| Pricing Supplement Dated March 12, 2008 (To Prospectus dated November 21, 2007, and Prospectus Supplement dated November 21, 2007) |
Filed Pursuant to Rule 424(b)(5) Registration Statement Nos. 333-147181 and 333-147181-01 CUSIP: 74254PXR8 |
Principal Life Insurance Company
Secured Medium-Term Notes (that are also Asset-Backed Securities)
Issued Through and Obligations of
Principal Life Income Fundings Trust 35 (the “Trust” and the “Issuing Entity”)
Secured Medium-Term Notes (that are also Asset-Backed Securities)
Issued Through and Obligations of
Principal Life Income Fundings Trust 35 (the “Trust” and the “Issuing Entity”)
The description in this pricing supplement of the particular terms of the Secured Medium-Term
Notes offered hereby, and the Funding Agreement (specified below) issued by Principal Life
Insurance Company (“Principal Life”) to the Trust, the payment obligations of which are fully and
unconditionally guaranteed by the Guarantee (specified below) issued by Principal Financial Group,
Inc. to the Trust, supplements the description of the general terms and provisions of the notes,
the funding agreements and the guarantees set forth in the accompanying prospectus and prospectus
supplement, to which reference is hereby made.
| 1. | The Notes |
Principal Amount:
|
$200,000,000 | |||||||
Issue Price:
|
100.0% | Original Issue Date: | March 19, 2008 | |||||
Purchasing Agent(s) Discount: |
0.10% | |||||||
Net Proceeds to the Trust:
|
$199,800,000 | Stated Maturity Date: | The Initial Maturity Date, the Final Maturity Date or any other maturity date resulting from the failure of a holder to elect to extend the maturity date of all or a portion of its Notes (as set forth in the attached “Schedule of Additional Provisions Relating to the Notes”); provided, however, that in no event shall the maturity date of any Notes be extended beyond the Final Maturity Date. | |||||
| Initial Maturity Date: | April 9, 2009, or if such day is not a Business Day, the immediately preceding Business Day. | |||||||
| Final Maturity Date: | March 19, 2010, or if such day is not a Business Day, the immediately preceding Business Day. | |||||||
Specified Currency:
|
U.S. Dollars | |
Interest Payment Dates:
|
Quarterly
on January 9, April 9, July 9 and October 9 of each year, subject to
adjustment in accordance with the Modified Following Business Day
Convention, and the Final Maturity Date; provided that the final
Interest Payment Date for any Notes maturing prior to the Final
Maturity Date will be the relevant maturity date, and interest for
the final interest Reset Period will accrue from and including the
Interest Payment Date immediately preceding such relevant maturity
date to but excluding such relevant maturity date. |
|
Initial Interest Payment Date:
|
July 9,
2008 |
|
Regular Record Date:
|
15 calendar days prior to the Interest Payment Date |
Type of
Interest Rate: o Fixed Rate ý Floating Rate
Fixed Rate Notes: o Yes ý No. If, Yes,
Interest Rate:
Floating Rate Notes: ý Yes o No. If, Yes,
Regular Floating Rate Notes: ý Yes o No. If, Yes,
| Interest Rate: | Three-Month USD LIBOR (except as noted under “Interest Rate Basis”) plus the applicable Spread set forth in the attached “Schedule of Additional Provisions Relating to the Notes — Spread.” |
| Interest Rate Basis(es): | Three-Month USD LIBOR; provided, however, that for the initial Interest Reset Period (from and including the Original Issue Date to but excluding the Interest Payment Date occurring in July 2008), the Interest Rate Basis will be an interpolated rate between Three-Month USD LIBOR and Four-Month USD LIBOR. With respect to the final interest payment on any maturity date prior to the Final Maturity Date and on the Final Maturity Date, the Interest Rate Basis will be (i) One-Month USD LIBOR, if the final Interest Reset Period is a period of one month; (ii) Two-Month USD LIBOR, if the final Interest Reset Period is a period of two months; (iii) Three-Month USD LIBOR, if the final Interest Reset Period is a period of three months and (iv) an interpolated rate between Two- Month USD LIBOR and Three-Month USD LIBOR, if the final Interest Reset Period is a period longer than two months and shorter than three months. |
