As filed with the Securities and Exchange Commission on October 12, 2004
Registration No. 333-[ ]
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GRANITE MASTER ISSUER PLC
(Exact name of Registrant 1 as specified in its charter)
England and Wales
(State or other jurisdiction of incorporation or organization)
Fifth Floor, 100 Wood Street, London EC2V 7EX, United Kingdom (011 44 20)
7606 5451
(Address and telephone number of Registrant 1's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8600
(Name, address and telephone number of Registrant 1's agent for service)
GRANITE FINANCE FUNDING 2 LIMITED
(Exact name of Registrant 2 as specified in its charter)
England and Wales
(State or other jurisdiction of incorporation or organization)
Fifth Floor, 100 Wood Street, London EC2V 7EX, United Kingdom (011 44 20)
7606 5451
(Address and telephone number of Registrant 2's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8600
(Name, address and phone number of Registrant 2's agent for service)
GRANITE FINANCE TRUSTEES LIMITED
(Exact name of Registrant 3 as specified in its charter)
Jersey, Channel Islands
(State or other jurisdiction of incorporation or organization)
22 Grenville Street, St Helier, Jersey JE4 8PX, Channel Islands (011 44 1534)
609892
(Address and telephone number of Registrant 3's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 894-8600
(Name, address and phone number of Registrant 3's agent for service)
------------------------------------------------
Copies to:
Phil Robinson Michael Durrer, Esq. Christopher Bernard,Esq.
Northern Rock plc Sidley Austin Brown & Wood Allen & Overy LLP
Northern Rock House Woolgate Exchange One New Change
Gosforth 25 Basinghall Street London EC4M 9QQ
Newcastle upon Tyne NE34PL London EC2V 5HA United Kingdom
United Kingdom United Kingdom
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
==============================================================================
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
Title of securities Amount to be Proposed maximum Proposed maximum Amount of
to be registered registered offering price aggregate registration
per unit(1) offering price(1) fee(2)
- -------------------------------------------------------- ------------------- ------------------- ------------------- ---------------
Mortgage Backed Notes $12,000,000,000 100% $12,000,000,000 $1,520,400
- -------------------------------------------------------- ------------------- ------------------- ------------------- ---------------
Global intercompany loan(3) - - - -
- -------------------------------------------------------- ------------------- ------------------- ------------------- ---------------
Funding 2 interest in the mortgage trust(3) - - - -
- -------------------------------------------------------- ------------------- ------------------- ------------------- ---------------
Total $12,000,000,000 100% $12,000,000,000 $1,520,400
- -------------------------------------------------------- ------------------- ------------------- ------------------- ---------------
1 Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act, as amended.
2 $1,520,400 has been paid in connection with the filing of this Registration
Statement on Form S-3.
3 These items are not being offered directly to investors. Granite Finance
Trustees Limited is the registrant for Granite Finance Funding 2 Limited's
interest in the mortgages trust and is holding that interest in the
mortgages trust on behalf of Granite Finance Funding 2 Limited. The
interest of Granite Finance Funding 2 Limited in the mortgages trust will
be the primary source of payment on the global intercompany loan listed.
Granite Finance Funding 2 Limited is the registrant for the global
intercompany loan. The global intercompany loan will be the primary source
of payments on the notes. Granite Master Issuer plc is the registrant for
the notes.
The Registrants hereby amend this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrants shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
EXPLANATORY NOTE
This Registration Statement includes (i) a base prospectus and (ii) an
illustrative form of prospectus supplement for use in the offering of each
series of notes. Appropriate modifications will be made to the form of
prospectus supplement to disclose the specific terms of any particular series
of notes, the specific classes of notes to be offered thereby, and the terms
of the related offering. Each base prospectus used (in either preliminary or
final form) will be accompanied by a prospectus supplement.
Each of the Registrants has filed this Registration Statement on Form S-3 with
the Securities and Exchange Commission staff's permission based in part on the
staff's experience with prior, similar filings and Northern Rock plc's and
Granite Master Issuer plc's undertakings and representations.
The information in this prospectus supplement is not complete and may be
amended. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus supplement and the accompanying prospectus are not an offer to sell
these securities and are not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
Form of Prospectus Supplement
Subject to completion dated January [ ], 2005
PROSPECTUS SUPPLEMENT DATED January [ ], 2005
to Prospectus dated January [ ] 2005
Granite Master Issuer plc
Issuer
The issuer will issue and sell Series [ ] Class [ ] Notes
Principal amount $[ ]
Interest rate [ ]
Interest payment dates [ ] day of [ ], [ ],
[ ] and [ ]
[Scheduled] [bullet] redemption dates [ ]
Final maturity date [ ]
Expected issuance date January [ ], 2005
Price to public $[ ]
Underwriting discount $[ ]
Proceeds to the issuer $[ ]
The series [ ] class [ ] notes form a portion of the class [ ] notes issued by
Granite Master Issuer plc. Payments of principal of the class [ ] notes are
subordinated to payments on the class [ ] notes.
You should review and consider the discussion under "Risk Factors" beginning
on page [27] of this prospectus supplement and page [9] of the accompanying
prospectus before you purchase any notes.
Application has been made to the Financial Services Authority in its capacity
as competent authority for the purposes of Part VI of the Financial Services
and Markets Act 2000 for the notes to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for such notes to be admitted to trading on the
London Stock Exchange's market for listed securities.
The notes are obligations of Granite Master Issuer plc only and are not
obligations of any other person. The primary asset securing the notes is the
repayment of a loan to Granite Master Issuer plc from Granite Finance Funding
2 Limited, which in turn is secured by a beneficial interest in a portfolio of
residential mortgage loans secured by properties located in England and
Scotland.
The notes are not insured or guaranteed by any United States or United Kingdom
governmental agency or instrumentality. Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of
the notes or determined that this prospectus supplement or the accompanying
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
[Underwriters]
S-2
Table of Contents
Prospectus Supplement Page Prospectus Page
- --------------------- ---- ---------- ----
Summary..........................S-4 Forward-looking statements.........3
Risk Factors.....................S-9 Important notice about
Maturity and repayment information presented in
considerations................S-10 this prospectus and the
The currency rate swap provider.S-12 accompanying prospectus
Underwriting....................S-13 supplement......................4
Annex A..........................A-1 Summary of prospectus..............6
The cut-off portfolio.........A-1 Risk factors......................27
US dollar presentation.......A-12 Defined terms.....................53
The issuer........................54
Use of proceeds...................55
The Northern Rock Group...........56
Funding 2.........................57
The mortgages trustee.............58
Holdings..........................59
GPCH Limited......................60
Issuance of notes.................63
The mortgage loans................67
Certain charactristics of
United Kingdom residential
mortgage market................92
The administrator and the
administration agreement.......97
Assignment of the mortgage
loans and related security....108
The mortgages trust..............119
The global intercompany loan
agreement.....................139
Cashflows........................147
Credit structure.................166
The Funding bridge loan..........174
The swap agreements..............176
Cash management for the
mortgages trustee and
Funding 2.....................182
Cash management for the issuer...186
Security for Funding 2's
obligations...................188
Security for the issuer's
obligations...................194
Description of the trust
deed..........................199
The notes........................201
Description of the US notes......207
Material legal aspects of the
mortgage loans and the
related security..............228
Material United Kingdom tax
consequences..................234
Material United States tax
consequences..................238
Material Jersey (Channel Islands)
tax considerations............242
ERISA Considerations.............243
Enforcement of foreign
judgments in England and
Wales.........................246
United States legal investment
considerations ...............247
Experts..........................248
Underwriting.....................249
Reports to noteholders...........253
Where investors can find more
information...................253
Listing and general information..254
Glossary.........................257
S-3
Information about these [ ] class [ ] notes is presented in two separate
documents: this prospectus supplement and the accompanying prospectus. This
prospectus supplement provides the specific terms of these [ ] class [ ]
notes. The prospectus provides general information about each series and class
of notes issued by Granite Master Issuer plc, including information on the
mortgages trust and the global intercompany loan which is essential to
understanding how principal of and interest on the [ ] class [ ] notes is
expected to be paid. Most of the information provided in the prospectus does
not appear in this prospectus supplement. Consequently, you should carefully
read both the prospectus and the prospectus supplement before you purchase any
of these [ ] class [ ] notes.
This prospectus supplement may supplement disclosure in the accompanying
prospectus.
In deciding whether to purchase these [ ] class [ ] notes you should reply
solely on the information in this prospectus supplement and the accompanying
prospectus. We have not authorized anyone to give you different information
about these [ ] class [ ] notes.
This prospectus supplement may be used to offer and sell these [ ] class [ ]
notes only if accompanied by the prospectus.
Neither this prospectus supplement nor the prospectus contains all of the
information included in the registration statement. The registration statement
also includes copies of the various contracts and documents referred to in
this prospectus supplement and the prospectus. You may obtain copies of these
documents for review. See "Where You Can Find More Information" in the
prospectus.
If you require additional information, the mailing address of our office
is [ ].
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The preceding Table of Contents and the Table of
Contents included in the accompanying prospectus provide the pages on which
these captions are located.
You can find definitions of capitalized terms used in this prospectus
supplement and the accompanying prospectus under the caption "Glossary" in the
accompanying prospectus.
References in this prospectus supplement to "we" or "us" mean the issuer and
references to "you" mean potential investors in the [ ] class [ ] notes.
Through and including [?], 2005, all dealers effecting transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
S-4
Summary
This summary does not contain all the information you may need to make an
informed investment decision. You shall need this entire prospectus supplement
and the accompanying prospectus before you purchase any notes.
Securities offered $[ ] [rate] [ ] class [ ] notes
These [ ] class [ ] notes are an issuance of
class [ ] notes which is part of our multiple
issuance series of notes. Our notes consists of
class A notes, class B notes, class M notes,
class C notes and class D notes. The [ ] class [
] notes are issued by us and are solely our
obligations.
We expect to issue other notes in the future of
various classes. These notes, including
additional class [ ] notes, may have interest
rates, payment dates, repayment terms and other
characteristics that differ from the [ ] class [
] notes. You will not receive notice of any
future issuance of notes and will not be asked
for your consent to any such issuance.
Interest The [ ] class [ ] notes will accrue interest at
an annual rate equal to [ ]. Interest will be
paid on each quarterly payment date.
Interest will accrue from [ ] 2005 and be
calculated on the basis of a 360-day year and
the actual number of days in each interest
period. We will make payments of interest on the
[ ] class [ ] notes on each payment date. The
payment dates are the [ ] day of each [ ], [ ],
[ ] and [ ].
Principal We expect to repay the principal amount
outstanding of the [ ] class [ ] notes on
[scheduled redemption dates] [bullet redemption
date] [controlled amortization dates] and are
obliged to do so if we have funds available for
that purpose. If the principal amount
outstanding of the [ ] class [ ] notes is
not repaid in full on the [scheduled redemption
dates] [bullet redemption date] noteholders
generally will not have any remedies against us
until [ ] which is the final maturity date of
the [ ] class [ ] notes. In addition, if
the outstanding principal amount of the [ ]
class [ ] notes is not repaid in full on the
[bullet redemption date] these notes will
become pass-through notes and, subject to the
principal payment rules described below under
"Cashflow - [ ]" and "Cashflow - [ ]"
in the prospectus, will receive payments of
principal on each payment date thereafter in
the amounts, and to the extent available, until
repaid in full.
S-5
Payment of principal of the [ ] class notes may
be deferred on their [scheduled] [bullet]
redemption date [controlled amortization date]
at a time when they are needed to provide the
required subordination for more senior classes
of notes. Any such deferral of principal
repayment will continue until the required
subordination for such senior classes is
restored through repayment of the senior classes
or the issuance of sufficient additional
subordinated notes. See "Risk factors - Payments
of class B, class M, class C and class D notes
may be delayed or reduced because of
subordination provisions" in the prospectus.
Principal of the [ ] class [ ] notes may be
repaid earlier than expected if a trigger event
occurs or an event of default occurs in respect
of these notes. See "Maturity and repayment
considerations" below and "The Mortgages Trust -
Mortgages Trust allocation and distribution of
principal receipts on or after the occurrence of
a trigger event" in the prospectus.
Subordination and credit
enhancement The class [ ] required subordinated percentage
is [ ]%.
Payments of principal and interest on class [ ]
notes, including the [ ] class [ ] notes, are
subordinated to payments of principal and
interest on [class [ ] notes and class [ ]
notes]], including amounts of principal to be
credited to the cash accumulation subledgers of
those more senior classes of notes. In addition,
amounts of principal otherwise available to pay
principal of the [ ] class [ ] notes may be used
to pay interest on more senior classes of notes.
See "Credit Structure - Use of Funding 2
principal receipts to pay Funding 2 income
deficiency" in the prospectus.
No payment of principal will be made on any
class [ ] note unless after making that payment
the remaining aggregate amount of subordination
subordinated amount of class [ ] notes is at
least equal to each class of required
subordinated amount of each class of notes. See
[ ] in prospectus.
The issuer may at any time change the required
subordination percentage for the required class
[ ] notes or any other class of notes, or the
method of calculating the amounts of that
subordination, without your consent or the
consent of any other noteholders if the rating
agencies consent. See [ ] in the prospectus.
S-6
Funding 2 target reserve
percentage [ ]%
Losses Losses on the mortgage loans and principal
receipts applied to pay interest on more senior
classes of notes and certain expenses of the
issuer may reduce the amount of principal
available to repay principal of the [ ] class
[ ] notes. Losses on the mortgage loans will
be allocated to the classes of notes in inverse
order of seniority, beginning with the class D
notes. No losses will be allocated to the [ ]
class [ ] notes until the aggregate amount of
losses exceeds the initial principal amount
outstanding of each class of notes junior to
the [ ] class [ ] notes. See "The global
intercompany loan - [ ]" and "Credit
Structure- [ ]" in the prospectus.
Optional redemption
by the issuer We have the right to redeem the [ ] class [ ]
notes in whole but not in part:
o on any day on which the principal amount
outstanding of the [ ] class [ ] notes
is less than [10%] of the initial
outstanding principal balance of the [ ]
class [ ] notes; and
o the payment date falling in [ ]
[step-up-date] or any payment date
thereafter.
Security for the notes The [ ] class [ ] notes are secured primarily by
our rights under the [ ] class [ ] loan tranche
of the global intercompany loan. In addition, we
have granted security for the benefit of
noteholders in certain of our accounts. See
"Security for the issuer's obligations" in the
prospectus.
The [ ] class [ ]
loan tranche We have entered into a global intercompany
loan with Funding 2. The portion of the
global intercompany loan which secures
payment of principal of and interest on the [
] class [ ] notes is the [ ] class [ ] loan
tranche. The principal amount outstanding,
repayment terms and required subordination
amounts of the [ ] class [ ] loan tranche
will be the same as those of the [ ] class [ ]
notes. A description of the global intercompany
loan is set forth in the prospectus under "The
global intercompany loan".
Events of default The [ ] class [ ] notes are subject to certain
events of default described under "Description
of the notes" in the prospectus.
Limited recourse The only source of payment for principal of or
interest on the [ ] class [ ] notes are:
o repayments of the [ ] class [ ] loan
tranche of the global intercompany loan;
and
S-7
o funds in the issuer transaction account
[[ ] class [ ] sub account] that are
allocable to the [ ] class [ ] notes
The mortgage trust The [ ] class [ ] loan tranche which is our
primary source of funds for the payment of
principal of and interest on the [ ] class [
] notes is a tranche of the global intercompany
loan and made by us to Funding 2. Funding 2
has secured its obligation to repay the global
intercompany loan by granting security over its
beneficial interest in the mortgages trust.
The assets of the mortgages trust consist
primarily of mortgage loans originated by
Northern Rock plc secured over residential
property located in England, Wales and
Scotland. The mortgage loans included in the
trust property are randomly selected from the
seller's portfolio of mortgage loans that meet
eligibility criteria for inclusion in the
mortgages trust. These criteria are discussed
in the prospectus under "Assignment of the
mortgage loans and related security". For a
description of the types of mortgage loans
originated by the seller as well as the
seller's lending criteria and related matters,
see "The Mortgage Loans" in the prospectus.
The aggregated outstanding current balance of
mortgage loans in the mortgages trust as at [ ]
2005 was $[ ]. See Annex A to this prospectus
supplement for detailed financial and
statistical information on the mortgage loans.
Issuer accounts The issuer transaction account
Other issuer notes The [ ] class [ ] notes are the first
subclass of notes issued by the issuer. Only
the [ ] class [ ] notes are being offered by
this prospectus supplement on and accompanying
prospectus. As of the closing date, the dollar
equivalent aggregate principal amount
outstanding of notes issued by us, including
the [ ] class [ ] notes, will be:
class A $
class B $
class M $
class C $
class D $
See Annex A for a description of US dollar
presentation in this prospectus supplement
S-8
Stock exchange listing Application has been made to the Financial
Services Authority in its capacity as competent
authority for the purposes of Part VI of the
Financial Services and Markets Act 2000 for
notes issued during the period of twelve months
from the date of the prospectus to be admitted
to the official list maintained by the UK
Listing Authority. Application has also been
made to the London Stock Exchange plc for such
notes to be admitted to trading on the London
Stock Exchange's market for listed securities.
[Luxembourg listing; non-listed notes]
Ratings We will issue the [ ] class [ ] notes only if
they are rated at least [ ] or its equivalent
by at least one nationally recognized rating
agency. See "Risk Factors - Ratings assigned
to the notes may be lowered or withdrawn after
you purchase the notes, which may lower the
market value of the notes."
Issuer swaps We will enter into an interest rate and
currency swap with the interest rate interest
rate swap provider in order to hedge against
the possible variance between the interest
received by us under the [ ] class [ ] loan
tranche, which will be related to sterling
[LIBOR for three month sterling deposits] and
the interest which is payable on the [ ] class
[ ] notes, which will be related to [US dollar
LIBOR for three month dollar deposits]; and to
hedge against fluctuations in the exchange rate
in respect of principal received under the [ ]
class [ ] loan tranche, which will be paid in
sterling, and principal which we are obliged to
repay in dollars on the [ ] class [ ] notes.
See "Credit structure - issuer currency swaps"
in the prospectus.
S-9
Risk Factors
The information in this section and in "Risk Factors" in the
accompanying prospectus describes the principal risks associated with an
investment in the [ ] class [ ] notes. You should read these sections closely
and consider the risks carefully.
[Selected risk factors related to the position of the [ ] class [ ]
notes in the capital structure of the transaction]
S-10
Maturity and repayment considerations
The average lives of the [ ] class [ ] notes cannot be stated because
the actual rate of repayment of the mortgage loans and redemption of the
mortgage loans and a number of other relevant factors are unknown.
Calculations of the possible average lives of the [ ] class [ ] notes can be
made, however, based on certain assumptions. The assumptions used to calculate
the possible average lives of the [ ] class [ ] notes in the following table
include that:
(1) [each series and class of notes is repaid in full by its final
maturity date]
(2) neither the issuer security nor the Funding 2 security is enforced;
(3) the aggregate current balance of mortgage loans in the mortgages
trust will not fall below an amount equal to the product of [1.05]
and the principal amount outstanding of all notes of the issuer at
any time;
(4) no asset trigger event or non-asset trigger event occurs;
(5) no event occurs that would cause payments on the [ ] class [ ]
notes to be deferred;
(6) [the issuer exercises its option to redeem the [each series and
class of] notes on the step-up date, if any, relating to such
notes;
(7) the [ ] class [ ] notes are issued on January [o], 2005;
(8) each payment made by the issuer to the noteholders is paid on the
[20th] day of the relevant month in which such payment is payable,
regardless of whether such date is a business day;
(9) no interest or fees are paid from mortgages trustee principal
receipts, Funding 2 available principal receipts or issuer
available principal receipts;
(10) the mortgage loans are not subject to any defaults or losses, and
no mortgage loan falls into arrears; and
(11) the long-term, unsecured, unsubordinated and unguaranteed debt
obligations of the seller continue to be rated at least "A2" by
Moody's, "A+" by Fitch and "A" by Standard & Poor's.
Assumptions (1), (6) and (7) reflect the issuer's current expectations,
although no assurance can be given that repayment of the notes will occur as
described. Assumptions (2) through (5) and (9) through (11) relate to
unpredictable circumstances.
Based upon the foregoing assumptions, the approximate average lives of
the dollar notes, at various constant payment rates for the mortgage loans,
would be as follows:
S-11
Possible average life of the
Constant payment rate (% per annum) class [ ] notes
- ---------------------------------- ----------------------------
(years)
----------------------------
5%
10%
15%
20%
25%
30%
35%
The average lives of the [ ] class [ ] notes are subject to factors
largely outside the control of the issuer and consequently no assurance can be
given that these assumptions and estimates are realistic and they must
therefore be viewed with considerable caution. For more information relating
to the risks involved in the use of these estimated average lives, see "Risk
factors - The yield to maturity of the notes may be adversely affected by
prepayments or redemptions on the mortgage loans or repurchases of mortgage
loans by the seller" in the prospectus.
S-12
The currency rate swap providers
[TO BE ADDED UPON SELECTION OF CURRENCY SWAP PROVIDERS]
S-13
Underwriting
United States
We have agreed to sell, and [o], [o] and [o] (the "lead underwriters")
and the other underwriters for the notes listed in the following table have
agreed to purchase, the principal amount of those notes listed in that table
(also called the "US notes"). The terms of these purchases are governed by an
underwriting agreement among us, the lead underwriters and the underwriters.
The underwriters or affiliates of certain of the underwriters have also agreed
to pay and subscribe for the other classes of notes not being offered pursuant
to this prospectus on the closing date.
Principal
amount of the
Underwriters of the [ ] class [ ] notes [ ] class [ ] notes
- ----------------------------------------- --------------------
[o] USD[o]
[o] USD[o]
[o] USD[o]
[o] USD[o]
[o] USD[o]
--------------------
Total USD[o]
====================
The price to the public as a percentage of the principal balance of the
US notes will be [o]%.
We have agreed to pay to the underwriters of the [ ] class [ ] notes a
selling commission of [o]% of the aggregate principal amount of the [ ] class
[ ] notes and a management and underwriting fee of [o]% of the aggregate
principal amount of the series [ ] class [ ] notes.
The lead underwriters of the offered notes have advised us that the
underwriters propose initially to offer the US notes to the public at the
offering price stated on the cover page of the prospectus supplement, and to
some dealers at that price, less a concession not in excess of [o]% per [ ]
class [ ] note, to certain other brokers and dealers.
Additional out-of-pocket expenses (other than underwriting discounts and
commissions stated above) solely in relation to the US notes are estimated to
be approximately $[o].
S-14
Annex A
The cut-off date mortgage portfolio
The statistical and other information contained in this prospectus
supplement has been complied by reference to the mortgage loans in the cut-off
date mortgage portfolio. [The U.S. dollar figures set forth in the tables
below have been rounded to the nearest cent following their conversion from
pounds sterling.] Columns stating percentage amounts may not add to 100% due
to rounding. A mortgage loan will have been removed from the additional
mortgage portfolio (which comprised a portion of the cut-off date portfolio)
if in the period up to (and including) the assignment dated on or about [o]
the mortgage loan is repaid in full or if the mortgage loan does not comply
with the terms of the mortgage sale agreement on or about the [o] assignment
date. Once such mortgage loans are removed, the seller will then randomly
select from the mortgage loans remaining in the additional mortgage portfolio
those mortgage loans which will be included in the additional assigned
mortgage portfolio once the determination had been made as to the anticipated
principal balances of the notes to be issued and the corresponding size of the
trust that would be required ultimately to support payments on the notes. It
is not expected that the characteristics of the mortgage portfolio as of the
closing date will differ materially from the characteristics of the cut-off
date mortgage portfolio. The U.S. dollar numbers in the following tables have
been calculated based on the currency exchange rate of [specify exchange
rate].
[o] of the mortgages securing the mortgage loans in the cut-off date
mortgage portfolio (or [o]% of the aggregate current balance of the mortgage
loans as of the cut-off date) were on freehold properties or heritable
properties (being the Scots law equivalent of freehold) and [o] of the
mortgages securing the mortgage loans in the cut-off date mortgage portfolio
(or [o]% of the aggregate current balance of the mortgage loans as of the
cut-off date) are on leasehold properties.
We do not expect the characteristics of the mortgage portfolio as of the
closing date to differ materially from the characteristics of the cut-off date
mortgage portfolio. Unless we indicate otherwise, the following description
relates to types of mortgage loans that could be included in the mortgage
portfolio as of the closing date or on any subsequent date.
The cut-off date mortgage portfolio was drawn up as at [o], 2004 and
comprised [o] mortgage loans having an aggregate current balance of (GBP)[o]
as at that date. The seller originated the mortgage loans in the cut-off date
mortgage portfolio between July 1, 1995 and [o], 2004. None of the mortgage
loans in the additional mortgage portfolio had an aggregate monthly payment
that is overdue by one or more months as of the assignment date on [o], 2004.
The borrowers in respect of [o] of the mortgage loans in the cut-off
date mortgage portfolio (or [o]% of the aggregate current balance of the
mortgage loans as of the cut-off date) have agreed to have their monthly
mortgage payments to the seller directly debited from their bank accounts.
[o] mortgage loans in the cut-off date mortgage portfolio (or [o]% of
the aggregate current balance of the mortgage loans as of the cut-off date)
were fixed rate mortgage loans. The remaining [o] of the mortgage loans in the
cut-off date mortgage portfolio (or [o]% of the aggregate current balance of
the mortgage loans as of the cut-off date) were standard variable rate
mortgage loans, discounted variable rate mortgage loans, "Together", "Together
Connections", "Connections" and flexible capped rate mortgage loans, as
described below.
[o] of the mortgage loans in the cut-off date mortgage portfolio (or
[o]% of the aggregate current balance of the mortgage loans as of the cut-off
date) were flexible mortgage loans, [o]
A-15
mortgage loans (or [o]% of the aggregate current balance of the mortgage loans
as of the cut-of-date) of which were Together mortgage loans.
A-16
Types of property
Aggregate Aggregate Number
current current of
balance balance % of mortgage % of
Type of property ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
Expected seasoning of mortgage loans at closing
The following table shows length of time since the mortgage loans were
originated as of the closing date.
Aggregate Aggregate Number
current current of
Age of mortgage loans balance balance % of mortgage % of
(months) ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
The weighted average seasoning of mortgage loans as of the closing date
is expected to be [o] months and the maximum seasoning of mortgage loans as of
the closing date is expected to be [o] months. The minimum seasoning of the
mortgage loans as of the closing date is expected to be [o] months.
A-17
Years to maturity at closing
Aggregate Aggregate Number
current current of
Years to maturity balance balance % of mortgage % of
at closing ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
The weighted average remaining term of the mortgage loans as of the
closing date is expected to be [o] years and the maximum remaining term as of
the closing date is expected to be [o] years. The minimum remaining term as of
the closing date is expected to be less than one month.
Geographical distribution of mortgaged properties
The following table shows the spread of mortgaged properties securing
the mortgage loans throughout England, Wales and Scotland as of the cut-off
date. No properties are situated outside England, Wales and Scotland. The
geographical location of a property has no impact upon the seller's lending
criteria and credit scoring tests.
Aggregate Aggregate
current current Number of
balance balance % of mortgage % of
Region ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
East Anglia
East Midlands
Greater London
North
North West
Scotland
South East (excluding
London)
South West
Wales
West Midlands
Yorkshire
---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
Current loan-to-value ratios
The following table shows the range of current loan-to-value, or LTV,
ratios, which express the outstanding balance of a mortgage loan as at the
cut-off date divided by the value of the mortgaged property securing that
mortgage loan at the same date. The seller has not revalued any of the
mortgaged properties since the date of the origination of the related mortgage
loan, other than in respect of a mortgaged property of a related borrower that
has
A-18
remortgaged its property or to which the seller has made a further advance, as
described under "- Maximum LTV ratio".
Aggregate Aggregate Number
current current of
balance balance % of mortgage % of
Current LTV ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
The weighted average current loan-to-value ratio of the mortgage loans
at the cut-off date was [o]%.
Current indexed loan-to-value ratios
The following table shows the range of current indexed loan-to-value, or
LTV, ratios, which express the outstanding balance of a mortgage loan as of
the cut-off date divided by the indexed value of the mortgaged property
securing that mortgage loan as of the same date (calculated using the Halifax
House Price Index).
Aggregate Aggregate Number
current current of
balance balance % of mortgage % of
Current indexed LTV ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
---------- ---------- ----- -------- -----
A-19
Aggregate Aggregate Number
current current of
balance balance % of mortgage % of
Current indexed LTV ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
The weighted average current indexed loan-to-value ratio of the mortgage
loans as of the cut-off date was [o]%.
A-20
Outstanding current balances
Aggregate Aggregate Number
current current of
Range of current balance balance % of mortgage % of
Principal balance ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
The largest mortgage loan had a current balance as of the cut-off date
of (GBP)[o] or $[o]. The average current balance as of the cut-off date was
approximately (GBP)[o] or $[o].
Mortgage loan products
Aggregate Aggregate Number
current current of
balance balance % of mortgage % of
Mortgage loan products ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
Employment status
Aggregate Aggregate Number
current current of
balance balance % of mortgage % of
Employment status ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
A-21
Aggregate Aggregate Number
current current of
balance balance % of mortgage % of
Employment status ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
Approximately [o]% of the aggregate current balance of the mortgage
loans as of the cut-off date were made to borrowers under the seller's fast
track program as described under "- Characteristics of the mortgage loans -
Lending criteria".
Distribution of fixed rate mortgage loans
Fixed rate mortgage loans remain at the relevant fixed rate for a period
of time as specified in the offer of advance, after which they move to the
seller's standard variable rate or some other rate as specified in the offer
of advance.
Aggregate Aggregate Number
current current of
balance balance % of mortgage % of
Fixed rate % ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
Month/year in which fixed rate period ends
Aggregate Aggregate Number
Month/Year in current current of
which fixed rate balance balance % of mortgage % of
period ends ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
A-22
Repayment terms
Aggregate Aggregate Number
current current of
balance balance % of mortgage % of
Type of repayment plan ((GBP)) (US$) total loans total
- ----------------------- ---------- ---------- ----- -------- -----
---------- ---------- ----- -------- -----
Total
========== ========== ===== ======== =====
A-23
Certain characteristics of the United Kingdom residential mortgage market
CPR rates
The quarterly constant payment rate ("CPR") data presented below was
calculated by dividing the amount of scheduled and unscheduled repayments of
mortgage loans in a quarter by the quarterly balance of mortgage loans
outstanding for building societies in the UK. These quarterly scheduled and
unscheduled repayment rates were then annualized using standard methodology.
You should note that the CPR data presented below and in the accompanying
prospectus understates the seller's historical CPR data for mortgage loans
originated by the seller (and therefore the expected CPR for mortgage loans
included in the mortgages trust) as the data presented below and in the
accompanying prospectus is based upon a percentage of the total UK residential
mortgage market which has been increasing over time, and as the seller's CPR
data (which calculates the amount of scheduled and unscheduled repayments on a
monthly basis) includes the effect of product switches, which results in a
higher CPR.
The following table shows the actual annualized CPR experience of the
mortgage loans that have been assigned to the mortgages trust between June
2004 and December 2004. For the actual annualized CPR experience of the
mortgage loans assigned to the mortgages trust between March 26, 2001 and May
2004, see "Characteristics of the United Kingdom residential mortgage market"
in the accompanying prospectus. You should note that the table covers a
relatively short period of time and that the actual annualized CPR experience
of the seller may differ over time from the data presented below and in the
accompanying prospectus. Since the seller may assign new mortgage loans and
their related security to the mortgages trustee after the Funding 2 program
date, you should note that the actual annualized CPR experience of any new
mortgage loans assigned to the mortgages trustee after the closing date may
also differ from the data presented below and in the accompanying prospectus.
Month Annualized CPR
June 2004 49.41%
July 2004 44.04%
August 2004 [o]%
September 2004 [o]%
October 2004 [o]%
November 2004 [o]%
December 2004 [o]%
Over the past 40.5 years, quarterly CPR experienced in respect of
residential mortgage loans made by building societies have been between 9.5%
and 14.0% for approximately 70.6% of that time. See "Characteristics of United
Kingdom residential mortgage market" in the accompanying prospectus.
Aggregate Aggregate Aggregate Aggregate Aggregate
Quarters quarters quarters quarters quarters
over 40 CPR over 40 CPR over 40 CPR over 40 over 40
CPR (%) years (%) years (%) years (%) years CPR (%) years
- ------- -------- ---- --------- ---- --------- ---- -------- ------ --------
7.0 0 10.5 18 14.0 6 17.5 1 21.0 0
7.5 0 11.0 18 14.5 2 18.0 1 21.5 0
8.0 4 11.5 16 15.0 3 18.5 1 22.0 1
8.5 1 12.0 19 15.5 2 19.0 1 22.5 2
9.0 6 12.5 13 16.0 4 19.5 2 23.0 0
9.5 9 13.0 10 16.5 2 20.0 2 23.5 0
10.0 10 13.5 4 17.0 1 20.5 1 24.0 0
- ----------
A-24
Source of repayment and outstanding mortgage information: Bank of England
Over the past 40.5 years, the highest single quarter CPR experienced in
respect of residential mortgage loans made by building societies was recorded
in September 2002 at a level of 22.41%. The lowest level was 7.94% in June and
March of 1974. The highest four quarter rolling average CPR over the same 40.5
year period was 21.13%. The lowest was 8.84%. For the four quarter rolling
average CPR between March 1964 and December 2003, see "Characteristics of
United Kingdom residential mortgage market" in the accompanying prospectus.
