pay the principal of the note, together with
all interest due on the principal to the due date of the note (including any
carryover interest), or to the date fixed for redemption of the note, as the
case may be. Afterwards, the indenture trustee is obligated to hold moneys
and/or eligible investments in trust for the benefit of the holder of the note
but is not liable to the holder of that note for interest. The holder of the
note will be restricted exclusively to the moneys and/or eligible investments,
for any claim of whatever nature on its part on or with respect to that note,
including any claim for the payment of the note. If any moneys and/or eligible
investments held by the indenture trustee are unclaimed by the holders of these
notes 4 years after the principal of the respective notes with respect to which
moneys and/or eligible investments have been so set aside, has become due and
payable (whether at maturity or on redemption or otherwise), moneys and/or
eligible investments will be paid to the issuer free from the trusts created by
the indenture, and all liabilities of the indenture trustee with respect to
moneys and/or eligible investments will cease. If this happens, the holders will
be deemed to be general unsecured creditors of the issuer for the amounts so
paid to the issuer (without interest), subject to any applicable statute of
limitation.
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REMOVAL OF THE INDENTURE TRUSTEE; RESIGNATION; SUCCESSORS
The indenture trustee may be removed at any time with or without cause by the
written direction or on affirmative vote of the holders of a majority in
aggregate principal amount of the outstanding directing notes under the
indenture or their attorneys-in-fact duly authorized.
In case at any time any of the following occurs:
(1) the indenture trustee has or shall fail to comply with specific
obligations imposed on it under the Trust Indenture Act of 1939
with respect to notes of any series after written request
therefor by the issuer or any holder of the series who has been
a bona fide holder of a note of this series for at least 6
months;
(2) the indenture trustee ceases to be eligible under the
provisions of the indenture and fails to resign after written
request therefor has been given to the indenture trustee by the
issuer or by any holder; or
(3) the indenture trustee becomes incapable of acting, or is
adjudged a bankrupt or insolvent or a receiver of the indenture
trustee or of its property is appointed, or any public officer
takes charge or control of the indenture trustee or of its
property or affairs for the purpose of reorganization,
conservation or liquidation;
then, the issuer may remove the indenture trustee by an instrument in writing,
or, subject to specific provisions of the Trust Indenture Act of 1939, any
holder may, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the indenture trustee. The
court may, after notice, if any, as it may deem proper and prescribe and as may
be required by law, remove the indenture trustee.
The indenture trustee may resign by giving not less than 60 days' written notice
to the issuer.
A successor trustee may be appointed by the holders of not less than a majority
in aggregate principal amount of the outstanding directing notes under the
indenture by an instrument or concurrent instruments in writing signed by the
holders or their attorneys-in-fact duly authorized. If at any time there is a
vacancy in the office of the indenture trustee, the issuer, by an instrument in
writing, will appoint a successor to fill the vacancy until a new indenture
trustee is appointed by the holders as described above. Any successor trustee
must meet the qualifications set forth in the indenture.
FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a summary that constitutes the opinion of Thompson Hine &
Flory LLP as to all material federal income tax consequences of the purchase,
ownership and disposition of the notes. Thompson Hine & Flory LLP is of the
opinion that the descriptions of the law and legal conclusions contained in this
summary are correct in all material respects and the discussions hereunder
fairly summarize the federal income tax considerations that are material to the
holders. The discussion is based on the provisions of the Internal Revenue Code
of 1986, as amended, the Treasury Regulations promulgated thereunder, and the
judicial and administrative rulings and decisions now in effect, all of which
are subject to change or possible differing interpretations. However, the
Internal Revenue Service may disagree with some aspects of the discussion below.
The statutory provisions, regulations, and interpretations on which this
discussion is based are subject
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to change, and a change in one or more of them could apply retroactively. No
ruling on any of the tax matters discussed below will be sought from the
Internal Revenue Service.
THE DISCUSSION DOES NOT DEAL WITH ALL ASPECTS OF FEDERAL INCOME TAXATION THAT
MAY AFFECT PARTICULAR INVESTORS IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES, NOR
WITH SPECIFIC CATEGORIES OF INVESTORS SUBJECT TO SPECIAL TREATMENT UNDER THE
FEDERAL INCOME TAX LAWS. FOR EXAMPLE, IT DOES NOT DISCUSS THE TAX TREATMENT OF
HOLDERS THAT ARE INSURANCE COMPANIES, REGULATED INVESTMENT COMPANIES OR DEALERS
IN SECURITIES. THIS DISCUSSION FOCUSES PRIMARILY ON INVESTORS WHO WILL HOLD
NOTES AS CAPITAL ASSETS (GENERALLY HELD FOR INVESTMENT) WITHIN THE MEANING OF
SECTION 1221 OF THE INTERNAL REVENUE CODE, BUT MUCH OF THE DISCUSSION IS
APPLICABLE TO OTHER INVESTORS AS WELL. THE DISCUSSION DOES NOT ADDRESS THE
ANTICIPATED STATE INCOME TAX CONSEQUENCES TO INVESTORS OF OWNING AND DISPOSING
OF THE NOTES. CONSEQUENTLY, WE ENCOURAGE POTENTIAL PURCHASERS OF NOTES TO
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE OR LOCAL TAX
CONSEQUENCES TO THEM OF THE PURCHASE, HOLDING, AND DISPOSITION OF THE NOTES.
PAYMENTS RECEIVED ON NOTES
Payments received by holders on the notes will be accorded the same tax
treatment under the Internal Revenue Code as payments received on other taxable
debt instruments. Except as described below for notes issued with original issue
discount, acquired with market discount, or issued or acquired at a premium,
interest paid or accrued on a note will be treated as ordinary income to the
holder and a principal payment on a note will be treated as a return of capital.
Interest paid to holders who report their income on the cash receipts and
disbursements method should be taxable to them when received. Interest earned by
holders who report their income on the accrual method will be taxable when
accrued, regardless of when it is actually received. The indenture trustee will
report annually to the Internal Revenue Service and to holders of record with
respect to interest paid or accrued, and original issue discount and market
discount, if any, accrued, on the notes.
SUBORDINATION
One or more series of notes may be subordinated to one or more other series of
notes issued under the same indenture.
THIS SUBORDINATION WILL NOT AFFECT THE FEDERAL INCOME TAX TREATMENT OF EITHER
THE SUBORDINATED OR THE SENIOR NOTES. WE ENCOURAGE EMPLOYEE BENEFIT PLANS
SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, TO
CONSULT THEIR TAX ADVISORS BEFORE PURCHASING ANY SUBORDINATED NOTE. SEE "ERISA
CONSIDERATIONS" IN THIS PROSPECTUS AND "SUMMARY OF TERMS-ERISA CONSIDERATIONS"
IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
Based on the assumptions and representations of the depositor and the trust
described in the following sentence, in the opinion of Thompson Hine & Flory
LLP, the notes will be characterized as debt for federal income tax purposes.
The assumptions and representations upon which the above opinion is based are:
(1) the pertinent provisions of the Internal Revenue Code, the
Treasury Regulations promulgated thereunder, and the judicial
and administrative rulings and decisions now in effect will
remain in effect and will not otherwise be amended, revised,
reversed, or overruled;
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(2) the eligible lender trust agreement, the indenture, the notes,
and the servicing agreements are executed and delivered in
substantially the form as attached as exhibits to this
prospectus;
(3) there are no changes to the terms of the notes; and
(4) the depositor, the trust, and the holders treat the notes as
indebtedness of the depositor for federal income tax purposes.