Floating Rate/Fixed Rate Note: o Yes ý No. If, Yes,
Floating Interest Rate:
Interest Rate Basis(es):
Fixed Interest Rate:
Fixed Rate Commencement Date:
Floating Interest Rate:
Interest Rate Basis(es):
Fixed Interest Rate:
Fixed Rate Commencement Date:
Inverse Floating Rate Note: o Yes ý No. If, Yes,
Fixed Interest Rate:
Floating Interest Rate:
Interest Rate Basis(es):
Floating Interest Rate:
Interest Rate Basis(es):
| Initial Interest Rate, if any: | The Initial Interest Rate in effect as of the Original Issue Date shall be an interpolated rate between Three-Month USD LIBOR and Four-Month USD LIBOR determined on the second London Banking Day preceding the Original Issue Date plus 0.25%. |
| Initial Interest Reset Date: | July 9, 2008 |
Interest Rate Basis(es). Check all that apply:
| o CD Rate | o Commercial Paper Rate | |||
| o CMT Rate | o Eleventh District Cost of Funds Rate | |||
| o Constant Maturity Swap Rate | o Federal Fund Open Rate | |||
| ý LIBOR | o Federal Funds Rate | |||
| o EURIBOR | o Treasury Rate | |||
| o Prime Rate | o Other |
| If LIBOR: | ý LIBOR Reuters | |||
| LIBOR Currency: U.S. Dollars | ||||
| If CMT Rate: | ||||
| Designated Reuters Page: | ||||
| If FEDCMT: o Weekly Average o Monthly Average | ||||
| Designated CMT Maturity Index: |
Index Maturity: Three-Month (subject to the exceptions listed above in “Interest Rate Basis”)
Spread (+/-): See the attached “Schedule of Additional Provisions Relating to the Notes—Spread”
Spread Multiplier: Not applicable
Interest Reset Date(s): Each Interest Payment Date
Interest Rate Determination Date(s): The second London Banking Day preceding the related Interest Reset Date.
Maximum Interest Rate, if any: Not applicable
Minimum Interest Rate, if any: Not applicable
Calculation Agent: Citibank, N.A.
Exchange Rate Agent: Not applicable
Computation of Interest (not applicable unless different than as specified in the prospectus and prospectus supplement): Not applicable
Day Count Convention (not applicable unless different than as specified in the prospectus and prospectus supplement): Not applicable
Amortizing Notes: o Yes ý No. If, Yes,
Amortizing Schedule:
Additional/ Other Terms
Additional/ Other Terms
Discount Note: o Yes ý No. If, Yes,
Total Amount of Discount:
Initial Accrual Period of Discount:
Additional/Other Terms:
Initial Accrual Period of Discount:
Additional/Other Terms:
Redemption Provisions: o Yes ý No. If, Yes,
Additional/Other Terms:
Repayment: o Yes ý No. If Yes,
Repayment Date(s):
Repayment Price:
Repayment: o In whole only and not in part
o May be in whole or in part
Additional/Other Terms:
Repayment Price:
Repayment: o In whole only and not in part
o May be in whole or in part
Additional/Other Terms:
Sinking Fund (not applicable unless specified): Not applicable
Additional Amounts to be Paid for Withholding Tax (not applicable unless specified): Not
applicable
Securities Exchange Listing: o Yes ý No. If Yes, Name of Exchange: Not applicable
| Authorized Denominations: | $100,000 and integral multiples of $1,000 in excess thereof; holders of Notes may extend a portion of their Notes in Authorized Denominations and the Principal Amount of their Notes remaining after an extension must also be in Authorized Denominations. |
Ratings: The Notes issued under the Program are rated AA by Standard & Poor’s Ratings Services, a
division of The McGraw-Hill Companies, Inc. (“S&P”). Principal Life expects the Notes to be rated
Aa2 by Moody’s Investors Service, Inc. (“Moody’s”).