The following table sets forth the four quarter rolling CPR since [December
2003].
four
CPR for quarter
the rolling
quarter average
Date (%) (%)
- ----------- ------- --------
March 2004 20.00 20.80
June 2004 21.50 21.13
September 2004 [ ] [ ]
December 2004 [ ] [ ]
- ----------
Source of repayment and outstanding mortgage information: Bank of England
You should also note that the prior two CPR tables and the CPR tables in
the accompanying prospectus present the historical CPR experience only of
building societies in the UK. During the late 1990's, a number of former
building societies (including Northern Rock) converted to stock form UK banks,
and the CPR experience of these banks is therefore not included in the
foregoing building society CPR data and the CPR data included in the
accompanying prospectus. According to the Council of Mortgage Lenders, the
four quarter rolling average CPR experience of banks during 1998 was 14.85%,
during 1999 was 16.08%, during 2000 was 15.34%, during 2001 was 18.69%, during
2002 was 21.81% and during 2003 was 23.82%.
Repossession rate
The repossession rate of residential mortgaged properties in the UK has
steadily declined since 1991. The repossession rate of residential mortgage
properties in the UK between 1982 and 2002 are presented in the section
"Characteristics of United Kingdom residential mortgage market" in the
accompanying prospectus.
Year Repossessions (%)
- ------ -------------------
2003 0.07
2004 [ ]
- -----------
Source: Council of Mortgage Lenders
In January 2004, the Council of Mortgage Lenders published arrears
figures for the year ended 2003, which showed that repossessions in the United
Kingdom had fallen to a 22-year low. In 2003, the repossession rate in the
United Kingdom was 0.07%. No assurance can be given as to whether, or for how
long, this downward trend will continue.
Arrears information
The percentage of mortgage loans in arrears in the UK has steadily
declined since 1993. The percentage of mortgage loans in arrears in the UK
between 1993 and 2002 are presented
A-25
in the section "Characteristics of United Kingdom residential mortgage market"
in the accompanying prospectus.
Arrears Arrears
6-12 12
months months +
Year (%) (%)
- ------------- -------- --------
2003 0.25 0.11
2004 [ ] [ ]
- ----------
Source: Council of Mortgage Lenders
The arrears table above shows the number of mortgage loans in arrears at
the end of the period as a percentage of the total number of mortgage loans
outstanding at the end of the period.
A-26
House price to earnings ratio
The following table shows the ratio for any one year of the average
annual value of houses (sourced from the DETR/CML Survey of Mortgage Lenders)
compared to the average annual salary in the UK as calculated from the weekly
earnings in April of the same year of male employees whose earnings were not
affected by their absence from work (as recorded by the Department for
Education and Employment). While this is a good indication of house
affordability, it does not take into account the fact that the majority of
households have more than one income to support a mortgage loan. For
information relating to house price to earning ratio for the period between
1998 and 2002, see "Characteristics of United Kingdom residential mortgage
market" in the accompanying prospectus.
Year House price to
earnings ratio
- ------------------- --------------
2003 5.64
2004 [ ]
- -----------------
Source: Council of Mortgage Lenders
House price index
UK residential property prices, as measured by the Nationwide House
Price Index and Halifax House Price Index (collectively the "Housing
Indices"), have generally followed the UK Retail Price Index over an extended
period. Nationwide is a UK building society and Halifax is a UK bank.
The housing market has been through three economic cycles since 1976.
High year to year increases in the Housing Indices occurred in the late 1970s
and late 1980s with greatest decrease in the early 1990s. The Housing Indices
have generally increased since 1996. The Housing Indices between 1973 and
[December 2004] are presented in the section "Characteristics of United
Kingdom residential mortgage market" in the accompanying prospectus.
UK Retail Nationwide House Halifax House
Price Index Price Index Price Index
----------------- ------------------- ------------------
% annual % annual % annual
Time in Quarters Index change1 Index change1 Index change1
- ---------------- ------- -------- --------- -------- ------- ---------
2004 Q1 184.5 2.6 279.7 15.6 480.4 16.9
2004 Q2 186.8 3.0 298.7 17.8 508.9 19.2
2004 Q3 [ ] [ ] [ ] [ ] [ ] [ ]
2004 Q4 [ ] [ ] [ ] [ ] [ ] [ ]
- ----------------
1 The percentage annual change is calculated in accordance with the following
formula: In (x/y) where "x" is equal to the current quarter's index value
and "y" is equal to the index value of the previous year's corresponding
quarter.
Source: Office for National Statistics, Nationwide, Halifax.
Arrears experience
The following table summarizes, in respect of Northern Rock's overall
mortgage portfolio, Northern Rock's experience administering mortgage loans in
arrears and its repossession experience for residential mortgage loans that
were originated by the seller. The information set forth below includes
information in respect of Northern Rock's experience in administering mortgage
loans secured by mortgaged properties located in England, Wales and Scotland.
The mortgage loans used for statistical purposes in the table below are
administered in accordance with Northern Rock's administration policies. You
should note the method by which
A-27
Northern Rock classifies mortgage loans as being in arrears, which is
described under "- Arrears and default procedures", and which is important in
helping you to understand Northern Rock's arrears and repossession experience
as set forth in the following table.
December 31, 1996(1) December 31, 1997(1)
-------------------------------- -------------------------------
(GBP) (GBP)
(mls) US$ (mls) % (mls) US$ (mls) %
Current balance 10,515 [o] n/a 12,119 [o] n/a
Number of mortgage loans 292,222 292,222 n/a 315,184 315,184 n/a
outstanding
Current balance of loans in
arrears
1 to 2 months 231.3 [o] 2.20 283.4 [o] 2.34
2 to 3 months 82.0 [o] 0.78 71.2 [o] 0.59
3 to 6 months 93.5 [o] 0.89 78.1 [o] 0.64
6 to 12 months 83.5 [o] 0.79 56.3 [o] 0.46
Over 12 months 96.9 [o] 0.92 45.1 [o] 0.37
Total current balance of 587.2 [o] 5.58 534.1 [o] 4.41
mortgage loans in arrears
Number of mortgage loans
outstanding in arrears
1 to 2 months 6,136 6,136 2.10 6,922 6,922 2.20
2 to 3 months 2,247 2,247 0.77 1,793 1,793 0.57
3 to 6 months 2,485 2,485 0.85 1,911 1,911 0.61
6 to 12 months 2,005 2,005 0.69 1,322 1,322 0.42
Over 12 months 2,104 2,104 0.72 940 940 0.30
Total number of mortgage loans 14,977 14,977 5.13 12,888 12,888 4.09
outstanding in arrears
Repossessions during year 1,133 1,133 0.39 956 956 0.30
Amount of mortgage loan losses 14 [o] n/a 14 [o] n/a
Mortgage loan losses as % of 0.13% 0.13% n/a 0.12% 0.12% n/a
total current balance
December 31, 1998(1) December 31, 1999(1)
-------------------------------- -------------------------------
(GBP) (GBP)
(mls) US$ (mls) % (mls) US$ (mls) %
Current balance 13,720 [o] n/a 15,524 [o] n/a
Number of mortgage loans 327,088 327,088 n/a 338,149 338,149 n/a
outstanding
Current balance of loans in
arrears
1 to 2 months 244.4 [o] 1.78 247.5 [o] 1.59
2 to 3 months 101.8 [o] 0.74 62.5 [o] 0.40
3 to 6 months 93.7 [o] 0.68 71.7 [o] 0.46
6 to 12 months 51.2 [o] 0.37 36.0 [o] 0.23
Over 12 months 37.5 [o] 0.27 21.3 [o] 0.14
Total current balance of 528.6 [o] 3.85 439.0 [o] 2.83
mortgage loans in arrears
Number of mortgage loans
outstanding in arrears
1 to 2 months 6,040 6,040 1.85 5,428 5,428 1.61
2 to 3 months 2,579 2,579 0.79 1,470 1,470 0.43
3 to 6 months 2,269 2,269 0.69 1,749 1,749 0.52
6 to 12 months 1,174 1,174 0.36 870 870 0.26
Over 12 months 756 756 0.23 447 447 0.13
Total number of mortgage loans 12,818 12,818 3.92 9,964 9,964 2.95
outstanding in arrears
Repossessions during year 875 875 0.27 763 763 0.23
Amount of mortgage loan losses 10.8 [o] n/a 8.5 [o] n/a
Mortgage loan losses as % of 0.08% 0.08% n/a 0.05% 0.05% n/a
total current balance
December 31, 2000(1) December 31, 2001(1)
-------------------------------- -------------------------------
(GBP) (GBP)
(mls) US$ (mls) % (mls) US$ (mls) %
Current balance 17,858 [o] n/a 21,639 [o] n/a
Number of mortgage loans 367,963 367,963 n/a 414,023 414,023 n/a
outstanding
Current balance of loans in
arrears
1 to 2 months 218.2 [o] 1.22 231.98 [o] 1.07
2 to 3 months 77.1 [o] 0.43 78.08 [o] 0.36
3 to 6 months 69.3 [o] 0.39 74.11 [o] 0.34
6 to 12 months 34.8 [o] 0.19 36.17 [o] 0.17
Over 12 months 13.2 [o] 0.07 9.27 [o] 0.04
Total current balance of 412.6 [o] 2.31 429.60 [o] 1.99
mortgage loans in arrears
Number of mortgage loans
outstanding in arrears
1 to 2 months 5,104 5,104 1.39 4,861 4,861 1.17
2 to 3 months 1,896 1,896 0.52 1,694 1,694 0.41
3 to 6 months 1,601 1,601 0.44 1,598 1,598 0.39
6 to 12 months 800 800 0.22 736 736 0.18
Over 12 months 290 290 0.08 191 191 0.05
Total number of mortgage loans 9,691 9,691 2.63 9,080 9,080 2.19
outstanding in arrears
Repossessions during year 620 620 0.17 658 658 0.16
Amount of mortgage loan losses 7 [o] n/a 5.27 [o] n/a
Mortgage loan losses as % of 0.04% 0.04% n/a 0.03% 0.03% n/a
total current balance
December 31, 2002(1) December 31, 2003(1)
-------------------------------- -------------------------------
(GBP) (GBP)
(mls) US$ (mls) % (mls) US$ (mls) %
Current balance 28,955 [o] n/a 36,875 [o] n/a
Number of mortgage loans 489,690 489,690 n/a 531,403 531,403 n/a
outstanding
Current balance of loans in
arrears
1 to 2 months 271.07 [o] 0.94 349.77 [o] 0.95
2 to 3 months 104.94 [o] 0.36 123.18 [o] 0.33
3 to 6 months 96.55 [o] 0.33 101.42 [o] 0.28
6 to 12 months 32.60 [o] 0.11 36.86 [o] 0.10
Over 12 months 7.39 [o] 0.03 5.96 [o] 0.02
Total current balance of 512.55 [o] 1.77 617.19 [o] 1.67
mortgage loans in arrears
Number of mortgage loans
outstanding in arrears
1 to 2 months 4,557 4,557 0.93 5,260 5,260 0.99
2 to 3 months 2,150 2,150 0.44 1,965 1,965 0.37
3 to 6 months 1,946 1,946 0.40 1,674 1,674 0.32
6 to 12 months 658 658 0.13 634 634 0.12
Over 12 months 133 133 0.03 106 106 0.02
Total number of mortgage loans 9,444 9,444 1.93 9,639 9,639 1.81
outstanding in arrears
Repossessions during year 573 573 0.06 509 509 0.09
Amount of mortgage loan losses 3.72 [o] n/a 1.00 [o] n/a
Mortgage loan losses as % of 0.01% 0.01% n/a 0.00% 0.00% n/a
total current balance
A-28
June 30, 2004(1)
--------------------------------
(GBP)
(mls) US$ (mls) %
Current balance [o] [o] n/a
Number of mortgage loans [o] [o] n/a
outstanding
Current balance of loans in
arrears
1 to 2 months [o] [o] [o]
2 to 3 months [o] [o] [o]
3 to 6 months [o] [o] [o]
6 to 12 months [o] [o] [o]
Over 12 months [o] [o] [o]
Total current balance of [o] [o] [o]
mortgage loans in arrears
Number of mortgage loans
outstanding in arrears
1 to 2 months [o] [o] [o]
2 to 3 months [o] [o] [o]
3 to 6 months [o] [o] [o]
6 to 12 months [o] [o] [o]
Over 12 months [o] [o] [o]
Total number of mortgage loans [o] [o] [o]
outstanding in arrears
Repossessions during year [o] [o] [o]
Amount of mortgage loan losses [o] [o] n/a
Mortgage loan losses as % of [o]% [o]% n/a
total current balance
______________
Provided by Northern Rock plc
(1) Year ended December 31 or six months ended June 30, as applicable
Repossessions expresses the number of mortgaged properties that the
administrator has taken into possession during the period, as a percentage of
the number of mortgage loans outstanding at the end of the period.
In January 2004, the Council of Mortgage Lenders published arrears
figures for the year ended 2003, which showed that repossessions in the United
Kingdom had fallen to a 22-year low. No assurance can be given as to whether,
or for how long, this downward trend will continue. See "Risk factors - The
timing and amount of payments on the mortgage loans could be affected by
various factors which may adversely affect payments on the notes" in the
prospectus.
US dollar presentation
Translations of pounds sterling into US dollars, unless otherwise stated
in this prospectus supplement, have been made at the rate of (GBP)[o] = $1.00,
which reflects the noon buying rate in the City of New York for cable
transfers in sterling per US$1.00 as certified for customs purposes by the
Federal Reserve Bank on [o], 2005. Use of this rate does not mean that pound
sterling amounts actually represent those US dollar amounts or could be
converted into US dollars at that rate at any particular time.
References throughout this prospectus supplement to "(GBP)", "pounds" or
"sterling" are to the lawful currency for the time being of the United Kingdom
of Great Britain and Northern Ireland.
References in this prospectus supplement to "US$", "USD", "$", "US
dollars" or "dollars" are to the lawful currency of the United States of
America.
A-29
Sterling/US dollar exchange rate history*
[o], 2004
through Years ended December 31
[o], 2004 2003 2002 2001 2000
-------------- --------- ----------- ---------- ----------
Last(1) [o] 1.7858 1.6100 1.4546 1.4930
Average(2) [o] 1.6359 1.5038 1.4407 1.5160
High [o] 1.7858 1.6100 1.5038 1.6537
Low [o] 1.5541 1.4082 1.3727 1.3977
*
______________
Notes
(1) Last is the closing exchange rate on the last operating business day of
each of the years indicated, years commencing from January 1 or the next
operating business day.
(2) Average is the average daily exchange rate during the period.
[o], 2004
through
[o], 2004 [o], 2004 [o], 2004 [o], 2004 [o], 2004
------------ ---------- ---------- ---------- ---------
High [o] [o] [o] [o] [o]
Low [o] [o] [o] [o] [o]
*
______________
Source: Bloomberg
[Include exchange methodology for calculating US dollar equivalents of
non-dollar note issuances for purposes of table on p. S-6]
A-30
[Subject to completion, dated [o], 2005]
The information in this prospectus is not complete and may be amended. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Granite Master Issuer plc
Issuer
o We may issue from time to time class A, class B, class M, class C and
class D notes in one or more series. Each series will consist of one or
more classes or sub-classes of notes. One or more series and class of
notes may be issued at one time.
o The principal asset from which we will make payments of interest on, and
principal of, the notes is a global intercompany loan to an affiliated
company called Granite Finance Funding 2 Limited.
o The principal asset from which Granite Finance Funding 2 Limited will
make payments on the global intercompany loan is its interest in a pool
of UK residential mortgage loans originated by Northern Rock plc and held
in a master trust by Granite Finance Trustees Limited.
o Each mortgage loan is secured by a mortgaged property located in England,
Wales or Scotland. All of the transaction documents are governed by the
laws of England and Wales, Scotland, Jersey or New York.
o Only class A, class B, class M and class C notes will be offered pursuant
to this prospectus and related prospectus supplements.
The notes offered by this prospectus will be solely our obligation. The
notes will not be obligations of Northern Rock plc, any of its affiliates or
any of the other parties named in this prospectus other than us.
You should consider the discussion under the "Risk Factors" beginning on
page [27] of this prospectus before you purchase any notes.
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the Financial
Services and Markets Act 2000 for notes issued during the period of twelve
months from the date of this prospectus to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for such notes to be admitted to trading on the
London Stock Exchange's market for listed securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the notes or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Prospectus dated January [o], 2005
You should note that Granite Finance Funding Limited, a company of
common ownership with us, has an interest in the same trust property (being
the pool of UK residential mortgage loans originated by Northern Rock plc) as
Granite Finance Funding 2 Limited. Granite Finance Funding Limited has
established issuers which have issued notes and used the proceeds thereof to
make intercompany loans to Granite Finance Funding Limited, and Granite
Finance Funding Limited may establish from time to time new issuers which will
issue notes and make new intercompany loans to Granite Finance Funding
Limited. The notes issued by these issuers ultimately are, and any new notes
issued by such new Funding issuer ultimately will be, secured by the same
trust property as the notes issued by us under this prospectus and the related
prospectus supplements. References in this document to "Funding" means Granite
Finance Funding Limited and references to "Funding 2" means Granite Finance
Funding 2 Limited.
A note is not a deposit and none of the notes, payments under the
global intercompany loan or the underlying mortgage loans are insured or
guaranteed by any United Kingdom or United States governmental agency or
authority.
2
Forward-looking statements
This prospectus includes forward-looking statements including, but
not limited to, statements made under the captions "Risk factors", "The
mortgage loans", and "The administrator and the administration agreement".
These forward-looking statements can be identified by the use of
forward-looking terminology, such as the words "believes", "expects", "may",
"intends", "should" or "anticipates", or the negative or other variations of
those terms. These statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results and
performance of the notes, Northern Rock plc or the UK residential mortgage
industry to differ materially from any future results or performance expressed
or implied in the forward-looking statements. These risks, uncertainties and
other factors include, among others: general economic and business conditions
in the UK; currency exchange and interest fluctuations; governmental,
statutory, regulatory or administrative initiatives affecting Northern Rock
plc; changes in business strategy, lending practices or customer
relationships; and other factors that may be referred to in this prospectus.
Some of the most significant of these risks, uncertainties and other factors
are discussed under the caption "Risk factors", and you are encouraged to
carefully consider those factors prior to making an investment decision.
3
Important notice about information presented in this
prospectus and the accompanying prospectus supplement
We provide 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 and class of notes, including your series and class, and (b) the
accompanying prospectus supplement, which will describe the specific terms of
your series and class of notes, including:
o the timing of interest and principal payments;
o financial and other information about our assets;
o information about enhancement for your series or class;
o the ratings for your class;
o the method for selling the notes; and
o other terms and conditions not contained herein that are
applicable to such series and class.
This prospectus may be used to offer and sell any series and class of
notes only if accompanied by the prospectus supplement for that series and
class.
If the terms of a particular series or class of notes vary between
this prospectus and the accompanying prospectus supplement, you should rely on
the information in the accompanying prospectus supplement.
You should rely only on the information provided in this prospectus
and the accompanying prospectus supplement including the information
incorporated by reference. We have not authorized anyone to provide you with
different information.
We include cross-references in this prospectus and in the
accompanying prospectus supplement to captions in these materials where you
can find further related discussions. The Table of Contents in this prospectus
and in the accompanying prospectus supplement provide the pages on which these
captions are located.
Incorporation by Reference
The SEC allows us to incorporate by reference the information we file
with them about your notes. This means that we can disclose important
information to you by referring you to these documents. The information
incorporated by reference is an important part of this prospectus, and
information that we file later with the SEC about your notes will
automatically update and supersede this information.
You may request a copy of our filings at no cost by writing or
telephoning at the following address:
[ ]
Where You Can Find More Information
We will file reports and other information with the SEC about the
mortgages trust the property of which ultimately secures your notes. Our SEC
filings are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on their public reference rooms.
4
Table of Contents
Forward-looking statements.....................................................3
Important notice about information presented in this prospectus and
the accompanying prospectus supplement.....................................4
Summary of prospectus..........................................................6
Risk factors..................................................................27
Defined terms.................................................................53
The issuer....................................................................54
Use of proceeds...............................................................55
The Northern Rock Group.......................................................56
Funding 2.....................................................................57
The mortgages trustee.........................................................58
Holdings......................................................................59
GPCH Limited..................................................................60
Issuance of notes.............................................................63
The mortgage loans............................................................67
Certain characteristics of United Kingdom residential mortgage market.........92
The administrator and the administration agreement............................97
Assignment of the mortgage loans and related security........................108
The mortgages trust..........................................................119
The global intercompany loan agreement.......................................139
Cashflows....................................................................144
Credit structure.............................................................166
The Funding bridge loan......................................................174
The swap agreements..........................................................176
Cash management for the mortgages trustee and Funding 2......................182
Cash management for the issuer...............................................186
Security for Funding 2's obligations.........................................188
Security for the issuer's obligations........................................194
Description of the trust deed................................................199
The notes....................................................................201
Description of the US notes..................................................207
Material legal aspects of the mortgage loans and the related security........228
Material United Kingdom tax consequences.....................................234
Material United States tax consequences......................................238
Material Jersey (Channel Islands) tax considerations.........................242
ERISA Considerations.........................................................243
Enforcement of foreign judgments in England and Wales........................246
United States legal investment considerations................................247
Experts......................................................................248
Underwriting.................................................................249
Reports to noteholders.......................................................253
Where investors can find more information....................................253
Listing and general information..............................................254
Glossary.....................................................................257
5
Summary of prospectus
The information in this section is a summary of the principal
features of the notes, including a description of the mortgage loans that will
generate the income for us to make payments on the notes and the contracts
that document the transaction. This summary does not contain all of the
information that you should consider before investing in the notes. You should
read the entire prospectus carefully, especially the risks of investing in the
notes discussed under "Risk factors".
Overview of the transaction
The following is an overview of the transaction as illustrated by the
"Structural diagram of the securitization transaction". The numbers in the
diagram refer to the numbered paragraphs in this section.
(1) On March 26, 2001, the seller assigned the initial mortgage
portfolio and the other initial trust property to the
mortgages trustee pursuant to the mortgage sale agreement
and retained an interest for itself in the trust property.
Since March 26, 2001 the seller has assigned (and may in
the future, from time to time assign) further mortgage
portfolios and the other further trust property to the
mortgages trustee pursuant to the mortgage sale agreement,
while continuing to retain an interest for itself in the
trust property. For a further description of the assignment
of the initial mortgage portfolio and the further mortgage
portfolios, see "Summary of the notes - Assignment of the
mortgage loans". The trust property consists of the
mortgage loans in the mortgage portfolio, their related
security, any accrued interest on those mortgage loans and
other amounts derived from those mortgage loans. The
mortgage loans are residential mortgage loans originated by
Northern Rock plc and secured over mortgaged properties
located in England, Wales and Scotland.
(2) The mortgages trustee holds the trust property on trust for
the benefit of the seller, Funding and Funding 2 pursuant
to a mortgages trust deed. The seller, Funding and Funding
2 each have a joint and undivided interest in the trust
property, but their entitlement to the proceeds from the
trust property is in proportion to their respective shares
of the trust property.
(3) Unless otherwise expressly provided in the mortgages trust
deed, the cash manager on behalf of the mortgages trustee
distributes interest and principal payments on the mortgage
loans and allocates losses in relation to the mortgage
loans to the seller, Funding and Funding 2 according to the
share that each of them then has in the trust property,
expressed as a percentage. These percentages fluctuate as
described under "Summary of the notes - The mortgages
trust".
(4) Under the terms of the global intercompany loan agreement,
we will make advances (each a loan tranche) to Funding 2 in
an amount equal to the gross proceeds of each class of
notes issued by us as part of a series. The aggregate of
the loan tranches, at any time, will constitute the global
intercompany loan. The amount outstanding under the global
intercompany loan agreement, may be increased from time to
time through additional loan tranches. Funding 2 will apply
the proceeds of each loan tranche:
o in payment of a contribution to the mortgages trustee
to acquire and/or increase its beneficial interest in
the trust property pursuant to the mortgages trust
deed. Upon receipt of any such contribution from
Funding 2, the mortgages trustee will pay these
funds:
6
(a) to the seller, as initial consideration for
additional mortgage loans to be assigned, from
time to time, by the seller to the mortgages
trustee;
(b) to the seller, as a special distribution to
acquire part of the seller share of the trust
property (which will have the effect of reducing
the seller share); or
(c) to Funding as a special distribution, to acquire
part of the Funding share of the trust property
(which will have the effect of reducing the
Funding share)
o to fund the Funding 2 reserve fund and/or to make a
deposit into the Funding 2 GIC account; or
o in payment back to us to refiance an existing loan
tranche.
From time to time Funding 2 will make deferred
contributions to the mortgages trustee pursuant to the
mortgages trust deed in respect of the Funding 2 share of
the trust property and from such deferred contributions
the mortgages trustee will from time to time make
corresponding payments of deferred purchase price to the
seller.
(5) In addition to paying certain of its own fees and expenses,
Funding 2 will use amounts received from its share in the
trust property to meet its obligations to pay interest,
principal and fees due to us under the global intercompany
loan agreement, to replenish the Funding 2 liquidity
reserve fund, if any, and to replenish the Funding 2
reserve fund. Funding 2's obligations to us under the
global intercompany loan agreement will be secured under
the Funding 2 deed of charge by, among other things,
Funding 2's interest in the trust property.
(6) Our obligations to pay interest on, and principal of, the
notes will be funded primarily from the payments of
interest and principal received by us from Funding 2 under
the global intercompany loan agreement. Our primary asset
will be our rights under the global intercompany loan
agreement. Neither you nor we will have any direct interest
in the trust property, although we will have a security
interest under the Funding 2 deed of charge in Funding 2's
interest in the trust property. Prior to the enforcement of
the issuer security, we may only repay a class of notes (or
part thereof) of any series on the relevant payment date
if:
o we have received principal repayments in respect of
the loan tranche that was funded by the issue of such
notes; and
o following such repayment there is sufficient credit
enhancement on that date for each outstanding class
of notes, either in the form of lower ranking classes
of notes or other forms of credit enhancement.
(7) Subject to satisfying certain issuance tests, we will issue
notes in separate series and classes from time to time.
Each series will consist of one or more class of notes and
will be offered pursuant to this prospectus and a
prospectus supplement setting out the terms of that series.
We may issue notes of any class on any date provided there
is sufficient credit enhancement on that date, either in
the form of lower ranking classes of notes or other forms
of credit enhancement. We will use the proceeds of each
series and class of notes to fund a new loan tranche [or to
fund an increase in the amount outstanding under existing
loan tranches.]
(8) [At any time after the Funding 2 program date and following
its entry into certain loan arrangements, Funding 2 will be
permitted to borrow funds and advance the
7
same to Funding under a bridge facility for use by Funding
for certain agreed purposes. Any such funds will not be
advanced to Funding 2 by us.]
(9) The accounts, reserve funds and swaps, and their function
in the transaction structure are described later in this
prospectus and in the related prospectus supplement. They
are included in the following diagram so that you can refer
back to see where they fit into the structure.
8
Structural diagram of the securitization transaction
-------------------- --------------------
| | Assignment of | |
| | mortgage portfolio (1) | |
| | (mortgage sale agreement) | |
| |----------------------------------------->| |
| THE SELLER | Contributions in respect of | MORTGAGES |
| Northern Rock plc | beneficial interest in the seller | TRUSTEE |
| (administration | share of the trust property | Granite Finance |
| agreement) |<-----------------------------------------| Trustees Limited |
| (cash management | Beneficial interest in the seller | (mortgage trust |
| agreement) | share of the trust property | deed) |
| |----------------------------------------->| |
| | | |
| | | |
| | | |
-------------------- --------------------
^ |
Contributions | | Beneficial
in respect of | | interest in the
beneficial | | Funding 2
interest in | | share of the
the Funding 2 | | trust property
share of the | | (2)(4)
trust property | | (mortgage trust
(4) | | deed) - - - - - - - - -
| v | Funding 2 basis |
-------------------- -------------------- rate
| | | | - - - - - - - | swap (9) |
| | Bridge loan (8) | | - - - - - - - - -
| | | |
| |<--------------------------| | - - - - - - - - -
| FUNDING | | FUNDING 2 | | Funding 2 |
| Granite Finance | Repayment of | Granite Finance | - - - - - - - GIC account (9)
| Funding Limited | Bridge loan (8) | Funding 2 Limited | | |
| | | | - - - - - - - - -
| |-------------------------->| |
| | | | - - - - - - - - -
| | | | - - - - - - - | Funding 2 |
| | | | reserve fund (9)
-------------------- -------------------- | |
^ | - - - - - - - - -
Global | | Principal of, and
intercompany | | interest on, the
loan (7) | | global
(global | | intercompany
intercompany | | loan (5)(6)
loan | |
agreement) | |
| v
-------------------- - - - - - - - - -
| GMI PLC | | |
| Granite Master |---------------- Issuer swaps
| Issuer plc | | (9) |
-------------------- - - - - - - - - -
^ |
Note proceeds (7) | | Principal of, and interest
| | on, the notes (6)
| v
---------------------------------------------------------------------------------------------------
| | | | |
| | | | |
--------------- --------------- --------------- --------------- ---------------
| Class A | | Class B | | Class M | | Class C | | Class D |
| Notes | | Notes | | Notes | | Notes | | Notes |
--------------- --------------- --------------- --------------- ---------------
9
Diagram of ownership structure
----------------------------------
| |
| SHARE TRUSTEE |
| The Law Debenture |
| Intermediary Corporation plc |
| |
----------------------------------
|
|
|
|
|
|
|
----------------------------------
| |
| HOLDINGS |
| Granite Finance Holdings |
| Limited |
| |
----------------------------------
/ | | \
/ | | \
/ | | \
/ | | \
/ | | \
/ | | \
/ | | \
/ | | \
/ | | \
-------------------- ----------------- ------------------ ------------------
| | | | | | | |
| | | | | | | |
| | | POST- | | | | |
| MORTGAGES | | ENFORCEMENT | | | | FUNDING 2 |
| TRUSTEE | | CALL OPTION | | FUNDING | | Granite Finance |
| Granite Finance | | HOLDER | | Granite Finance | | Funding 2 |
| Trustees Limited | | GPCH Limited | | Funding Limited | | Limited |
| | | | | | | |
| | | | | | | |
-------------------- ----------------- ------------------ ------------------
| | \
| | \
| | \
| | \
| | \
| | \
------------------ ------------------ ---------------
| | | | | |
| | | ISSUER | | |
| FUNDING | | Granite Master | | FUTURE |
| ISSUERS | | Issuer plc | | ISSUER |
| | | | | |
| | | | | |
------------------ ------------------ ---------------
This diagram illustrates the ownership structure of the principal parties to
the transaction:
o Each of the mortgages trustee, Funding, Funding 2 and the
post-enforcement call option holder is a wholly-owned subsidiary
of Granite Finance Holdings Limited.
o We are a wholly-owned subsidiary of Funding 2.
o The entire issued share capital of Holdings is held on trust by
a professional trust company under the terms of a discretionary
trust for the benefit of one or more charities. The professional
trust company is not affiliated with the seller. Any profits
received by Holdings, after payment of the costs and expenses of
Holdings, will be paid for the benefit of the Down's Syndrome
North East Association (UK) and for other charitable purposes
selected at the discretion of
10
the professional trust company. The payments on your notes will
not be affected by this arrangement.
o Funding 2 may establish an additional issuer or issuers in the
future.
The purpose of this diagram is to draw your attention to two facts:
o Firstly, the seller has no ownership interest in any of the entities in
the above diagram. As a result, the financial condition of the seller
should not directly affect the mortgages trustee, Funding, Funding 2, the
Funding issuers, us or, ultimately, investors in the notes, although the
seller still has a connection with the transaction for other reasons
(such as acting as administrator of the mortgage loans and as Funding 2
basis rate swap provider); and
o Secondly, Funding and Funding 2, which each have a beneficial interest in
the mortgages trust, have each established and may establish issuers that
have issued and will issue notes which are ultimately secured by the same
trust property (primarily consisting of the mortgage portfolio) as the
notes offered by us under this prospectus and the related prospectus
supplements. Subject to certain exceptions, allocations of the trust
property, including receipts of principal and interest, will be made pari
passu and pro rata as between Funding and Funding 2.
The issuer
Granite Master Issuer plc is a public limited company incorporated in
England and Wales. Its registered office is at Fifth Floor, 100 Wood Street,
London EC2V 7EX. References in this document to "we" or "us" mean the issuer
and references to "you" mean potential investors in the notes.