This opinion will not be binding on the courts or the Internal Revenue Service.
The depositor, the trust and the holders, by accepting the notes have agreed to
treat the notes as indebtedness of the depositor for federal income tax
purposes. Both the depositor and the trust intend to treat this transaction as a
financing reflecting the notes as indebtedness for tax and financial accounting
purposes.
Tax Consequences If Notes Are Characterized As Equity
Contrary to the opinion of Thompson Hine & Flory LLP, the Internal Revenue
Service might assert that the notes do not represent debt for federal income tax
purposes, but rather the notes should be treated as equity interests in the
trust. Even if the Internal Revenue Service were to assert successfully that the
notes should not be characterized as debt for federal income tax purposes, in
the opinion of Thompson Hine & Flory LLP based on the representation of both the
trust and the depositor, described in the following sentence, although the trust
might be treated as a publicly traded partnership, it would not be taxable as a
corporation. Both the trust and the depositor have represented that for 1999 and
for any subsequent taxable year 90% or more of the gross income of the
depositor, and the trust if treated as a separate entity, will be interest
income attributable to loans acquired by either the depositor or the trust and
not attributable to loans originated by either the depositor or the trust.
If the notes were treated as equity interests in a publicly traded partnership,
some holders could suffer adverse tax consequences. For example, income to
tax-exempt entities (including pension funds) would be "unrelated business
taxable income," income to foreign holders would be subject to U.S. tax and U.S.
tax return filing and withholding requirements, and individual holders might be
subject to some limitations on their ability to deduct their share of trust
expenses. Furthermore, this characterization could subject holders to state and
local taxation in jurisdictions in which they are not currently subject to tax.
CHARACTERIZATION OF THE TRUST
In the opinion of Thompson Hine & Flory LLP, for federal income tax purposes,
the trust established under each indenture will not be treated as an entity
separate from the depositor and thus will not be classified as a separate entity
that is an association (or a publicly traded partnership) taxable as a
corporation. However, the Internal Revenue Service might assert that the trust
is a separate entity from the depositor for federal income tax purposes. If for
federal income tax purposes the trust were instead treated as an entity separate
from the depositor, the trust might be treated as a partnership among the
related holders, and, possibly, the depositor as well. In the opinion of
Thompson Hine & Flory LLP, based on the representation of both the trust and the
depositor described in "-- Tax Consequences If Notes Are Characterized As
Equity," the resulting partnership would not be subject to federal income tax as
a publicly traded partnership taxable as a corporation. Rather, each holder
would be taxed individually on their respective distributive shares of the
partnership's income, gain, loss, deductions and credits. This opinion will not
be binding on the courts or the
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Internal Revenue Service. The amount and timing of items of income and deduction
of the holders may differ if the notes were held to constitute partnership
interests, rather than indebtedness.
The Internal Revenue Service, however, might assert that one or more of the
activities of the trust constitutes a financial business so that the qualifying
income tests are not met. If qualifying income tests are not met, the trust
would constitute a publicly traded partnership taxable as a corporation. If it
were determined that the transaction results in the trust being classified as a
corporation or a publicly traded partnership treated as an association taxable
as a corporation, the trust would be subject to federal income tax at corporate
income tax rates on the income it derives from the financed student loans and
other assets, which would reduce the amounts available for payment to the
related holders. Cash payments to these holders would be treated as dividends
for tax purposes to the extent of the publicly traded partnership's or
corporation's earnings and profits.
ORIGINAL ISSUE DISCOUNT
Notes issued at a price less than their stated principal amount (i.e., discount
notes), notes on which interest is accrued and is compounded and added to the
principal balance of the notes periodically (i.e., accretion notes), and other
series of notes will be issued with "original issue discount" within the meaning
of Section 1273(a) of the Internal Revenue Code. Original issue discount will
equal the difference between the "stated redemption price at maturity" of the
note (generally, its principal amount) and its issue price. Original issue
discount is treated as ordinary interest income, and holders of notes with
original issue discount must include the amount of original issue discount in
income on an accrual basis in advance of the receipt of the cash to which it
relates.
The amount of original issue discount required to be included in a holder's
income in any taxable year will be computed under Section 1272(a)(6) of the
Internal Revenue Code, which provides rules for the accrual of original issue
discount for debt instruments, such as the notes, that are subject to prepayment
by reason of prepayments of underlying debt obligations. No regulatory guidance
currently exists under Section 1272(a)(6) of the Internal Revenue Code.
Accordingly, until the U.S. Treasury Department issues guidance to the contrary,
the issuer or other person responsible for computing the amount of original
issue discount to be reported to a holder each taxable year (i.e., the tax
administrator), except as otherwise provided in this prospectus, expects to base
its computations on Section 1272(a)(6) of the Internal Revenue Code and final
Treasury Regulations governing the accrual of original issue discount on debt
instruments (i.e., the OID Regulations). The amount and rate of accrual of
original issue discount on a note will be calculated by the tax administrator
based on:
- a single constant yield to maturity, and
- the prepayment rate of the financed student loans and the
reinvestment rate on amounts held pending distribution that
were assumed in pricing the note (i.e., the pricing prepayment
assumptions).
Investors should be aware, however, that the OID Regulations do not address
directly the treatment of instruments that are subject to Section 1272(a)(6) of
the Internal Revenue Code, and, accordingly, there can be no assurance that this
methodology, which is described below, represents the correct manner of
calculating original issue discount on the notes. The tax administrator intends
to account for income on notes that provide for one or more contingent payments
as described in "-- Variable Rate Notes."
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Computation of Original Issue Discount
The amount of original issue discount on a note equals the excess, if any, of
the note's "stated redemption price at maturity" over its "issue price." Under
the OID Regulations, a debt instrument's stated redemption price at maturity is
the sum of all payments provided by the instrument other than "qualified stated
interest," i.e., deemed principal payments. Qualified stated interest, in
general, is stated interest that is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually at (1) a single
fixed rate or (2) a variable rate that meets specific requirements set out in
the OID Regulations. See "-- Variable Rate Notes." Thus, in the case of any note
providing for this stated interest other than an accretion note, the stated
redemption price at maturity generally will equal the total amount of all deemed
principal payments due on that note. Because an accretion note generally does
not require unconditional payments of interest at least annually, the stated
redemption price at maturity this note will equal the aggregate of all payments
due, whether designated as principal, accrued interest, or current interest. The
issue price of a series of notes generally will equal the initial price at which
the series is sold to the public.
De Minimis Rule
Under a de minimis rule, a note will be considered to have no original issue
discount if the amount of original issue discount is less than 0.25% of the
note's stated redemption price at maturity multiplied by the weighted average
maturity of the note. No Treasury Regulations have been issued with respect to
computing the weighted average maturity of instruments like a note. The tax
administrator will compute the weighted average maturity of a note as equaling
the sum of the amounts obtained by multiplying the number of complete years from
the note's issue date until the payment is made by a fraction, the numerator of
which is the amount of each deemed principal payment, and the denominator of
which is the note's stated redemption price at maturity. A holder will include
de minimis original issue discount in income on a pro rata basis as stated
principal payments on the note are received or, if earlier, on disposition of
the note, unless the holder makes the election described below in "All Original
Issue Discount Election."