Purchasing Agent(s) Purchasing Notes as Principal: ý Yes o No. If Yes,
| Purchasing Agent(s) | Principal Amount | |||
Banc of America Securities LLC |
$ | 100,000,000 | ||
Wachovia Capital Markets, LLC |
$ | 100,000,000 | ||
Total: |
$ | 200,000,000 | ||
Purchasing Agent(s) Acting as Agent: o Yes ý No. If Yes,
| Purchasing Agent(s) | Principal Amount | |||
Total: |
||||
State of Organization of Trust: New York
Additional/Other Terms: See the attached “Schedule of Additional Provisions Relating to the Notes”
Special Tax Considerations: See the attached “Certain U.S. Federal Income Tax Considerations”
| 2. | The Funding Agreement |
Funding Agreement Issuer:
|
Principal Life Insurance Company | |
Funding Agreement No.:
|
6-15308 | |
Deposit Amount:
|
$200,000,015 | |
Net Deposit:
|
$199,800,000 | |
Effective Date:
|
March 19, 2008 | |
Stated Maturity Date:
|
March 19, 2010 | |
Maturity Date:
|
The earlier to occur of (a) the Stated Maturity Date or (b) such other date on which the Deposit Amount is equal to zero. | |
Specified Currency:
|
U.S. Dollars | |
Interest Payment Dates:
|
Quarterly on January 9, April 9, July 9, and October 9 of each year, subject to adjustment in accordance with the Modified Following Business Day Convention; provided however, that the final Interest Payment Date shall be the Maturity Date and interest for the Interest Reset Period immediately preceding such Maturity Date will accrue from and including the last Interest Payment Date immediately preceding such Maturity Date to but excluding such Maturity Date. | |
Initial Interest Payment Date:
|
July 9, 2008 | |
Type of Interest Rate:
|
o Fixed Rate ý Floating Rate |
Fixed Rate Funding Agreement: o Yes ý No. If, Yes,
Interest Rate:
Floating Rate Funding Agreement: ý Yes o No. If, Yes,
Regular Floating Rate Funding Agreement: ý Yes o No. If Yes,
| Interest Rate: | Three-Month USD LIBOR (except as noted under “Interest Rate Basis”) plus the applicable Spread set forth in the attached “Schedule of Additional Provisions Relating to the Funding Agreement—Spread.” |
| Interest Rate Basis(es): | Three-Month USD LIBOR; provided, however, that for the initial Interest Reset Period (from and including the Effective Date to but excluding the Interest Payment Date occurring in July 2008), the Interest Rate Basis will be an interpolated rate between Three-Month USD LIBOR and Four-Month USD LIBOR. With respect to the final interest payment on any maturity date of any Note or portion of any Note, the Interest Rate Basis for the applicable Deposit Amount of the Funding Agreement will be (i) One-Month USD LIBOR if the final Interest Reset Period for such Notes or portion of Notes is a period of one month; (ii) Two- Month USD LIBOR, if the final Interest Reset Period for such Notes or portion of Notes is a period of two months; (iii) Three-Month USD LIBOR, if the final Interest Reset Period for such Notes or portion of Notes is a period of three months and (iv) an interpolated rate between Two-Month USD LIBOR and Three-Month USD LIBOR, if the final Interest Reset Period for such Notes or portion of Notes is a period longer than two months and shorter than three months. |
Floating Rate/Fixed Rate Funding Agreement: o Yes ý No. If, Yes,
Floating Interest Rate:
Interest Rate Basis(es):
Fixed Interest Rate:
Fixed Rate Commencement Date:
Interest Rate Basis(es):
Fixed Interest Rate:
Fixed Rate Commencement Date:
Inverse Floating Rate Funding Agreement: o Yes ý No. If, Yes,
Fixed Interest Rate:
Floating Interest Rate:
Interest Rate Basis(es):
Floating Interest Rate:
Interest Rate Basis(es):
| Initial Interest Rate, if any: | The Initial Interest Rate in effect as of the Effective Date, shall be an interpolated rate between Three-Month USD LIBOR and Four-Month USD LIBOR determined on the second London Banking Day preceding the Effective Date plus 0.25%. |
Initial
Interest Reset Date: July 9, 2008
Interest Rate Basis(es). Check all that apply
| o CD Rate | o Commercial Paper Rate | |||
| o CMT Rate | o Eleventh District Cost of Funds Rate | |||
| o Constant Maturity Swap Rate | o Federal Funds Open Rate | |||
| ý LIBOR | o Federal Funds Rate | |||
| o EURIBOR | o Treasury Rate | |||
| o Prime Rate | o Other (See Attached) |
| If LIBOR: | ý LIBOR Reuters | |||
| LIBOR Currency: U.S. Dollars | ||||
| If CMT Rate: | ||||
| Designated Reuters Page: | ||||
| If FEDCMT: o Weekly Average o Monthly Average | ||||
| Designated CMT Maturity Index: | ||||
Index Maturity: 3-Month (subject to the exceptions listed above in “Interest Rate Basis”)