We are a newly created special purpose company and a wholly-owned
subsidiary of Granite Finance Funding 2 Limited. Our purpose is to issue notes
from time to time which represent our mortgage-backed obligations and to use
the proceeds to lend amounts equal to the proceeds of the notes to Granite
Finance Funding 2 Limited. We will not engage in any activities unrelated to
this purpose.
Funding 2
Granite Finance Funding 2 Limited is a newly created private limited
company incorporated in England and Wales. Its registered office is at Fifth
Floor, 100 Wood Street, London EC2V 7EX.
Funding 2 is a special purpose company. Funding 2 will borrow money
from us pursuant to the terms of the global intercompany loan agreement.
Funding 2 will use the money borrowed from us to pay to the mortgages trustee
contributions for the Funding 2 share of the trust property pursuant to the
mortgages trust deed or to refinance existing loans made by us to Funding 2.
Funding, Funding 2 and the seller together are beneficially entitled to all of
the trust property in accordance with their respective shares in the trust.
The mortgages trustee
Granite Finance Trustees Limited is a private limited company
incorporated in Jersey, Channel Islands. Its registered office is at 22
Grenville Street, St. Helier, Jersey JE4 8PX.
The mortgages trustee is a special purpose company. The purpose of
the mortgages trustee is to acquire from time to time additional trust
property from the seller and to hold all of the trust property on trust for
the seller, Funding and Funding 2 under the terms of the mortgages trust deed.
11
The seller, the administrator, the cash manager, the issuer cash manager and
the account bank
Northern Rock plc is a bank incorporated in England and Wales as a
public limited company. It is regulated by the Financial Services Authority.
Its registered office is at Northern Rock House, Gosforth, Newcastle upon Tyne
NE3 4PL.
The seller originated each of the mortgage loans which it assigned to
the mortgages trustee according to the seller's lending criteria applicable at
the time such mortgage loan was offered, which lending criteria were the same
as or substantially similar to the criteria described later in this
prospectus.
The seller acts as administrator of the mortgage portfolio under the
terms of the administration agreement, pursuant to which it has agreed to
continue to perform administrative functions in respect of the mortgage loans
on behalf of the mortgages trustee and the beneficiaries, including collecting
payments under the mortgage loans and taking steps to recover arrears. The
seller may not resign as administrator unless a successor administrator has
been appointed. In addition, the administrator may be replaced by a new
administrator if it defaults in its obligations under the administration
agreement.
The seller has also been appointed as the cash manager for the
mortgages trustee, Funding and Funding 2 to manage their bank accounts,
determine the amounts of and arrange payments to be made by them and keep
certain records on their behalf.
The seller has also been appointed as account bank in respect of the
Funding 2 GIC account and the mortgages trustee GIC account.
The seller will also be appointed as the issuer cash manager to
manage our bank account, determine the amounts of and arrange payments to be
made by us and keep certain records on our behalf.
Citibank, N.A. will be appointed as account bank to provide banking
services to us.
Lloyds TSB Bank plc has also been appointed as account bank to
provide banking services to Funding and Funding 2. Lloyds TSB Bank plc, Jersey
International Branch has been appointed as Jersey account bank to provide
banking services to the mortgages trustee. Lloyds TSB Bank plc, Jersey
International Branch is a branch of Lloyds TSB Bank plc. Its activities
currently include currency exchange, fund management, private banking,
investment advice and treasury operations. The address of Lloyds TSB Bank plc,
Jersey International Branch is 25 New Street, St. Helier, Jersey JE4 8ZE.
The seller has a continuing interest in the mortgage loans as one of
the beneficiaries of the mortgages trust.
The Funding 2 security trustee
The Bank of New York is the security trustee. Its address is 48th
Floor, One Canada Square, London E14 5AL.
The note trustee
The Bank of New York is the note trustee. Its address is 48th Floor,
One Canada Square, London E14 5AL. The note trustee will act as trustee for
you under the trust deed.
The paying agents and agent bank
Citibank, N.A. is the principal paying agent. Its address is 5
Carmelite Street, London EC4Y 0PA. Citibank, N.A. is the US paying agent and
its address is 14th Floor Zone 3, 111 Wall Street, New York, New York 10043.
The paying agents will make payments on the notes to you.
12
Citibank, N.A. is the agent bank. Its address is 5 Carmelite Street,
London EC4Y 0PA. The agent bank will calculate the interest rate on the notes.
The registrar and transfer agent
Citibank, N.A. is the registrar and transfer agent. Its address is 5
Carmelite Street, London EC4Y 0PA. The registrar will maintain a register in
respect of the notes. The transfer agent is responsible for administering any
transfer of notes.
Swap providers
The Funding 2 basis rate swap provider is Northern Rock plc. Its
registered office is at Northern Rock House, Gosforth, Newcastle upon Tyne NE3
4PL England. The Funding 2 basis rate swap provider has entered into the basis
rate swap agreement with Funding 2 and the Funding 2 security trustee. (see
"The swap agreements - The Funding 2 basis rate swap")
Each series and class of notes to be issued by us from time to time
may be denominated in different currencies and have a fixed or floating rate
of interest (as specified in the relevant prospectus supplement). To hedge
certain interest rate, currency and/or other risks in respect of amounts
received by us from Funding 2 under the global intercompany loan agreement and
amounts payable by us in respect of each series and class of notes, on the
closing date for any series and class of notes we may enter into an issuer
swap agreement with an issuer swap provider in relation to such series and
class of notes. Each prospectus supplement will provide details of any issuer
swap agreement in respect of the related series and class of notes including
the name of the issuer swap provider (see "The swap agreements - The issuer
swaps").
Series of notes
The notes will be issued in series. Each series will comprise one or
more of class A, class B, class M, class C or class D notes issued on a single
issue date. A class designation determines the relative seniority for receipt
of cash flows. The notes of a particular class and series will all have the
same terms. The notes of a particular class in different series will not
necessarily have all the same terms. Differences may include principal amount,
interest rates, interest rate calculations, currency, scheduled maturity date,
final maturity date and ratings. Each series and class of notes will be
secured over the same property as the notes offered by this prospectus. The
terms of each series and class of notes will be set forth in the related
prospectus supplement.
Some series and classes of notes will be paid ahead of others,
regardless of the ranking of the notes. For example, some payments on some
series of class B notes, class M notes, class C and class D notes may be paid
before some series of class A notes, as described in "-The notes - Payment
priority and ranking of the notes" .
References in this prospectus to a "series" of notes refer to all
classes of notes issued on a given day.
References in this prospectus to a "series and class" of notes refer
to a particular class of notes of a given series.
A class of notes of a given series may comprise one or more
sub-classes. Except where otherwise specified, references to a particular
"series and class" will refer to all sub-classes within such series and class
or class.
Unless otherwise specified in the related prospectus supplement for
the series and class of notes we may only issue such series and class of notes
on the satisfaction of certain tests, referred to as "issuance tests", which
are set out in "Issuance of notes - issuance". In particular, a note may be
issued only if there is sufficient credit enhancement on that date,
13
in the form of outstanding subordinated loan tranches and reserves or other
forms of credit enhancement, equal to or greater than the required
subordinated amount for each outstanding class of notes. The required
subordinated percentage for each class of notes will be specified in the
applicable prospectus supplement. The required subordination for a class of
notes may, subject to certain conditions, be increased or decreased without
noteholder consent.
We are not required to provide prior notice to, or permit any prior
review by you or obtain your consent to issue any notes. There are no
restrictions on the timing of any issuance of notes so long as the issuance
tests are met.
Not all series and classes of notes will be registered in the United
States under the Securities Act and therefore will not be offered by this
prospectus. However, the term "notes", unless otherwise stated, when used in
this prospectus includes all of the notes issued by us.
US notes
Any series of class A, class B, class M or class C notes which is
registered in the United States under the Securities Act and offered under
this prospectus and a related prospectus supplement.
Status of the notes
The notes issued from time to time by us will constitute our direct,
secured and unconditional obligations and will be secured by the same
security.
Ratings on the notes
Each series and class of US Notes and Reg S notes is expected to be
issued with the following ratings by each of Standard & Poor's, Moody's and
Fitch.
Class A Class B Class M Class C Class D
Standard & Poor's [o] [o] [o] [o] [o]
Moody's [o] [o] [o] [o] [o]
Fitch [o] [o] [o] [o] [o]
The ratings assigned to each series and class of US Notes and Reg S
notes will be set forth in the prospectus supplement for that class and
series.
Listing
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the Financial
Services and Markets Act 2000 for the notes issued during the period of 12
months from the date of this prospectus to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for each series and class of the notes to be
admitted to trading on the London Stock Exchange's market for listed
securities.
Denominations
Notes will be issued in such denominations as may be agreed between
[the note trustee, the relevant underwriters and/or dealers (as applicable)
and us], subject to minimum and maximum denominations as may be allowed or
required from time to time by the relevant central bank or regulatory
authority (or equivalent body) or any laws or regulations applicable to the
issuer or the relevant specified currency.
14
Maturities
Notes will be issued in such maturities as may be specified in the
relevant prospectus supplement, subject to compliance with all applicable
legal and/or regulatory and/or central bank requirements.
Currencies
Subject to compliance with all applicable legal and regulatory and
central bank requirements a series and class of notes may be denominated in
such currency [or currencies] as may be agreed between us [the note trustee,
the relevant underwriters and/or dealers (as applicable) and the principal
paying agent] and set out in the applicable prospectus supplement.
Issue price
Each series and class of notes may be issued on a fully paid or
partly paid basis and at an issue price which is at par, or at discount from
or premium over, par.
Selling Restrictions
For a description of certain restrictions on offers, sales and
deliveries of notes and on the distribution of offering material in the United
States of America, the United Kingdom and certain other jurisdictions, see
"Underwriting" below and the relevant prospectus supplement.
Registration, clearance and settlement
Redenomination
If the country of a specified currency becomes, or announces its
intention to become, a participating member state, the notes denominated in
that currency may be redenominated in euro in accordance with condition 11(f)
(Redenomination) if so specified in the relevant prospectus supplement.
Relationship between the notes and the global intercompany loan
The global intercompany loan will comprise multiple loan tranches.
For more information on the global intercompany loan, see "The global
intercompany loan". The gross proceeds of each issue of a series and class of
notes will fund a single loan tranche. The repayment terms of the loan tranche
(for example payment dates and the type of amortisation or redemption) will
reflect the terms of the equivalent series and class of notes. Subject to the
various swap agreements and the payments to be made to us by the various swap
providers as described under "The swap agreements", we will repay the notes
from payments made to us by Funding 2 under the global intercompany loan
agreement.
Payment priority and ranking of the notes
Payments of interest and principal on any series of class A notes
will rank ahead of payments of interest and principal on any series of class B
notes of any series, the class M notes of any series, the class C notes of any
series and the class D notes of any series. Payments of interest and principal
on any series of class B notes will rank ahead of payments of interest and
principal on the class M notes of any series, the class C notes of any series
and the class D notes of any series. Payments of interest and principal on any
series of class M notes will rank ahead of payments of interest and principal
on the class C notes of any series and the class D notes of any series.
Payments of interest and principal on any series of class C notes will rank
ahead of payments of interest and principal on the
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class D notes of any series. For more information on the priority of payments
to you, see "Cashflows" and see also "Risk factors - Subordination of other
note classes may not protect you from all risk of loss".
Payments of interest and principal on the class A notes of each
series rank equally (but subject to the permitted redemption dates of each
series of class A notes). Payments of interest and principal on the class B
notes of each series rank equally (but subject to the permitted redemption
dates of each series of class B notes). Payments of interest and principal on
the class M notes of each series rank equally (but subject to the permitted
redemption dates of each series of class M notes). Payments of interest and
principal on the class C notes of each series rank equally (but subject to the
permitted redemption dates of each series of class C notes). Payments of
interest and principal on the class D notes of each series rank equally (but
subject to the permitted redemption dates of each series of class D notes).
The prospectus supplement related to each series and class of notes will set
forth the permitted redemption dates for each series and class of notes.
Investors should note that:
o notes of different series and classes are intended to receive
payment of principal at different times, therefore lower ranking
classes of notes may be repaid before higher ranking classes of
notes;
o no notes of any class (other than the class A notes) may be
redeemed (in whole or in part) if, following such redemption,
the amount of subordination available from all outstanding
classes of notes (and other forms of credit enhancement) is
less than the required credit enhancement for each class of
notes. The "repayment tests", which determine whether any
series or class of notes (or any part thereof) may be repaid
are set out in "Cashflows - Distribution of Funding 2 available
principal receipts prior to the enforcement of the Funding 2
security - Rules for the application of Funding 2 available
principle receipts". The failure to redeem such notes on the
permitted applicable redemption date for such reason will not
constitute a note event of default in respect of such notes;
o subject to the repayment tests, prior to the enforcement of the
issuer security, a series and class of notes will be redeemed on
a [permitted redemption date] only to the extent of the amount
(if any) repaid on the related loan tranche on such date; and
o if not redeemed earlier, each series of notes will be redeemed
by us on the final maturity date specified in the applicable
prospectus supplement.
Interest
Interest will accrue on each series and class of notes from its date
of issuance at the applicable interest rate for that series and class of
notes, which may be a fixed, floating or other type of rate as specified in
the prospectus supplement related to that series and class of notes. Interest
on each series and class of notes will be due and payable on each payment date
or as otherwise specified in the related prospectus supplement.
Fixed rate notes
Fixed interest will be payable on such date or dates as set out in
the applicable prospectus supplement and on redemption and will be calculated
on the basis of such day count fraction as set out in the applicable
prospectus supplement.
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Floating rate notes
Floating rate will bear interest at a rate determined:
(i) on the same basis as the floating rate under a notional
interest rate swap transaction in the relevant specified
currency governed by an agreement incorporating the ISDA
Definitions; or
(ii) on the basis of a reference rate appearing on the agreed
screen page of a commercial quotation service: or
(iii) on such other basis.
as set out in the applicable prospectus supplement.
The margin (if any) relating to such floating rate will be set out in
the applicable prospectus supplement for each issue of a series and class of
floating rate notes.
Index linked notes
Payments of principal in respect of index linked redemption notes or
of interest in respect of index linked interest notes will be calculated by
reference to such index and/or formula or to changes in the prices of
securities or commodities or to such other factors as set out in the
applicable prospectus supplement.
Other provisions in relation to floating rate and index linked interest notes
Floating rate and index linked interest notes may also have a maximum
interest rate, a minimum interest rate or both (as indicated in the applicable
prospectus supplement). Interest on floating rate notes and index linked
interest notes in respect of each interest period, will be payable on such
payment dates, and will be calculated on the basis of such day count fraction
as set out in the applicable prospectus supplement.
Dual currency notes
Payments (whether in respect of principal or interest and whether at
maturity or otherwise) in respect of dual currency notes will be made in such
currencies, and based on such rates of exchange, as set out in the applicable
prospectus supplement.
Zero coupon notes
Zero coupon notes may be offered and sold at a discount to their
nominal amount unless otherwise specified in the applicable prospectus
supplement.
Pass-through notes
Pass-through notes will be redeemable in full on the final maturity
date specified in the applicable prospectus supplement. On each payment date,
Funding 2 may be permitted to make payments of amounts equal to the
pass-through requirement in respect of pass-through loan tranches to us so
that we may repay all or part of the pass-through notes prior to their
respective final maturity dates.
Controlled amortization notes
Controlled amortization notes will be redeemable, on each payment
date, in controlled amortization installments, the amounts of which will be
determined as set forth in the applicable prospectus supplement. On each
payment date, Funding 2 will seek to make payments equal to the controlled
amortization requirement to us so that we may repay each controlled
amortization amount on its controlled amortization date. If there are
insufficient funds on a controlled amortization date to repay the relevant
controlled amortization loan
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amount(s) (and to pay the corresponding controlled amortization amount(s)),
then we shall be required to pay the shortfall, to the extent we receive funds
therefor, on subsequent payment dates.
Scheduled redemption notes
Scheduled redemption notes will be redeemable, on scheduled
redemption dates, in one or more scheduled amortization installments, the
amounts of which will be determined as set forth in the applicable prospectus
supplement. On each payment date Funding 2 will seek to make payments equal to
the scheduled repayment requirement to us so that we may repay each scheduled
amortization installment on its scheduled redemption date. If there are
insufficient funds on a relevant scheduled repayment date to repay the
relevant scheduled repayment loan installment(s) on that date (and to make the
corresponding scheduled amortization installment(s)), then we shall be
required to pay the shortfall, to the extent we receive funds therefor, on
subsequent payment dates.
Bullet redemption notes
Bullet redemption notes will be redeemable in full on a bullet
redemption date. Funding 2 will seek to accumulate funds relating to principal
payments on each bullet loan tranche over its cash accumulation period in
order to repay such funds as a lump sum payment to us so that we can redeem
the corresponding series of bullet notes in full on its bullet redemption
date. A cash accumulation period in respect of a bullet loan tranche is the
period of time estimated to be the number of months prior to the relevant
bullet repayment date necessary for Funding 2 to accumulate enough payments of
principal derived from its share of the trust property to repay that bullet
loan tranche to us so that we will be able to redeem the corresponding notes
in full on the relevant bullet redemption dates. The cash accumulation period
will be determined according to a formula described under "Cashflows -
Distribution of Funding 2 principal receipts prior to the enforcement of the
Funding 2 security". To the extent that there are insufficient funds to redeem
a series of bullet redemption notes on the relevant bullet redemption date,
then we shall be required to pay the shortfall, to the extent we receive funds
therefor, on subsequent payment dates.
No assurance can be given that Funding 2 will accumulate sufficient
funds during the cash accumulation period relating to any bullet loan tranche
to enable it to repay the relevant loan tranche to us so that the related
series of bullet redemption notes on their bullet redemption date. See "Risk
factors - The yield to maturity of the notes may be adversely affected by
prepayments or redemptions on the mortgage loans or repurchases of mortgage
loans by the seller".
Redemption and Repayment
If not redeemed earlier, each series of notes will be redeemed by us
on the final maturity date specified in the applicable prospectus supplement.
For more information on the redemption of the notes, including a
description of asset trigger events and non-asset trigger events, see "The
mortgages trust - Cash management of trust property - principal receipts" and
"Cashflows". See also "-Payment priority and ranking of the notes".
Redemption of certain money market notes
We may repay a series and class of money market notes on their final
maturity date using amounts received from a money market note subscriber
pursuant to the terms of a money market note subscription agreement. The
related prospectus supplement will provide information regarding a series and
class of money market notes, the identity of any money market note subscriber
and the terms of the money market note subscription agreement.
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Certain risks relating to repayment of money market notes by means of a money
market note subscriber are described under "Risk Factors - Payments from a
money market note subscriber may not be sufficient to repay money market
notes"
Acceleration and cross default
Each series and class of notes will not contain a cross default
provision.
The notes of a series and class will become immediately due and
payable upon the service on the issuer by the note trustee of a note
acceleration notice. The note trustee becomes entitled to serve a note
acceleration notice in respect of a series and class of notes following the
occurrence of a note event of default in respect of such notes (and it may do
so using its own discretion or on the instructions of the noteholders of the
relevant series and class of notes). It may not (whether it is instructed to
or otherwise) serve a note acceleration notice in respect of a series and
class of notes following the occurrence of a note event of default in respect
of a different series and class of notes.
The service of a note acceleration notice in respect of a series and
class of notes will not cross accelerate the notes of any other class in that
series or any notes of any other series.
All notes of any series and any class will become immediately due and
payable on the service on the issuer by the note trustee of an issuer
enforcement notice. The note trustee becomes entitled to serve an issuer
enforcement notice at any after the service of a note acceleration notice (and
it may do so using its own discretion or, subject to restrictions in the trust
deed and the issuer deed of charge to protect the rights of higher ranking
noteholders, on the instructions of the noteholders of a particular class of
notes across all series). The note trustee may not serve an issuer enforcement
notice on the instructions of the noteholders of a particular series and class
of notes (unless such notes are the only issued notes of such class).
For more information of note acceleration notices, issuer enforcement notices
and note events of default, see "Description of the US notes - Events of
default" and "Description of the US notes - Enforcement of notes".
Optional redemption of the notes for tax and other reasons
We may redeem a series of notes at their principal amount outstanding
in the event of particular tax changes affecting such series or the global
intercompany loan which cannot be avoided by us or Funding 2, as the case may
be, taking reasonable measures available to us or Funding 2 if (a) we give not
more than 60 nor less than 30 days' notice to you and the note trustee in
accordance with the terms and conditions of such series, and (b) we have,
prior to giving that notice, provided all necessary opinions to the note
trustee and certified to the note trustee that, among other things, we will
have the necessary funds to pay principal and interest due in respect of such
series on the relevant payment date.
In addition, we may redeem in principally the same manner a series
and class of notes outstanding:
o on the step-up date relating to such series and class of notes
(as specified in the applicable prospectus supplement) and on
any payment date thereafter. This gives us the option to redeem
such series and class on or after the related step-up date for
interest; or
[o if the New Basel Capital Accord (as described in "International
Convergence of Capital Measurement and Capital Standards: a
Revised Framework" published in June 2004 by the Basel
Committee) has been implemented in the United Kingdom, whether
by rule of law, recommendation or best practice or by any
other regulation, on the first payment date falling after such
implementation and
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any payment date thereafter provided that an issuer enforcement
notice has not been served; or]
o on any payment date on which the aggregate principal amount
outstanding of such series and class of notes is less than 10%
of the aggregate principal amount outstanding of such series and
class as at the applicable closing date; or
o on any payment date after it has become unlawful for us to make,
fund or allow to remain outstanding the global intercompany loan
and we have required Funding 2 to prepay the global intercompany
loan.
Any notes that we redeem under these circumstances will be redeemed
at their principal amount outstanding together with accrued and unpaid
interest on that principal amount.
For a detailed description of the circumstances in which the notes
may be redeemed see "Description of the US notes".
Post-enforcement call option
The note trustee is required, at the request of a subsidiary of
Holdings called GPCH Limited (in its capacity as post-enforcement call option
holder), for a nominal consideration, to transfer or procure transfer of all
of the notes to the post enforcement call option holder pursuant to the option
granted to it by the note trustee (as agent for the noteholders) under the
terms of the issuer post-enforcement call option agreement. The
post-enforcement call option may only be exercised following the final
maturity date of the latest maturing notes or this enforcement of the issuer
security. See "GPCH Limited - Post enforcement call option"
Withholding tax
Payments of interest and principal with respect to any series of
notes will be subject to any applicable withholding taxes and we will not be
obliged to pay additional amounts in relation thereto. The applicability of
any UK withholding tax is discussed under "Material United Kingdom tax
consequences".
The Funding 2 program date
On or about January [o], 2005.
Operative documents concerning the notes
We will issue each series of notes under the trust deed. The notes
will also be subject to a paying agent and agent bank agreement. The security
for the notes is provided under the issuer deed of charge among us, the note
trustee and our other secured creditors. Operative legal provisions relating
to the notes are included in the trust deed, the paying agent and agent bank
agreement, the issuer deed of charge, the issuer cash management agreement and
the notes themselves.
Governing law
The notes will be governed by, and construed in accordance with,
English law.
The global intercompany loan
We have entered into the global intercompany loan agreement with
Funding 2.
As described under ["- The notes - Relationship between the notes and
the global intercompany loan"], the global intercompany loan will consist of
separate loan tranches, each relating to a particular series and class of
notes. The loan tranches will
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comprise AAA tranches, AA tranches, A tranches, BBB tranches and BB tranches
reflecting the designated credit rating assigned to each loan tranche. The
loan tranche related to each series and class of notes, and the timing of
repayment of each such series and class, will be specified in the prospectus
supplement relating to such series and class. The terms of each loan tranche
will be set forth in the related loan tranche supplement and the global
intercompany loan agreement.
From time to time and subject to certain conditions, we will lend
amounts to Funding 2 as separate loan tranches using the proceeds of each
issuance of a series and class of notes by us. Funding 2 will use the funds
advanced under each such loan tranche to:
o pay to the mortgages trustee a contribution to acquire and/or
increase its beneficial interest in the trust property pursuant to
the mortgages trust deed;
o fund the Funding 2 reserve fund and/or to make a deposit into the
Funding 2 GIC account; or
o make a payment back to us to refinance an existing loan tranche.
Funding 2 will repay the global intercompany loan from payments
received from the mortgages trustee, as described under "- The mortgages
trust". We will make payments of interest on, and principal of, the notes
principally from payments of interest and principal made by Funding 2 to us
under the global intercompany loan agreement.
In certain circumstances, the amount we receive from Funding 2 may be
increased by the amount standing to the credit of the Funding 2 reserve fund
and/or the Funding 2 liquidity reserve fund, if any. In other circumstances
(for example, to the extent of amounts recorded on the Funding 2 principal
deficiency ledgers) the amount we receive may be decreased.
During a cash accumulation period for any bullet loan tranche,
Funding 2 will continue to make principal repayments on any other loan
tranches that are then due and payable, subject to having sufficient funds
therefor after meeting its obligations with a higher priority. Such principal
repayments may only be made to the extent that (following such principal
repayments and the principal repayments on the related series and class of
notes) the amount of subordination available from all outstanding classes of
notes (and other forms of credit enhancement) and reserves is at least equal
to the required credit enhancement for each class of notes then outstanding.
In certain circumstances, payment on the controlled amortization loan
tranches, scheduled repayment loan tranches and pass-through loan tranches
will be deferred. (see "Cashflows - Distribution of Funding 2 available
principal receipts - Repayment of loan tranches of each series prior to the
occurrence of a trigger event and prior to the service on Funding 2 of a
global intercompany loan enforcement notice or the service on the issuer of an
issuer enforcement notice").
Prior to the occurrence of a trigger event or the service of a global
intercompany loan enforcement notice on Funding 2 or the service of an issuer
enforcement notice on us, Funding 2 is generally required to repay principal
on the loan tranches (after repaying amounts owed to the Funding 2 liquidity
facility provider, if any, and after replenishing the reserve funds) based on
their respective loan tranche ratings. This means that the AAA loan tranches
are repaid before the AA loan tranches, which in turn are repaid before the A
loan tranches, which in turn are repaid before the BBB loan tranches which in
turn are repaid before the BB tranches. There are a number of exceptions to
this priority of payments. For further information on such exceptions you
should read the "Cashflows" section of this prospectus.
If a trigger event occurs or a global intercompany loan enforcement
notice is served on Funding 2, then principal receipts will be allocated as
described in the "Cashflows" section of this prospectus. For a detailed
description of Funding 2's payments of interest and principal under the global
intercompany loan, see "The global intercompany loan
21
agreement - Payment of interest" and "The global intercompany loan agreement -
Repayment of the global intercompany loan".
Redemption of loan tranches
Whenever Funding 2 is to redeem a loan tranche, it will do so only to
the extent that principal receipts it has received from the mortgages trustee
and allocated to that loan tranche are sufficient to redeem that loan tranche
in accordance with its terms, and only to the extent that following such
redemption and the consequential redemption of the related series and class of
notes, the amount of subordination available from all outstanding classes of
notes (and other forms of credit enhancement) and reserves is greater than or
equal to the required credit enhancement for each class of notes (see
"Cashflows - Distribution of Funding 2 available principal receipts prior to
the enforcement of the Funding 2 security - Rules for application of Funding 2
available principal receipts").
The circumstances under which we can take action against Funding 2 if
it does not make a payment under the global intercompany loan agreement are
limited. In particular, it will not be an event of default in respect of the
global intercompany loan if Funding 2 does not pay some or all amounts due in
respect of the global intercompany loan where Funding 2 does not have the
money to make the relevant payment or because the loan tranche that would
otherwise be redeemed is required to provide subordination for senior loan
tranches. For more information on events of default under the global
intercompany loan generally, see "The global intercompany loan agreement".
Issuance of loan tranches
Upon receipt by us of the proceeds from an issue of a series and
class of notes, we will, subject to certain conditions, advance a new loan
tranche to Funding 2.
Neither Funding 2 nor ourselves are required to provide prior notice
to, permit any prior review by you or to obtain your consent to the advance of
any loan tranche. There are no restrictions on the timing of any loan
tranches.
[Funding 2 may from time to time, without notice to, or the consent
of, us or any noteholders, increase the outstanding principal amount of a loan
tranche so long as the issuance tests are met.]
[When issued, the additional loan tranches will be equally and
rateably entitled to the benefits of the global intercompany loan agreement as
applicable to the previously issued loan tranches of that class without
preference, priority or distinction.]
The mortgage loans
The mortgage loans comprising the mortgage portfolio from time to
time have been, and will be originated by the seller. Each mortgage loan
(other than a personal secured loan) is secured by a first legal charge over a
residential property in England or Wales or a first ranking standard security
over a residential property in Scotland. Each personal secured loan will be
secured by a legal charge over freehold or leasehold mortgaged properties
located in England and Wales or by a standard security over heritable or long
leasehold mortgaged properties located in Scotland. The mortgage loans
included in the mortgage portfolio consist of several different types with a
variety of characteristics relating to, among other things, calculation of
interest and repayment of principal. See "The mortgage loans - Characteristics
of the mortgage loans for a more detailed description of the mortgage loans
offered by the seller and the relevant prospectus supplement for statistical
information on the mortgage portfolio.
All such mortgage loans are originated in accordance with the
seller's lending criteria. The seller may, from time to time, change its
lending criteria and any other terms applicable
22
to the new mortgage loans or their related security assigned to the mortgages
trust after the Funding 2 program date so that all new mortgage loans
originated after the date of that change will be subject to the new lending
criteria. Notwithstanding any change to the lending criteria or other terms
applicable to new mortgage loans, they and their related security may only be
assigned to the mortgages trust if those new mortgage loans comply with the
seller's representations and warranties set out in the mortgage sale
agreement, including a representation that those new mortgage loans were
originated in accordance with the seller's lending criteria applicable at the
time of their origination. The seller is obliged to repurchase from the
mortgage trustee mortgage loans that are in breach of these representations
and warranties. See "Assignment of the mortgage loans and the related
security"
Assignment of the mortgage loans
The seller assigned the initial mortgage portfolio to the mortgages
trustee on March 26, 2001, and since March 26, 2001 has assigned further
mortgage portfolios and other trust property to the mortgages trustee, in each
case subject to the terms of the mortgage sale agreement. After the Funding 2
program date, the seller may assign new mortgage loans and their related
security to the mortgages trustee in order to increase or maintain the size of
the trust property. The seller also may increase the size of the trust
property from time to time in connection with, amongst other things, an issue
of new notes by the issuer, the proceeds of which are applied ultimately to
fund the assignment of the new mortgage loans and their related security to
the mortgages trustee as described under "Assignment of the mortgage loans and
related security - Assignment of new mortgage loans and their related
security".
The English mortgage loans and their related security are assigned by
the seller to the mortgages trustee by way of an English law equitable
assignment. The beneficial interests in the Scottish mortgage loans and their
related security are transferred by the seller to the mortgages trustee by way
of a declaration of trust in favour of the mortgages trustee. In each case
this means that the beneficial interest in the mortgage loans and the related
security is passed to the mortgages trustee in its capacity as trustee for and
on behalf of the beneficiaries of the mortgages trust. However, unless certain
events have occurred and certain additional steps have been taken (including
the execution and (where necessary) registration of certain transfers and
assignations and the giving of notices of the assignment to the relevant
borrowers), legal title to the mortgage loans and their related security will
remain with the seller. More information on equitable and beneficial
assignments is described under "Assignment of the mortgage loans and related
security - Transfer of legal title to the mortgages trustee".
When new mortgage loans are assigned to the mortgages trustee, the
amount of the trust property will increase. Depending on the circumstances,
the increase in the trust property may result in an increase in the seller
share of the trust property, the Funding share and/or the Funding 2 share of
the trust property. For a description of how adjustments are made to the
seller share of the trust property and the Funding 2 share of the trust
property, see "The mortgages trust".
The mortgages trust
The mortgages trust was established on March 26, 2001 among the
mortgages trustee, the seller, Funding and Law Debenture Corporate Services
Limited. On the Funding 2 program date Funding 2 became a beneficiary of the
mortgages trust. As of the Funding 2 program date, the mortgages trustee holds
the trust property on trust for Funding 2, Funding and the seller. Funding 2,
Funding and the seller each has a joint and undivided beneficial interest in
the trust property. Unless otherwise expressly provided in the mortgages trust
deed, payments of interest and principal arising from the mortgage loans in
the trust property
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are allocated to Funding 2, Funding and the seller as described later in this
section. The only beneficiaries of the trust are Funding, Funding 2 and the
seller.
The trust property currently consists of, among other things, the
mortgage portfolio, including any permitted replacement mortgage loan in
respect of any permitted product switch and any income generated by the
mortgage loans or their related security on or after the relevant assignment
date (excluding third party amounts). In addition, re-draws that have been
made under flexible mortgage loans and further draws that have been made under
personal secured loans, in each case that were assigned to the mortgages
trustee, also form part of the existing trust property. Future re-draws that
are made under flexible mortgage loans and further draws that are made under
personal secured loans, in each case that were assigned to the mortgages
trustee, will also form part of the trust property. The trust property also
includes any contribution paid by each beneficiary to the mortgages trustee
(until the relevant funds are applied by the mortgages trustee in accordance
with the mortgages trust deed) and includes any money in the mortgages trustee
transaction account and the mortgages trustee guaranteed investment contract,
or GIC, account. The mortgages trustee GIC account is the bank account in
which the mortgages trustee holds any cash that is part of the trust property
until it is distributed to the beneficiaries.