Teaser Notes
Notes of a series may bear interest under terms that provide for a teaser rate
period, interest holiday, or other period during which the rate of interest
payable on the notes is lower than the rate payable during the remainder of the
life of the notes (i.e., teaser notes). The OID Regulations provide a more
expansive test under which a teaser note may be considered to have a de minimis
amount of original issue discount even though the amount of the original issue
discount on the note would be more than de minimis as determined under the
regular test. The expanded test applies to a teaser note only if the stated
interest on the note would be qualified stated interest but for the fact that
during one or more accrual periods its interest rate is below the rate
applicable for the remainder of its term. Under the expanded test, the amount of
original issue discount on a teaser note that is measured against the de minimis
amount of original issue discount allowable on the note is the greater of (1)
the excess of the stated principal amount of the note over its issue price and
(2) the amount of additional stated interest that would be necessary to be
payable on the note in order for all stated interest.
Computation of Daily Portions of Original Issue Discount
The holder of a note must include in gross income the sum, for all days during
his taxable year on which he holds the note, of the "daily portions" of the
original issue discount on the note. The daily portions of original
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issue discount with respect to a note will be determined by allocating to each
day in any accrual period the note's ratable portion of the excess, if any, of:
(1) the sum of (a) the present value of all payments under the
note yet to be received as of the close of this period and (b)
the amount of any deemed principal payments received on the
note during this period, OVER
(2) the note's "adjusted issue price" at the beginning of this
period.
The present value of payments yet to be received on a note will be computed by
using the pricing prepayment assumptions and the note's original yield to
maturity (adjusted to take into account the length of the particular accrual
period), and taking into account deemed principal payments actually received on
the note prior to the close of the accrual period. The adjusted issue price of a
note at the beginning of the first accrual period is its issue price.
The adjusted issue price at the beginning of each subsequent period is the
adjusted issue price of the note at the beginning of the preceding period
increased by the amount of original issue discount allocable to that period and
decreased by the amount of any deemed principal payments received during that
period. Thus, an increased (or decreased) rate of prepayments received with
respect to a note will be accompanied by a correspondingly increased (or
decreased) rate of recognition of original issue discount by the holder of the
note.
The yield to maturity of a note will be calculated based on
(1) the pricing prepayment assumptions; and
(2) any contingencies not already taken into account under the
pricing prepayment assumptions that, considering all the facts
and circumstances as of the issue date, are significantly more
likely than not to occur.
Contingencies, such as the exercise of "mandatory redemptions," that are taken
into account by the parties in pricing the note typically will be subsumed in
the pricing prepayment assumptions and thus will be reflected in the note's
yield to maturity.
Optional Redemption
The notes of a series may be subject to optional redemption by the issuer before
their legal final maturities. Under the OID Regulations, the issuer will be
presumed to exercise its option to redeem for purposes of computing the accrual
of original issue discount if, and only if, by using the optional redemption
date as the maturity date and the optional redemption price as the stated
redemption price at maturity, the yield to maturity of the notes is lower than
it would be if the notes were not redeemed early. If the issuer is presumed to
exercise its option to redeem the notes, original issue discount on these notes
will be calculated as if the redemption date were the maturity date and the
optional redemption price were the stated redemption price at maturity. In cases
in which all of the notes of a particular series are issued at par or at a
discount, the issuer will not be presumed to exercise its option to redeem the
notes because a redemption by the issuer would not lower the yield to maturity
of the notes.
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If, however, some notes of a particular series are issued at a premium, the
issuer may be able to lower the yield to maturity of the notes by exercising its
redemption option. In determining whether the issuer will be presumed to
exercise its option to redeem notes when one or more series of the notes are
issued at a premium, the tax administrator will take into account all series of
notes that are subject to the optional redemption to the extent that they are
expected to remain outstanding as of the optional redemption date, based on the
pricing prepayment assumptions. If, determined on a combined weighted average
basis, the notes of the series were issued at a premium, the tax administrator
will presume that the issuer will exercise its option. However, the OID
Regulations are unclear as to how the redemption presumption rules should apply
to instruments such as the notes, and there can be no assurance that the
Internal Revenue Service will agree with the tax administrator's position.
All Original Issue Discount Election
The OID Regulations provide that a holder may make an election to include in
gross income all stated interest, acquisition discount, original issue discount,
de minimis original issue discount, market discount (see "-- Market Discount"),
de minimis market discount that accrues on the note, and unstated interest (as
reduced by any amortizable premium, "-- Amortizable Premium") under the constant
yield method used to account for original issue discount. To make this election,
the holder of the note must attach a statement to its timely filed federal
income tax return for the taxable year in which the holder acquired the note.
The statement must identify the instruments to which the election applies. An
election is irrevocable unless the holder obtains the consent of the Internal
Revenue Service.
If an election is made for a debt instrument with market discount, the holder is
deemed to have made an election to include in income currently the market
discount on all of the holder's other debt instruments with market discount. See
"-- Market Discount." In addition, if an election is made for a debt instrument
with amortizable premium, the holder is deemed to have made an election to
amortize the premium on all of the holder's other debt instruments with
amortizable premium under the constant yield method. See "-- Amortizable
Premium." Holders should be aware that the law is unclear as to whether an
election is effective for a note that is subject to the contingent payment
rules. See "-- Variable Rate Notes."
Subsequent Holder
A note having original issue discount may be acquired in a transaction
subsequent to its issuance for more than its adjusted issue price. If the
subsequent holder's adjusted basis in a note, immediately after its acquisition,
exceeds the sum of all deemed principal payments to be received on the note
after the acquisition date, the note will no longer have original issue
discount, and the holder may be entitled to reduce the amount of interest income
recognized on the note by the amount of amortizable premium. See "-- Amortizable
Premium."
If the subsequent holder's adjusted basis in the note immediately after the
acquisition exceeds the adjusted issue price of the note, but is less than or
equal to the sum of the deemed principal payments to be received under the note
after the acquisition date, the amount of original issue discount on the note
will be reduced by a fraction, the numerator of which is the excess of the
note's adjusted basis immediately after its acquisition over the adjusted issue
price of the note and the denominator of which is the excess of the sum of all
deemed principal payments to be received on the note after the acquisition date
over the adjusted issue price of the note. Alternately, the subsequent purchaser
of a note having original issue discount may make the election described above
in "-- All Original Issue Discount Election" with respect to the note.
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Original Issue Discount On Teaser Notes For The First Distribution Period
If the interval period between the issue date of a note that pays interest at
the series interest rate on a current basis and the first distribution date
contains more days than the number of days of stated interest that are payable
on the first distribution date, the effective interest rate received by the
holder during the interval period will be less than the note's stated interest
rate making the note a teaser note. If the amount of original issue discount on
the note measured under the expanded de minimis test (see "-- Teaser Notes")
exceeds the de minimis amount of original issue discount allowable on the note,
the amount by which the stated interest on the note exceeds the interest that
would be payable on the note at the effective rate of interest for the interval
period would be treated as part of the note's stated redemption price at
maturity. Accordingly, the holder of a teaser note may be required to recognize
ordinary income arising from original issue discount attributable to the
interval period in addition to any qualified stated interest that accrues in
that period.
Original Issue Discount On Rate Bubble Notes For The Distribution Period
Similarly, if the interval period is shorter than the number of days between
subsequent distribution dates, the effective rate of interest payable on a note
during the interval period will be higher than the stated rate of interest if a
holder receives interest on the first distribution date based on a full accrual
period. Unless the "pre-issuance accrued interest rule" described below applies,
the note would be issued with original issue discount unless the amount of
original issue discount is de minimis. The amount of original issue discount on
a rate bubble note attributable to the interval period would be the amount by
which the interest payment due on the first distribution date exceeds the amount
that would have been payable had the effective rate for that period been equal
to the stated interest rate. However, under the pre-issuance accrued interest
rule, if:
(1) a portion of the initial purchase price of a rate bubble note
is allocable to interest that has accrued under the terms of
the note prior to its issue date (i.e., pre-issuance accrued
interest); and
(2) the note provides for a payment of stated interest on the
first payment date within one year of the issue date that
equals or exceeds the amount of the pre-issuance accrued
interest, the note's issue price may be computed by
subtracting from the issue price the amount of pre-issuance
accrued interest.