Spread (+/-): See the attached “Schedule of Additional Provisions Relating to the Funding
Agreement—Spread”
Spread Multiplier: Not applicable
Interest Reset Date(s): Each Interest Payment Date
Interest Rate Determination Date(s): The second London Banking Day preceding the related
Interest Reset Date
Maximum Interest Rate, if any: Not applicable
Minimum Interest Rate, if any: Not applicable
Calculation of Interest (not applicable unless different than as specified in the prospectus and
prospectus supplement): Not applicable
Day Count Convention (not applicable unless different than as specified in the prospectus and
prospectus supplement): Not applicable
Amortizing Funding Agreement: o Yes ý No. If Yes,
Amortizing Schedule
Additional/Other Terms
Additional/Other Terms
Discount Funding Agreement: o Yes ý No. If, Yes,
Total Amount of Discount:
Initial Accrual Period of Discount:
Additional/Other Terms:
Initial Accrual Period of Discount:
Additional/Other Terms:
Redemption Provisions: o Yes ý No. If, Yes,
Additional/Other Terms:
Repayment: ý Yes o No.
| Additional/Other Terms: | See the attached “Schedule of Additional Provisions Relating to the Funding Agreement— Repayment” |
Sinking Fund (not applicable unless specified): Not applicable
Additional Amounts to be Paid For Withholding Tax (not applicable unless specified): Not
applicable
Ratings: The Funding Agreement issued under the Program is rated AA by S&P. Principal Life
expects the Funding Agreement to be rated Aa2 by Moody’s.
Additional/Other Terms if any: See the attached “Schedule of Additional Provisions Relating to the
Funding Agreement”
Special Tax Considerations: See the attached “Certain U.S. Federal Income Tax Considerations”
| 3. | The Guarantee |
Guarantee Issuer: Principal Financial Group, Inc.
Effective Date: March 19, 2008
Additional/Other Terms if any: None
SCHEDULE OF ADDITIONAL PROVISIONS RELATING TO THE NOTES
SPREAD:
The Spread for the Notes for the indicated periods is as follows:
| Period | Spread | |||
From and including the Original Issue Date to but excluding the
Interest Payment Date occurring in April 2009 |
0.25 | % | ||
From and including the Interest Payment Date occurring in April
2009 to but excluding the Final Maturity Date |
0.30 | % | ||
EXTENSION ELECTION:
The Notes will mature on the Initial Maturity Date, unless the maturity of all or a portion of
the Principal Amount of the Notes is extended in accordance with the procedures described below.
In no event shall the maturity of the Notes be extended beyond the Final Maturity Date.
During a notice period relating to an Election Date (as defined below), a holder may elect to
extend the maturity of all or any portion of the Principal Amount of its Notes (in Authorized
Denominations) so that the maturity of the Notes will be extended to the Corresponding Maturity
Date (as defined below) for the immediately following Election Date; provided, however, that if
such Corresponding Maturity Date is not a Business Day, the maturity of such Notes will be the
immediately preceding Business Day. The Election Dates will take place monthly on the
9th day of each month, commencing on April 9, 2008 and ending on March 9, 2009, except
that if any Election Date would otherwise be a day that is not a Business Day, the notice period
(described below) will be extended until 12:00 Noon, New York City time, on the first Business Day
following the applicable Election Date, at which time such notice will be irrevocable. The
respective Corresponding Maturity Date for each Election Date is the 9th day of the
calendar month which is one calendar month after (1) April 9, 2009 (in the case of an initial
extension of maturity) or (2) any later date to which the maturity date of the Notes has previously
been extended; provided, that such maturity date shall be March 19, 2010 in respect of an election
to extend on March 9, 2009 (the “Corresponding Maturity Date”). If a holder fails to make an
effective election to extend all or a portion of the maturity of its Notes, the maturity date of
such Notes (or portion thereof) will be the Corresponding Maturity Date for the immediately
preceding Election Date. For example, assuming a holder has previously made an election to extend
the maturity date to May 9, 2009, if a holder fails to make an effective election to extend all or
a portion of its Notes on the Election Date occurring in May 2008, such portion will mature on May
9, 2009. If a holder elects to extend a portion of its Notes on the Election Date occurring in May
2008, such portion of its Notes will then be scheduled to mature on June 9, 2009.