The seller is entitled, but not obliged, to purchase any mortgage
loans that are the subject of a further advance or any mortgage loans where
the applicable borrower takes a personal secured loan. This arrangement may
change if the seller decides at a later date to retain these mortgage loans
within the trust property and to assign these further advances to the
mortgages trustee. Any further advance made to an existing borrower (in
respect of a mortgage loan within the mortgages trust) that the seller at a
later date decides to assign to the mortgages trustee will be funded solely by
the seller, will comply with the applicable conditions to the assignment of
new mortgage loans and their related security to the mortgages trust as
described in this prospectus, will be secured by the same mortgaged property
securing that borrower's mortgage loan, will form part of the trust property,
and will increase only the seller share of the trust property, unless at the
time of assignment Funding 2 or Funding provides a contribution (excluding any
deferred contribution) to the mortgages trustee in respect of that new trust
property.
The seller is solely responsible for funding re-draws under flexible
mortgage loans and further draws under personal secured loans. This means that
for any cash re-draw under a flexible mortgage loan or further draw under a
personal secured loan, the seller will pay the amount of that cash re-draw or
further draw to the borrower and both the size of the trust property and the
seller share of the trust property will increase by the amount of that cash
payment. It also means that for any non-cash re-draw under a flexible mortgage
loan, the seller will pay to the mortgages trustee an amount equal to the
unpaid interest associated with that non-cash re-draw, and both the size of
the trust property and the seller share of the trust property will increase by
the amount of that payment.
The composition of the trust property fluctuates as re-draws under
flexible mortgage loans, further draws under personal secured loans, future
further advances and new mortgage loans are added to the mortgages trust and
as the mortgage loans that are already part of the trust property are repaid
or mature, or are purchased by the seller.
Losses on the mortgage loans generally are allocated to each of
Funding, Funding 2 and the seller in accordance with each of Funding's,
Funding 2's and the seller's respective percentage share of the trust property
calculated on the immediately preceding distribution date (or, in certain
circumstances, each of Funding's, Funding 2's and the seller's respective
weighted average percentage share of the trust property as calculated on the
relevant distribution date). However, certain losses related to re-draws
and/or set-off by borrowers may, in limited circumstances, be allocated solely
to the seller. In addition, losses in respect of personal secured loans will
be allocated first to the seller's share of the trust property (including the
minimum seller share) until the seller's share is reduced to zero, and only
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thereafter to reduce the Funding and Funding 2 shares of the trust property.
For a detailed description of how losses on the mortgage loans are allocated
to the global intercompany loan of each issuer, see "The global intercompany
loan agreement - Allocation of losses".
Under the terms of the Funding beneficiary deed, Funding, Funding 2,
the security trustee and the Funding 2 security trustee have agreed as to,
amongst other things, arrangements amongst them in respect of certain
commercial decisions (relating to authorizations, consents, waivers,
instructions or other acts) to be made from time to time in respect of the
transaction documents.
United Kingdom tax status
Subject to important qualifications and conditions set out under
"Material United Kingdom tax consequences", including as to final
documentation and assumptions, Sidley Austin Brown & Wood, our UK tax
advisers, are of the opinion that:
[o if and for so long as the notes of any series are listed on a
"recognised stock exchange", no UK withholding tax will be
required on interest payments to any holder of such notes. If
such notes cease to be so listed at the time of the relevant
interest payment, UK withholding tax at the current rate of 20%
will be imposed on interest paid on such notes. US residents
may be able to reclaim this withholding tax under the double
taxation treaty between the US and the UK;
o US persons who are not and have never been either resident or
ordinarily resident in the UK and who are not carrying on a
trade, profession or vocation through a branch or agency (or, in
the case of a noteholder which is a company, which is not
carrying on a trade through a permanent establishment) in the UK
will not be subject to UK taxation in respect of payments of
principal and interest on the notes, except to the extent
that any withholding or deduction from interest payments is
required, as described in the paragraph above;
o US resident noteholders will not be liable to UK tax in respect
of a disposal of notes provided they are not within the charge
to UK corporation tax and (i) are not resident or ordinarily
resident in the UK, and (ii) do not carry on a trade,
profession or vocation in the UK through a branch or agency in
connection with which interest is received or to which such
notes are attributable;
o no UK stamp duty or stamp duty reserve tax is payable on the
issue or transfer of any US note;
o Funding 2 and the issuer generally will be subject to UK
corporation tax, currently at a rate of 30%, on the profit
reflected in their respective profit and loss accounts as
increased by the amounts of any non-deductible expenses or
losses. In respect of Funding 2, the profit in the profit and
loss account will not exceed 0.01% of the Funding 2 available
revenue receipts. In respect of the issuer, the profit in the
profit and loss account will not exceed 0.01% of the interest
received under the intercompany loan. Any liability to UK
corporation tax will be paid out of the available revenue
receipts of Funding 2 and the issuer, respectively; and
o the mortgages trustee will not be liable to UK tax in respect
of any income, profit or gain arising under these arrangements.
Accordingly, the mortgages trustee will not be liable to UK tax
in relation to amounts which it receives on behalf of Funding 2
or the seller under the mortgages trust.]
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United States tax status
[While not free from doubt, in the opinion of Sidley Austin Brown &
Wood LLP, our US tax advisers, the [US notes] will be treated as debt for US
federal income tax purposes. See "Material United States tax consequences".]
Our US tax advisers have also provided their opinion that, assuming
compliance with the transaction documents, the mortgages trustee acting in its
capacity as trustee of the mortgages trust, Funding 2 and the issuer will not
be subject to US federal income tax.
Jersey (Channel Islands) tax status
It is the opinion of Jersey (Channel Islands) tax counsel that the
mortgages trustee is resident in Jersey for taxation purposes and will be
liable to income tax in Jersey at a rate of 20% in respect of the profits it
makes from acting as trustee of the mortgages trust. The mortgages trustee
will not be liable for any income tax in Jersey in respect of any income it
receives in its capacity as mortgages trustee on behalf of the beneficiaries
of the mortgages trust.
On June 3, 2003, the European Union Council of Economic and Finance
Ministers reached political agreement on the adoption of a Code of Conduct on
Business Taxation. Although Jersey is not a member of the European Union, the
Policy & Resources Committee of the States of Jersey has announced that, in
keeping with Jersey's policy of constructive international engagement, it
intends to propose legislation to replace the Jersey exempt company regime by
the end of 2008 with a general zero rate of corporate tax.
ERISA considerations for investors
The US notes will be eligible for purchase by employee benefit and
other plans subject to Section 406 of ERISA or Section 4975 of the Code and by
governmental plans that are subject to any state, local or other federal law
of the United States that is substantially similar to Section 406 of ERISA or
Section 4975 of the Code, subject to consideration of the issues described in
this prospectus under "ERISA considerations". Each purchaser of any such notes
(and all subsequent transferees thereof) will be deemed to have represented
and warranted that its purchase, holding and disposition of such notes will
not result in a non-exempt prohibited transaction under ERISA or the Code (or
in the case of any governmental plan, any substantially similar state, local
or other federal law of the United States). In addition, any fiduciary of a
plan subject to the fiduciary responsibility provisions of ERISA or similar
provisions of state, local or other federal laws of the United States should
consult with their counsel to determine whether an investment in the notes
satisfies the prudence, investment diversification and other applicable
requirements of those provisions.
26
Risk factors
This section describes the principal risk factors associated with an
investment in the notes. If you are considering purchasing our notes, you
should carefully read and think about all the information contained in this
document, including the risk factors set out here, prior to making any
investment decision.
The risks and uncertainties described below are not the only ones
relating to the notes. Additional risks and uncertainties not presently known
to us may also impair your investment. In addition, this prospectus contains
forward-looking statements that involve risks and uncertainties. Actual
results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the risks
described below and elsewhere in this prospectus.
You cannot rely on any person other than us to make payments on the notes
We are the only party responsible for making payments on the notes.
The notes do not represent an interest in or obligation of, and are not
insured or guaranteed by, any of Northern Rock plc, the underwriters, Funding
2, Funding, the mortgages trustee, the security trustee, the note trustee, any
swap provider or any of their respective affiliates or any other party to the
transaction other than us.
We have a limited amount of resources available to us to make payments on the
notes
Our ability to make payments of interest on, and principal of, the
notes and to pay our operating and administrative expenses will depend
primarily on funds being received under the global intercompany loan. The
payment of interest on, and principal of, each series and class of notes will
primarily depend on funds being received under the related loan tranche (and
no other loan tranche). In addition, we will rely on the issuer swaps to
provide payments on certain series and classes of notes.
We will not have any other significant sources of funds available to
meet our obligations under the notes and/or any other payments ranking in
priority to the notes. If the resources described above cannot provide us with
sufficient funds to enable us to make required payments on the notes, you may
incur a loss of interest and/or principal which would otherwise be due and
payable on your notes.
Funding 2 is not required to make payments on the global intercompany loan if
it does not have enough money to do so, which could adversely affect payment
on the notes
Funding 2's ability to pay amounts due on loan tranches advanced
under the global intercompany loan agreement will depend upon:
o Funding 2 receiving enough funds from the Funding 2 share of the
trust property, including revenue receipts and principal
receipts on the mortgage loans included in the mortgages trust
on or before each payment date;
o Funding 2 receiving funds from the Funding 2 basis rate swap
provider;
o Funding 2 receiving funds from the Funding 2 liquidity facility
provider (if any); and
o (in the case of interest due under the global intercompany
loan) the amount of funds credited to the Funding 2 reserve
fund (as described under "Credit structure - Funding 2 reserve
fund") and subject to certain restrictions, the amount of funds
credited to the Funding 2 liquidity reserve fund (as described
under "Credit structure - Funding 2 liquidity reserve fund").
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According to the terms of the mortgages trust deed, the mortgages
trustee is obliged to pay to Funding 2 on each distribution date (a) that
portion of revenue receipts on the mortgage loans which is payable to Funding
2 in accordance with the terms of the mortgages trust deed and (b) that
portion of principal receipts on the mortgage loans which is payable to
Funding 2 in accordance with the terms of the mortgages trust deed.
On each payment date, however, Funding 2 will only be obliged to pay
amounts due to us in respect of any loan tranche under the global intercompany
loan agreement to the extent that it has funds available to it after making
payments ranking in priority to such loan tranche, such as payments of certain
fees and expenses of Funding 2 and loan tranches of a more senior ranking. If
Funding 2 does not pay amounts to us in respect of a loan tranche under the
global intercompany loan agreement because it does not have sufficient funds
available, those amounts will be due but not payable until funds are available
to pay those amounts in accordance with the relevant Funding 2 priority of
payments. Funding 2's failure to pay those amounts to us when due in such
circumstances will not constitute an event of default under the global
intercompany loan.
If there is a shortfall between the amounts payable by Funding 2 to
us in respect of a loan tranche under the global intercompany loan agreement
and the amounts payable by us on the related series and class of notes, then
depending on the other sources of funds available to Funding 2 referred to
above, you may not receive the full amount of interest and/or principal which
would otherwise be due and payable on those notes.
Our recourse to Funding 2 under the global intercompany loan is limited, which
could adversely affect payment on the notes
If, on the final repayment date of the global intercompany loan,
there is a shortfall between the amount required by us to pay all outstanding
interest and/or principal in respect of any series and class of notes and the
amount available to Funding 2 to pay amounts due under the related loan
tranche to fund repayment of such amounts, then Funding 2 shall not be obliged
to pay that shortfall to us under the global intercompany loan agreement. Any
claim that we may have against Funding 2 in respect of that shortfall will
then be extinguished. If there is a shortfall in interest and/or principal
payments in respect of a loan tranche under the global intercompany loan
agreement, we may not have sufficient funds to make payments on the related
series and class of notes and you may incur a loss on interest and/or
principal which would otherwise be due and payable on your notes.
Enforcement of the issuer security is the only remedy for a default in our
obligations, and the note trustee will not be able to assign its or our rights
under the global intercompany loan agreement
The only remedy for recovering amounts due on the notes is through
the enforcement of the issuer security. If Funding 2 does not pay amounts due
under the global intercompany loan because it does not have sufficient funds
available, those amounts will be deemed to be not due and payable, there will
not be an event of default under the global intercompany loan agreement and we
will not have recourse to the assets of Funding 2 in that instance. We will
only have recourse to the assets of Funding 2 if Funding 2 has also defaulted
on its obligations under the global intercompany loan and the Funding 2
security trustee (on our behalf and on behalf of the other Funding 2 secured
creditors) has enforced the Funding 2 security.
There may be a conflict between the interests of the holders of the various
classes of notes, and the interests of other classes of noteholders may
prevail over your interests
The trust deed, the issuer deed of charge and the terms of the notes
will provide that the note trustee is to have regard to the interests of the
holders of all the classes of notes.
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There may be circumstances, however, where the interests of one class of the
noteholders conflict with the interests of another class or classes of the
noteholders. In general, the note trustee will give priority to the interests
of the holders of the most senior class of notes such that:
o the note trustee is to have regard only to the interests of the
class A noteholders in the event of a conflict between the
interests of the class A noteholders on the one hand and the
class B noteholders and/or the class M noteholders and/or the
class C noteholders and/or class D noteholders on the other
hand;
o (if there are no class A notes outstanding) the note trustee is
to have regard only to the interests of the class B noteholders
in the event of a conflict between the interests of the class B
noteholders on the one hand and the class M noteholders and/or
the class C noteholders and/or class D noteholders on the other
hand;
o (if there are no class A notes or class B notes outstanding) the
note trustee is to have regard only to the interests of the
class M noteholders in the event of a conflict between the
interests of the class M noteholders on the one hand and the
class C noteholders and/or class D noteholders on the other
hand; and
o (if there are no class A, class B or class M notes outstanding)
the note trustee is to have regard only to the interests of the
class C noteholders in the event of a conflict between the
interests of the class C noteholders on the one hand and the
class D noteholders on the other hand.
As new mortgage loans are assigned to the mortgages trustee and as mortgage
loans are in certain circumstances removed from the mortgages trust, the
characteristics of the trust property may change from those existing at the
Funding 2 program date, and those changes may delay or reduce payments on the
notes
We do not guarantee that the characteristics of any new mortgage
loans assigned to the mortgages trustee will have the same characteristics as
the mortgage loans in the mortgage portfolio as of the Funding 2 program date.
In particular, new mortgage loans may have different payment characteristics
than the mortgage loans in the mortgage portfolio as of the Funding 2 program
date. The ultimate effect of this could be to delay or reduce the payments you
receive on your notes or increase the rate of repayment of the notes. However,
the new mortgage loans will be required to meet the conditions described under
"Assignment of the new mortgage loans and their related security".
In addition, in order to promote the retention of borrowers, the
seller may periodically contact certain borrowers in order to encourage a
borrower to review the seller's other mortgage products and to discuss
offering that borrower to an alternative Northern Rock mortgage product. The
seller also may periodically contact borrowers in the same manner in order to
offer to a borrower the opportunity to apply for a further advance or a
personal secured loan. The employee of the seller who contacts a borrower will
not know whether that borrower's original mortgage loan has been sold to the
mortgages trust. However, if the relevant original mortgage loan made to that
borrower happens to have been sold to the mortgages trust and that borrower
decides to switch mortgage products or take a further advance or a personal
secured loan, the seller then has the option of repurchasing that original
mortgage loan from the mortgages trust.
Generally, the borrowers that the seller may periodically contact are
those borrowers whose mortgage loans are not in arrears and who are otherwise
in good standing. To the extent that these borrowers switch to a different
Northern Rock mortgage product or take a further advance or a personal secured
loan and their original mortgage loans are purchased by the seller, the
percentage of fully performing mortgage loans in the mortgage portfolio may
decrease, which could delay or reduce payments you receive on your notes.
However, as described above, the seller's decision as to which borrowers to
target for new mortgage products and/or further advances and/or personal
secured loans and the decision whether to
29
approve a new mortgage product and/or further advance and/or personal secured
loan for a particular borrower will be made without regard to whether a
borrower's mortgage loan is included in the mortgage portfolio.
The seller may change the lending criteria relating to mortgage loans which
are subsequently assigned to the mortgages trustee which could affect the
characteristics of the trust property, and which could lead to a delay or a
reduction in the payments received on your notes or could increase the rate of
repayment of the notes
Each of the mortgage loans was originated in accordance with the
seller's lending criteria applicable at the time of origination, which lending
criteria in the case of each mortgage loan included in the mortgage portfolio
as of the Funding 2 program date were the same as or substantially similar to
the criteria described later in this prospectus under "The mortgage loans -
Origination of the mortgage loans - Lending criteria". These lending criteria
consider a variety of factors such as a potential borrower's credit history,
employment history and status and repayment ability, as well as the value of
the property to be mortgaged. In the event of the assignment of any new
mortgage loans and new related security to the mortgages trustee, the seller
will warrant to the mortgages trustee, Funding 2 and the Funding 2 security
trustee that those new mortgage loans and new related security were originated
in accordance with the seller's lending criteria applicable at the time of
their origination. However, the seller retains the right to revise its lending
criteria as determined from time to time, and so the lending criteria
applicable to any new mortgage loan at the time of origination may not be the
same as those set out in the section "The mortgage loans - Origination of the
mortgage loans - Lending criteria".
If new mortgage loans that have been originated under revised lending
criteria are assigned to the mortgages trustee, the characteristics of the
trust property could change. This could lead to a delay or a reduction in the
payments received on your notes or it could increase the rate of repayment of
the notes.
If property values decline payments on the notes could be adversely affected
The security granted by Funding 2 in respect of the global
intercompany loan, which is the principal source of funding for your notes,
consists, among other things, of Funding 2's interest in the mortgages trust.
Since the value of the mortgage portfolio held by the mortgages trustee may
increase or decrease, the value of that security may decrease and will
decrease if there is a general decline in property values. We cannot guarantee
that the value of a mortgaged property will remain at the same level as on the
date of origination of the related mortgage loan. If the residential property
market in the United Kingdom experiences an overall decline in property
values, the value of the security created by the mortgage loans could be
significantly reduced and, ultimately, may result in losses to you if the
security is required to be enforced.
The timing and amount of payments on the mortgage loans could be affected by
geographic concentration of the mortgage loans
To the extent that specific geographic regions have experienced or
may experience in the future weaker regional economic conditions and housing
markets than other regions, a concentration of the mortgage loans in such a
region may be expected to exacerbate all of the risks relating to the mortgage
loans described in this section. We can predict neither when and where such
regional economic declines may occur nor to what extent or for how long such
conditions may continue. See "The mortgage loans" in the related prospectus
supplement.
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The timing and amount of payments on the mortgage loans could be affected by
various factors which may adversely affect payments on the notes
Various factors influence mortgage delinquency rates, prepayment
rates, repossession frequency and therefore the timing and ultimate payment of
interest and repayment of principal. These factors include changes in the
national or international economic climate, prevailing mortgage interest
rates, regional economic or housing conditions, homeowner mobility, changes in
tax laws, inflation, the availability of financing, yields on alternative
investments, political developments and government policies.
The rate of prepayments on the mortgage loans may be increased due to
borrowers refinancing their mortgage loans and sales of mortgaged properties
by borrowers (either voluntarily or as a result of enforcement action taken),
as well as the receipt of proceeds from buildings insurance and life insurance
policies. The rate of prepayment of mortgage loans may also be influenced by
the presence or absence of early repayment charges.
Other factors in borrowers' personal or financial circumstances may
reduce the ability of borrowers to repay mortgage loans. Loss of earnings,
illness, divorce and other similar factors may lead to an increase in
delinquencies by and bankruptcies of borrowers, and could ultimately have an
adverse impact on the ability of borrowers to repay mortgage loans. In
addition, the ability of a borrower to sell a property given as security for a
mortgage loan at a price sufficient to repay the amounts outstanding under the
mortgage loan will depend upon a number of factors, including the availability
of buyers for that property, the value of that property and property values
and the property market in general at the time.
The global intercompany loan is our principal source of income for
repayment of the notes. The principal source of income for repayment by
Funding 2 of the global intercompany loan is its interest in the mortgage
loans held on trust by the mortgages trustee for the benefit of Funding,
Funding 2 and the seller. If the timing and payment of the mortgage loans is
adversely affected by any of the risks described above, the payments on your
notes could be reduced or delayed.
Repurchases of mortgage loans by the seller may have the same effect as
prepayments on the mortgage loans
The purchase by the seller of mortgage loans subject to product
switches, further advances or in respect of which personal secured loans are
made to the same borrower and secured over the same property or by the
repurchase by the seller of mortgage loans for breaches of representations and
warranties, then the payment received by the mortgages trustee will have the
same effect as a prepayment of such mortgage loan or mortgage loans. Because
these factors are not within our control or the control of Funding 2 or the
mortgages trustee, we cannot give any assurances as to the level of resulting
prepayments that the mortgage portfolio may experience.
In addition, if a mortgage loan is subject to a product switch or a
further advance, the seller may purchase the relevant borrower's mortgage loan
or mortgage loans and their related security from the mortgages trustee. If a
borrower takes a personal secured loan after the borrower's existing mortgage
loan(s) has been assigned to the mortgages trustee, the seller currently
intends to purchase from the mortgages trustee the mortgage loan(s) of that
borrower (including any personal secured loans and any further draws
thereunder in respect of that borrower) that were part of the trust property.
In the case of any such purchase, the payment received by the mortgages
trustee will have the same effect as a prepayment of such mortgage loan or
mortgage loans.
In order to promote the retention of borrowers, the seller may
periodically contact certain borrowers in respect of the seller's total
portfolio of outstanding mortgage loans in order to encourage a borrower to
review the seller's other mortgage products and to discuss shifting that
borrower to an alternative Northern Rock mortgage product. The employee of
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the seller who contacts a borrower will not know whether that borrower's
original mortgage loan has been sold to the mortgages trust. However, if the
relevant original mortgage loan made to that borrower happens to have been
sold to the mortgages trust and that borrower decides to switch mortgage loan
products, the seller's retention policy may ultimately result in that mortgage
loan becoming the subject of a product switch which ultimately may result in a
prepayment as described in the preceding paragraph. Furthermore, the seller
also may periodically contact certain borrowers in respect of the seller's
total portfolio of outstanding mortgage loans in order to offer to a borrower
the opportunity to apply for a further advance. If the borrower decides to
take a further advance and the seller decides to purchase the mortgage loan
subject to that further advance, the mortgage loan will be prepaid.
As the decision by the seller whether to purchase a mortgage loan
subject to a product switch or a further advance, or the mortgage loan(s) of a
borrower taking a personal secured loan, is not within our control or the
control of Funding 2 or the mortgages trustee, we cannot give any assurance as
to the level of effective prepayments that the mortgage portfolio may
experience as a result.
The inclusion of certain types of mortgage loans may affect the rate of
repayment and prepayment of the mortgage loans
The mortgage portfolio contains flexible mortgage loans. Flexible
mortgage loans provide the borrower with a range of options that gives that
borrower greater flexibility in the timing and amount of payments made under
the mortgage loan. Subject to the terms and conditions of the mortgage loans
(which may require in some cases notification to the seller and in other cases
the consent of the seller), under a flexible mortgage loan a borrower may
"overpay" or prepay principal on any day or make a re-draw in specified
circumstances. For a detailed summary of the characteristics of the flexible
mortgage loans, see "The mortgage loans - Characteristics of the mortgage
loans - Flexible mortgage loans". In addition, certain of the seller's
flexible mortgage loan products allow the borrower to make overpayments or
repay the entire current balance under the flexible mortgage loan at any time
without incurring an early repayment charge. See "The mortgage loans -
Characteristics of the mortgage loans - Early repayment charges".
The inclusion of Together Connections mortgage loans and Connections
mortgage loans, which are another type of flexible mortgage loan, in the
mortgages trust may also affect the yield to maturity of and the timing of
payments on the notes. Application of the Together Connections Benefit, a
feature of Together Connections mortgage loans, and Connections Benefit, a
feature of Connections mortgage loans, will reduce the principal amount
outstanding on a Together Connections mortgage loan and a Connections mortgage
loan, respectively. As a result, less of a related borrower's contractual
monthly payment (which the borrower is nevertheless obligated to continue
making in full) will be required to pay interest, and proportionately more of
that contractual monthly payment will be allocated as a repayment of
principal. This reallocation may lead to amortization of the related mortgage
loan more quickly than would otherwise be the case. For a description of the
Together Connections mortgage loans and the Together Connections Benefit and
the Connections mortgage loans and the Connections Benefit, see "The mortgage
loans - Characteristics of the mortgage loans - Mortgage loan products offered
by the seller".
To the extent that borrowers under flexible mortgage loans
consistently prepay principal or to the extent that Together Connections
mortgage loans and Connections mortgage loans amortize more quickly than
otherwise expected, the timing of payments on your notes may be adversely
affected.
32
The yield to maturity of the notes may be adversely affected by prepayments or
redemptions on the mortgage loans or repurchases of mortgage loans by the
seller
The yield to maturity of the notes of each class will depend mostly
on (a) the amount and timing of the repayment of principal on the mortgage
loans and (b) the price paid by the noteholders of each class of notes. The
yield to maturity of the notes of each class may be adversely affected by a
higher or lower than anticipated rate of prepayments on the mortgage loans.
The rate of prepayment of mortgage loans is influenced by a wide variety of
factors, as summarized in the two immediately preceding risk factors.
Variation in the rate and timing of prepayments of principal on the
mortgage loans may affect each class of notes differently depending upon
amounts already repaid by Funding 2 to us under the global intercompany loan
and whether a trigger event has occurred or the security granted by us under
the issuer deed of charge has been enforced. If prepayments on the mortgage
loans occur less frequently than anticipated, then the amortization of the
notes may take much longer than is presently anticipated and the actual yields
on your notes may be lower than you anticipate.
No assurance can be given that Funding 2 will receive sufficient
funds during the cash accumulation period for a bullet loan tranche or prior
to the scheduled repayment date for a scheduled repayment loan tranche to
enable Funding 2 to repay these loan tranches to us in time for us to redeem
the corresponding series and classes of notes on their bullet redemption date
or scheduled redemption dates, respectively. The extent to which sufficient
funds are received by Funding 2 during a cash accumulation period for a bullet
loan tranche or prior to a scheduled repayment date will depend on whether the
actual principal prepayment rate of the loans is the same as the assumed
principal prepayment rate.
If Funding 2 does not have sufficient funds to pay the full amount
scheduled to be repaid on a bullet loan tranche or scheduled repayment loan
tranche and therefore we cannot redeem the corresponding series and classes of
notes on their bullet redemption date or scheduled redemption date,
respectively, then Funding 2 will be required to pay us only the amount it has
actually received in respect of such loan tranches. Accordingly, we will only
be obliged to pay the amount of funds we received from Funding 2 to holders of
the corresponding notes. Any shortfall on such loan tranches and related notes
will be deferred to and paid on subsequent payment dates when Funding 2 has
money available to pay such shortfall on the loan tranches to us and we, in
turn, have funds to pay the related series and classes of notes. If this
happens, holders of affected notes will not receive repayment of principal
when expected which may have an adverse effect on the yield to maturity of
those notes.
In addition, during the cash accumulation period for the bullet loan
tranches, no payments of principal will be made on other loan tranches unless
the quarterly CPR of the mortgage loans is greater than [15]% and certain
other conditions are met, as described under "Cashflows - Distribution of
Funding 2 available principal receipts prior to the enforcement of the Funding
2 security - Rules for application of Funding 2 available principal receipts".
The occurrence of a non-asset trigger event may accelerate the repayment of
certain notes and/or delay the repayment of other notes
If a non-asset trigger event has occurred, the mortgages trustee will
distribute all principal receipts to Funding 2 and Funding until the Funding 2
share percentage and the Funding share percentage of the trust property are
each zero. Funding 2 will on each payment date apply these principal receipts
to repay the global intercompany loan and each new intercompany loan (if any)
equally and in proportion to the outstanding principal balance of the relevant
intercompany loan.
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Following the occurrence of a non-asset trigger event, we will apply
these principal repayments of the global intercompany loan which are available
for payment to noteholders on each payment date to repay the classes of notes
in order of seniority, and pro rata in proportion to [the amounts due];
provided that the [class A] notes will be repaid in order of the final
maturity date of each series of such class beginning with the earliest such
date.
If a non-asset trigger occurs or the issuer security is enforced,
bullet redemption notes and scheduled redemption notes may not be repaid on
their bullet redemption dates or scheduled redemption dates, and there is a
risk that they may not be repaid by their final maturity dates. In addition,
payment of principal of controlled amortization notes will not be limited to
their controlled amortization amounts. This may cause certain series and
classes of controlled amortization notes to be repaid more rapidly than
expected and other series and classes of such notes be repaid more slowly than
expected.
Competition in the UK mortgage loan industry could increase the risk of an
early redemption of your notes
The mortgage loan industry in the United Kingdom is highly
competitive. Both traditional and new lenders use heavy advertising, targeted
marketing, aggressive pricing competition and loyalty schemes in an effort to
expand their presence in or to facilitate their entry into the market and
compete for customers. For example, certain of the seller's competitors have
implemented loyalty discounts for long-time customers to reduce the likelihood
that these customers would refinance their mortgage loans with other lenders
such as the seller.
This competitive environment may affect the rate at which the seller
originates new mortgage loans and may also affect the level of attrition of
the seller's existing borrowers. If the rate at which new mortgage loans are
originated declines significantly or if existing borrowers refinance their
mortgage loans with lenders other than the seller then the risk of a trigger
event occurring increases, which could result in an early redemption of your
notes.
If the seller does not purchase fixed rate mortgage loans under which the
borrower exercises his or her re-fix option then Funding 2 may need to enter
into new hedging arrangements and we may not find a counterparty at the
relevant time
If the seller does not elect within 30 days of the end of the
relevant fixed rate period to purchase the relevant mortgage loan from the
mortgages trustee if it becomes a re-fixed mortgage loan, then this will
necessitate the entry by Funding 2 into further hedging arrangements with an
alternative basis rate swap counterparty satisfactory to the rating agencies.
Entering into additional hedging arrangements may increase Funding 2's
obligations on any payment date which may adversely affect payments on your
notes. In addition, we cannot provide assurance that an alternative basis rate
swap counterparty will be available at the relevant time.
If the mortgages trustee GIC provider or the Funding 2 GIC provider ceases to
satisfy certain criteria, then the mortgages trustee GIC account or the
Funding 2 GIC account may have to be transferred to another GIC provider under
terms that may not be favourable as those offered by the current GIC provider
The mortgages trustee GIC provider and the Funding 2 GIC provider are
required to satisfy certain criteria (including certain criteria and/or
permissions set or required by the FSA from time to time) in order to continue
to receive deposits in the mortgages trustee GIC account and the Funding 2 GIC
account, respectively. If either the mortgages trustee GIC provider or the
Funding 2 GIC provider ceases to satisfy that criteria, then the relevant
account may need to be transferred to another entity which does satisfy that
criteria. In these circumstances, the stand-by GIC provider or other bank, as
applicable, may not offer a
34
GIC on terms as favourable as those provided by the mortgages trustee GIC
provider or the Funding 2 GIC provider.
The criteria referred to above as of the date of this prospectus
include a requirement that the short-term, unguaranteed and unsecured ratings
ascribed to the mortgages trustee GIC provider or, as the case may be, the
Funding 2 GIC provider are at least "A-1+" (or in the circumstances described
below, "A-1") by Standard & Poor's, "F1" by Fitch and "P-1" by Moody's,
provided that where the relevant deposit amount is less than 20% of the amount
of the Funding share of the trust property, then the short-term, unguaranteed
and unsecured rating required to be ascribed by Standard & Poor's to the
mortgages trustee GIC provider or, as the case may be, the Funding 2 GIC
provider shall be at least "A-1". These criteria are subject to change by the
rating agencies.
Termination payments on the Funding 2 basis rate swap may adversely affect the
funds available to make payments on the notes
The amount of revenue receipts that Funding 2 receives will fluctuate
according to the interest rates applicable to the mortgage loans in the
mortgages trust. However, the amount of interest payable by Funding 2 to us
under the global intercompany loan will depend upon [a LIBOR based rate for
one-month sterling deposits].
To hedge its exposure against the possible variance between the
foregoing interest rates, Funding 2 entered into the Funding 2 basis rate swap
with the Funding 2 basis rate swap provider and the Funding 2 security trustee
on the Funding 2 program date (see "The swap agreements - The Funding 2 basis
rate swap").
If the basis rate swap is terminated, Funding 2 may be obliged to pay
a termination payment to the Funding 2 basis rate swap provider. The amount of
the termination payment will be based on the cost of entering into a
replacement swap.