If the holder opts to apply the pre-issuance accrued interest rule, the portion
of the interest received on the first distribution date equal to the
pre-issuance accrued interest would be treated as a return of the interest and
would not be treated as a payment on the note. Thus, where the pre-issuance
accrued interest rule applies, a rate bubble note will not have original issue
discount attributable to the interval period, provided that the increased
effective interest rate for that period is attributable solely to pre-issuance
accrued interest, as typically will be the case.
The tax administrator intends to apply the pre-issuance accrued interest rule to
each rate bubble note for which it is available if the note's stated interest
otherwise would be qualified stated interest. If, however, the interval period
of a rate bubble note is longer than subsequent distribution periods, the
application of the pre-issuance accrued interest rule typically will not prevent
disqualification of the note's stated interest because its effective interest
rate during the interval period typically will be less than its stated interest
rate. A note with a long interval period typically will be a teaser note, as
discussed above. The pre-issuance accrued interest rule will not apply to any
amount paid at issuance for a teaser note that is normally allocable to interest
accrued under
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the terms of the note before its issue date. All amounts paid for a teaser note
at issuance, regardless of how designated, will be included in the issue price
of the note for federal income tax accounting purposes.
IN VIEW OF THE COMPLEXITIES AND CURRENT UNCERTAINTIES AS TO THE MANNER OF
INCLUSION IN INCOME OF ORIGINAL ISSUE DISCOUNT ON THE NOTES, WE ENCOURAGE
POTENTIAL INVESTORS TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
APPROPRIATE AMOUNT AND METHOD OF INCLUSION IN INCOME OF ORIGINAL ISSUE DISCOUNT
ON THE NOTES FOR FEDERAL INCOME TAX PURPOSES.
VARIABLE RATE NOTES
A note may pay interest at a variable rate, i.e., a variable rate note. A
variable rate note that qualifies as a "variable rate debt instrument" as that
term is defined in the OID Regulations will be governed by the rules applicable
to variable rate debt instruments in the OID Regulations, which are described
below. A variable rate note qualifies as a variable rate debt instrument under
the OID Regulations if:
(1) the note is not issued at a premium to its noncontingent principal
amount in excess of the lesser of:
(a) .015 multiplied by the product of the noncontingent principal
amount and the weighted average maturity of the note, or
(b) 15 percent of the noncontingent principal amount;
(2) stated interest on the note compounds or is payable unconditionally
at least annually at:
(a) one or more qualified floating rates,
(b) a single fixed rate and one or more qualified floating rates,
(c) a single "objective rate," or
(d) a single fixed rate and a single objective rate that is a
"qualified inverse floating rate," and
(3) the qualified floating rate or the objective rate in effect during
an accrual period is set at a current value of that rate (i.e., the
value of the rate on any day occurring during the interval that
begins three months prior to the first day on which that value is in
effect under the note and ends one year following that day).
If the variable rate note provides for any contingent payments (which do not
include qualified stated interest), the tax administrator intends to account for
the income earned on the note as described below.
Qualified Floating Rate
Under the OID Regulations, a rate is a qualified floating rate if variations in
the value of the rate reasonably can be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the debt
instrument is denominated. A qualified floating rate may measure contemporaneous
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variations in borrowing costs for the issuer of the debt instrument or for
depositors in general. A multiple of a qualified floating rate is considered a
qualified floating rate only if the rate is equal to either (a) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate. If a note provides for two or more qualified floating
rates that reasonably can be expected to have approximately the same values
throughout the term of the note, the qualified floating rates together will
constitute a single qualified floating rate. Two or more qualified floating
rates conclusively will be presumed to have approximately the same values
throughout the term of a note, if the values of all the rates on the issue date
of the note are within 25 basis points of each other.
A variable rate will be considered a qualified floating rate if it is subject to
a restriction or restrictions on the maximum stated interest rate (i.e., a cap),
a restriction or restrictions on the minimum stated interest rate (i.e., a
floor), a restriction or restrictions on the amount of increase or decrease in
the stated interest rate (i.e., a governor), or other similar restriction only
if:
(1) the cap, floor, or governor is fixed throughout the term of
the related note; or
(2) the cap, floor, governor, or similar restriction is not
reasonably expected, as of the issue date, to cause the yield
on the note to be significantly less or significantly more
than the expected yield on the note determined without such
cap, floor, governor, or similar restriction, as the case may
be.
Objective Rate
Under the OID Regulations, an objective rate is a rate (other than a qualified
floating rate) that:
(1) is determined using a single fixed formula;
(2) is based on objective financial or economic information; and
(3) is not based on information that either is within the control
of the issuer (or a related party) or is unique to the
circumstances of the issuer (or related party), including
dividends, profits, or the value of the issuer's (or related
party's) stock.
That definition would include a rate that is based on changes in a general
inflation index. In addition, a rate would not fail to be an objective rate
merely because it is based on the credit quality of the issuer.
Fixed Rate Followed By A Variable Rate
Under the OID Regulations if interest on a variable rate note is stated at a
fixed rate for an initial period of less than one year followed by a variable
rate that is either a qualified floating rate or an objective rate for a
subsequent period, and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. A fixed
rate and a variable rate conclusively will be presumed to approximate an initial
fixed rate if the value of the variable rate on the issue date does not differ
from the value of the fixed rate by more than 25 basis points.
Single Rate Variable Rate Debt Instrument Note
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Under the OID Regulations, all interest payable on a variable rate note that
qualifies as a variable rate debt instrument and provides for stated interest
unconditionally payable in cash or property at least annually at a single
qualified floating rate or a single objective rate (i.e., a single rate variable
rate debt instrument note), is treated as qualified stated interest. The amount
and accrual of OID on a single rate variable rate debt instrument note is
determined, in general, by converting the note into a hypothetical fixed rate
note and applying the rules applicable to fixed rate notes described under "--
Original Issue Discount" to the hypothetical fixed rate note. Qualified stated
interest or original issue discount allocable to an accrual period with respect
to a single rate variable rate debt instrument note also must be increased (or
decreased) if the interest actually accrued or paid during the accrual period
exceeds (or is less than) the interest assumed to be accrued or paid during the
accrual period under the related hypothetical fixed rate note.
Multiple Rate Variable Rate Debt Instrument Note
Except as provided below, the amount and accrual of original issue discount on a
variable rate note that qualifies as a variable rate debt instrument but is not
a single rate variable rate debt instrument note (i.e., a multiple rate variable
rate debt instrument note), is determined by converting the note into a
hypothetical equivalent fixed rate note that has terms that are identical to
those provided under the multiple rate variable rate debt instrument note,
except that the hypothetical equivalent fixed rate note will provide for fixed
rate substitutes in lieu of the qualified floating rates or objective rates
provided for under the multiple rate variable rate debt instrument note. A
multiple rate variable rate debt instrument note that provides for a qualified
floating rate or rates or a qualified inverse floating rate is converted to a
hypothetical equivalent fixed rate note by assuming that each qualified floating
rate or the qualified inverse floating rate will remain at its value as of the
issue date. A multiple rate variable rate debt instrument note that provides for
an objective rate or rates is converted to a hypothetical equivalent fixed rate
note by assuming that each objective rate will equal a fixed rate that reflects
the yield that reasonably is expected for the multiple rate variable rate debt
instrument note. Qualified stated interest or original issue discount allocable
to an accrual period with respect to a multiple rate variable rate debt
instrument note must be increased (or decreased) if the interest actually
accrued or paid during the accrual period exceeds (or is less than) the interest
assumed to be accrued or paid during the accrual period under the hypothetical
equivalent fixed rate note.