To make an effective election on any Election Date, a holder must deliver a notice of election
during the notice period for such Election Date. The notice period for an Election Date begins on
the 5th Business Day immediately preceding the relevant Election Date and ends on the
relevant Election Date provided that such Election Date is a Business Day. The Paying Agent must
receive a holder’s notice through the normal clearing system channels (described in more detail
below), no later than 12:00 Noon, New York City time, on the last Business Day in the notice period
(i.e. the relevant Election Date or, if the Election Date is not a Business Day, 12:00 Noon, New
York City time, on the first Business Day following such Election Date), at which time such notice
becomes irrevocable.
If, with respect to any Election Date, a holder does not make an election to extend the
maturity of all or a portion of the Principal Amount of its Notes, the Principal Amount of such
Notes will become due and payable on the earlier of the Initial Maturity Date or such later
Corresponding Maturity Date related to the relevant Election Date on which the Notes were not
extended. The Principal Amount of the Notes for which such election is not exercised will be
represented by a new Note issued on such Election Date. The new Note so issued will have the same
terms as the Notes, except that it will not be extendible, will have a separate CUSIP number, and
its maturity date will be the earlier of the Initial Maturity Date or such later Corresponding
Maturity Date to which the Notes were previously extended. The failure to elect to extend the
maturity of all or any portion of a holder’s Notes will be irrevocable and will be binding upon any
subsequent holder of such Notes.
The Notes will be issued in registered global form and remain on deposit with The Depository
Trust Company, the depositary for the Notes. Therefore, a holder must exercise the option to
extend the maturity of its Notes through the depositary. To ensure that the depositary receives
timely notice of an election to extend the maturity of all or a portion of
the Notes by a holder so
that the depositary can deliver notice of such election to the Indenture Trustee, as paying agent,
prior to 12:00 Noon, New York City time, on the last Business Day in the notice period, a holder
must instruct the direct or indirect participant through which it holds an interest in the Notes in
accordance with the then applicable operating procedures of the depositary.
The depositary must receive any notice of election from its participants no later than 12:00
Noon, New York City
time, on any Election Date, provided that such Election Date is a Business Day, for the depositary
to deliver timely notice of the election by a holder to the Indenture Trustee, as paying agent. If
the applicable Election Date is not a Business Day, the depositary must receive notice of election
from its participants no later than 10:00 A.M., New York City time, on the first Business Day
following such Election Date, for the depositary to deliver timely notice of the election by a
holder to the Indenture Trustee, as paying agent. Different firms have different deadlines for
accepting instructions from their customers. A holder should consult the direct or indirect
participant through which it holds an interest in the Notes to ascertain the deadline for ensuring
that timely notice will be delivered to the depositary.
SCHEDULE OF ADDITIONAL PROVISIONS RELATING TO THE FUNDING AGREEMENT
SPREAD:
The Spread for the Funding Agreement for the indicated periods is as follows:
| Period | Spread | |||
From and including the Effective Date to but excluding the Interest
Payment Date occurring in April 2009 |
0.25 | % | ||
From and including the Interest Payment Date occurring in April
2009 to but excluding the Stated Maturity Date |
0.30 | % | ||
REPAYMENT:
In the event (and only to the extent) it is necessary to fund payments due under the Notes as
a result of the failure of a holder to elect to extend the maturity of all or any portion of the
Principal Amount of its Notes, the Trust, as owner of the Funding Agreement, shall notify Principal
Life that it must prepay all or a portion of the Deposit Amount (each, a “Repayment”). The Trust
shall give Principal Life written notice of such Repayment requirement (the “Repayment Notice”) no
later than the related Repayment Notice Date (as defined below) and Principal Life shall prepay the
applicable portion of the Deposit Amount (including any accrued but unpaid interest) on the
relevant Repayment Date (as defined below).