We cannot give you any assurance that Funding 2 will have the funds
available to make that payment or that Funding 2 will have sufficient funds
available to make any termination payment under the Funding 2 basis rate swap
or to make subsequent payments to us in respect of the relevant series and
class of notes. Nor can we give you any assurance that Funding 2 will be able
to enter into a replacement swap, or if one is entered into, that the credit
rating of the replacement swap provider will be sufficiently high to prevent a
downgrading of the then current ratings of the notes by the rating agencies.
Except where the Funding 2 basis rate swap provider has caused the
Funding 2 basis rate swap to terminate by its own default, any termination
payment due by Funding 2 will rank equally with payments due on the loan
tranches. Any additional amounts required to be paid by Funding 2 following
termination of the Funding 2 basis rate swap (including any extra costs
incurred (for example, from entering into "spot" interest rate swaps) if
Funding 2 cannot immediately enter into a replacement swap), will also rank
equally with payments due on the loan tranches.
Therefore, if Funding 2 is obliged to make a termination payment to
the Funding 2 basis rate swap provider or to pay any other additional amount
as a result of the termination of the Funding 2 basis rate swap, this may
affect the funds which Funding 2 has to make payments on the global
intercompany loan and therefore may affect the funds which we have available
to make payments on the notes of any class and any series.
Ratings assigned to the notes may be lowered or withdrawn after you purchase
the notes, which may lower the market value of the notes
The ratings assigned to each class of notes address the likelihood of
full and timely payment to you of all payments of interest on each payment
date under those classes of notes. The ratings also address the likelihood of
ultimate repayment of principal on the final
35
maturity date of each class of notes. The expected ratings of a series and
class of notes offered by this prospectus will be set out in the prospectus
supplement applicable to that series and class of notes. Any rating agency may
lower its rating or withdraw its rating if, in the sole judgement of the
rating agency, the credit quality of the notes has declined or is in question.
If any rating assigned to the notes is lowered or withdrawn, the market value
of the notes may be reduced.
Subordination of other note classes may not protect you from all risk of loss
The class B notes, the class M notes, class C notes and class D notes
of any series are subordinated in right of payment of interest to the class A
notes of any series. The class M notes, the class C notes and the class d
notes of any series are subordinated in right of payment of interest to the B
notes of any series. The class C notes and the class D notes of any series are
subordinated in right of payment of interest to the class M notes of any
series. The class D notes of any series are subordinated in right of payment
of interest to the class C notes of any series.
The class B notes, the class M notes, the class C notes and the class
D notes of any series are subordinated in right of payment of principal to the
class A notes of any series. The class M notes, the class C notes and the
class D notes of any series are subordinated in right of payment of principal
to the class B notes of any series. The class C notes and the class D notes of
each series are subordinated in right of payment of principal to the class M
notes of each series. The class D notes of any series are subordinated in
right of payment of principal to the class C notes and any series.
You should be aware, however, that not all classes of notes are
scheduled to receive payments of principal on each payment date. Despite the
principal priority of payments described above, subject to there being no
trigger event and no enforcement of the Funding 2 security and/or the issuer
security, lower ranking classes of notes may nevertheless be repaid principal
before higher ranking classes of notes. Payments of principal are expected to
be made to each class of notes in amounts up to the amounts set forth under
"Cashflows - Distribution of issuer available principal receipts prior to
enforcement of the issuer security and/or occurrence of a trigger event".
There is no assurance that these subordination rules will protect the
class A noteholders from all risks of loss, the class B noteholders from all
risk of loss, the class M noteholders from all risk of loss, or the class C
noteholders from all risk of loss. If the losses allocated to the class D
notes, the class C notes, the class M notes and the class B notes, as
evidenced on each of the class D, class C, class M and class B principal
deficiency subledgers, respectively, plus any other debits to each of the
class D, class C, class M and class B principal deficiency subledgers, as the
case may be, are in an aggregate amount equal to the aggregate outstanding
principal balances of the class D notes, the class C notes, the class M notes
and the class B notes, then losses on the mortgage loans will thereafter be
allocated to the class A notes at which point there will be an asset trigger
event. If the losses allocated to the class D, the class C notes and the class
M notes, as evidenced on each of the class D, the class C and class M
principal deficiency subledgers, respectively, plus any other debits to each
of the class D, the class C and class M principal deficiency subledgers, as
the case may be, are in an aggregate amount equal to the aggregate outstanding
principal balances of the class D and class C notes and the class M notes,
then losses on the mortgage loans will thereafter be allocated to the class B
notes. Similarly, if the losses allocated to the class D notes and the class C
notes as evidenced on the class D and the class C principal deficiency
subledger plus any other debits to each of the class D and the class C
principal deficiency subledgers are in an aggregate amount equal to the
aggregate outstanding principal balance of the class D and the class C notes,
then losses on the mortgage loans will thereafter be allocated to the class M
notes. Finally, if the losses allocated to the class D notes as evidenced on
the class D principal deficiency subledger plus any other debits to the class
D principal deficiency subledger are in an
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amount equal to the aggregate outstanding principal balance of the class D
notes, then loss on the mortgage loans will thereafter be allocated to the
class C notes.
The required subordination for a class of notes may be changed
We may change the required subordinated amount for any class of
notes, or the method of calculating the required subordinated amount for such
class, at any time without the consent of any noteholders if certain
conditions are met, including confirmation from each rating agency that has
rated any outstanding notes that such change will not cause a reduction,
qualification or withdrawal of its then-current rating of any outstanding
notes.
In certain circumstances some of the conditions for issuance of notes
may be waived
If we obtain confirmation from each rating agency that has rated any
outstanding notes that the issuance of a new series and class of notes will
not cause a reduction, qualification or withdrawal of its then-current rating
of any outstanding notes rated by that rating agency, then some of the
conditions of issuance described under "Issuance of new notes" may be waived.
Payments of class B, class M, class C and class D notes may be delayed or
reduced because of subordination provisions
If on any payment date on which a payment of principal is due on any
series of class B, class M, class C or class D notes at a time when there is
insufficient subordination for more senior classes of notes and we are unable
to issue additional notes of such class B, class M class C or class D notes or
obtain acceptable alternative forms of credit enhancement, such subordinated
class of notes will not be entitled to receive payments of principal until all
outstanding classes of notes have their required level of subordination. See
"Cashflows - Rules for application of Funding 2 available principal receipts"
Issuance of additional notes may affect the timing and amounts of payments to
you
We expect to issue notes from time to time. New notes may be issued
without notice to existing noteholders and without their consent, and may have
different terms from outstanding notes. For a description of the conditions
that must be meet before the issuer can issue new notes, see "Issuance of new
notes".
The issuance of new notes could adversely affect the timing and
amount of payments on outstanding notes. For example, if notes of the same
class as your notes issued after your notes have a higher interest rate than
your notes, this could result in a reduction in the available funds used to
pay interest on your notes. Also when new notes are issued, the voting rights
of your notes will be diluted.
You may not be able to sell the notes
There currently is no secondary market for the notes. The
underwriters expect, but are not obliged, to make a market in the notes. If no
secondary market develops, you may not be able to sell the notes prior to
maturity. We cannot offer any assurance that a secondary market will develop
or, if one does develop, that it will continue.
You may be subject to exchange rate and interest rate risks
Repayments of principal and payments of interest on a series and
class of notes may be made in a currency other than sterling but the global
intercompany loan made by us to Funding 2 and repayments of principal and
payments of interest by Funding 2 to us under the global intercompany loan
will be in sterling. In addition interest due and payable by Funding 2 to us
under the global intercompany loan will be calculated pursuant to a margin
37
over [one month sterling LIBOR] but interest due and payable on a series and
class of notes may be calculated on a fixed, floating or other type of
calculation basis (as set out in the applicable prospectus supplement).
To hedge our currency exchange rate exposure and/or interest rate
exposure in such cases, on the closing date for a series and class of notes we
will, where applicable, enter into appropriate currency and/or interest rate
swaps for such notes with an issuer swap provider as specified in the related
prospectus supplement (see "The swap agreements - The issuer swaps").
If we fail to make timely payments of amounts due under an issuer
swap, then we will have defaulted under that issuer swap. Each issuer swap
provider is obliged only between sterling and the currency in which such notes
are denominated to make payments under an issuer swap as long as we make
payments under it. If such issuer swap provider is not obliged to make
payments of, or if it defaults in its obligations to make payments of, amounts
equal to the full amount to be paid to us on the payment dates under the
issuer swap (which are the same dates as the payment dates under the notes),
we will be exposed to changes in the exchange rates between sterling and the
currency in which such notes are denominated and in the associated interest
rates on these currencies. Unless a replacement currency swap is entered into,
we may have insufficient funds to make payments due on the notes of any class
and any series.
In addition, some of the mortgage loans carry variable rates of
interest, some of the mortgage loans pay interest at a fixed rate or rates of
interest and some of the flexible mortgage loans pay interest at variable
rates of interest no higher than the rate offered by a basket of UK mortgage
lenders or pay interest at a rate which tracks the Bank of England base rate.
However, these interest rates on the mortgage loans which will fund the
interest payable under the global intercompany loan will not necessarily match
the floating and/or fixed rates on the notes. If the Funding 2 basis rate swap
provider defaults in its obligation to make payments under the Funding 2 basis
rate swap, Funding 2 will be exposed to the variance between the rates of
interest payable on the mortgage loans and the rate of interest payable on the
global intercompany loan. Unless a replacement swap is entered into, Funding 2
may have insufficient funds to make payments due on the global intercompany
loan which may affect the funds we will have available to make payments due on
the notes of any class and any series.
Termination payments on the issuer swaps may adversely affect the funds
available to make payments on the notes
If any of the issuer swaps terminate, we may be obliged to pay a
termination payment to the relevant issuer swap provider. The amount of the
termination payment will be based on the cost of entering into a replacement
issuer swap. Under the global intercompany loan agreement, Funding 2 will be
required to pay us an amount required by us to pay any termination payment due
by us to the relevant issuer swap provider. Funding 2 will also be obliged to
pay us any extra amounts which we may be required to pay to enter into a
replacement swap.
We cannot give you any assurance that Funding 2 will have the funds
available to make that payment or that we will have sufficient funds available
to make any termination payment under any of the issuer swaps or to make
subsequent payments to you in respect of the relevant series and class of
notes. Nor can we give you any assurance that we will be able to enter into a
replacement swap, or if one is entered into, that the credit rating of the
replacement issuer swap provider will be sufficiently high to prevent a
downgrading of the then current ratings of the notes by the rating agencies.
Except where the relevant issuer swap provider has caused the
relevant issuer swap to terminate by its own default, any termination payment
due by us will rank equally with payments due on the notes. Any additional
amounts required to be paid by us following
38
termination of the relevant issuer swap (including any extra costs incurred
(for example, from entering into "spot" currency or interest rate swaps if we
cannot immediately enter into a replacement swap), will also rank equally with
payments due on the notes.
Therefore, if we are obliged to make a termination payment to the
relevant issuer swap provider or to pay any other additional amount as a
result of the termination of the relevant issuer swap, this may affect the
funds which we have available to make payments on the notes of any class and
any series.
If the Bank of England base rate falls below a certain level, we could suffer
a revenue shortfall which could adversely affect our payments on the notes
The seller guarantees that for variable rate mortgage loans that are
eligible to be charged at the seller's standard variable rate (including fixed
rate mortgage loans which become variable after the fixed period), during the
period in which the seller may impose an early repayment charge, the actual
gross interest rate that the seller charges will be the lower of:
(a) the seller's standard variable rate; or
(b) the Bank of England base rate plus a margin which is determined
by Northern Rock.
If the Bank of England base rate plus the appropriate margin (as
described above) falls to a level below the seller's standard variable rate it
is possible that there would be a shortfall of income on the mortgage loans
and that, as a result, either or both of Funding 2 and we would suffer a
revenue shortfall.
If borrowers become entitled to the loyalty discount offered by the seller, we
could suffer a revenue shortfall which could adversely affect our payments on
the notes
The seller currently offers a loyalty discount on each mortgage loan
(other than a Together mortgage loan, a Together Connections mortgage loan and
a CAT standard mortgage loan) which currently provides for a reduction of
0.25% (although the seller may in the future allow for a discount of between
0.25% and 0.75%) of the applicable interest rate on that mortgage loan once
the borrower has held that mortgage loan for at least seven years, subject to
certain conditions. If the loyalty discount becomes applicable to a
significant number of borrowers it is possible that there would be a shortfall
of income on the mortgage loans and that, as a result, either or both of
Funding 2 and we would suffer a revenue shortfall.
We rely on third parties and you may be adversely affected if they fail to
perform their obligations
We are a party to contracts with a number of other third parties that
have agreed to perform services in relation to the notes. For example, the
issuer swap providers will agree to provide their respective swaps, the
corporate services provider has agreed to provide corporate services and the
paying agents and the agent bank have agreed to provide payment and
calculation services in connection with the notes. In the event that any
relevant third party was to fail to perform its obligations under the
respective agreements to which it is a party, you may be adversely affected.
Excess revenue receipts may not be sufficient to replenish principal that has
been used to pay interest, which may result in your notes not being repaid in
full
If, on any payment date, revenue receipts available to us are
insufficient to enable us to pay interest on the notes and our other expenses
ranking in priority to interest due on
39
notes, then we may use principal receipts from the global intercompany loan to
make up that revenue shortfall.
During the term of the transaction, however, it is expected that
these principal deficiencies will be recouped from subsequent excess issuer
available revenue receipts. However, if subsequent excess issuer available
revenue receipts are insufficient to recoup those principal deficiencies, then
you may receive later than anticipated, or you may not receive in full,
repayment of the principal amount outstanding on your notes.
For more information on principal deficiencies, see "Credit structure
- - Principal deficiency ledger".
The seller share and the Funding share of the trust property do not provide
credit enhancement for the notes
Subject to certain exceptions as described under "The mortgages trust
- - Adjustments to trust property" and " - Losses", any losses from mortgage
loans included in the trust property will be allocated to Funding, Funding 2
and the seller on each distribution date in proportion to the then current
Funding share percentage, the then current Funding 2 share and the then
current seller share percentage of the trust property.
The seller share and the Funding share of the trust property do not
provide credit enhancement for the Funding 2 share of the trust property.
Losses on the mortgage loans in the trust property are generally allocated
proportionately among the seller, Funding and Funding 2 depending on their
respective percentage shares (or, in certain circumstances, their weighted
average percentage shares) of the trust property.
We will only have recourse to the seller if there is a breach of warranty by
the seller, and otherwise the seller's assets will not be available to us as a
source of funds to make payments on the notes
After a global intercompany loan enforcement notice under the global
intercompany loan is given (as described under "Security for Funding 2's
obligations"), the Funding 2 security trustee may sell the Funding 2 share of
the trust property. There is no assurance that a buyer would be found or that
such a sale would realize enough money to repay amounts due and payable under
the global intercompany loan agreement, the previous global intercompany loan
agreements and any new global intercompany loan agreements.
We will not, and Funding 2 and the mortgages trustee will not, have
any recourse to the seller of the mortgage loans, other than in respect of a
breach of warranty under the mortgage sale agreement.
We will not, and the mortgages trustee, Funding 2 and the Funding 2
security trustee will not, undertake any investigations, searches or other
actions on any mortgage loan or its related security and we and each of them
will rely instead on the warranties given in the mortgage sale agreement by
the seller.
If any of the warranties made by the seller is materially untrue on
the date on which a mortgage loan (including any personal secured loan) is
assigned to the mortgages trustee, then, in the first instance, the seller
will be required to remedy the breach within 28 days of the seller becoming
aware of the same or of receipt by it of a notice from the mortgages trustee.
If the seller fails to remedy the breach within 28 days, then the
seller will be required to repurchase from the mortgages trustee (i) the
relevant mortgage loan and its related security and (ii) any other mortgage
loans (including any personal secured loans) of the relevant borrower and
their related security that are included in the trust property, in each case
at their current balance as of the date of completion of such repurchase
together with all interest (whether due or accrued but not due) and arrears of
interest payable thereon to
40
the date of repurchase. There can be no assurance that the seller will have
the financial resources to repurchase the mortgage loan or mortgage loans and
their related security. However, if the seller does not repurchase those
mortgage loans and their related security when required, then the seller share
of the trust property will be deemed to be reduced by an amount equal to the
principal amount outstanding of those mortgage loans together with any arrears
of interest and accrued and unpaid interest and expenses.
Other than as described here, none of the mortgages trustee, Funding
2, you, or we will have any recourse to the assets of the seller.
There can be no assurance that a borrower will repay principal at the end of
the term on an interest-only loan (with or without a capital repayment
vehicle) or a combination loan
Each mortgage loan in the cut-off date mortgage portfolio was
advanced on one of the following bases:
o Repayment basis, with principal and interest repaid on a monthly
basis through the mortgage term; or
o An interest-only basis with or without a capital repayment
vehicle; or
o A combination basis, that is, a combination of the repayment and
interest-only arrangements where only part of the principal will
be repaid by way of monthly payments.
Neither the interest-only mortgage loans nor the interest-only
portion of any combination mortgage loan includes scheduled amortization of
principal. Instead the principal must be repaid by the borrower in a lump sum
at maturity of the mortgage loan.
For interest-only mortgage loans with a capital repayment vehicle or
a combination loan with a capital repayment vehicle the borrower is
recommended to put in place an investment plan or other repayment mechanism
forecast to provide sufficient funds to repay the principal due at the end of
the term.
The ability of a borrower to repay the principal on an interest-only
mortgage loan or the final payment of principal on a combination mortgage loan
at maturity depends on such borrower's responsibility to ensure that
sufficient funds are available from an investment plan or another source, such
as ISAs, pension policies, personal equity plans or endowment policies, as
well as the financial condition of the borrower, tax laws and general economic
conditions at the time. However, there can be no assurance that there will be
sufficient funds from any investment plan to repay the principal or (in the
case of a combination loan) the part of the principal that it is designed to
cover.
The seller does not (and in certain circumstances cannot) take
security over investment plans. Consequently, in the case of a borrower in
poor financial condition the investment plan will be an asset available to
meet the claims of other creditors. The seller also recommends the borrower to
take out term life insurance cover in relation to the mortgage loan, although
the seller again does not take security over such policies.
In the case of interest-only mortgage loans, there can be no
assurance that the borrower will have the funds required to repay the
principal at the end of the term. If a borrower cannot repay the mortgage loan
and a loss occurs on the mortgage loan, then this may affect payments on the
notes if that loss cannot be cured by the application of excess issuer
available revenue receipts.
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There may be risks associated with the fact that the mortgages trustee has no
legal title to the mortgage loans and their related security which may
adversely affect payments on the notes
The assignment by the seller to the mortgages trustee of the benefit
of the English mortgage loans and their related security in the mortgage
portfolio as at the Funding 2 program date took effect in equity only (and any
assignment of the benefit of the English mortgage loans and their related
security in the future will take effect in equity only). The sale and
assignment by the seller to the mortgages trustee of the Scottish mortgage
loans and their related security in the mortgage portfolio as at the Funding 2
program date were given effect by a declaration of trust by the seller by
which the beneficial interests in such Scottish mortgage loans and their
related security were transferred to the mortgages trustee (and any sale of
Scottish mortgage loans and their related security in the future will be given
effect by further declaration of trust). In each case this means that legal
title to the mortgage loans and their related security in the trust property
remains with the seller, but the mortgages trustee has all the other rights
and benefits relating to ownership of each mortgage loan and its related
security (which rights and benefits are subject to the trust in favor of the
beneficiaries). The mortgages trustee has the right to demand the seller to
give it legal title to the mortgage loans and the related security in the
circumstances described under "Assignment of the mortgage loans and their
related security - Transfer of legal title to the mortgages trustee" and until
then the mortgages trustee will not apply to H.M. Land Registry or H.M. Land
Charges Registry to register or record its equitable interest in the English
mortgages, and cannot in any event apply to the Registers of Scotland to
register or record its beneficial interest in the Scottish mortgages. For more
information on the Scottish mortgage loans and their related security, see
"The mortgage loans - Scottish mortgage loans" and "Material legal aspects of
the mortgage loans - Scottish mortgages". In addition, except in the limited
circumstances set out in "Assignment of the mortgage loans and related
security - Transfer of legal title to the mortgages trustee", the seller will
not give notice of the assignment of the mortgage loans and related security
to any borrower.
At any time during which the mortgages trustee does not hold the
legal title to the mortgage loans and their related security or has not
notified its interest in the mortgage loans and their related security to the
borrowers, there are risks, as follows:
o firstly, if the seller wrongly sold to another person a
mortgage loan and that mortgage loan has already been assigned
to the mortgages trustee, and that person acted in good faith
and did not have notice of the interests of the mortgages
trustee or the beneficiaries in the mortgage loan and that
person notified the borrower of that sale to it of the mortgage
loan and its related security or registered its interest in
that mortgage, then she or he might obtain good title to the
mortgage loan, free from the interests of the mortgages trustee
and the beneficiaries. If this occurred then the mortgages
trustee would not have good title to the affected mortgage loan
and its related security and it would not be entitled to
payments by a borrower in respect of such a mortgage loan. This
may affect our ability to repay the notes;
o secondly, the rights of the mortgages trustee and the
beneficiaries may be subject to the rights of the borrowers
against the seller, such as the rights of setoff (see in
particular "- There are risks in relation to flexible mortgage
loans and personal secured loans which may adversely affect the
funds available to pay the notes") which occur in relation to
transactions or deposits made between certain borrowers and the
seller and the rights of borrowers to redeem their mortgages by
repaying the mortgage loan directly to the seller. If these
rights were exercised, the mortgages trustee may receive less
money than anticipated from the mortgage loans, which may
affect our ability to repay the notes; and
42
o finally, the mortgages trustee would not be able to enforce any
borrower's obligations under a mortgage loan or mortgage itself
but would have to join the seller as a party to any legal
proceedings.
However, once notice has been given to a borrower of the
transfer of the related mortgage loan and its related security to the
mortgages trustee, any independent set-off rights which that borrower has
against the seller will crystallize, further rights of independent set-off
would cease to accrue from that date and no new rights of independent set-off
could be asserted following that notice. Set-off rights arising under
transaction set-off (which are set-off claims arising out of a transaction
connected with the mortgage loan) will not be affected by that notice.
Additionally, if a borrower exercises any set-off rights then an
amount equal to the amount set off will reduce the total amount of the seller
share of the trust property only. For more information on the risks of
transaction set-off, see "- There are risks in relation to flexible mortgage
loans and personal secured loans which may adversely affect the funds
available to pay the notes".
There are risks in relation to flexible mortgage loans and personal secured
loans which may adversely affect the funds available to pay the notes
As described under "- There may be risks associated with the fact
that the mortgages trustee has no legal title to the mortgage loans and their
related security, which may adversely affect payments on the notes", the
seller has made an equitable assignment of (or, in the case of the Scottish
mortgage loans, a transfer of the beneficial interest in) the relevant
mortgage loans and mortgages to the mortgages trustee, with legal title being
retained by the seller. Therefore, the rights of the mortgages trustee may be
subject to the direct rights of the borrowers against the seller, including
rights of set-off existing prior to notification to the borrowers of the
assignment of the mortgage loans and the mortgages. Such set-off rights
(including analogous rights in Scotland) may occur if the seller fails to
advance a cash re-draw to a borrower under a flexible mortgage loan or a
further draw to a borrower under a personal secured loan when the borrower is
entitled to such cash re-draw or further draw.
If the seller fails to advance the cash re-draw or further draw in
accordance with the relevant mortgage loan, then the relevant borrower may
argue that it is entitled to set off any damages claim (or the exercise of
analogous rights in Scotland) arising from the seller's breach of contract
against the seller's (and, as equitable assignee of or holder of the
beneficial interest in the mortgage loans and the mortgages, the mortgages
trustee's) claim for payment of principal and/or interest under the flexible
mortgage loan or personal secured loan as and when it becomes due. In
addition, a borrower under a personal secured loan may attempt to set off any
such damages claim (or the exercise of analogous rights in Scotland) against
the seller's claim for payment of principal and/or interest under any other
mortgage loan which the borrower has with the seller. Such set-off claims will
constitute transaction set-off as described in the immediately preceding risk
factor.
The amount of the claim in respect of a cash re-draw or further draw
will, in many cases, be the cost to the borrower of finding an alternative
source of funds (although in the case of Scottish mortgage loans which are
personal secured loans it is possible, though regarded as unlikely, that the
borrower's rights of set-off could extend to the full amount of the relevant
further draw). The borrower may obtain a mortgage loan elsewhere in which case
the damages would be equal to any difference in the borrowing costs together
with any consequential losses, namely the associated costs of obtaining
alternative funds (for example, legal fees and survey fees). If the borrower
is unable to obtain an alternative mortgage loan, he or she may have a claim
in respect of other losses arising from the seller's breach of contract where
there are special circumstances communicated by the
43
borrower to the seller at the time the borrower entered into the mortgage or
which otherwise were reasonably foreseeable.
A borrower may also attempt to set off against his or her mortgage
payments an amount greater than the amount of his or her damages claim (or the
exercise of analogous rights in Scotland). In that case, the administrator
will be entitled to take enforcement proceedings against the borrower although
the period of non-payment by the borrower is likely to continue until a
judgement is obtained.
The exercise of set-off rights by borrowers would reduce the incoming
cash flow to the mortgages trustee during such exercise. However, the amounts
set off will be applied to reduce the seller share of the trust property only.
Further, there may be circumstances in which:
o a borrower may seek to argue that certain re-draws are
unenforceable by virtue of non-compliance with the CCA;
o a borrower may seek to argue that personal secured loans may be
unenforceable or unenforceable without a court order because of
non-compliance with the CCA; or
o certain re-draws or further draws may rank behind liens created
by a borrower after the date upon which the borrower entered
into its mortgage with the seller.
The minimum seller share has been sized in an amount expected to
cover these risks, although there is no assurance that it will. If the minimum
seller share is not sufficient in this respect then there is a risk that you
may not receive all amounts due on the notes or that payments may not be made
when due.
If the administrator is removed, there is no guarantee that a substitute
administrator would be found, which could delay collection of payments on the
mortgage loans and ultimately could adversely affect payments on the notes
The seller has been appointed by the mortgages trustee and the
beneficiaries as administrator to service the mortgage loans. If the
administrator breaches the terms of the administration agreement, then the
mortgages trustee, [Funding, Funding 2, the security trustee and the Funding 2
security trustee] will be entitled to terminate the appointment of the
administrator and to appoint a substitute administrator.
There can be no assurance that a substitute administrator would be
found who would be willing and able to service the mortgage loans on the terms
of the administration agreement. In addition, as described under the third
risk factor immediately succeeding this risk factor, any substitute
administrator will be required to be authorized under the FSMA in order to
administer mortgage loans that constitute regulated mortgage contracts. The
ability of a substitute administrator fully to perform the required services
would depend, among other things, on the information, software and records
available at the time of the appointment. Any delay or inability to appoint a
substitute administrator may affect payments on the mortgage loans and hence
our ability to make payments when due on the notes.
You should note that the administrator has no obligation itself to
advance payments that borrowers fail to make in a timely fashion.
The mortgages trustee may not receive the benefit of claims made on the
buildings insurance which could adversely affect payments on the notes
The practice of the seller in relation to buildings insurance is
described under "The mortgage loans - Buildings insurance policies". As
described in that section, we cannot provide assurance that the mortgages
trustee will always receive the benefit of any claims made under any
applicable insurance contracts or that the amount received in the case of a
44
successful claim will be sufficient to reinstate the property. This could
reduce the principal receipts received by Funding 2 according to the Funding 2
share and could adversely affect our ability to make payments on the notes.
You should note that buildings insurance is normally renewed annually.
The mortgages trustee is not required to maintain mortgage indemnity insurance
with the current insurer, and the seller is not required to maintain the
current level of mortgage indemnity insurance coverage for new mortgage loans
that it originates in the future, which may adversely affect the funds
available to pay the notes
The mortgages trustee is not required to maintain a mortgage
indemnity policy with the current insurer. The mortgages trustee has the
discretion to contract for mortgage indemnity guarantee protection from any
insurer then providing mortgage indemnity insurance policies or not at all,
subject to prior agreement with the rating agencies and their confirmation
that this will not affect the then current ratings of the notes.
In addition, the seller is not required to maintain the same level of
coverage under mortgage indemnity insurance policies for mortgage loans that
it may originate in the future and assign to the mortgages trust. See "The
mortgage loans - Buildings insurance policies - MIG Policies".
Possible regulatory changes by the Office of Fair Trading, the Financial
Services Authority and any other regulatory authorities may have an impact on
the seller, the issuer, the mortgage loans and/or personal secured loans and
may adversely affect our ability to make payments when due on the notes
In the United Kingdom, the Office of Fair Trading ("OFT") is
responsible for the issue of licenses under and the enforcement of the CCA,
related consumer credit regulations and other consumer protection legislation.
The OFT may review businesses and operations, provide guidelines to follow and
take actions when necessary with regard to the mortgage market in the United
Kingdom.
Regulation of Mortgage lending in the United Kingdom under the FSMA
Mortgage lending in the United Kingdom became a regulated activity
under the FSMA on October 31, 2004 ("N(m)")
The FSMA applies to a "regulated mortgage contract". A mortgage loan
contract will be a regulated mortgage contract under the FSMA, if it is
originated after N(m) or originated prior to N(m) but varied after N(m) such
that a new contract is entered into and if, at the time it is entered into:
(a) the borrower is an individual or trustee, (b) the contract provides for
the obligation of the borrower to repay to be secured by a first legal
mortgage on land (other than timeshare accommodation) in the UK, and (c) at
least 40% of that land is used, or is intended to be used, as or in connection
with a dwelling by the borrower or (in the case of credit provided to
trustees) by an individual who is a beneficiary of the trust, or by a related
person. Therefore, the FSMA will not apply to a mortgage contract that is
secured by a second or subsequent charge or is provided to a corporate body.
The CCA will continue to apply, if applicable, to mortgage loans post N(m)
where the mortgage loan does not satisfy the definition of a regulated
mortgage contract.
From N(m), subject to any exemption, persons carrying on any
specified regulated mortgage-related activities by way of business must, be
authorized by the Financial Services Authority (the "FSA") under the FSMA. The
specified activities currently are (a) entering into a regulated mortgage
contract as lender, (b) administering a regulated mortgage contract
(administrating in this context means notifying borrowers of changes in
mortgage payments and/or collecting payments due under the mortgage loan), (c)
advising on regulated mortgage contracts, and (d) arranging regulated mortgage
contracts. Agreeing to carry on any of these activities is a regulated
activity. If requirements as to, inter alia, authorization of
45
lenders and brokers are not complied with, a regulated mortgage contract may
be unenforceable against the borrower except with the approval of a court.
The regime under the FSMA regulating financial promotions covers the
content and manner of promotion of regulated mortgage products, and by whom
such promotion can be issued or approved.
An unauthorized person who carries on a regulated mortgage-related
activity of administering or advising in respect of a regulated mortgage
contract that has been validly entered into may commit an offense, although
this will not render the contract unenforceable against the borrower. We do
not need to be an authorised person under the FSMA in order to acquire legal
or beneficial title to a regulated mortgage contract. We will not carry on the
regulated activity of administering in relation to regulated mortgage
contracts, where such contracts are administered pursuant to an administration
agreement by an entity having the required FSA authorization and permission.
If such administration agreement terminates, however, we will have a period of
not more than one month in which to arrange for mortgage administration to be
carried out by a replacement administrator having the required FSA
authorization and permission. In addition, from N(m) no variations have or
will be made to the mortgage loans and no re-draws or further advances have or
will be made under the mortgage loans, where this would result in us
arranging, advising on, administering or entering into a regulated mortgage
contract or agreeing to carry on any of these activities, if we would be
required to be authorized under the FSMA to do so.
Prior to N(m), self-regulation of mortgage business in the UK was
under the Mortgage Code (the "CML Code") issued by the Council of Mortgage
Lenders (the "CML"). The seller subscribes to the CML Code and since N(m), as
an authorised person is subject to the FSA requirements in its Mortgages:
Conduct of Business Source Book ("MCoB"). MCoB sets out various requirements
that a regulated mortgage lender must comply with when carrying on regulated
mortgage-related activities, in particular, MCoB sets out requirements as to
pre-application disclosures at offer stage, disclosures at start of contract
and responsible lending. A failure to comply with MCoB, by a regulated
mortgage lender, would not make the regulated mortgage contract unenforceable
or void as against the borrower or constitute an offence by the regulated
mortgage lender. A borrower which is a private person may have a right of
action against the regulated mortgage lender where the borrower has suffered a
loss as a result of the contravention. Membership of the CML and compliance
with the CML Code are voluntary. The CML Code sets out a minimum standard of
good mortgage business practice, from marketing to lending procedures and
dealing with borrowers experiencing financial difficulties. Since April 30,
1998, lender-subscribers to the CML Code may not accept mortgage business
introduced by intermediaries who were not registered with (before November 1,
2000) the Mortgage Code Register of Intermediaries or (on and after November
1, 2000) the Mortgage Code Compliance Board.