Under the OID Regulations, the amount and accrual of original issue discount on
a multiple rate variable rate debt instrument note that provides for stated
interest at either one or more qualified floating rates or at a qualified
inverse floating rate and in addition provides for stated interest at a single
fixed rate (other than an initial fixed rate that is intended to approximate the
subsequent variable rate) is determined using the method described above for all
other multiple rate variable rate debt instrument notes except that prior to its
conversion to a hypothetical equivalent fixed rate note, the multiple rate
variable rate debt instrument note is treated as if it provided for a qualified
floating rate (or a qualified inverse floating rate), rather than the fixed
rate. The qualified floating rate (or qualified inverse floating rate) replacing
the fixed rate must be a rate so that the fair market value of the multiple rate
variable rate debt instrument note as of its issue date would be approximately
the same as the fair market value of an otherwise identical debt instrument that
provides for the qualified floating rate (or qualified inverse floating rate),
rather than the fixed rate.
Inverse Floater Notes
Notes of a series may provide for the payment of interest at a rate determined
as the difference between two interest rate parameters, one of which is a
variable rate and the other of which is a fixed rate or a different variable
rate (i.e., inverse floater notes). The inverse floater notes are expected to
bear interest at objective
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rates. Consequently, if the interest rates of the notes meet the test for
qualified stated interest, the income on the notes will be accounted for under
the rules applicable to variable rate debt instruments described above.
Contingent Payment Obligations
The OID Regulations contain rules that address the federal income tax treatment
of debt obligations with one or more contingent payments (i.e., contingent
payment obligations). Under the contingent payment rules of the OID Regulations,
any variable rate debt instrument that is not a variable rate debt instrument is
classified as a contingent payment obligation. However, the contingent payment
rules of the OID Regulations, by their terms, do not apply to debt instruments
that are subject to Section 1272(a)(6) of the Internal Revenue Code.
In the absence of further guidance, the tax administrator will account for notes
that are contingent payment obligations under Section 1272(a)(6) of the Internal
Revenue Code. Income will be accrued on the notes based on a constant yield that
is derived from a projected payment schedule as of the closing date. The
projected payment schedule will take into account the pricing payment
assumptions and the interest payments that are expected to be made based on the
value of any relevant indices on the issue date. To the extent that actual
payments differ from projected payments for a particular taxable year,
appropriate adjustments to interest income and expense accruals will be made for
that year.
The method described in the paragraph for accounting for notes that are
contingent payment obligations is consistent with Section 1272(a)(6) of the
Internal Revenue Code and the legislative history of that provision. Because of
the uncertainty with respect to the treatment of the notes under the OID
Regulations, however, there can be no assurance that the Internal Revenue
Service will not assert successfully that a method less favorable to holders
will apply.
IN VIEW OF THE COMPLEXITIES AND THE CURRENT UNCERTAINTIES AS TO INCOME
INCLUSIONS WITH RESPECT TO NOTES THAT ARE CONTINGENT PAYMENT OBLIGATIONS, IT IS
SUGGESTED THAT POTENTIAL INVESTORS CONSULT THEIR OWN TAX ADVISORS TO DETERMINE
THE APPROPRIATE AMOUNT AND METHOD OF INCOME INCLUSION ON THE NOTES FOR FEDERAL
INCOME TAX PURPOSES.
ANTI-ABUSE RULE
The U.S. Treasury Department issued Treasury Regulations containing an
anti-abuse rule because it was concerned that taxpayers might be able to
structure debt instruments or transactions, or to apply the bright-line or
mechanical rules of the OID Regulations in a way that produces unreasonable tax
results. Those regulations provide that if a principal purpose in structuring a
debt instrument or engaging in a transaction is to achieve a result that is
unreasonable in light of the purposes of the applicable statutes, the Internal
Revenue Service can apply or depart from the OID Regulations as necessary or
appropriate to achieve a reasonable result. A result is not considered
unreasonable under Treasury Regulations, however, in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
MARKET DISCOUNT
A subsequent purchaser of a note at a discount from its outstanding principal
amount (or, in the case of a note having original issue discount, its "adjusted
issue price") will acquire the note with market discount. The purchaser
generally will be required to recognize the market discount (in addition to any
original issue discount remaining with respect to the note) as ordinary income.
A person who purchases a note at a price
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lower than the note's outstanding principal amount but higher than its adjusted
issue price does not acquire the note with market discount, but will be required
to report original issue discount, appropriately adjusted to reflect the excess
of the price paid over the adjusted issue price. See "-- Original Issue
Discount."
A note will not be considered to have market discount if the amount of the
market discount is de minimis (i.e., less than the product of (1) 0.25% of the
remaining principal amount (or, in the case of a note having original issue
discount, the adjusted issue price of the note), multiplied by (2) the weighted
average maturity of the note (determined as for original issue discount)
remaining after the date of purchase). Regardless of whether the subsequent
purchaser of a note with more than a de minimis amount of market discount is a
cash-basis or accrual-basis taxpayer, market discount generally will be taken
into income as principal payments (including, in the case of a note having
original issue discount, any deemed principal payments) are received, equal to
the lesser of:
- the amount of the principal payment received; or
- the amount of the market discount that has "accrued", but that
has not yet been included in income.
Elections
The purchaser of a note with market discount may make a special election, which
applies to all market discount instruments held or acquired by the purchaser in
the taxable year of election or afterwards, to recognize market discount
currently on an uncapped accrual basis. In addition, the purchaser may make the
election described in "-- All Original Issue Discount Election," with respect to
a note purchased with market discount.
Until the U.S. Treasury Department promulgates applicable Treasury Regulations,
the purchaser of a note with market discount may elect to accrue the market
discount either:
(1) on the basis of a constant interest rate;
(2) in the case of a note issued with original issue discount, in
the ratio of stated interest payable in the relevant period to
the total stated interest remaining to be paid from the
beginning of this period; or
(3) in the case of a note issued with original issue discount, in
the ratio of original issue discount accrued for the relevant
period to the total remaining original discount at the
beginning of this period.
Regardless of which computation method is elected, the pricing prepayment
assumptions must be used to calculate the accrual of market discount.
Sale or Exchange of a Note With Market Discount
A holder who has acquired any note with market discount generally will be
required to treat a portion of any gain on a sale or exchange of the note as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the above three methods, less any accrued market
discount previously
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reported as ordinary income as partial principal payments were received.
Moreover, the holder generally must defer interest deductions attributable to
any indebtedness incurred or continued to purchase or carry the note to the
extent they exceed income on the note. Any deferred interest expense, in
general, is allowed as a deduction not later than the year in which the related
market discount income is recognized. If a holder makes the election to
recognize market discount currently on an uncapped accrual basis or the election
described above in "-- All Original Issue Discount Election," the interest
deferral rule will not apply.