With respect to any Election Date for the Notes, the “Repayment Notice Date” shall be the
third Business Day immediately following the applicable Election Date and the “Repayment Date”
shall be the Initial Maturity Date or, if later, the Corresponding Maturity Date related to the
relevant Election Date on which the holder previously elected to extend the maturity of all or any
portion of the Principal Amount of its Notes, or if such Initial Maturity Date or Corresponding
Maturity Date is not a Business Day the immediately preceding Business Day.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
Discussion
The following discussion is based on the opinion of Sidley Austin llp, special U.S.
federal income tax counsel to the Trust (“Special Tax Counsel”). This summary supplements, and
should be read in conjunction with, the discussion in the prospectus supplement under the caption
“Material United States Federal Income Tax Considerations.”
The following discussion describes certain U.S. federal income tax consequences of the
purchase, ownership and disposition of the Notes and of the new Notes (the “Substitute Notes”) that
will be issued in exchange for the Notes when a holder elects not to extend the maturity of the
Notes. This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), and
existing and proposed Treasury regulations, revenue rulings, administrative interpretations and
judicial decisions, all as currently in effect and all of which are subject to change, possibly
with retroactive effect. This discussion deals only with Notes purchased by a U.S. Holder, as
defined below, on original issuance and Substitute Notes (if applicable) and held as capital
assets, within the meaning of section 1221 of the Code. It does not discuss all of the tax
consequences that may be relevant to investors in light of their particular circumstances or to
holders subject to special rules, such as persons other than U.S. Holders, insurance companies,
banks, tax-exempt organizations, dealers in securities or foreign currencies, traders in securities
that elect the mark-to-market method of accounting, persons holding the Notes as part of a hedging
transaction, straddle, conversion transaction, or other integrated transaction, certain former U.S.
citizens and resident aliens, persons liable for the alternative minimum tax or U.S. Holders whose
functional currency, as defined in section 985 of the Code, is not the U.S. dollar. Persons
considering the purchase of the Notes should consult with their own tax advisors concerning the
application of the U.S. federal income tax laws to their particular situations as well as any tax
consequences arising under the laws of any state, local or foreign jurisdiction.
As used in this section, the term “U.S. Holder” means a beneficial owner of a Note who or that
is a U.S. person. The term “U.S. person” means (i) a citizen or resident of the United States for
U.S. federal income tax purposes; (ii) a corporation, including an entity treated as a corporation
for U.S. federal income tax purposes, created or organized in or under the laws of the United
States, any state of the United States or the District of Columbia; (iii) an estate the income of
which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust if (a) a
U.S. court is able to exercise primary supervision over the administration of the trust; and (b)
one or more U.S. persons have the authority to control all substantial decisions of the trust. In
addition, some trusts treated as U.S. persons before August 20, 1996 that elect to continue to be
so treated to the extent provided in Treasury regulations shall be considered U.S. persons.
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes
holds Notes, the tax treatment of a partner will generally depend upon the status of the partner
and the activities of the partnership, and special rules may apply to such partners and
partnerships. Such persons should consult their own tax advisors in that regard.
Interest on Notes and Sale of Notes
For the reasons discussed below, the interest rates on the Notes and Substitute Notes should
be treated as “qualified floating rates,” and thus the Notes and Substitute Notes should qualify as
“variable rate debt instruments” for U.S. federal income tax purposes. Accordingly, payments of
interest on the Notes and Substitute Notes should be included by a U.S. Holder as ordinary income
at the time the interest is paid or accrued, in accordance with the U.S. Holder’s regular method of
accounting for U.S. federal income tax purposes. U.S. Holders will generally recognize capital
gain or loss on the sale, exchange or retirement of the Notes and Substitute Notes in an amount
equal to the difference between the amount realized on the sale, exchange or retirement (excluding
any amount attributable to accrued but unpaid interest, which will generally be taxed as such) and
the U.S. Holder’s tax basis in the Notes or Substitute Notes.
U.S. Holders that Elect to Extend Maturity Date
An election to extend the maturity of all or any portion of the principal amount of the Notes
in accordance with the procedures described herein should not be a taxable event for U.S. federal
income tax purposes. Special Tax Counsel has reached this conclusion based, in part, upon the
Treasury regulations governing original issue discount on debt instruments (the “OID Regulations”).