In March 2001, the European Commission published a Recommendation to
member states urging their lenders to subscribe to the code issued by the
European Mortgage Federation. On July 26, 2001 the CML decided to subscribe to
the code collectively on behalf of its members. Lenders had until September
30, 2002 to implement the code, an important element of which is provision to
consumers of a "European Standardised Information Sheet" (an "ESIS") similar
to the pre-application illustration required by the FSA. Following
postponement of the regulation by the FSA of mortgage business from August
2002 to N(m), UK lenders generally could not begin to provide ESISs to
consumers until N(m). The CML has discussed this with the European Commission
and the European Mortgage Federation. While compliance with the code is
voluntary, if the code is not effective, the European Commission is likely to
see further pressure from consumer bodies to issue a Directive on mortgage
credit or to extend its proposal for a Directive on consumer credit (as to
which, see the paragraph below) to all mortgage credit.
46
In September 2002, the European Commission published a proposal for a
directive of the European Parliament and of the Council on the harmonization
of the laws, regulations and administrative provisions of the member states
concerning credit for consumers and surety agreements entered into by
consumers. In its original form, the proposal requires specified requirements
to be met and restrictions observed in respect of certain mortgage loan
products, including new credit agreements for further drawings under certain
flexible mortgages and for further advances and amortization tables for
repayment mortgages. If the proposal comes into force in its original form,
mortgage loans which do not comply with these requirements and restrictions
may be subject to penalties, potentially including loss of interest and
charges by the mortgagee coupled with continuation of the right of repayment
in installments by the borrower. Significantly, in its original form the
proposal provides that it does not apply retrospectively (subject to certain
exceptions including in respect of new drawings or further advances made in
respect of existing agreements) and does not apply to residential mortgage
loans except those which include an equity release component. There has been
significant opposition from the European Parliament to the original form of
the proposed directive. On April 20, 2004, the European Parliament voted on
its first reading the proposed directive and has made over 150 amendments. In
particular, these amendments provide that (subject to certain exceptions)
loans not exceeding (Euro)100,000 will be regulated, but that the proposed
directive will not apply to any loan secured by a mortgage on land or to any
loan originated before national implementing legislation comes into force.
The European Commission will now re-draft the proposed directive in
light of the European Parliament resolution. There are differences in opinion
as to the extent to which mortgage loans should be included in the scope of
the proposed directive, and the directive may be substantially further amended
before it is ultimately brought into effect.
In any event the proposed directive is unlikely to come into force
before 2006 as the co-decision procedures of the European Parliament and of
the Council, from the publication of the proposal to the coming into force of
the new consumer credit directive, are likely to take at least two years and
member states will then have a further two years in which to bring national
implementing legislation regulations and administrative provisions into force.
The UK Department of Trade and Industry (the "DTI") is currently in
consultation with consumer and industry organizations in relation to this
proposal. As a result of the above, the form and the effect of the ultimately
implemented directive on our ability to make payments when due on the notes
cannot be fully determined at this stage.
Currently, a credit agreement is regulated by the CCA where: (a) the
borrower is or includes an individual, (b) the amount of "credit" as defined
in the CCA does not exceed the financial limit, which is (GBP)25,000 for
credit agreements made on or after May 1, 1998, or lower amounts for credit
agreements made before that date, and (c) the credit agreement is not an
exempt agreement as specified in or under section 16 of the CCA (for example,
certain types of credit to finance the purchase of, or alterations to, homes
or business premises). Some of the personal secured loans in the mortgage
portfolio might be wholly or partly regulated or treated as such by the CCA.
Any such personal secured loan has to comply with requirements under the CCA
as to content, layout and execution of the personal secured loan agreement. If
it does not comply, then to the extent that it is regulated or to be treated
as such:
(a) the personal secured loan is unenforceable if the form to be
signed by the borrower is not signed by the borrower or omits or
mis-states a "prescribed term"; or
(b) in other cases, the personal secured loan is unenforceable
without a court order and, in exercising its discretion whether
to make the order, the court will take into account any
prejudice suffered by the borrower and any culpability by the
seller.
If a court order is necessary to enforce some or part of a personal
secured loan in the mortgage portfolio to the extent that it is regulated,
then in dealing with such an application,
47
the court has the power, if it appears just to do so, to amend the personal
secured loan agreement or to impose conditions upon its performance or to make
a time order (for example, giving extra time for arrears to be cleared). The
CCA contains anti-avoidance provisions. The seller does not believe that these
provisions would apply to the mortgage loans, and has represented that no
mortgage loan (apart from a personal secured loan) is wholly or partly
regulated by the CCA or to be treated as such.
In November 2002, the DTI announced its intention that a credit
agreement will be regulated by the CCA where, for credit agreements made after
this change is implemented: (a) the borrower is or includes an individual,
save for partnerships of four or more partners, (b) irrespective of the amount
of credit (although in July 2003, the DTI announced its intention that the
financial limit will remain for certain business-to-business lending), and (c)
the credit agreement is not an exempt agreement. If this change is
implemented, then any new loan or further advance made after this time, other
than a regulated mortgage contract under the FSMA or an exempt agreement under
the CCA, will be regulated by the CCA. Such loan or further advance will have
to comply with requirements as to the form and content of the credit agreement
and, in certain cases, new requirements for pre-contract disclosure of key
information. If it does not comply, it will be unenforceable against the
borrower. A consumer credit white paper was published by the DTI in December
2003. The white paper was accompanied by a consultation on draft regulations
detailing the changes proposed for consumer credit advertising, the form and
content of credit agreements, pre-contract disclosure requirements, the early
settlement of credit agreements and facilitating the conclusion of credit
agreements over the internet.
Following the consultation process, in June 2004 finalized
regulations were laid before Parliament governing consumer credit advertising;
the form and content of credit agreements; requirements for pre-contract
disclosure; and the rebate of interest charges to which a borrower will be
entitled on early settlement. The new regulations relating to advertising are
due to come into effect on October 31, 2004. The regulations relating to form
and content of credit agreements are due to come into effect on May 31, 2005,
or August 31, 2005 for agreements that have been presented, sent or made
available to the borrower but have not been executed before May 31, 2005.
Regulations on pre-contract disclosure are due to take effect from May 31,
2005. The regulations on early settlement introduce revised formulae for
calculating the minimum rebate of interest to which the borrower is entitled
on an early settlement, which are anticipated to be more favourable to the
borrower than the existing formulae. The new formulae come into force on May
31, 2005 for all agreements entered into on or after that date. For all
agreements existing on May 31, 2005, the new formulae will apply from May 31,
2007 for all such agreements which were originally for a term of 10 years or
less, and from May 31, 2010 for all such agreements which were originally for
a term of more than 10 years.
The FSA has announced that, to avoid dual regulation from N(m), all
mortgages regulated by the FSA will not be covered by the CCA. This carve-out
only affects mortgages entered into or varied such that a new contract is
formed on or after N(m). Before that date, the CCA will continue to be the
relevant legislation. For the avoidance of doubt, a mortgage securing a
regulated mortgage contract that would (except for the carve-out) be regulated
under the CCA or treated as such will, however, be enforceable on an order of
the court only pursuant to section 126 of the CCA, notwithstanding regulation
under the FSMA.
No assurance can be given that additional regulations from the OFT,
the FSA or any other regulatory authority will not arise with regard to the
mortgage market in the United Kingdom generally, the seller's particular
sector in that market or specifically in relation to the seller. Any such
action or developments, in particular, but not limited to, the cost of
compliance, may have a material adverse effect on the seller, us and/or the
servicer and their respective businesses and operations. This may adversely
affect our ability to make payments in full when due on the notes.
48
Regulations in the United Kingdom could lead to some terms of the mortgage
loans and personal secured loans being unenforceable, which may adversely
affect payments on the notes
In the United Kingdom, the Unfair Terms in Consumer Contracts
Regulations 1994 applied to all of the mortgage loans that were entered into
between July 1, 1995 and September 30, 1999. These regulations were revoked
and re-enacted by the Unfair Terms in Consumer Contracts Regulations 1999
("UTCCR") on October 1, 1999, which apply to all the mortgage loans as of that
date. The UTCCR generally provide that:
o a borrower may challenge a term in an agreement on the basis
that it is an "unfair" term within the regulations and therefore
not binding on the borrower; and
o the OFT and any "qualifying body" (as defined in the
regulations, such as the FSA) may seek to prevent a business
from relying on unfair terms.
This will not generally affect "core terms" which set out the main
subject matter of the contract, such as the borrower's obligation to repay
principal. However, it may affect terms that are not considered to be core
terms, such as the right of the lender to vary the interest rate. For example,
if a term permitting a lender to vary the interest rate is found to be unfair,
the borrower will not be liable to pay the increased rate or, to the extent
that she or he has paid it, will be able, as against the lender or the
mortgages trustee, to claim repayment of the extra interest amounts paid or to
set off the amount of such claim against the amount owing by the borrower
under the mortgage loan. Any such non-recovery, claim or set-off ultimately
may adversely affect our ability to make payments on the notes such that the
payments on your notes could be reduced or delayed.
On February 24, 2000, the OFT issued a guidance note on what the OFT
considers to be fair and unfair terms for interest variation in mortgage
contracts. Where the interest variation term does not provide for precise and
immediate tracking of an external rate outside the lender's control, and if
the borrower is locked in, for example by an early repayment charge that is
considered to be a penalty, the term is likely to be regarded as unfair under
the UTCCR unless the lender (i) notifies the borrower in writing at least 30
days before the rate change and (ii) permits the borrower to repay the whole
loan during the next three months after the rate change, without paying the
early repayment charge. The seller has reviewed the guidance note and has
concluded that its compliance with it will have no material adverse effect on
the mortgage loans or its business. The guidance note has been withdrawn from
the OFT website. The FSA has agreed with the OFT to take responsibility for
the enforcement of the UTCCR in regulated mortgage contracts. The guidance
note is currently under review by the OFT and the FSA, but there is no
indication as to when this review is likely to be concluded or what changes,
if any may arise from it.
In August 2002 the Law Commission for England and Wales and the
Scottish Law Commission published a Joint Consultation Paper proposing changes
to the UTCCR, including harmonizing provisions of the UTCCR and the Unfair
Contract Terms Act 1977, applying the UTCCR to business-to-business contracts
and revising the UTCCR to make it "clearer and more accessible". The closing
date for comments on this consultation was November 8, 2002 and a final report
(together with a Bill) is expected in 2004. No assurances can be given that
changes to the UTCCR, if implemented, will not have an adverse effect on the
seller, us and/or the administrator.
Under the FSMA, the Financial Ombudsman Service (the "Ombudsman") is
required to make decisions on (among other things) complaints relating to the
terms in agreements on the basis of what, in the Ombudsman's opinion, would be
fair and reasonable in all circumstances of the case, taking into account
(among other things) law and guidance. Complaints brought before the Ombudsman
for consideration must be decided on a case-by-case basis, with reference to
the particular facts of any individual case. Each case would first be
adjudicated by an adjudicator. Either party to the case may appeal against the
adjudication. In the event of an appeal, the case proceeds to a final decision
by the
49
Ombudsman. The Ombudsman may make a money award to a borrower, which may
adversely affect the value at which mortgage loans could be realized and
accordingly our ability to make payments in full when due on the notes.
The mortgages trustee's entitlement to be indemnified for liabilities
undertaken during the enforcement process may adversely affect the funds
available to Funding 2 to pay amounts due under the global intercompany loan,
which may in turn adversely affect the funds available to pay the notes
In order to enforce a power of sale in respect of a mortgaged
property, the relevant mortgagee (which may be Northern Rock, the mortgages
trustee or any receiver appointed by the security trustee) must first obtain
possession of the mortgaged property unless the property is vacant. Possession
is usually obtained by way of a court order although this can be a lengthy
process and the mortgagee must assume certain risks. Each of the mortgages
trustee and the Funding 2 security trustee and any receiver appointed by it is
entitled to be indemnified to its satisfaction against personal liabilities
which it could incur if it were to become a mortgagee in possession before it
is obliged to seek possession, provided that it is always understood that the
security trustee is never obliged to enter into possession of the mortgaged
property.
The European Union directive on the Taxation of Savings Income may prevent you
from receiving interest on the notes in full
The European Union has adopted a Directive regarding the taxation of
savings income. Subject to a number of important conditions being met, it is
proposed that member states will be required from July 1, 2005, to provide to
the tax authorities of other member states details of payments of interest and
other similar income paid by a person to an individual in another member
state, except that Austria, Belgium and Luxembourg will instead impose a
withholding system for a transitional period unless during such period they
elect otherwise.
Tax payable by Funding 2 and us may adversely affect our ability to make
payments on the notes
As explained under "Material United Kingdom tax consequences", both
Funding 2 and we will generally be subject to UK corporation tax, currently at
a rate of 30%, on the profit reflected in their respective profit and loss
accounts as increased by the amount of any expenses which are not deductible
for the purposes of UK corporation tax. If the tax payable by Funding 2 or us
is greater than expected because, for example, expenses or losses which are
not so deductible are greater than expected, the funds available to make
payments on your notes could be materially reduced and this could have a
material adverse effect on our ability to make payments on the notes.
If the United Kingdom joins the European Monetary Union prior to the maturity
of the notes, we cannot assure you that this would not adversely affect
payments on your notes
It is possible that prior to the maturity of the notes the United
Kingdom may become a participating member state in the European economic and
monetary union and the euro may become the lawful currency of the United
Kingdom. In that event, (a) all amounts payable in respect of any notes
denominated in sterling may become payable in euro; (b) applicable provisions
of law may allow or require us to re-denominate such notes into euro and take
additional measures in respect of such notes; and (c) the introduction of the
euro as the lawful currency of the United Kingdom may result in the
disappearance of published or displayed rates for deposits in sterling used to
determine the rates of interest on such notes or changes in the way those
rates are calculated, quoted and published or displayed. The
50
introduction of the euro could also be accompanied by a volatile interest rate
environment which could adversely affect a borrower's ability to repay its
loan as well as adversely affect investors. It cannot be said with certainty
what effect, if any, adoption of the euro by the United Kingdom will have on
investors in the notes.
Your interests may be adversely affected by a change of law in relation to UK
withholding tax
In the event that amounts due under the notes are subject to
withholding tax, we will not be obliged to pay additional amounts in relation
thereto. The applicability of any UK withholding tax under current English law
is discussed under "Material United Kingdom tax consequences".
Proposed changes to the Basel Capital Accord and the risk weighted asset
framework may result in changes to the risk-weighting of your notes
In June 1999, the Basel Committee on Banking Supervision (the "Basel
Committee") issued proposals for reform of the 1988 Capital Accord and
proposed a new capital adequacy framework which places enhanced emphasis on
market discipline. Following an extensive consultation period on its
proposals, the Basel Committee announced on May 11, 2004 that it had achieved
consensus on the framework of the "New Basel Capital Accord" as "International
Conveyance of Capital Measurement and Capital Standards: A Revised Framework".
The text of the New Basel Capital Accord was published on June 26, 2004. This
text will serve as the basis for national and super national rule-making and
approval processes to continue and for banking organizations to complete their
preparation for the implementation of the New Basel Capital Accord. The Basel
Committee confirmed that it is currently intended that the various approaches
under the framework be implemented in stages, some from year-end 2006, and the
most advanced at year-end 2007. The New Basel Capital Accord proposals could
affect risk weighting of the notes in respect of certain investors if those
investors are regulated in a manner which will be affected by the proposals.
Consequently, you should consult your own advisers as to the consequences to
and effect on you of the potential application of the New Basel Capital Accord
proposals. We cannot predict the precise effects of potential changes which
might result from the adoption of the New Basel Capital Accord.
You will not receive physical notes, which may cause delays in distributions
and hamper your ability to pledge or resell the notes
Unless the global note certificates are exchanged for individual note
certificates, which will only occur under a limited set of circumstances, your
beneficial ownership of the notes will only be registered in book-entry form
with DTC, Euroclear or Clearstream, Luxembourg. The lack of physical notes
could, among other things:
o result in payment delays on the notes because we will be sending
distributions on the notes to DTC instead of directly to you;
o make it difficult for you to pledge or otherwise grant security
over the notes if physical notes are required by the party
demanding the pledge or other security; and
o hinder your ability to resell the notes because some investors
may be unwilling or unable to buy notes that are not in physical
form.
If you have a claim against us it may be necessary for you to bring suit
against us in England to enforce your rights
We have agreed to submit to the non-exclusive jurisdiction of the
courts of England, and it may be necessary for you to bring a suit in England
to enforce your rights against us.
51
Provisions of the Insolvency Act 2000 could delay enforcement of your rights
in the event of our insolvency or an insolvency of Funding 2
The Insolvency Act 2000 amended the Insolvency Act 1986 to provide
that certain "small" companies (which are defined by reference to certain
tests relating to a company's balance sheet, turnover and number of employees)
will be able to seek protection from their creditors for a period of up to 28
days with the option for creditors to extend the moratorium for a further two
months. The position as to whether or not a company is a "small" company may
change from period to period and consequently no assurance can be given that
we or Funding 2 will, at any given time, be determined to be a "small"
company. The Secretary of State for Trade and Industry may by regulation
modify the eligibility requirements for "small" companies and can make
different provisions for different cases. No assurance can be given that any
such modification or different provisions will not be detrimental to the
interests of noteholders.
However, the Insolvency Act 1986 (Amendment) (No.3) Regulations 2002
(Statutory Instrument 2002 No. 1990) provides for an exception to the "small"
companies moratorium provisions if the company is party to an arrangement
which is or forms part of a capital market arrangement under which (i) a party
has incurred, or when the arrangement was entered into was expected to incur,
a debt of at least (GBP)10 million under the arrangement and (ii) the
arrangement involves the issue of a capital market investment. We believe that
we will fall within this exception and that the moratorium provisions will not
apply to us. However, we take the view that the exception will not cover
Funding 2 and there is therefore a risk that it may be the subject of a
"small" companies moratorium under the Insolvency Act 2000. It should be borne
in mind that the moratorium merely delays the enforcement of security whilst
the moratorium is in effect (a maximum of three months), it does not void or
in any way negate the security itself.
52
Defined terms
We have provided an index of defined terms at the end of this
prospectus under "Glossary". Terms used in this prospectus have the meaning
set out in the glossary unless they are defined where they first appear in
this prospectus. For purposes of this prospectus, the term "borrower" has the
meaning set out in the glossary, but generally means a person or persons who
have borrowed money under a mortgage loan.
References to "the issuer", "we" or "us" refer to Granite Master
Issuer plc. References to "the notes" refer to any of the notes, including the
"US notes", that we are issuing under this prospectus and the related
prospectus supplements.
References to a "series" of notes refer to all classes of notes
issued on a given day.
References to a "series and class" of notes refer to a particular
class of notes of a given series.
53
The issuer
Introduction
The issuer was incorporated in England and Wales as a public company
limited by shares under the Companies Act 1985 on 5 October, 2004 with
registered number 5250668. The registered office of the issuer is at Fifth
Floor, 100 Wood Street, London EC2V 7EX. The issuer is wholly owned by Funding
2 (see "Funding 2").
The issuer is organized as a special purpose company and will be
mostly passive. The issuer has no subsidiaries. The seller does not own
directly or indirectly any of the share capital of Funding 2 or the issuer.
The principal objects of the issuer are set out in its memorandum of
association and permit the issuer, among other things, to lend money and give
credit, secured or unsecured, to borrow or raise money and to grant security
over its property for the performance of its obligations or the payment of
money.
The issuer was established to raise capital by the issue of notes and
to use the net proceeds of such issuance to make the global intercompany loan
to Funding 2 in accordance with the global intercompany loan agreement entered
into between Funding 2 and the issuer.
Since its incorporation, the issuer has not engaged in any material
activities other than those incidental to its registration as a public company
under the Companies Act 1985, the authorization and issue of the notes, the
matters contemplated in this prospectus, the authorization of the other
transaction documents referred to in this prospectus or in connection with the
issue of the notes and other matters which are incidental or ancillary to
those activities. The issuer has no employees.
54
Use of proceeds
The gross proceeds from each issue of notes will (after exchanging, where
applicable, the proceeds of the notes for sterling, calculated by reference to
the applicable [specified currency exchange rate]) be used by the issuer to
make available loan tranches to Funding 2 pursuant to the terms of the global
intercompany loan agreement. Funding 2 will use the gross proceeds of each
loan tranche to:
o make an initial contribution to the mortgages trustee, which the
mortgages trustee will use to pay to the seller the initial purchase
price in respect of any new mortgage portfolio which is assigned to
the mortgages trustee;
o make a further contribution to the mortgages trustee, which the
mortgages trustee will use to pay a special distribution to the
seller or to Funding; and/or
o fund the Funding 2 reserve fund and/or make a deposit into the Funding
2 GIC account;
o if an existing series and class of notes (or any part thereof) is
being refinanced by such issue of notes, to repay the loan tranche(s)
(or any part thereof) relating to the series and class of notes being
so refinanced.
55
The Northern Rock Group
The seller
The seller was incorporated as a public limited liability company in
England and Wales on October 30, 1996 with registered number 03273685. The
seller is regulated by the Financial Services Authority. The seller was
originally a building society and was converted October 1, 1997 from a mutual
form UK building society to a stock form UK bank listed on the London Stock
Exchange plc and authorized under the FSMA.
The registered office of the seller is at Northern Rock House,
Gosforth, Newcastle upon Tyne NE3 4PL.
At [June 30, 2004], the seller was the [ninth] largest UK quoted bank
by market capitalization. It is a specialized mortgage lender whose core
business is the provision of residential mortgages funded in both the retail
and wholesale markets. It also provides a range of other services, mainly
related to its core activities.
At [June 30, 2004], the seller and its principal subsidiaries (the
"Group") had total assets under management of approximately (GBP)[o] billion
and employed approximately [o] employees. At the date of this prospectus,
Northern Rock has a long-term rating of "A" by Standard & Poor's, "A1" by
Moody's and "A+" by Fitch. The seller's ordinary shares are listed on the
London Stock Exchange plc.
Mortgage business
The seller is one of the major mortgage lenders in the UK in terms of
mortgage loans outstanding. In the UK mortgage market, the seller's net
mortgage lending during 2002 and 2003 and for the six months ended [June 30,
2004] (i.e., new mortgage lending during the year/period net of capital
repayments and acquisitions) was (GBP)6.7 billion, (GBP)8.5 billion and
(GBP)[o] billion, respectively, and gross mortgage lending during 2002 and
2003 and for the six months ended [June 30, 2004] (i.e., solely on the basis
of new mortgage lending during the year/period) was (GBP)12.6 billion,
(GBP)17.3 billion and (GBP)[o] billion, respectively.
Subsidiaries of the seller
The seller currently has the following two principal subsidiaries:
o Northern Rock Mortgage Indemnity Company Limited
Northern Rock Mortgage Indemnity Company Limited, or NORMIC, is a
limited liability company incorporated in Guernsey on July 15, 1994 with
registered number 28379. NORMIC's core business is the provision of mortgage
indemnity insurance. NORMIC provides mortgage indemnity insurance to the
seller.
o Northern Rock (Guernsey) Limited
Northern Rock (Guernsey) Limited, or NRG, is a limited liability
company incorporated in Guernsey on November 17, 1995 with registered number
30224. NRG is a wholly owned subsidiary of the seller and engages in retail
deposit taking.
The issuer believes that additional information relating to Northern
Rock, in its capacity as Funding 2 basis rate swap provider and administrator,
is not material to an investor's decision to purchase the notes.
56
Funding 2
Introduction
Funding 2 was incorporated in England and Wales as a private limited
company on 4 October, 2004 with registered number 05249387. The registered
office of Funding 2 is at Fifth Floor, 100 Wood Street, London EC2V 7EX.
Funding 2 is wholly owned by Holdings.
Funding 2 is organized as a special purpose company and will be
mostly passive. Funding 2 has no subsidiaries other than the issuer although,
subject to certain conditions, Funding 2 may establish new issuers from time
to time.
Since its incorporation, Funding 2 has not engaged in any material
activities other than those incidental to establishing the issuer, authorising
the transaction documents referred to in this prospectus, and other matters
which are incidental or ancillary to those activities. Funding 2 has no
employees.
57
The mortgages trustee
Introduction
The mortgages trustee was incorporated as a private limited company
in Jersey, Channel Islands on February 14, 2001 with registered number 79309.
The registered office of the mortgages trustee is at 22 Grenville Street, St.
Helier, Jersey JE4 8PX, Channel Islands. The mortgages trustee is wholly owned
by Holdings. The mortgages trustee is organized as a special purpose company
and is mostly passive. The mortgages trustee has no subsidiaries. The seller
does not own directly or indirectly any of the share capital of Holdings or
the mortgages trustee.
Since its incorporation, the mortgages trustee has not engaged in any
material activities other than those incidental to the settlement of the trust
property on the mortgages trustee or relating to the issue of notes by the
Funding issuers and us, the authorization of the transaction documents
referred to in this prospectus to which it is or will be a party, and other
matters which are incidental or ancillary to those activities.
58
Holdings
Introduction
Holdings was incorporated as a private limited company in England and
Wales on December 14, 2000 with registered number 4127787. The registered
office of Holdings is at Fifth Floor, 100 Wood Street, London EC2V 7EX.
Holdings is wholly owned by The Law Debenture Intermediary
Corporation p.l.c. under the terms of a trust for the benefit of charitable
institutions. Holdings is organized as a special purpose company and is mostly
passive.
The principal objects of Holdings are as set out in its memorandum of
association and are, among other things, to acquire and hold, by way of
investments or otherwise and to deal in or exploit in such manner as may from
time to time be considered expedient, all or any of the shares, stocks,
debenture stocks, debentures or other interests of or in any company
(including the mortgages trustee, Funding, Funding 2 and the post-enforcement
call option holder).
59
GPCH Limited
Introduction
GPCH Limited, the post-enforcement call option holder, was
incorporated as a private limited company in England and Wales on December 15,
2000 with registered number 4128437. The registered office of the
post-enforcement call option holder is at Fifth Floor, 100 Wood Street, London
EC2V 7EX.
GPCH Limited is wholly owned by Holdings.
The post-enforcement call option holder is organized as a special
purpose company and is mostly passive. The post-enforcement call option holder
has no subsidiaries. The seller does not own directly or indirectly any of the
share capital of Holdings or the post-enforcement call option holder.
The principal objects of the post-enforcement call option holder are
as set out in its memorandum of association and are, among other things, to
hold bonds, notes, obligations and securities issued or guaranteed by any
company and any options or rights in respect of them.
Since its incorporation, the post-enforcement call option holder has
not engaged in any material activities other than those activities incidental
or relating to the issue of the notes by the Funding issuers and the
authorizing of the transaction documents referred to in this prospectus and
other matters which are incidental to those activities. The post-enforcement
call option holder has no employees.
60
Post-enforcement call option
The post-enforcement call option agreement will be entered into
between us, the note trustee (as agent for the noteholders) and by a
subsidiary of Holdings called GPCH Limited. The terms of the option will
require, upon exercise of the option granted to GPCH Limited by the note
trustee, the transfer to GPCH Limited of all (but not some only) of the notes.
The option may be exercised upon the earlier of (1) within 20 days following
the final maturity date of the latest maturing notes, the note trustee
certifying that there is no further amount outstanding under the related
global intercompany loan, and (2) the enforcement by the note trustee of the
security granted by us under the issuer deed of charge as certified by the
note trustee (following the note trustee's determination that there are no
further assets available to pay amounts due and owing to the noteholders). If
the earlier of the foregoing two events is the enforcement of the security
under the issuer deed of charge, the option may only be exercised if the note
trustee has determined that there is not enough money to pay all amounts due
to the noteholders and has distributed to the noteholders their respective
shares of the remaining proceeds. The noteholders will be bound by the terms
of the notes to transfer the notes to GPCH Limited in these circumstances. The
noteholders will not be paid more than a nominal sum for that transfer.
As the post-enforcement call option may only be exercised in the two
situations described above, the economic position of the noteholders will not
be further disadvantaged. In addition, exercise of the post-enforcement call
option and delivery by the noteholders of the notes to GPCH Limited will not
extinguish any other rights or claims that these noteholders may have against
us other than the rights to payment of interest and repayment of principal
under the notes.
Fees
The table below sets out the on-going fees to be paid by the issuer,
Funding 2 and the mortgages trustee to transaction parties.
Type of fee Amount of fee Priority in cashflow Frequency
- -------------------------------- ---------------------- ------------------------- ----------------------
Administration fee 0.08% per year of the Ahead of all revenue Each distribution date
Funding 2 share of amounts payable to
trust property Funding 2 by the
mortgages trustee
Funding 2 cash management fee (GBP)[o] each year Ahead of all revenue Each payment date
amounts payable by
Funding 2 and allocable
to the issuer
Issuer cash management fee (GBP)[o] each year Ahead of all interest Each payment date
payments on the notes
Corporate expenses of mortgages Estimated (GBP)[o] Ahead of all revenue Each payment date
trustee each year amounts payable to
Funding 2 by the
mortgages trustee
Corporate expenses of Funding 2 Estimated (GBP)[o] Ahead of all revenue Each payment date
each year amounts payable by
Funding 2 and allocable
to the issuer
Corporate expenses of issuer Estimated (GBP)[o] Ahead of all interest Each payment date
each year payments on the notes
Fee payable by Funding 2 to Estimated (GBP)[o] In respect of the Each payment date
security trustee, by issuer to each year security trustee, ahead
the note trustee and by issuer of all revenue amounts
to the principal paying agent, payable by Funding 2 and
paying agent, transfer agent, allocable to the issuer,
61
registrar and agent bank and in respect of the
note trustee and the
agents, ahead of all
interest payments on the
notes
Each of the above fees is inclusive of value added tax ("VAT"), which
is currently assessed at 17.5%. The VAT-exclusive amount of the fees will be
subject to adjustment if the applicable rate of VAT changes so that the actual
amount of each fee (inclusive of VAT and regardless of the VAT rate assessed)
will be the amount as set out above.
62
Issuance of notes
The notes will be issued pursuant to the trust deed. The following
summary and the information set out in "Description of the trust deed", "The
notes" and "Description of the US notes" summarize the material terms of the
notes and the trust deed. These summaries do not purport to be complete and
are subject to the provisions of the trust deed and the terms and conditions
of the notes.
General
The notes will be issued in series. Each series will comprise of one
or more class A, class B, class M, class C or class D notes issued on a single
issue date. A class designation determines the relative seniority for receipt
of cash flows. The notes of a particular class and series will all have the
same terms. The notes of a particular class in different series will not
necessarily have all the same terms. Differences may include principal amount,
interest rates, interest rate calculations, currency, scheduled maturity date,
final maturity date and ratings. Each series and class of notes will be
secured over the same property as the notes offered by this prospectus. The
terms of each series of notes will be set forth in the related prospectus
supplement.
Issuance
We may issue new series and classes of notes and advance new loan
tranches to Funding 2 from time to time without obtaining the consent of
existing noteholders. As a general matter we may only issue a new series and
class of notes if sufficient subordination is provided for that new series and
class of notes by one or more existing subordinate classes of notes and/or the
Funding 2 reserve fund. The required subordinated percentage, which is used to
calculate the required subordination for each class of notes, will be set
forth in the applicable prospectus supplement for each series of that class of
notes. Similarly, the Funding 2 reserve required amount will be specified in
each prospectus supplement. The conditions and tests (including the required
levels of subordination) necessary to issue a series and class of notes, or
the "issuance tests", include the following:
All classes of notes
On the closing date of any series and class of notes:
o there is no debit balance on the principal deficiency ledger (in
respect of any loan tranche);
o [no note event of default shall have occurred which is
continuing or will occur as a consequence of such issuance;]
o [no note acceleration notice or note enforcement notice has
been served on the issuer by the note trustee;]
o [no global intercompany loan enforcement notice has been served
on Funding 2 by the Funding 2 security trustee;]
o [the Funding 2 reserve fund is fully funded;]
o [each of the applicable transaction documents has been executed
by the relevant parties to those documents;]
o [the issuer has delivered a solvency certificate to the note
trustee in form and substance satisfactory to the note trustee;]
63
o [the rating agencies have provided written confirmation that
their ratings of the outstanding notes will not be adversely
affected as a consequence of such issuance;]
o [other]
AND,
For the class A notes of any series, on the closing date for that series of
notes and after giving effect to the issuance of that series of notes, the
class A available subordinated amount must be equal to or greater than the
class A required subordinated amount.
The "class A required subordinated amount" is calculated, on any date, as the
product of:
A x B
where:
A = the class A required subordination percentage as specified in
the prospectus supplement for such series of class A notes; and
B = the principal amount outstanding of all notes on such date
(after giving effect to any payments of principal to be made on
the notes on such date).
The "class A available subordinated amount" is calculated, on any date, as the
sum of (a) the aggregate of the principal amounts outstanding of the class B
notes of all series, the class M notes of all series, the class C notes of all
series and the class D notes of all series (after giving effect to payments of
principal being made on the notes on such date); and (b) the Funding 2 target
reserve amount.