Under the contingent payment regulations, a secondary market purchaser of a
contingent payment obligation at a discount generally would continue to accrue
interest and determine adjustments on the note based on the original projected
payment schedule devised by the issuer of the note. The holder of a note would
be required, however, to allocate the difference between the adjusted issue
price of the note and its basis in the note as positive adjustments to the
accruals or projected payments on the note over the remaining term of the note
in a manner that is reasonable (e.g., based on a constant yield to maturity).
Treasury Regulations implementing the market discount rules have not yet been
issued, and uncertainty exists with respect to many aspects of those rules. For
example, the treatment of a note subject to redemption at the option of the
issuer that is acquired at a market discount is unclear. It appears likely,
however, that the market discount rules applicable in this case would be similar
to the rules pertaining to original issue discount. Due to the substantial lack
of regulatory guidance with respect to the market discount rules, it is unclear
how those rules will affect any secondary market that develops for a given
series of notes. Therefore, it is suggested that prospective investors consult
their own tax advisors regarding the application of the market discount rules to
the notes.
Clinton Administration Revenue Proposals
In February 1999, the Clinton administration issued revenue proposals including
one that would require taxpayers that use an accrual method of accounting to
include market discount in income as it accrues. The taxpayer's yield for
purposes of determining and accruing market discount would be limited to the
greater of:
- the original yield-to-maturity of the debt instrument plus 5
percentage points or
- the applicable federal rate at the time the taxpayer acquired
the debt instrument plus 5 percentage points.
This proposal would be effective for debt instruments acquired on or after the
date of enactment.
AMORTIZABLE PREMIUM
A subsequent purchaser of a note who purchases the note at a premium over the
total of its deemed principal payments may elect to amortize the premium under a
constant yield method that reflects compounding based on the interval between
payments on the notes. Treasury Regulations were issued on December 30, 1997
concerning the treatment of bond premium. Under these Treasury Regulations, bond
premium may be amortized to offset interest income only as a holder takes the
qualified stated interest into account under the holder's regular accounting
method. Moreover, the Treasury Regulations generally provide that in the case of
notes subject to optional redemption, the holder is deemed to exercise or not
exercise the option in the manner that maximizes the holder's yield on the note
while the issuer generally is deemed to exercise or not exercise the option in
the manner that minimizes the holder's yield on the note. However, the issuer is
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deemed to exercise or not exercise a call option or a combination of call
options in the manner that maximizes the holder's yield on the note. The
Treasury Regulations are effective for notes acquired on or after March 2, 1998.
However, if a holder elects to amortize bond premium for the taxable year
containing March 2, 1998, or any subsequent taxable year, the Treasury
Regulations would apply to all of the holder's notes held on or after the first
day of that taxable year.
Under the contingent payment regulations, a secondary market purchaser of a
contingent payment obligation at a premium generally would continue to accrue
interest and determine adjustments on the note based on the original projected
payment schedule devised by the issuer of the note. The holder of the note would
allocate the difference between its basis in the note and the adjusted issue
price of the note as negative adjustments to the accruals or projected payments
on the note over the remaining term of the note in a manner that is reasonable
(e.g., based on a constant yield to maturity).
GAIN OR LOSS ON DISPOSITION
If a note is sold, the holder will recognize gain or loss equal to the
difference between the amount realized on the sale and his adjusted basis in the
note. The adjusted basis of a note will equal the cost of the note to the
holder, increased by any original issue discount or market discount previously
includable in the holder's gross income with respect to the note and reduced by
the portion of the basis of the note allocable to payments on the note (other
than qualified stated interest) previously received by the holder and by any
amortized premium. Similarly, a holder who receives a scheduled or prepaid
principal payment with respect to a note will recognize gain or loss equal to
the difference between the amount of the payment and the allocable portion of
his adjusted basis in the note. Except to the extent that the market discount
rules apply and except as provided below, any gain or loss on the sale or other
disposition of a note generally will be capital gain or loss. This gain or loss
will be long-term gain or loss if the note is held as a capital asset for the
applicable long term holding period.
Special Rules for Banks, Thrifts, and Similar Institutions
If the holder of a note is a bank, thrift, or similar institution described in
Section 582 of the Internal Revenue Code, any gain or loss on the sale or
exchange of the note will be treated as ordinary income or loss. In addition, a
portion of any gain from the sale of a note that might otherwise be capital gain
may be treated as ordinary income to the extent that the note is held as part of
a "conversion transaction" within the meaning of Section 1258 of the Internal
Revenue Code. A conversion transaction generally is one in which the taxpayer
has taken two or more positions in notes or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in the
transaction. The amount of gain realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable federal rate" (which rate is computed and published
monthly by the Internal Revenue Service) at the time the taxpayer entered into
the conversion transaction, subject to appropriate reduction for prior inclusion
of interest and other ordinary income from the transaction.
Federal Income Tax Rates
The highest marginal individual income tax bracket is 39.6%. The alternative
minimum tax rate for individuals is 26% with respect to alternative minimum tax
income up to $175,000 and 28% with respect to alternative minimum tax income
over $175,000. The recently enacted Internal Revenue Service Restructuring
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and Reform Act of 1998 established the highest marginal federal tax rate on net
capital gains for individuals with respect to assets held for more than one year
at 20%. The highest marginal corporate tax rate is 35% for corporate taxable
income over $10 million, and the marginal tax rate on corporate net capital
gains is 35%, although the distinction between capital gains and ordinary income
remains relevant for other purposes.
Generally, the deductibility of capital losses for individuals for a taxable
year is limited to the amount of capital gains for the taxable year plus $3,000.
The deductibility of capital losses for corporations for a taxable year is
limited to the amount of capital gains for the taxable year.
BACKUP WITHHOLDING, FOREIGN HOLDERS, AND OTHER TAX MATTERS
Backup Withholding
A note may, under some circumstances, be subject to "backup withholding" at the
rate of 31% with respect to "reportable payments," which include interest
payments and principal payments to the extent of accrued original issue discount
as well as distributions of proceeds from a sale of notes. This withholding
generally applies if the holder of a note:
- fails to furnish the indenture trustee with its taxpayer
identification number;
- furnishes the indenture trustee or the issuer an incorrect
taxpayer identification number;
- fails to report properly interest, dividends or other
"reportable payments" as defined in the Internal Revenue Code;
or
- under some circumstances, fails to provide the indenture
trustee or the issuer or the holder's securities broker with a
certified statement, signed under penalty of perjury, that the
taxpayer identification number is its correct number and that
the holder is not subject to backup withholding.
Backup withholding will not apply, however, with respect to some payments made
to holders, including payments to specific exempt recipients (such as exempt
organizations) and to specific nonresident alien individuals, foreign
corporations, foreign partnerships, or specific foreign estates and trusts
complying with requisite certification procedures. Holders should consult their
tax advisors as to their qualification for exemption from backup withholding and
the procedure for obtaining the exemption.
The indenture trustee will report to the holders and to the Internal Revenue
Service each calendar year the amount of any "reportable payments" during the
year and the amount of tax withheld, if any, with respect to payments on the
notes within a reasonable time after the end of each calendar year.
Foreign Holders
Under the Internal Revenue Code, interest and original issue discount income
(including accrued interest or original issue discount recognized on sale or
exchange) paid or accrued with respect to notes held by holders who are
nonresident alien individuals, foreign corporations, foreign partnerships or
specific foreign estates and trusts or holders holding on behalf of foreign
persons generally will be treated as "portfolio interest" and therefore will not
be subject to any United States tax provided that:
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- the interest is not effectively connected with a trade or
business in the United States of the holder and
- the issuer (or other person who would otherwise be required to
withhold tax from these payments) is provided with an
appropriate statement that the beneficial owner of a note is a
foreign person.