Pursuant to Treasury regulations governing modifications to the terms of debt instruments (the
“Modification Regulations”), the exercise of an option by a holder of a debt instrument to defer
any scheduled payment of principal is a taxable event if, based on all the facts and circumstances,
such deferral is considered material under the Modification
Regulations. The Modification
Regulations do not specifically address the unique features of the Notes (including their economic
equivalence to an approximately two-year debt instrument containing put options). However, under
the OID Regulations, for purposes of determining the yield and maturity of a debt instrument that
provides the holder with an unconditional option or options, exercisable on one or more dates
during the term of the debt instrument, that, if exercised, require payments to be made on the debt
instrument under an alternative payment schedule or schedules (e.g., an option to extend the
maturity of the debt instrument), a holder is deemed to exercise or not exercise an option or
combination of
options in a manner that maximizes the yield on the debt instrument. Since the Spread will
periodically increase during the term of the Notes from an initial amount equal to +0.25% to an
amount equal to + 0.30%, under the OID Regulations, as of the Original Issue Date, original holders
of the Notes should be deemed to elect to extend the maturity of all of the principal amount of the
Notes to the Final Maturity Date in accordance with the procedures described above. Accordingly,
under the OID Regulations, the Final Maturity Date should be treated as the maturity date of the
Notes for U.S. federal income tax purposes. Although it is unclear how the OID Regulations should
apply in conjunction with the Modification Regulations to the Notes, Special Tax Counsel is of the
opinion that, based upon the OID Regulations, an election to extend the maturity of all or any
portion of the principal amount of the Notes in accordance with the procedures described above
should not be a taxable event for U.S. federal income tax purposes. In addition, the Notes should
not constitute contingent payment debt instruments that would be subject to certain Treasury
regulations governing contingent payment obligations (the “Contingent Payment Regulations”).
Under the treatment described above, the Notes should be treated as having been issued with de
minimis original issue discount. Therefore, the Notes should not be treated as having been issued
with original issue discount for U.S. federal income tax purposes.
Prospective investors should note that, in particular because of the absence of authority
directly addressing the unique features of the Notes, no assurance can be given that the Internal
Revenue Service (the “IRS”) will accept, or that the courts will uphold, the characterization and
the tax treatment of the Notes described above. If the IRS were successful in asserting that an
election to extend the maturity of all or any portion of the principal amount of the Notes is a
taxable event for U.S. federal income tax purposes, then Special Tax Counsel has indicated that
investors would be required to recognize any gain inherent in the Notes at such time upon the
exercise of such election. Because the Notes bear interest at
variable rates, the Trust believes
that changes in market interest rates are unlikely to have a significant effect on the market value
of the Notes. The market value of the Notes, however, is impossible to predict and there can be no
assurance that a U.S. Holder that makes such an election will not recognize a taxable gain if the
election is treated as a taxable event. Also, if the IRS were successful in asserting that the
Notes were subject to the Contingent Payment Regulations, Special Tax Counsel has indicated that
the timing and character of income thereon would be affected. Among other things, investors may be
required to accrue original issue discount income, subject to adjustments, at a “comparable yield”
on the issue price. Furthermore, any gain recognized with respect to the Notes would generally be
treated as ordinary income.
U.S. Holders that Do Not Elect to Extend Maturity Date
If a U.S. Holder does not elect to extend the maturity of the Notes as of an Election Date,
the U.S. Holder will not be subject to U.S. federal income tax in connection with that non-election
and will be subject to U.S. federal income tax on the Substitute Notes as described under
“—Interest on Notes and Sale of Notes.”
Information Withholding and Backup Withholding
In general, payments of interest on the Notes and Substitute Notes to, and payment of the
proceeds from the sale of Notes and Substitute Notes by, a non-corporate U.S. Holder will be
subject to information reporting requirements. In addition, such payments may be subject to backup
withholding unless the U.S. Holder provides an accurate taxpayer identification number or
certification of exempt status and otherwise complies with the backup withholding rules. The
foregoing is a summary of the views of Special Tax Counsel and is not to be construed as tax advice
for the benefit of investors. Prospective investors should consult their tax advisors regarding the
U.S. federal income tax consequences of an investment in, and extending the maturity of, the Notes.