For the class B notes of any series, on the closing date for that series of
notes and after giving effect to the issuance of that series of notes, the
class B available subordinated amount must be equal to or greater than the
class B required subordinated amount.
The "class B required subordinated amount" is calculated, on any date, as the
product of:
A x B
where:
A = the class B required subordination percentage as specified in
the prospectus supplement for such series of class B notes; and
B = the principal amount outstanding of all notes on such date
(after giving effect to any payments of principal to be made on
the notes on such date).
The "class B available subordinated amount" is calculated, on any date, as the
sum of (a) the aggregate of the principal amounts outstanding of the class M
notes of all series, the class C notes of all series and the class D notes of
all series (after giving effect to payments of principal being made on the
notes on such date); and (b) the Funding 2 target reserve amount.
For the class M notes of any series, on the closing date for that series of
notes and after giving effect to the issuance of that series of notes, the
class M available subordinated amount must be equal to or greater than the
class M required subordinated amount.
64
The "class M required subordinated amount" is calculated, on any date, as the
product of:
A x B
where:
A = the class M required subordination percentage as specified in
the prospectus supplement for such series of class M notes; and
B = the principal amount outstanding of all notes on such date
(after giving effect to any payments of principal to be made on
the notes on such date).
The "class M available subordinated amount" is calculated, on any date, as the
sum of (a) the aggregate of the principal amounts outstanding of the class C
notes of all series and the class D notes of all series (after giving effect
to payments of principal being made on the notes on such date); and (b) the
Funding 2 target reserve amount.
For the class C notes of any series, on the closing date for that series of
notes and after giving effect to the issuance of that series of notes, the
class C available subordinated amount must be equal to or greater than the
class C required subordinated amount.
The "class C required subordinated amount" is calculated as the product of:
A x B
where:
A = the class C required subordination percentage as specified in
the prospectus supplement for such series of class C notes; and
B = the principal amount outstanding of all notes on such date
(after giving effect to any payments of principal to be made on
the notes on such date).
The "class C available subordinated amount" is calculated, on any date, as the
sum of (a) the aggregate of the principal amounts outstanding of the class D
notes of all series (after giving effect to payments of principal being made
on the notes on such date); and (b) the Funding 2 target reserve amount.
For the class D notes of any series, on the closing date for that series of
notes and after giving effect to the issuance of that series of notes, the
amount standing to the credit of the Funding 2 reserve ledger, after giving
effect to any debits and credits made to the Funding 2 reserve ledger on such
date, is at least equal to the then Funding 2 target reserve amount.
The Funding 2 target reserve percentage will be specified in each prospectus
supplement.
[The Funding 2 target reserve amount, on any date, is the product of (a)
Funding 2 target reserve percentage and (b) the then principal amount
outstanding of the global intercompany loan (including the balances of any
loan tranches issued on such date). The Funding 2 reserve required amount is
calculated as (i) the Funding 2 target reserve amount less (ii) excess spread.
[Excess spread is calculated, on any date, as (1) the weighted average yield
on the mortgage loans in the mortgage trust at such date, together with new
mortgage loans (if any) to be assigned to the mortgages trustee on such date
and taking into account the margins on the basis rate swaps as at such date
less (2) the weighted average yield of the outstanding notes at such date,
65
including any notes issued on such date and taking into account the margins on
the issuer swaps as at such date.]
We may change the required subordinated amount for any class of notes
or the method of computing the required subordinated amount, at any time
without the consent of any noteholders so long as the we have:
o received confirmation from each rating agency that has rated
any outstanding notes that the change will not result in the
reduction, qualification or withdrawal of its then current
rating of any outstanding notes; and
o an opinion of counsel that for US federal income tax
purposes (i) the change will not adversely affect the tax
characterization as debt of any outstanding series and class
of notes that were characterized as debt at the time of
their issuance, (ii) following the change, we will not be
treated as an association, or publicly traded partnership,
taxable as a corporation, and (iii) such change will not
cause or constitute an event in which gain or loss would be
recognized by any holder of such notes.
If we obtain confirmation from each rating agency that has rated any
outstanding notes that the issuance of a new series and class of notes will
not cause a reduction, qualification or withdrawal of the ratings of any
outstanding notes rated by that rating agency, then some of the conditions to
issuance described above may be waived.
We may also at any time adjust the Funding 2 target reserve
percentage and the calculation of the Funding 2 reserve required amount
provided we obtain confirmation from each rating agency that has rated any
outstanding notes that such adjustments will not cause a reduction,
qualification or withdrawal of the ratings of any outstanding notes by that
rating agency.
66
The mortgage loans
Summary of mortgage portfolio
Each prospectus supplement issued in connection with the issuance of
a series and class of notes will contain tables summarising information in
relation to the applicable cut-off date mortgage portfolio. The tables will
contain information in relation to various criteria as of the applicable
cut-off date. Tables will indicate, amongst other things, composition by [type
of property, seasoning, period to maturity, geographical distribution, indexed
loan-to-value ratios, outstanding current balance, mortgage loan products and
repayment terms] as well as other information that may be described from time
to time.
Each prospectus supplement relating to the issuance of a series and
class of notes also will contain tables summarizing certain characteristics of
the United Kingdom mortgage market. Tables will provide historical information
on, amongst other things, repossession rates, arrears, house price to earnings
ratios as well as other information that may be described from time to time.
These tables should be read in conjunction with the additional historical
information on certain aspects of the United Kingdom residential mortgage
market appearing in "Certain characteristics of the United Kingdom residential
mortgage market".
Introduction
The housing market in the UK primarily consists of owner-occupied
housing. The remainder of dwellings are in some form of public, private
landlord or social ownership. The mortgage market, in which mortgage loans are
provided for the purchase of a property and secured on that property, is the
primary source of household borrowings in the UK.
In describing the characteristics of the mortgage loans, references
in this prospectus to:
o "initial mortgage portfolio" means the portfolio of mortgage
loans, their related security, accrued interest and other
amounts derived from such mortgage loans that the seller
assigned to the mortgages trustee on March 26, 2001;
o "further mortgage portfolios" means the portfolios of further
mortgage loans, their related security, accrued interest and
other amounts derived from such further mortgage loans that the
seller has assigned to the mortgages trustee after March 26,
2001;
o "additional mortgage portfolio" means the portfolio of
additional mortgage loans, their related security, accrued
interest and other amounts derived from such additional mortgage
loans that the seller, as of any cut-off date, anticipates
assigning to the mortgages trustee;
o "cut-off date mortgage portfolio" means, as of any cut-off date,
the initial mortgage portfolio and the further mortgage
portfolios (taking account of, among other things, amortization
of mortgage loans in that portfolio and the addition and/or
removal of any mortgage loans to or from that portfolio since
March 26, 2001) combined with any additional mortgage portfolio;
and
o "mortgage portfolio" means, as of any date of determination, the
initial mortgage portfolio and the further mortgage portfolios
assigned to the mortgages trustee prior to such date of
determination, taking account of, among other things,
amortization of mortgage loans in that portfolio and the
addition and/or removal of any mortgage loans to or from that
portfolio since the last such assignment.
The following is a description of some of the characteristics of the
mortgage loans currently or previously offered by the seller and includes
details of mortgage loan types, the underwriting process, lending criteria and
selected statistical information. Each mortgage
67
loan in the mortgage portfolio incorporated one or more of the features
referred to in this section. The seller will not assign to the mortgages trust
any mortgage loan that was in arrears at any time during the 12 months prior
to the assignment date, and will not assign to the mortgages trust any
mortgage loan that is a non-performing mortgage loan.
Each borrower may have more than one mortgage loan incorporating
different features, but all mortgage loans secured on the same mortgaged
property will be incorporated in a single account with the seller which is
called the mortgage account. Each mortgage loan (other than a personal secured
loan) is secured by a first legal charge over a residential property in
England or Wales (an "English mortgage") or a first ranking standard security
over a residential property in Scotland (a "Scottish mortgage"). Each personal
secured loan will be secured by a legal charge over freehold or leasehold
mortgaged properties located in England and Wales or by a standard security
over heritable or long leasehold mortgaged properties located in Scotland. The
priority of the legal charge or (in Scotland) standard security securing a
personal secured loan will rank below the first priority legal charge or
standard security securing the related borrower's existing mortgage loan. A
"mortgage" means an English mortgage or, as applicable, a Scottish mortgage.
Each mortgage loan secured over a property located in England and Wales (an
"English mortgage loan") is subject to the laws of England and Wales and each
mortgage loan secured over a property located in Scotland (a "Scottish
mortgage loan") is subject to the laws of Scotland.
Characteristics of the mortgage loans
Mortgage loan products offered by the seller
The seller offers a variety of fixed rate, variable rate and hybrid
mortgage loan products to borrowers. The seller may assign to the mortgages
trustee any of the following of its mortgage loan products, which in each case
may comprise one or more of the following:
o "fixed rate mortgage loans": mortgage loans subject to a fixed
interest rate for a specified period of time and at the
expiration of that period are generally subject to the seller's
standard variable rate.
o "standard variable rate mortgage loans": mortgage loans subject
to the seller's standard variable rate for the life of the
mortgage loan.
o "Together mortgage loans": flexible mortgage loans, which are
offered in various product types: Together flexible, Together
variable, Together fixed, Together fixed for life, Together
discount tracker and Together stepped tracker. These products
allow the borrower to obtain a mortgage loan, an unsecured loan
and, in some cases, a credit card, each with a variable or a
fixed interest rate, depending on the product type, and which in
certain circumstances permit the borrower to make authorized
underpayments and take payment holidays (collectively referred
to in this prospectus as "non-cash re-draws"), receive cash
re-draws and make overpayments.
o "Together Connections mortgage loans": flexible mortgage loans,
which are offered in two product types: Together Connections
variable and Together Connections fixed. These products have
the same basic features as a Together mortgage loan, but also
allow the borrower to link the mortgage loan with certain
deposit and/or current accounts that are held with the seller.
If a borrower elects to take the Together Connections Benefit
(as defined below), the seller will only charge interest on the
difference between the total of the outstanding balances on the
Together Connections mortgage loan and certain deposit/current
accounts held with the seller (the "combined debit balance")
and the average monthly cleared credit balance in that
borrower's linked deposit account or accounts (the
68
"combined credit balance"). Despite the foregoing, the borrower
is nevertheless obligated to make their contractual monthly
payment of principal (if any) and interest in full. The
"Together Connections Benefit" is the difference between (1)
the contractual monthly payment due on the combined debit
balance and (2) the proportion of the payment made on the
amount by which the outstanding combined debit balance exceeds
the average cleared credit balance in that borrower's linked
deposit account or accounts in respect of each month or any
part of a month. Where the customer has elected to take
Together Connections Benefit, calculations will be made and
applied with effect from the first day of the month following
the month during which the combined debit balance exceeded such
credit balance. Unless the borrower specifies otherwise, the
Together Connections Benefit will be apportioned pro rata
between the mortgage loan and the unsecured loan in accordance
with their respective contractual monthly payments. Any
Together Connections Benefit is used to reduce the principal
amount outstanding on the mortgage loan and related unsecured
loan as described above. The application of the Together
Connections Benefit may lead to amortization of the related
mortgage loan more quickly than would otherwise be the case, as
a higher proportion of the contractual monthly payment could be
allocated towards the repayment of principal of the mortgage
loan. See "Risk factors - The inclusion of flexible mortgage
loans may affect the yield to maturity of and the timing of
payments on the notes". The borrower is not permitted to make a
cash redraw of the principal amounts that have been repaid as a
result of the application of the Together Connections Benefit.
Alternatively, customers that have linked their mortgage loan
to one or more deposit accounts may simply opt to be paid
interest periodically on deposits held in their linked accounts
at the same interest rate that is used to calculate interest on
their mortgage loan. This option is referred to as "Together
Connections Interest".
The connection between a borrower's mortgage loan and unsecured
loan and any linked account or account of the borrower may be
ended (1) by the seller giving the borrower three months notice
in writing at any time or (2) immediately by the seller giving
the borrower notice in writing at any time where there are
serious grounds for ending the connection with immediate effect.
The connection between a borrower's mortgage loan and unsecured
loan and any linked account or account of the borrower will be
ended automatically where the average combined cleared credit
balance for the month exceeds the combined debit balance in any
month.
o "Connections mortgage loans": flexible mortgage loans, which
allow the borrower to obtain a mortgage loan with either a
variable or fixed rate, depending on the product type, and
which, in certain circumstances, permit the borrower to make
authorized underpayments and take payment holidays
(collectively referred to in this prospectus as "non cash
re-draws"), receive cash re-draws and make overpayments.
Connections mortgage loans have the same basic features as
Together Connections mortgage loans but without the facility
for an unsecured loan or credit card. The "Connections debit
balance" will equal the total outstanding balance on the
Connections mortgage loan. In addition, the "Connections
combined credit balance" will comprise the average monthly
cleared credit balance in the borrower's linked Save Direct
deposit account (a deposit account operated by a dedicated
savings division of the seller) and/or current account with the
seller. "Connections Benefit" and "Connections Interest" are
calculated in the same way as "Together Connections Benefit"
and
69
"Together Connections Interest" taking into account the
amended definitions of "Connections debit balance" and
"Connections combined credit balance" as outlined above. For
the purposes of calculating Connections Interest, only the
average cleared balance in the deposit account will apply.
o "CAT standard mortgage loans": flexible mortgage loans, which
can offer either a variable rate equal to the Bank of England
base rate plus an additional fixed percentage or can offer
initially a fixed rate for a specified period of time followed
by a variable rate equal to the Bank of England base rate plus
an additional fixed percentage, and which in some cases permit
the borrower to make non-cash re-draws and receive cash
re-draws.
o "capped rate mortgage loans": mortgage loans subject to a
maximum rate of interest and charge interest at the lesser of
the seller's standard variable rate or the specified capped
rate.
o "flexible capped rate mortgage loans": flexible mortgage loans
with the same basic features as a Together mortgage loan (other
than allowing the borrower to obtain a credit card and
unsecured loan) which are subject to a maximum rate of interest
for a specified period of time, and at the expiration of that
period are generally subject to the seller's standard variable
rate.
o "flexible discount rate mortgage loans": flexible mortgage loans
which allow the borrower to pay interest at a specified
discount to the seller's standard variable rate for a specified
period of time or for the life of the mortgage loan.
o "flexible fixed rate mortgage loans": flexible mortgage loans
with the same basic features as a Together mortgage loan (other
than allowing the borrower to obtain a credit card and
unsecured loan) which are subject to a fixed rate of interest
for a specified period of time, and at the expiration of that
period are generally subject to the seller's standard variable
rate.
o "discount rate mortgage loans": mortgage loans which allow the
borrower to pay interest at a specified discount to the
seller's standard variable rate for a specified period of time
or for the life of the loan.
o "tracker rate mortgage loans": mortgage loans subject to a
variable rate of interest that is linked to the Bank of England
base rate plus an additional fixed percentage.
o "flexible tracker rate mortgage loans": flexible mortgage loans
with the same basic features as a Together mortgage loan (other
than allowing the borrower to obtain a credit card and
unsecured loan) which are subject to a variable rate of
interest that is linked to the Bank of England base rate plus
an additional fixed percentage.
o "cashback mortgage loans": mortgage loans which provide a
specified lump sum payment to the borrower at the time that the
mortgage loan is advanced to the borrower. The cashback
mortgage loan product is sometimes combined with another
product (although the seller currently does not combine the
cashback feature with Together mortgage loans, Together
Connections mortgage loans, Connections mortgage loans and CAT
standard mortgage loans). For example, a borrower may have a
fixed rate and cashback mortgage loan, or a discounted and
cashback mortgage loan.
o "personal secured loans": mortgage loans having a fixed or
variable interest rate the proceeds of which may be used by the
borrower for unrestricted purposes and which are offered to
borrowers who have existing mortgage loans with the seller. A
personal secured loan is secured on the same property that
secures the borrower's existing mortgage loan. A personal
secured loan is, however, secured by means of a separate second
mortgage and is governed by
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separate terms and conditions documented either as a regulated
agreement subject to the CCA or as an unregulated agreement
based on the amount of the personal secured loan or the
purposes for which it is used. Some personal secured loans
permit the borrower to draw additional amounts in aggregate up
to the fixed amount of credit extended under the terms of the
mortgage conditions at the inception of such personal secured
loan. Such draws under a personal secured loan are collectively
referred to as "further draws".
Repayment terms
Borrowers typically make payments of interest on, and repay principal
of, their mortgage loans using one of the following methods:
o "repayment": the borrower makes monthly payments of both
interest and principal so that, when the mortgage loan matures,
the borrower will have repaid the full amount of the principal
of the mortgage loan.
o "interest-only" (with a repayment vehicle): the borrower makes
monthly payments of interest but not of principal; when the
mortgage loan matures, the entire principal amount of the
mortgage loan is still outstanding and the borrower must repay
that amount in one lump sum. The borrower arranges a separate
investment plan which will be administered by a separate
organization, which plan provides a lump sum payment to
coincide with the end of the mortgage term. Although these
investment plans are forecast to provide sufficient sums to
repay the principal balance of the mortgage loan upon its
maturity, to the extent that the lump sum payment is
insufficient to pay the principal amount owing, the borrower
will be liable for making up any shortfall. These types of
plans include:
o "endowment": the borrower makes regular payments to a life
assurance company which invests the premiums; the endowment
policy is intended to repay the mortgage loan at maturity;
o "pension policy": the borrower makes regular payments to a
personal pension plan; upon retirement, or plan maturity, the
borrower will receive a tax-free lump sum which is intended to
repay the mortgage loan;
o "individual savings accounts" or "ISAs": the borrower makes
contributions to a tax-free ISA account; once the value of the
ISA equals or exceeds the outstanding mortgage debt, the
borrower may use those amounts to repay the mortgage loan at any
time thereafter or may wait to repay the mortgage loan upon its
maturity;
o "personal equity plans" or "PEPs": similarly to ISAs, the
borrower makes contributions to a tax-free PEP account and uses
these amounts to repay the mortgage loan. Although PEPs have
been discontinued in the United Kingdom, some mortgage loans
with PEP repayment vehicles may be included in the mortgage
portfolio; and
o "unit trusts": the borrower makes regular payments to a unit
trust, and the accumulated unit trust is used to repay the
mortgage loan by the end of its term.
o "interest-only" (without a repayment vehicle): similar to the
interest-only mortgage loans described above, where the borrower
makes monthly payments of interest but not of principal and when
the mortgage loan matures, the entire principal amount of the
mortgage loan is due. However, the borrower has no formal
repayment vehicle in place to repay the mortgage loan in full.
o "combination repayment and interest-only" (with or without a
repayment vehicle): this situation most often occurs when the
borrower had an interest-only mortgage loan with a repayment
vehicle on a prior mortgaged property, and after selling that
mortgaged property the borrower purchased a property with a
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mortgage loan issued by the seller, where the subsequent home
was either more expensive than the prior home or the borrower
took out a larger mortgage loan or further advance. The
borrower used the existing interest-only repayment vehicle for
the new mortgage loan or further advance issued by the seller
and made up the difference between the anticipated maturity
value of the interest-only repayment vehicle and the higher
mortgage loan value with a repayment mortgage.
The required monthly payment in connection with repayment mortgage
loans or interest-only mortgage loans may vary from month to month for various
reasons, including changes in interest rates. See "- Origination of the
mortgage loans - Maximum LTV ratio" for the maximum LTV ratio for the mortgage
loans described above.
The seller does not (and in some cases cannot) take security over
investment plans. See "Risk factors - There can be no assurance that a
borrower will repay principal at the end of a term on an interest-only loan
(with or without a capital repayment vehicle) or a combination loan".
Capital payments, overpayments and underpayments on non-flexible mortgage loans
Subject to certain conditions, if a borrower makes a monthly payment
on a mortgage loan (other than a flexible mortgage loan) that is greater by
(GBP)200 or more than the amount due for that month, and the borrower notifies
the seller that the overpayment is intended to reduce the capital balance of
the related mortgage loan (a "capital payment"), then the current balance of
the mortgage loan will be immediately reduced, and the capital balance of the
mortgage loan will be reduced from the last day of the month in which the
capital payment occurs. As interest on the mortgage loans accrues on the
capital balance thereof from time to time, any capital payment will affect the
amount of interest payable by the borrower from the first day of the month
following the month in which the capital payment was made by the borrower.
Capital payments may be subject to early repayment charges, as described under
"- Early repayment charges", and may only be made in certain minimum amounts
and only if the relevant borrower's account is not in arrears at the time of
the capital payment.
If the borrower makes a monthly payment on a mortgage loan (other
than a flexible mortgage loan) that is greater than the amount due for that
month, but the borrower (1) does not specify that the additional payment is
intended to reduce the capital balance of the related mortgage loan, (2) does
not specify any intention or (3) specifies that the payment is intended to
repay the capital balance but the additional payment is less than (GBP)200,
that overpayment initially will only reduce the current balance of the related
mortgage loan and not the capital balance. Any overpayment will be held by the
cash manager in the mortgages trustee GIC account and recorded on an
overpayments ledger and will not reduce the capital balance of the related
mortgage loan until the annual date at the end of each calendar year on which
the capital balances of the mortgage loans (other than flexible mortgage loans
as described below) are reconciled with the current balances of such mortgage
loans. The capital balances of such mortgage loans will only be reduced on
such annual date in an amount equal to the aggregate amount of the
overpayments made in that calendar year less any amounts that the borrower has
underpaid (or has overpaid in error, which amounts may be refunded to the
borrower) during the same calendar year of the overpayment. These credits and
debits will be recorded on the overpayments ledger during each calendar year.
Any underpayments or refunds may be made only up to the net amount of the
overpayment standing to the credit of the overpayments ledger during the same
calendar year as the underpayment. As interest on the mortgage loans accrues
on the capital balance thereof from time to time, an overpayment may only have
an effect on the interest accruing on that mortgage loan after the annual date
that the current balance and the capital balance of the mortgage loan is
reconciled.
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If a borrower under a mortgage loan (other than a flexible mortgage
loan) makes a monthly payment which is less than the required monthly payment
(an "underpayment"), the current balance of that mortgage loan will remain
higher than the expected scheduled current balance, although the capital
balance of that mortgage loan will remain unchanged until the annual
reconciliation of the current balance and capital balance. As overpayments on
non-flexible mortgage loans will be held in the overpayments ledger throughout
the calendar year in which the overpayment was made, amounts standing to the
credit of the overpayments ledger will be used to fund underpayments that the
borrower has made during that same calendar year. See "The mortgages trust -
Overpayments". If a borrower makes an unauthorized underpayment but has not
made any prior overpayments within that same calendar year, those
underpayments are treated by the seller as arrears.
At the end of a calendar year, if a borrower under a mortgage loan
(other than a flexible mortgage loan) has a current balance which is less than
its capital balance (because of any overpayments made in that same calendar
year which were not used to fund an underpayment), the seller will decrease
the capital balance on that borrower's mortgage loan to equal the current
balance on that borrower's mortgage loan. The borrower then will no longer be
able to fund underpayments with amounts overpaid in the prior calendar year.
Conversely, if at the end of a calendar year a borrower under a mortgage loan
(other than a flexible mortgage loan) has a current balance which is greater
than its capital balance (because of any underpayments which were not funded
by overpayments made in that same calendar year), the seller will increase the
capital balance on that borrower's mortgage loan to equal the current balance
on that borrower's mortgage loan. Notwithstanding the year-end reconciliation
of the related capital balance and current balance, the borrower will still be
considered in arrears for the amount of the underpayment.
For a description of the treatment of overpayments and underpayments
under the seller's current flexible mortgage loan products, see "- Flexible
mortgage loans".
Early repayment charges
Borrowers under the seller's non-flexible mortgage products that have
received a benefit in the form of a cashback, capped, discounted or fixed rate
mortgage loan may be required to pay an early repayment charge if (a) in any
one calendar year in addition to the scheduled monthly payments they repay
more than a specified percentage of the initial amount of the mortgage loan,
or (b) generally if they make a product switch or a permitted product switch,
in each case before a date specified in the offer of advance. Although a
borrower under the seller's flexible capped rate mortgage loan, flexible fixed
rate mortgage loan, flexible discount rate mortgage loan, Together fixed
mortgage loan, Together Connections fixed mortgage loan or Connections fixed
mortgage loan may make overpayments or capital payments at any time without
incurring any early repayment charge, that borrower will be subject to an
early repayment charge for the remaining period of time during which the fixed
or capped rate, as the case may be, on the mortgage loan applies (except in
the case of flexible fixed rate mortgage loans with an extended early
repayment charge period), to the extent that the borrower repays the entire
current balance under that mortgage loan during such period. Borrowers under
the seller's Connections Base Rate Tracker mortgage loans will be subject to
an early repayment charge which is currently three (3) years from completion,
to the extent that the borrower repays the entire current balance under that
mortgage loan during such period. Borrowers under the seller's flexible fixed
rate mortgage loans with an extended early repayment charge period will be
subject to an early repayment charge for the remaining period of time during
which the fixed rate on the mortgage loan applies plus an additional period of
one year to the extent that the borrower repays the entire current balance
under that mortgage loan during such period. Borrowers under the seller's
Together variable, Together Connections variable and CAT standard mortgage
loans are not subject to early repayment charges regardless of whether they
make an overpayment or they repay the entire current balance under the
relevant mortgage loan.
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Any early repayment charge will equal a percentage of the amount
repaid in excess of the specified percentage limit (except for an early
repayment in full, where the early repayment charge will equal a varying
percentage of the entire amount repaid). The seller retains absolute
discretion to waive or enforce early repayment charges in accordance with the
seller's policy from time to time. Under the terms of the mortgage sale
agreement, the amount of any early repayment charges which may become payable
on any mortgage loans that have been assigned to the mortgages trustee will be
paid by the mortgages trustee to the seller as deferred purchase price.
Cashback mortgage loans offered by the seller provide the borrower
with a cash payment that the seller makes to the borrower upon completion of
the mortgage loan. The cash payment depends upon the terms of the offer of
advance, but is usually calculated as a percentage of the amount borrowed. If
a borrower with a cashback mortgage loan makes an unscheduled principal
repayment or executes a product switch or a permitted product switch (as
described under "- Product switches") in either case before a date specified
in the offer of advance, then the borrower must repay to the seller some or
all of the cash payment made by the seller.
All of the seller's mortgage loan products allow for the borrower to
avoid early repayment charges and, if applicable, avoid repaying to the seller
any of the cash payment described above, by "porting" the existing mortgage
loan to a new mortgaged property, provided that (1) the new mortgage loan is
equal to or greater than the existing mortgage loan and (2) the borrower
receives from the seller substantially the same mortgage loan product. The new
mortgage loan preserves the borrower's status in that mortgage loan product.
A prepayment of the entire outstanding balance of a mortgage loan
discharges the related mortgage. Any prepayment in full must be made together
with all accrued interest, arrears of interest, any unpaid charges and any
early repayment charges.
Interest payments and setting of interest rates
Interest on each mortgage loan accrues on the capital balance of that
mortgage loan from time to time. Interest is payable by the borrower monthly
in advance. Interest on the mortgage loans in the cut-off date mortgage
portfolio may be computed on a daily, monthly or annual basis. Each mortgage
loan in the cut-off date mortgage portfolio accrues interest at any time at a
fixed or a variable rate.
Fixed rate mortgage loans provide that the borrower pays interest on
such mortgage loan at a fixed rate of interest for the period specified in the
offer of advance. At the end of that period, the interest rate reverts to the
seller's standard variable rate. However, under the terms of certain fixed
rate loans, the borrower may exercise a one-time option within three months of
the end of the initial fixed rate period to "re-fix" the interest rate for a
further specified period of time at a new fixed rate that the seller is
offering to existing borrowers at that time. Any exercise of an option to
"re-fix" shall constitute a product switch and shall be dealt with as
described under "- Product switches".
The rate of interest set by the seller for variable rate mortgage
loans is the "seller's standard variable rate". Interest accrues on these
mortgage loans at a rate equal to the seller's standard variable rate, or, for
a specified period of time, at a set margin above or below the seller's
standard variable rate. The seller's standard variable rate is not directly
linked to interest rates in the financial markets although, in general, the
seller's standard variable rate follows movements in the markets. The seller's
standard variable rate for existing and/or new borrowers, as at each cut-off
date, will be specified in each prospectus supplement.
The seller's "base rate pledge" guarantees that for some variable
rate mortgage loans, and for fixed rate mortgage loans upon conversion from a
fixed rate to the seller's
74
standard variable rate, the actual gross interest rate that the seller charges
will be the lower of:
o the seller's standard variable rate; or
o the Bank of England base rate plus a margin which is determined
by Northern Rock.
This base rate pledge only applies, however, during the period, if
any, in which the borrower is subject to an early repayment charge as
described under "- Early repayment charges".
If the Bank of England's base rate falls to a level of [2.49]% below
the seller's standard variable rate it is possible that a revenue shortfall
would occur. See "Risk factors - If the Bank of England base rate falls below
a certain level, we could suffer a revenue shortfall".
Mortgage loans may combine one or more of the features listed in this
section. For mortgage loans with an interest rate that lasts for a limited
period of time specified in the offer of advance, after the expiration of that
period the interest rate adjusts to some other interest rate type or else it
reverts to, or remains at, the seller's standard variable rate. The features
that may apply to a particular mortgage loan are specified in the offer of
advance (and as the seller may vary from time to time).
Each mortgage loan (other than a Together mortgage loan, a Together
Connections mortgage loan and a CAT standard mortgage loan) currently provides
for a loyalty discount reduction of 0.25% (although the seller may in the
future allow for a discount of between 0.25% and 0.75%) of the applicable
interest rate once the borrower has held the mortgage loan for at least seven
years, subject to certain conditions.
Except in limited circumstances as set out in "The administrator and
the administration agreement - The administration agreement - Undertakings by
the administrator", the administrator on behalf of the mortgages trustee,
Funding, Funding 2 the security trustee and the Funding 2 security trustee is
responsible for setting the variable mortgage rate on the mortgage loans in
the mortgage portfolio as well as on any new mortgage loans that are assigned
to the mortgages trustee. The mortgage conditions applicable to all of the
variable rate mortgage loans provide that the seller and its successors may
vary the variable mortgage rate only for certain reasons which are specified
in the mortgage conditions. These reasons may include:
o where there has been, or the lender reasonably expects there to
be in the near future, a general trend to increase rates on
mortgages;
o where the lender for good commercial reasons needs to fund an
increase in the interest rate or rates payable to depositors;
o where the lender wishes to adjust its interest rate structure to
maintain a prudent level of profitability;
o where there has been, or the lender reasonably expects there to
be in the near future, a general increase in the risk of
shortfalls on the accounts of mortgage borrowers; and
o where the lender's administrative costs have increased or are
likely to increase in the near future.
The term "lender" in the above five bullet points means the seller
and its successors.
The rate that the borrower is required to pay under the variable rate
mortgage loans must not be greater than either the seller's standard variable
rate or a set margin above or below the seller's standard variable rate. The
seller has given the mortgages trustee, Funding, Funding 2, the administrator,
the security trustee and the Funding 2 security trustee
75
the power to set the seller's standard variable rate and other applicable
discretionary rates or margins, but that power may only be exercised in
limited circumstances.
In maintaining, determining or setting the variable mortgage rate for
mortgage loans within the mortgages trust, the administrator will apply the
factors set out here and has undertaken to maintain, determine or set the
standard variable rate and other applicable discretionary rates or margins at
rates which are not higher than the seller's equivalent rates from time to
time.
Flexible mortgage loans
The "Together" mortgage loans, the "Together Connections" mortgage
loans, the "Connections" mortgage loans, the flexible capped rate mortgage
loans, the flexible fixed rate mortgage loans, the flexible discount rate
mortgage loans, the flexible tracker rate mortgage loans and the "CAT
standard" mortgage loans (collectively, the "flexible mortgage loans") are
subject to a range of options selected by the borrower that give the borrower
greater flexibility in the timing and amount of payments made under the
mortgage loan as well as access to re-draws under the mortgage loan. A
mortgage loan that has one or more of these features may be called a flexible
mortgage loan. The seller anticipates that an increasing percentage of the
mortgage loans that it originates will offer the flexible features described
below. As a result, mortgage loans assigned to the mortgages trustee in the
future may contain a higher proportion of flexible mortgage loans than are in
the cut-off date mortgage portfolio. In addition to the flexible mortgage
loans that the seller currently offers, the seller in the future may offer
flexible mortgage loans that the seller also may assign to the mortgages
trustee that have different features than those described below.
Unlike non-flexible mortgage loans for which separate current
balances and capital balances are only reconciled annually (see "- Capital
payments, overpayments and underpayments on non-flexible mortgage loans"), the
flexible mortgage loans that the seller currently offers have separate current
balances and capital balances which are reconciled on a daily basis.