Interest (including original issue discount) paid on notes to holders who are
foreign persons will not be subject to withholding if the interest is
effectively connected with a United States business conducted by the holder. The
interest (including original issue discount) will, however, be subject to the
regular United States income tax.
New Withholding Tax Regulations
In 1997, Treasury Regulations were issued which alter the rules described above
in some respects. These Treasury Regulations will be effective with respect to
payments made after December 31, 2000, regardless of the issue date of the
instrument with respect to which these payments are made. It is suggested that
prospective investors consult their tax advisors concerning the requirements
imposed by these Treasury Regulations and their effect on the holding of the
notes.
Due to the complexity of the federal income tax rules applicable to holders and
the considerable uncertainty that exists with respect to many aspects of those
rules, it is suggested that potential investors consult their own tax advisors
regarding the tax treatment of the acquisition, ownership, and disposition of
the notes.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal Income
Tax Consequences," potential investors should consider the state income tax
consequences of the acquisition, ownership, and disposition of the notes. State
income tax law may differ substantially from the corresponding federal law, and
this discussion does not describe any aspect of the income tax laws of any
state. We strongly encourage you to consult your own tax advisors with respect
to the various state tax consequences of an investment in the notes.
USE OF PROCEEDS
The proceeds of the sale of a series of notes, net of underwriters' discount,
will be transferred to the indenture trustee for deposit to the credit of the
funds and accounts established under the Indenture, a portion of which will be
used to acquire financed student loans from the depositor. The order of
application of the net proceeds and the amounts to be deposited in each account
will be set forth in the related prospectus supplement. See "Use of Proceeds"
in the related prospectus supplement.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and other retirement plans and
arrangements that are subject to the Employee Retirement Income Security Act of
1974, as amended or corresponding provisions of the Internal Revenue Code,
including individual retirement accounts and annuities, Keogh plans and
collective investment funds in which these plans, accounts, annuities or
arrangements are invested, persons acting on behalf of a
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plan, or persons using the assets of a plan, should review carefully with their
legal advisors whether the purchase or holding of a series of notes could either
give rise to a transaction that is prohibited under ERISA or the Internal
Revenue Code or cause the assets of the trust to be treated as plan assets for
purposes of regulations of the Department of Labor set forth in 29 C.F.R.
2510.3-101. You should be aware that, although exceptions from the application
of the prohibited transaction rules and the plan asset regulations exist, there
can be no assurance that any exception will apply with respect to the
acquisition of a note.
The acquisition or holding of the notes by or on behalf of a plan could be
considered to give rise to a prohibited transaction if the parties to the
issuance transaction, or any of their respective affiliates is or becomes a
party in interest or a disqualified person with respect to the plan. One or more
exemptions may be available with respect to prohibited transaction rules of
ERISA and might apply in connection with the initial purchase, holding and
resale of the notes, depending in part on the type of plan fiduciary making the
decision to acquire notes and the circumstances under which decision is made.
Those exemptions include, but are not limited to:
- Prohibited Transaction Class Exemption (PTCE) 95-60, regarding
investments by insurance company general accounts;
- PTCE 91-38, regarding investments by bank collective
investment funds;
- PTCE 90-1, regarding investments by insurance company pooled
separate accounts; or
- PTCE 84-14, regarding transactions negotiated by qualified
professional asset managers.
Before purchasing notes, a plan subject to the fiduciary responsibility
provisions of ERISA or described in Section 4975(e)(1) (and not exempt under
Section 4975(g)) of the Internal Revenue Code should consult with its counsel to
determine whether the conditions of any exemption would be met. You should be
aware that even if the conditions specified in one or more exemptions are met,
the scope of the relief provided by an exemption might not cover all acts that
might be construed as prohibited transactions.
WHERE YOU CAN FIND MORE INFORMATION
The depositor has filed with the SEC a registration statement (together with all
amendments and exhibits) under the Securities Act of 1933, as amended, with
respect to the notes offered. This prospectus and the accompanying prospectus
supplement, which form part of the registration statement, do not contain all
the information contained in the registration statement. For further
information, we refer you to the registration statement which you can inspect
and copy at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington D.C. 20549; and at the SEC's regional offices at Seven
World Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any part may
be obtained from the Public Reference Branch of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 on the payment of some fees prescribed by the SEC. You
may obtain information on the operation of the SEC's public reference facilities
by calling the SEC at 1-800-SEC-0330. In addition, the registration statement
may be accessed electronically through the SEC's Electronic Data Gathering,
Analysis and Retrieval system at the SEC's site on the World Wide Web located at
http://www.sec.gov.
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REPORTS TO HOLDERS
Unless definitive notes are issued for any series of notes, periodic unaudited
reports as described in the related prospectus supplement containing information
concerning the financed student loans in the related trust will be prepared by
the issuer and sent only to Cede & Co., as nominee of DTC and registered holder
of the notes but will not be sent to any beneficial holder of the notes. These
reports will not constitute financial statements prepared under generally
accepted accounting principles. See "Description of the Notes -- Book-entry
Registration and -- Reports to Holders." The master servicer will file with the
SEC the periodic reports as are required under the Securities Exchange Act of
1934, as amended, and the rules and regulations of the SEC under the Securities
Exchange Act of 1934. The issuer intends to suspend the filing of these reports
under the Securities Exchange Act of 1934, as amended, when and if the filing of
these reports is no longer statutorily required.
INCORPORATION OF DOCUMENTS BY REFERENCE
All reports and other documents filed by or for the issuer, under Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this prospectus and prior to the termination of the
offering of any series of notes shall be deemed to be incorporated by reference
into this prospectus and the accompanying prospectus supplement and to be a part
hereof. Any statement contained in this prospectus or in a document incorporated
or deemed to be incorporated by reference in this prospectus shall be deemed to
be modified or superseded for purposes of this prospectus and the accompanying
prospectus supplement to the extent that a statement contained in this
prospectus or the accompanying prospectus supplement or in any subsequently
filed document that also is or is deemed to be incorporated by reference
modifies or supersedes this statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this prospectus and the accompanying prospectus supplement.
The issuer will provide without charge to each person to whom a copy of this
prospectus and the accompanying prospectus supplement are delivered, on the
written or oral request of any person, a copy of any or all of the documents
incorporated by reference, except the exhibits to these documents (unless the
exhibits are specifically incorporated by reference in these documents). Written
requests for these copies should be directed to Perry D. Moore, Senior Vice
President & Chief Financial Officer, Student Loan Funding Resources, Inc., One
West Fourth Street, Suite 200, Cincinnati, Ohio 45202 or "[email protected]"
on the internet. Telephone requests for these copies should be directed to (513)
352-0222.
PLAN OF DISTRIBUTION
Each issuance of notes will be offered in one or more series through one or more
underwriters or underwriting syndicates. The prospectus supplement for each
issuance of notes will set forth the terms of the offering of each series in the
issuance, including the name or names of the underwriters and either the initial
public offering price, the discounts and commissions to the underwriters and any
discounts or concessions allowed or reallowed to dealers, or the method by which
the price at which the underwriters will sell the notes will be determined.
The notes may be acquired by underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The obligations of any underwriters will be subject to
conditions precedent, and the underwriters will be obligated to purchase all of
a series of notes described in the related prospectus supplement, if any are
purchased. If notes of a series are offered other than through underwriters, the
related
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prospectus supplement will contain information regarding the nature of
the offering and any agreements to be entered into between the seller and
purchasers of notes of the series.
