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Eurosail 2006-2BL plc - Consent Solicitation - Launch - LIBOR

£269,060,000.00 Class A2c Mortgage Backed Floating Rate Notes due 2045 (ISIN XS0266235612, US298805AF91)

€27,000,000.00 Class B1a Mortgage Backed Floating Rate Notes due 2045 (ISIN XS0266238715, US298805AG74)

$18,000,000.00 Class B1b Mortgage Backed Floating Rate Notes due 2045 (ISIN XS0266244440, US298805AH57)

€24,800,0000.00 Class C1a Mortgage Backed Floating Rate Notes due 2045 (ISINXS0266246817, US298805AK86)

£11,000,000 Class C1c Mortgage Backed Floating Rate Notes due 2045 (ISIN XS0266250413, US298805AM43)

€9,000,000 Class D1a Mortgage Backed Floating Rate Notes due 2045 (ISIN XS0266252625, US298805AN26)

£17,300,000.00 Class D1c Mortgage Backed Floating Rate Notes due 2045 (ISIN0266256709, US298805AQ56)

£7,380,000.00 Class E1c Mortgage Backed Floating Rate Notes due 2045 (ISIN XS0266258317)

£1,538,000.00 Class F1c Mortgage Backed Floating Rate Notes due (ISIN XS0266260560)

(the "Notes")

40 Residual Certificates

(the"Residual Certificates")


02 MAY 2023


Full announcement including disclaimers and offer restrictions available via Euronext


"Notice is hereby given by the Issuer to the Instrumentholders in accordance with Condition 14 (Notice to Noteholders) that the Issuer intends to amend the rate of interest applicable to the Class B1b Notes and to make certain other associated amendments by amending and restating the applicable Transaction Documents in order to effect the Proposed Benchmark Rate Modification (as defined below).


Background


1. Capitalised terms used but not otherwise defined herein shall have the meanings ascribed to them in the master definitions schedule set out in Schedule 1 (Master Definitions Schedule) to the Master Securitisation Agreement in relation to the Issuer dated 11 October 2006, as amended and/or restated from time to time.


2. Pursuant to Condition 11(g) and clause 8.2(c) (Benchmark Rate Modification) of the Trust Deed, the Trustee shall be obliged, without any consent or sanction of the Noteholders, the Residual Certificateholders or any of the other Secured Creditors, to concur with the Issuer in making any modification to the Conditions, the Trust Deed or any other Transaction Document to which it is a party or in relation to which it holds security or entering into any new, supplemental or additional documents that the Issuer considers necessary or advisable for the purpose of changing the benchmark rate from USD-LIBOR in respect of the B1b Notes to an Alternative Benchmark Rate, provided that such modification is undertaken as a result of any of the circumstances set out in Condition 11(g)(1), the Alternative Benchmark Rate is a rate that satisfies Condition 11(g)(2) and the other procedural formalities of Condition 11(g) have been met.


3. The Alternate Reference Rates Committee (the "ARRC") has confirmed that it will no longer persuade or compel banks to submit rates for the calculation of the US dollar London Interbank Offered Rate ("USD LIBOR") benchmark after the end of June 2023 and expects that some panel banks will cease contributing to LIBOR panels at such time. In addition, ARRC announced that they have mandated a working group to promote a broad-based transition to the secured overnight financing rate ("SOFR") across US dollar bond, loan and derivative markets, meaning that SOFR is established as the primary dollar interest rate benchmark following the end of June 2023. The continuation of USD LIBOR on the current basis cannot and has not been guaranteed after the end of June 2023, and regulators have urged market participants to take active steps to implement the transition to SOFR and other risk-free rates.


4. Due to the differences in the nature of USD LIBOR and SOFR, the replacement of USD LIBOR as the reference rate for the Class B1b Notes will also require implementation of an adjusted margin payable in respect of the Class B1b Notes to address the fact that SOFR rates are typically lower than USD LIBOR because they do not include the credit risk component that USD LIBOR rates do. The pricing methodology proposed for the conversion of the interest rate calculation from USD LIBOR to SOFR uses a fixed credit adjustment spread of 0.26161 per cent. per annum.


5. The Issuer has engaged (at the expense of the Issuer) Chatham Financial Europe, Limited as the Issuer’s agent (the "Financial Advisor") in order to assist in formulating the Benchmark Rate Modification, and specifically, to (i) advise and consult with the Issuer as to the appropriate Alternate Benchmark Rate and related calculation methodology; and (ii) advise of and consult with the Issuer on the appropriate Note Rate Maintenance Adjustment.


6. The Financial Advisor has advised the Issuer that, following the discontinuation of USD LIBOR, in most cases, if borrowers adopt standard fallback language, debt will most likely transition to a term SOFR ("Term SOFR"), while derivatives will transition to a daily SOFR, compounded in arrears over a three-month interest period ("Compounded Daily SOFR"). This will create an economic mismatch, or basis risk, between the two rates. Following this approach in relation to the USD LIBOR exposures within this transaction, Compounded Daily SOFR would apply to the interest rate applicable to the the B1b Notes, and Term SOFR would apply to the interest applicable to the B1b Currency Swap Transaction. In order to avoid this mismatch, the Financial Advisor recommends a proactive transition rather than reliance on fallbacks. While Term SOFR is first choice in ARRC’s waterfall for floating rate notes, the Financial Advisor has advised the Issuer that recent market trends indicate that financial institutions do not adopt this rate due to regulatory constraints and certain challenges presented by Term SOFR in practice:


a. banks are unable to fully hedge Term SOFR, Compounded Daily SOFR is easier to hedge in the overnight indexed swap market;


b. banks are charging a "Term SOFR" premium in the market to trade on this index as there is currently no interbank trading market for Term SOFR;


c. floating rate note market issuances in recent months have overwhelmingly been indexed to overnight SOFR or ICE constant maturity swap rates;


d. Finally, current SOFR linked floating rate notes favour the use of the Compounded Daily SOFR versus simple SOFR. In addition to market precedent, Financial Advisor has recommended to the Issuer that this method as interest accrual is properly captured."


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