The time of delivery for the notes of a series in respect of which this
prospectus is delivered will be set forth in the related prospectus supplement.
RATING
It is a condition to the issuance and sale of each series of notes that they
each be rated by at least one nationally recognized statistical rating
organization in one of its four highest applicable rating categories. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
agency. See "Rating" in the accompanying prospectus supplement.
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APPENDIX A
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the Notes will be available only in
book-entry form (the "Global Securities"). Investors in the Global Securities
may hold the Global Securities through The Depository Trust Company ("DTC") or,
if applicable, Cedel or Euroclear. The Global Securities will be tradeable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities through
Cedel and Euroclear will be conducted in the ordinary way under their nominal
rules and operating procedures and under conventional eurobond practice.
Secondary market trading between investors holding Global Securities through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC participants
holding Securities will be effected on a delivery-against-payment basis through
the respective depositories of Cedel and Euroclear and as participants in DTC.
Non-U.S. holders of Global Securities will be exempt from U.S. withholding
taxes, provided that holders meet the requirements and deliver appropriate U.S.
tax documents to the securities clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective depositories,
which in turn will hold these positions in accounts as participants of DTC.
Investors electing to hold their Global Securities through DTC will follow the
settlement practices applicable to U.S. corporate debt obligations. Investor
securities custody accounts will be credited with their holdings against payment
in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no
"lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
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SECONDARY MARKET TRADING
Since the purchase determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to U.S. corporate
debt issues in same-day funds.
Trading between Cedel and/or Euroclear participants. Secondary market trading
between Cedel participants and/or Euroclear participants will be settled using
the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC participant to the
account of a Cedel participant or a Euroclear participant, the purchaser will
send instructions to Cedel or Euroclear through a participant at least one
business day prior to settlement. Cedel or Euroclear will instruct the
respective depositary to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including, the
last coupon payment date to and excluding the settlement date. Payment will then
be made by the respective depository to the DTC participant's account against
delivery of the Global.
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system under its
usual procedures, to the Cedel participant's or Euroclear participant's account.
The Global Securities credit will appear the next day (European time) and the
cash debit will be back-valued to and the interest on the Global Securities will
accrue from the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails). The Cedel or Euroclear cash debit will be valued
instead as of the actual settlement date.
Cedel participants and Euroclear participants will need to make available to
the respective clearing system the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or exiting lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to them,
participants can elect not to preposition funds and allow that credit line to be
drawn on to finance settlement. Under this procedure, Cedel participants or
Euroclear participants purchasing Global Securities would incur overdraft
charges for one day assuming they cleared the overdraft when the Global
Securities were credited to their accounts. However, interest on the Global
Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of the overdraft charges although this
result will depend on each participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending Global Securities to
the respective depositary for the benefit of Cedel participants or Euroclear
participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus,
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to the DTC participant a cross-market transaction will settle no differently
than a trade between two DTC participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to time zone
differences in their favor, Cedel and Euroclear participants may employ their
customary procedures for transactions in which Global Securities are to be
transferred by the respective clearing system, through the respective
depository, to a DTC participant. The seller will send instructions to Cedel or
Euroclear through a participant at least one business day prior to settlement.
In this case, Cedel or Euroclear will instruct the respective depository to
deliver the Securities to the DTC participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date. The payment will
then be reflected in the account of the Cedel participant or Euroclear
participant the following day, and receipt of the cash proceeds in the Cedel or
Euroclear participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
Cedel or Euroclear participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Cedel or Euroclear participant's account would instead be valued as of the
actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC participants for delivery to Cedel participants or Euroclear
participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
1. borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear
accounts) under the clearing system's customary procedures;
2. borrowing the Global Securities in the U.S. from a DTC participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
3. staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the Cedel
participant or Euroclear participant.
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YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR IN OTHER
INFORMATION TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH DIFFERENT INFORMATION. THIS DOCUMENT DOES NOT CONSTITUTE AN
OFFER TO SELL ANY SECURITIES OTHER THAN THE NOTES NOR AN OFFER OF THESE NOTES TO
ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH THE OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THE PROSPECTUS AND PROSPECTUS SUPPLEMENT AT ANY TIME
DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY OF TERMS ................................ S-1
RISK FACTORS .................................... S-10
THE ISSUER ...................................... S-19
THE DEPOSITOR ................................... S-21
USE OF PROCEEDS ................................. S-23
THE FINANCED STUDENT LOANS ...................... S-23
MATURITY AND PREPAYMENT
CONSIDERATIONS ............................... S-30
THE SERVICERS ................................... S-31
THE GUARANTEE AGENCIES .......................... S-36
EXCHANGE AGREEMENTS ............................. S-39
DESCRIPTION OF THE NOTES ........................ S-40
REDEMPTION ...................................... S-48
THE INDENTURE ................................... S-49
UNDERWRITING .................................... S-57
LEGAL MATTERS ................................... S-59
RATING .......................................... S-59
APPENDIX A -- GLOSSARY OF PRINCIPAL
DEFINITIONS .................................. A-1
APPENDIX B -- AUCTION PROCEDURES ................ B-1
APPENDIX C -- SETTLEMENT PROCEDURES ............. C-1
PROSPECTUS
FORMATION OF THE TRUSTS ..................... 1
THE DEPOSITOR ............................... 3
THE FINANCED STUDENT LOAN POOL .............. 5
MATURITY AND PREPAYMENT CONSIDERATIONS ...... 7
DESCRIPTION OF THE FFEL PROGRAM ............. 8
DESCRIPTION OF THE GUARANTEE AGENCIES ....... 29
THE PRIVATE LOAN PROGRAMS ................... 32
TRANSFER AND SALE AGREEMENTS ................ 33
SERVICING ................................... 36
DESCRIPTION OF THE NOTES .................... 39
REDEMPTION .................................. 57
SECURITY FOR THE NOTES ...................... 57
THE INDENTURES .............................. 60
FEDERAL INCOME TAX CONSEQUENCES ............. 76
STATE TAX CONSIDERATIONS .................... 92
USE OF PROCEEDS ............................. 92
ERISA CONSIDERATIONS ........................ 92
WHERE YOU CAN FIND MORE INFORMATION ......... 93
REPORTS TO HOLDERS .......................... 94
INCORPORATION OF DOCUMENTS BY
REFERENCE ............................... 94
PLAN OF DISTRIBUTION ........................ 94
RATING ...................................... 95
APPENDIX A -- GLOBAL CLEARANCE,
SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES ................ A-1
$525,000,000
STUDENT LOAN FUNDING 1999-A/B TRUST
STUDENT LOAN FUNDING RIVERFRONT LLC
STUDENT LOAN
ASSET-BACKED NOTES
SERIES 1999A-1
SENIOR AUCTION RATE
CALLABLE NOTES
SERIES 1999A-2
SENIOR AUCTION RATE
CALLABLE NOTES
SERIES 1999A-3
SENIOR AUCTION RATE
CALLABLE NOTES
SERIES 1999A-4
SENIOR AUCTION RATE
CALLABLE NOTES
SERIES 1999A-5
SENIOR AUCTION RATE
CALLABLE NOTES
SERIES 1999A-6
SENIOR AUCTION RATE
CALLABLE NOTES
SERIES 1999B-1
SUBORDINATE AUCTION RATE
CALLABLE NOTES
--------------
PROSPECTUS
--------------
SALOMON SMITH BARNEY
BANC OF AMERICA
SECURITIES LLC
OCTOBER 21, 1999