The following options currently are available to a borrower following
the issue of a flexible mortgage loan:
o Overpayments. A borrower may make overpayments or may repay the
entire current balance under its Together, Together
Connections, Connections and CAT standard mortgage loan at any
time without incurring any early repayment charges. Although a
borrower may make overpayments under its flexible capped rate
mortgage loan, flexible fixed rate mortgage loan, flexible
tracker rate mortgage loan, Together fixed mortgage loan,
Together Connections fixed mortgage loan, Connections Base Rate
Tracker mortgage loan or Connections fixed mortgage loan at any
time without incurring any early repayment charge, that
borrower will be subject to an early repayment charge for the
remaining period of time during which the fixed, tracker or
capped rate, as the case may be, on the mortgage loan applies
(except in the case of a Connections Base Rate Tracker mortgage
loan which has a variable early repayment charge period of
approximately three years from completion), to the extent that
the borrower repays the entire current balance under that
mortgage loan. Any overpayments immediately reduce the current
balance of the flexible mortgage loan from the day the seller
receives payment. Any overpayment on a flexible mortgage loan
will result in the immediate reduction in the amount of
interest payable by the relevant borrower.
o Authorized Underpayments. A borrower may use certain amounts
that it has previously overpaid to the seller to fund future
underpayments under its mortgage loan (an "authorized
underpayment"). If a borrower makes an authorized underpayment
under its mortgage loan, the current balance of that mortgage
loan
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will be increased at the end of the month in which the
authorized underpayment has been made and there will be an
immediate effect on the amount of interest payable by the
borrower. An authorized underpayment is also called a "non-cash
re-draw" for the purposes of this prospectus. A borrower under
a flexible mortgage loan may offset authorized underpayments up
to the aggregate amount of any overpayments previously made
(but not yet used to fund an authorized underpayment or redrawn
in cash by the borrower) during the lifetime of the mortgage
loan. Any authorized underpayment will be funded solely by the
seller in an amount equal to the unpaid interest associated
with that authorized underpayment. However, any such amounts
funded by the seller in connection with an authorized
underpayment will form part of the mortgage portfolio and
thereby increase the seller share of the trust property.
o Unauthorized Underpayments. Any underpayment made by a borrower
(a) which cannot be funded by prior overpayments and (b) where
the borrower is not entitled to a payment holiday (an
"unauthorized underpayment"), if any, will be treated by the
seller as arrears.
o Payment Holidays. A borrower that has made nine consecutive
scheduled monthly payments (or an equivalent sum of payments)
on its flexible mortgage loan may apply for a one month payment
holiday even if that borrower has not made prior overpayments.
A borrower may apply for this payment holiday facility once in
each rolling twelve-month period and may accumulate the right
to take up to a maximum of three monthly payment holidays in
any one calendar year if the borrower has not used the payment
holiday facility in a given three-year period. In addition, a
flexible mortgage loan borrower may apply for up to a six-month
payment holiday in certain limited cases (generally, where the
borrower can demonstrate an extenuating circumstance). The
mortgage loan will continue to accrue interest and other
charges during any payment holiday and accrued interest will be
added to the current balance of the related mortgage loans
which will increase the amount of interest payable by the
borrower. Any payment holiday will be funded solely by the
seller in an amount equal to the unpaid interest associated
with that payment holiday. However, any such amounts funded by
the seller in connection with a payment holiday will form part
of the mortgage portfolio and thereby increase the seller share
of the trust property. A payment holiday is also called a
"non-cash re-draw" for the purposes of this prospectus.
o Cash re-draws. A borrower may request a cash re-draw of
overpayments that the borrower has made on its flexible
mortgage loan by requesting that the seller refund some or all
of such overpayments in cash, provided that the aggregate
amount of all overpayments not yet used to fund an authorized
underpayment or otherwise re-drawn in cash by the borrower from
the period commencing with the origination of the mortgage loan
to the date of the cash re-draw is equal to or greater than
(GBP)500, and that the amount of such cash re-draw is equal to
or greater than (GBP)500. If the aggregate amount of all
overpayments for such period is less than (GBP)500, any
borrower wishing to make a cash re-draw in these amounts may
instead make an authorized underpayment of the scheduled
monthly payment, but is not entitled to a cash re-draw.
Notwithstanding the foregoing, a borrower under a Together
Connections Benefit mortgage loan or Connections mortgage loan
is not permitted to make a cash re-draw of the principal
amounts that have been repaid as a result of the application of
the Together Connections Benefit or Connections Benefit. Any
cash re-draw on a flexible mortgage loan will result in the
immediate increase in the related current balance and will
increase the amount of interest payable by the borrower. Any
cash re-draws will be funded solely by the seller, but will
form part of the mortgage portfolio and thereby increase the
seller share of the trust property.
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Under the mortgage conditions, a borrower must receive permission from
the seller to make an authorized underpayment or take a payment holiday on a
flexible mortgage loan. However, the seller occasionally waives the
requirement that the borrower first seeks the seller's permission. The seller,
however, retains the discretion whether to grant a cash redraw or to provide a
further advance (as described under "- Further advances" below) to a borrower
on a flexible mortgage loan, and also maintains discretion in some cases to
grant a payment holiday to a borrower, depending on the facts associated with
the borrower's request. Despite the foregoing means by which the seller
describes and treats authorized underpayments, payment holidays and cash
re-draws, each re-draw technically would be a "further advance" as used in the
Law of Property Act 1925 (which applies only in England and Wales and which
has no statutory or common law equivalent in Scotland).
For a description of the treatment of overpayments and underpayments
in respect of the seller's current non-flexible loan products, see "- Capital
payments, overpayments and underpayments on non-flexible mortgage loans".
In addition to the features described above, the flexible mortgage
loans that the seller currently offers under the Together and Together
Connections programs may be linked to an unsecured credit facility and a
credit card which are made available to a borrower. In 2002, the seller also
began offering a linked unsecured credit facility to borrowers under the
flexible capped rate mortgage loan, flexible tracker rate mortgage loan and
flexible fixed rate mortgage loan products and in 2003 under the flexible
discount rate mortgage loans. The unsecured credit facility is a line of
credit available to be drawn down by the borrower over and above the amount of
the mortgage loan. Amounts drawn under the credit facility (or the credit card
in respect of Together and Together Connections mortgage loans) are not
secured by a mortgage on the borrower's property. These flexible mortgage
loans that offer borrowers a linked unsecured credit facility allow a borrower
to make one monthly payment of amounts due under the mortgage loan and under
the unsecured credit facility, to the extent the borrower has made a drawing
under the unsecured credit facility (any linked credit card payments under the
Together and Together Connections programs will be made separately). The
seller applies the borrower's regular monthly payments and any overpayments
received on a flexible mortgage loan in proportion to the contractual monthly
payment due on the mortgage loan and the amount due on the unsecured credit
facility, unless the borrower specifies otherwise.
The amount of a flexible mortgage loan is agreed at origination.
Amounts available under the unsecured credit facility (currently a maximum of
(GBP)30,000 for Together and Together Connections mortgage loans and
(GBP)10,000 for flexible capped rate, flexible tracker rate and flexible fixed
rate mortgage loans) and any credit card (in respect of Together and Together
Connections mortgage loans) are not secured by the mortgaged property, and the
seller will not assign to the mortgages trustee amounts due under the
unsecured credit facility or any credit card. This means that only the secured
mortgage loan is assigned to the mortgages trustee.
The seller has originated several types of Together mortgage loans
(referred to collectively in this prospectus as "Together" mortgage loans):
(1) "Together variable" mortgage loans. The interest rate on Together
variable mortgage loans offered at any time is set periodically (a)
for approximately the first two years of the mortgage loan, at a rate
which is below the average standard variable rate offered by a basket
of mortgage lenders in the UK or a rate which tracks the Bank of
England base rate and (b) after that initial approximate two-year
period, at a variable rate which is below the seller's standard
variable rate for the seller's then-existing borrowers.
(2) "Together flexible" mortgage loans. The interest rate on Together
flexible mortgage loans is set periodically (a) for approximately the
first two years of the mortgage loan, at a rate equal to or lower
than the seller's standard variable rate and (b) after that
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initial period, at a variable rate equal to the lower of (i) the
Bank of England base rate plus a margin or (ii) the seller's then
current standard variable rate.
(3) "Together fixed for life" mortgage loans. The interest rate on
Together fixed for life mortgage loans is fixed by the seller, which
rate will remain for the life of the mortgage loan.
(4) "Together fixed" mortgage loans. The initial interest rate on
Together fixed mortgage loans is fixed by the seller. After the
initial interest rate period, the interest rate will be set
periodically at a variable rate equal to the lower of (i) the Bank of
England base rate plus a margin or (ii) the seller's then current
standard variable rate.
(5) "Together discount tracker" mortgage loans. The initial interest rate
on the Together discount tracker mortgage loans is a variable rate
and is linked to the Bank of England base rate. The interest rate on
the Together discount tracker mortgage loans is discounted for
approximately the first two years of the mortgage loan and thereafter
tracks the Bank of England base rate plus a margin.
(6) "Together stepped tracker" mortgage loans. The interest rate on
Together stepped tracker mortgage loans is a fixed rate which steps
up after a period of time (currently one or two years) before
becoming linked to the Bank of England base rate.
The seller also began originating Together Connections variable
mortgage loans (referred to in this prospectus as "Together Connections
variable" mortgage loans) in May 2001 and Together Connections fixed mortgage
loans (referred to in this prospectus as "Together Connections fixed" mortgage
loans) in August 2002 (Together Connections variable mortgage loans and
Together Connections fixed mortgage loans are together referred to in this
prospectus as "Together Connections" mortgage loans). Together Connections
mortgage loans generally share the same characteristics as Together mortgage
loans, but have the additional feature of allowing the borrower to link the
mortgage loan with one or more deposit accounts that are held with the seller,
as described above under "- Mortgage loan products offered by the seller". The
interest rate on Together Connections mortgage loans depends on the LTV ratio
of the particular mortgage loan.
The seller began originating Connections mortgage loans in November
2002. Connections mortgage loans have similar features to Together Connections
mortgage loans but allow the customer to connect the mortgage loan with a
current account and/or a Save Direct deposit account as described above under
"- Mortgage loan products offered by the seller". Connections mortgage loans
do not allow the customer to have an unsecured facility.
Generally, a prospective borrower applying for a currently offered
flexible mortgage loan may borrow up to a maximum of 95% of the lower of the
original property value or the purchase price of the mortgaged property. The
seller requires a lower LTV ratio where the valuation or purchase price is
over (GBP)250,000. In the case of a remortgage, the seller calculates the
maximum amount of the loan available by using the then current valuation of
the mortgaged property. A borrower may repay amounts owed under a currently
offered flexible mortgage loan under any of the repayment terms described
above under "- Repayment terms". The current term over which a borrower may
repay its flexible mortgage loan (other than a Together mortgage loan, a
Together Connections mortgage loan or a Connections mortgage loan) is up to 35
years, and the current term over which a borrower may repay its Together
mortgage loan, Together Connections mortgage loan or Connections mortgage loan
is up to 30 years.
The seller currently reviews monthly the interest rate on its
variable rate flexible mortgage loans. In addition, the seller will
recalculate accrued interest on flexible mortgage loans to take account of the
exercise of any overpayment or re-draw, so that (a) interest on
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any re-draw is charged from the date of the redraw, and (b) borrowers are
given the benefit of any overpayment from the date on which the overpayment is
paid.
In addition to the conditions described above, the re-draw options
for borrowers with flexible mortgage loans may cease to be available, at the
seller's sole discretion, if an event of default (as set out in the applicable
terms and conditions) occurs.
Personal secured loans
Personal secured loans are offered to borrowers who have an existing
mortgage loan with the seller. The proceeds of a personal secured loan may be
used for any purpose and such loan is secured by a legal charge or (in
Scotland) a standard security on the same property that secures the borrower's
existing mortgage loan. The priority of the legal charge or (in Scotland)
standard security securing a personal secured loan will rank below the first
priority legal charge or standard security securing the related borrower's
existing mortgage loan. A borrower may have more than one personal secured
loan. A personal secured loan may be in an amount up to (GBP)25,000. If the
borrower's existing mortgage loan is not a flexible mortgage loan then the
borrower may be eligible for a "flexi plan loan" which is a personal secured
loan under which a fixed amount of credit (up to (GBP)25,000) is extended. The
borrower may draw down the flexi plan loan in increments up to the amount of
credit granted. Draws after the initial advance of funds under a flexi plan
loan are referred to as further draws. Flexi plan loans bear interest at the
standard variable rate whereas all other personal secured loans bear interest
at either the standard variable rate or a fixed rate. For personal secured
loans that are not flexi plan loans, the borrower may elect the interest rate
applicable to the borrower's existing mortgage loan during the period, if any,
when an incentive rate of interest applies to that existing mortgage loan. The
seller will not assign to the mortgages trustee the mortgage loans of a
borrower where the combined LTV of the personal secured loan(s) and the other
mortgage loan secured on the same property that secures the personal secured
loan(s) is greater than 95%.
Further advances
An existing borrower may apply to the seller for a further amount to
be lent to him or her under his or her mortgage loan, which amount will be
secured by the same mortgaged property as the mortgage loan. Any such
application may result from a solicitation made by the seller, as the seller
may periodically contact borrowers in respect of the seller's total portfolio
of mortgage loans in order to offer to a borrower the opportunity to apply for
a further advance. Any further advance approved by the seller and made to an
existing borrower will be added to the outstanding principal balance of that
borrower's mortgage loan at the time of the advance under the same terms and
conditions as the existing mortgage loan. The aggregate of the outstanding
amount of the mortgage loan and the further advance may be greater than the
original amount of the mortgage loan.
In determining whether to make a further advance, the seller will use
its lending criteria applicable to further advances at that time in
determining, in its sole discretion, whether to approve the application. The
seller will calculate a new LTV ratio by dividing the aggregate of the
outstanding amount of the mortgage loan and the further advance by the revised
valuation of the mortgaged property. Where the aggregate of the initial
advance and the further advance is greater than 95% of the indexed value of
the mortgaged property, the seller will reassess the property's value, by
instructing a valuer, who may physically inspect the property. The seller will
not assign to the mortgages trust any mortgage loan where the LTV ratio at the
time of origination or further advance is in excess of 95% (excluding
capitalized fees and/or charges).
None of the mortgage loans in any cut-off date mortgage portfolio
will oblige the seller to make further advances. However, the seller may make
further advances on some mortgage loans in an additional mortgage portfolio
prior to their assignment to the mortgages
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trustee. The administrator is required under the administration agreement not
to issue an offer for a further advance to any borrower in respect of a
mortgage loan which has been assigned to the mortgages trustee unless the
seller has elected to purchase that mortgage loan in accordance with the terms
of the mortgage sale agreement, although this requirement may change if the
seller decides at a later date to retain those mortgage loans within the trust
property and to assign such further advances to the mortgages trustee. See
"Risk factors - The yield to maturity of the notes may be adversely affected
by prepayment or redemptions on the mortgage or repurchases of mortgage loans
by the seller" and "Assignment of the mortgage loans and related security".
Product switches
From time to time borrowers may request or the seller may offer, in
limited circumstances, a variation in the mortgage conditions applicable to
the borrower's mortgage loan. In addition, in order to promote the retention
of borrowers, the seller may periodically contact certain borrowers in respect
of the seller's total portfolio of outstanding mortgage loans in order to
encourage a borrower to review the seller's other mortgage products and to
discuss shifting that borrower to an alternative mortgage product. Any such
variation, including a change in product type (other than a variation
described as a permitted product switch), is called a "product switch". The
administrator is required under the administration agreement not to issue an
offer for a product switch to any borrower in respect of a mortgage loan which
has been assigned to the mortgages trustee unless the seller has elected to
purchase that mortgage loan in accordance with the terms of the mortgage sale
agreement. However, some fixed rate mortgage loans permit the borrower to
exercise a one-time option within three months of the end of the initial fixed
rate period to "re-fix" the interest rate at a new fixed rate that the seller
is offering existing borrowers at that time. Although this re-fixing of the
borrower's fixed rate mortgage loan is considered by the seller as a product
switch, these mortgage loans may or may not be purchased by the seller from
the mortgages trustee. See "Risk factors - The yield to maturity of the notes
may be adversely affected by prepayment or redemptions on the mortgage or
repurchases of mortgage loans by the seller" and "Assignment of the mortgage
loans and related security".
Arrears capitalization
From time to time, where a borrower has demonstrated a regular
payment history following previous arrears, the seller may capitalize any
outstanding amounts in arrears. In those circumstances, the seller will set
the arrears tracking balance to zero and the related mortgage loan will no
longer be considered to be in arrears. The outstanding balance will be
required to be repaid over the remaining term of such mortgage loan. See "The
administrator and the administration agreement - Arrears and default
procedures".
Origination of the mortgage loans
The seller currently derives its mortgage lending business from the
following sources:
o intermediaries that range from mortgage clubs to small
independent mortgage advisors;
o its branch network throughout the United Kingdom;
o its website; and
o Northern Rock Direct, a centralized telephone-based lending
operation.
In each case, the seller performs all the evaluations of the borrower
and determines whether a mortgage loan will be offered. The seller has adopted
the Council of Mortgage Lenders' Code of Mortgage Lending Practice, which is a
voluntary code observed by most banks, building societies and other
residential mortgage lenders in the UK. The seller became authorized to
conduct mortgage lending business under the FSMA on N(m) and is
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subject to the requirements of MCoB. MCoB sets out, among other things, what
information loan applicants should be provided with before committing to a
mortgage loan, including the repayment method and repayment period, the
financial consequences of early repayment, the type of interest rate,
insurance requirements, costs and fees associated with the mortgage loan and
when an applicant's account details can be given to credit reference agencies.
MCoB, like the CML Code also mandates that the lender, among other things, act
fairly and reasonably with its borrowers and assist borrowers in choosing a
mortgage that fits the needs of the relevant borrower. See "Risk factors -
Possible regulatory changes by the Office of Fair Trading, the Financial
Services Authority and any other regulatory authority may have an impact on
the seller, the issuer and/or the mortgage loans and may adversely affect our
ability to make payments when due on the notes".
Underwriting
The decision to offer a mortgage loan to a potential borrower is made
by one of the seller's underwriters and/or mandate holders located in its
mortgage service centers or head office in Gosforth, who may liaise with the
intermediaries. Each underwriter and/or mandate holder must pass the seller's
formal training program to gain the authority to approve mortgage loans. The
seller has established various levels of authority for its underwriters who
approve mortgage loan applications. The levels are differentiated by, among
other things, degree of risk, value of the property and LTV ratio in the
relevant application. An underwriter wishing to move to the next level of
authority must first take and pass a further training course. The seller also
monitors the quality of underwriting decisions on a regular basis.
The decision to offer a mortgage loan to a potential borrower also
may be made by one of the seller's mandate holders located in a regional
mortgage service center or the seller's head office. "Mandate holders" are
employees of the seller who are not underwriters but who have participated in
a formal training program, and who have been given a mandate by the seller to
approve a mortgage loan for which the potential borrower has attained a
specified minimum credit score on the seller's initial credit review.
The seller continually reviews the way in which it conducts its
mortgage origination business in order to ensure that it remains up-to-date
and cost effective in a competitive market. The seller may therefore change
its origination processes from time to time. However, the seller will retain
exclusive control over the underwriting polices and lending criteria to be
applied to the origination of each mortgage loan. The seller's underwriting
and processing of mortgage loans are independent from the process by which the
seller's mortgage loans are originated.
Lending criteria
Each mortgage loan was originated according to the seller's lending
criteria applicable at the time the mortgage loan was offered, which lending
criteria in the case of each mortgage loan included in the mortgage portfolio
as of the Funding 2 program date were the same as or substantially similar to
the criteria described in this section. New mortgage loans may only be
included in the mortgage portfolio if they are originated in accordance with
the lending criteria applicable at the time the mortgage loan is offered and
if the conditions contained in "Assignment of the mortgage loans and related
security - Assignment of new mortgage loans and their related security" have
been satisfied. However, the seller retains the right to revise its lending
criteria from time to time, so the criteria applicable to new mortgage loans
may not be the same as those currently used.
To obtain a mortgage loan, each prospective borrower completes an
application form which includes information about the applicant's income,
current employment details, bank account information, if any, current mortgage
information, if any, and certain other personal information. The seller
completes a credit reference agency search in all cases against each
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applicant at their current address and, if necessary, former addresses, which
gives details of public information including any county court judgements and
details of any bankruptcy. Some of the factors currently used in making a
lending decision are as follows:
(1) Employment details
The seller operates the following policy in respect of the
verification of a prospective borrower's income details. Under this policy,
the seller categorizes prospective borrowers as either "employed" or
"self-employed". Proof of income for employed prospective borrowers applying
for mortgage loans in an amount less than (GBP)500,000 may be established by:
o last three monthly bank statements and/or three monthly payslips
from the six month period prior to the date of the loan
application; and
o a form P60 or accountants' certificate certifying the
borrower's income.
Proof of income for self-employed prospective borrowers may be
established by:
o a letter from the prospective borrower's accountant in
acceptable form; or
o acceptable confirmation of self-employment which might include
any of a tax return, accountant's letter or a trade invoice,
together with a certificate from the prospective borrower as to
income.
In May 2001 the seller introduced its fast track program to
prospective borrowers for certain mortgage loan products. If a mortgage loan
is judged appropriate for the fast track program, income is accepted as stated
by the prospective borrower without further proof once positive identification
of the borrower is provided and the borrower has passed the seller's credit
scoring test. The seller does, nevertheless, reserve the right to request
income verification from prospective borrowers. In order to qualify, the
prospective borrower must have attained a specified minimum credit score on
the seller's initial credit review. From May 2001 through January 2002, a
prospective borrower eligible for the fast track program must have had a
property value of at least (GBP)150,000, applied for a mortgage loan with an
LTV ratio no greater than 60% and must have had a valuation made on the
mortgaged property. From January 2002 to August 2002, a prospective borrower
eligible for the fast track program must have had a property value of at least
(GBP)100,000, applied for a mortgage loan with an LTV ratio no greater than
75% and must have had a valuation made on the mortgaged property. From August
2002, a prospective borrower eligible for the fast track program must have a
property value of at least (GBP)100,000, applied for a mortgage loan with an
LTV ratio no greater than 80% and must have a valuation made on the mortgaged
property. From July 2003, a prospective borrower eligible for the fast track
program must have a property value of at least (GBP)100,000, be applying for a
mortgage loan with an LTV ratio no greater than 85% and must have a valuation
made on the mortgaged property. An existing borrower may also be eligible for
the fast track program in respect of a further advance under a mortgage loan
provided that the LTV ratio of the combined mortgage loan and further advance
does not exceed 95% and that prior to the request for a further advance the
mortgage loan was not subject to the seller's fast track program procedure.
Further, an existing borrower may also be eligible for the fast track program
if the borrower is moving from one property (for which the seller is the
mortgagee) to another property and either (a) the borrower has had a mortgage
loan with the seller for at least two years prior to the date on which the
borrower applies for the new mortgage loan and the LTV ratio for the new
mortgage loan is no greater than 80%, or (b) the amount of the new mortgage
loan is equal to or less than the amount of the original mortgage loan, and
the borrower's personal circumstances (for example, income and employment)
have not changed since the date of the original mortgage loan. In all cases,
the seller reserves the right to obtain proof of income references. Together
mortgage loans and Together Connections mortgage loans are excluded from the
seller's fast track program. As of March 2004 the seller no longer originates
mortgage loans under the fast track program.
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Since March 2004 the seller has adopted a new set of procedures under
which verification of a borrower's income is not required in certain
circumstances. For mortgage loans with an LTV ratio of 85% or less (80% or
less for mortgage loans greater than (GBP)500,000) a borrower receiving a
medium to high credit score does not need to provide proof of income. First
time buyers, borrowers employed less than six months and borrowers of Together
mortgage loans and Together Connections mortgage loans are ineligible for a
non-verified mortgage loan. In addition, mortgage loans for non owner-occupied
properties must have an LTV ratio no greater than 70% to qualify as a
non-verified mortgage loan. Notwithstanding these procedures, the seller
retains the right to require proof of income or other credit-related
information in any case it deems necessary.
(2) Valuation
The seller requires that a valuation of the property be obtained
either from its in-house valuation department or from an independent firm of
professional valuers selected from a panel of approved valuers. The seller
retains details of professional indemnity insurance held by panel valuers. The
person underwriting the mortgage loan and/or the valuation team reviews the
valuation of each property securing the mortgage loans. For more information
on the valuation process and criteria used for a further advance, including
the use of desktop valuations, see "- Characteristics of the mortgage loans -
Further advances".
(3) Property types
The seller applies the criteria set out below in determining the
eligibility of properties to serve as security for mortgage loans. Under these
criteria, eligible property types include freehold and leasehold houses,
leasehold flats and mixed commercial and residential use properties where
there is a separate entrance for the residential part of the property. In the
case of a mortgage loan secured by a leasehold property, the seller requires
that the unexpired term of the lease be at least 30 years from the end of the
agreed mortgage loan term.
The seller may consider some property types that do not meet its
usual lending criteria on a case-by-case basis. However, some property types
will not be considered for the purposes of providing security for a mortgage
loan. The types of property falling within this category comprise freehold
flats in England or Wales, shared ownership or shared equity schemes and
properties of non-standard construction of a type considered to be defective.
(4) Loan amount
Generally, the maximum loan amount is (GBP)1,000,000, but this may
vary according to the application in question. The amount borrowed may exceed
this limit in exceptional cases. The seller has represented and warranted in
the mortgage sale agreement that, as of the date of assignment, no mortgage
loan in the mortgage portfolio has a current balance greater than
(GBP)500,000.
(5) Term
Each mortgage loan must have an initial term of between 7 and 30
years (in the case of a Together mortgage loan, a Together Connections
mortgage loan and a Connections mortgage loan) or between 7 and 35 years in
the case of all other mortgage loans.
(6) Age of applicant
The first named borrower in respect of a Together mortgage loan or a
Together Connections mortgage loan must be aged 21 or over. All borrowers in
respect of all other mortgage loans must be aged 18 or over. There are no
maximum age limits.
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(7) Status of applicant(s)
The maximum loan amount of the mortgage loan(s) under a mortgage
account is determined by a number of factors, including the applicant's
income. In determining income, the seller includes basic salary along with
performance or profit-related pay, allowances, mortgage subsidies, pensions,
annuities, overtime, bonus and commission. The seller will deduct the annual
cost of existing commitments of twelve months or more from the applicant's
gross income. Positive proof of the applicant's identity and address is
obtained in all cases.
In cases where an applicant requests that the seller takes a
secondary income into account, the seller will consider the sustainability of
the applicant's work hours, the similarity of the jobs and/or skills, the
commuting time and distance between jobs, the length of employment at both
positions and whether the salary is consistent with the type of employment.
The seller will determine, after assessing the above factors, if it is
appropriate to use both incomes. If so, a portion of the secondary income will
be used as part of the normal income calculation.
Where there are two applicants, the seller adds joint incomes
together for the purposes of calculating the applicants' total income. In
determining the loan amount available to the applicants the seller may use the
higher of the joint income multiplied by the appropriate income multiple or
the highest of the two incomes multiplied by the appropriate income multiple
plus the lower income. The seller may at its discretion consider the income of
one additional applicant as well, but only at a maximum income multiple of 1.
The seller may exercise discretion within its lending criteria in
applying those factors that are used to determine the maximum amount an
applicant can borrow. Accordingly, these parameters may vary for some mortgage
loans. The seller may take the following into account when applying
discretion: credit score result, existing customer relationship, LTV and total
income needed to support the mortgage loan.
(8) Credit history
(a) Credit search
A credit search is carried out in respect of all applicants.
Applications may be declined where an adverse credit history (for
example, county court judgement (or the Scottish equivalent), default
or bankruptcy notice) is revealed.
(b) Existing lender's reference
In some cases the seller may seek a reference from any existing
and/or previous lender. Any reference must satisfy the seller that
the account has been properly conducted and that no history of
material arrears exists. The seller may substitute the reference with
the bureau record obtained as a result of the credit search.
(9) Scorecard
The seller uses some of the criteria described here and various other
criteria to produce an overall score for the application that reflects the
statistical analysis of the risk of advancing the mortgage loan. The scorecard
has been developed using the seller's own data and experience of its own
mortgage accounts. The lending policies and processes are determined centrally
to ensure consistency in the management and monitoring of credit risk
exposure. Full use is made of software technology in credit scoring new
applications. Credit scoring applies statistical analysis to publicly
available data and customer-provided data to assess the likelihood of an
account going into arrears. The seller also uses behavioural scoring, which
uses customer data on existing accounts to make further lending decisions and
to prioritize action in case of arrears.
The seller reserves the right to decline an application that has
achieved a passing score. The seller does have an appeals process if an
applicant believes that his/her
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application has been unfairly declined. It is the seller's policy to allow
only authorised individuals to exercise discretion in granting variances from
the scorecard.
Seller's discretion to lend outside of its lending criteria
On a case-by-case basis, and within approved limits as detailed in
the seller's lending criteria, the seller may have determined that, based upon
compensating factors, a prospective borrower that did not strictly qualify
under its lending criteria at that time warranted an underwriting exception.
The seller may take into account compensating factors including, but not
limited to, a low LTV ratio, stable employment and time in residence at the
applicant's current residence. New mortgage loans and further advances (made
prior to their assignment to the mortgages trustee or if the seller decides at
a later date to retain such mortgage loans subject to further advances within
the mortgages trust, after their assignment to the mortgages trustee) that the
seller has originated under lending criteria that are different than the
lending criteria set out here may be assigned to the mortgages trustee.
Maximum LTV ratio
The maximum LTV ratio permitted for prospective borrowers applying
for mortgage loans secured by mortgaged properties valued up to (GBP)250,000
is 95% of the lower of the purchase price or valuation of the mortgaged
property determined by the relevant valuation. The maximum LTV ratio permitted
for prospective borrowers applying for mortgage loans secured by mortgaged
properties valued up to (GBP)1,000,000 is 90% of the lower of the purchase
price or valuation of the mortgaged property determined by the relevant
valuation. The maximum LTV ratio permitted for prospective borrowers applying
for mortgage loans secured by mortgaged properties valued over (GBP)1,000,000
is 85% of the lower of the purchase price or valuation of the mortgaged
property determined by the relevant valuation. The maximum LTV ratio for
prospective borrowers applying for mortgage loans secured by the seller's
currently offered flexible mortgage loans is as described under "-
Characteristics of the mortgage loans - Flexible mortgage loans".
In the case of a purchase of a mortgaged property, the seller will
determine the current market value of that mortgaged property (which will be
used to determine the maximum amount of the mortgage loan permitted to be made
by the seller) to be the lower of:
o the valuation made by an independent valuer from the panel of
valuers appointed by the seller or an employee valuer of the
seller; or
o the purchase price for the mortgaged property paid by the
prospective borrower.
If a borrower or a prospective borrower has applied to remortgage its
current mortgaged property, the seller will determine the current market value
of the mortgaged property (for the purpose of determining the maximum amount
of the loan available) by using the then current valuation of the mortgaged
property as determined using the process described under "- Lending criteria -
(2) Valuation".
If the borrower has applied for a further advance or a personal
secured loan, the seller will determine the current market value of the
mortgaged property by using either an indexed valuation figure provided by a
UK pricing index, a desktop valuation by an employee valuer of the seller or
the then current valuation of the mortgaged property as determined using the
process described under "- Lending criteria - (2) Valuation".
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Buildings insurance policies
Insurance on the property
A borrower is required to arrange for insurance on the mortgaged
property for an amount equal to the full rebuilding cost of the property. The
borrower may either purchase the insurance through an insurer arranged by the
seller (a "seller arranged insurer"), or the borrower or landlord (for a
leasehold property) may arrange for the insurance independently. Where
borrower or landlord-arranged insurance fails or (without the knowledge of the
seller) no insurance is arranged, a contingency insurance policy exists to
protect the seller (but not the borrower) up to the amount of the seller's
insurable interest in the property (subject to aggregate limits of indemnity)
and the seller can make a claim under the contingency insurance policy. The
policy has a (GBP)50,000 deductible in the aggregate in any one period of
insurance.
Seller arranged buildings insurance policies
The solicitor, licensed or qualified conveyancer acting for the
seller is required to ensure that buildings insurance cover is taken out by
the relevant borrower prior to the completion of each mortgage loan. If a
borrower asks the seller to arrange insurance on its behalf, a policy will be
issued by a seller arranged insurer, which currently is AXA General Insurance
Ltd., a member of the AXA Group of Companies ("AXA"). AXA's registered number
is 141 885 and its address is 107 Cheapside, London EC2V 6DU. The policy will
provide the borrower with rebuilding insurance up to an amount equal to the
actual rebuilding cost. Standard policy conditions apply, which are
renegotiated periodically by the seller with the seller arranged insurer.
Under seller arranged insurance policies, the seller will assign its rights
under those policies to the mortgages trustee. Amounts paid under the
insurance policy are generally utilized to fund the reinstatement of the
property or are otherwise paid to the seller to reduce the amount of the
mortgage loan(s).
In the administration agreement, the seller, acting in its capacity
as administrator, has agreed to deal with claims under the seller arranged
insurance policies in accordance with its normal procedures and also has
agreed to make and enforce claims and to hold the proceeds of claims on trust
for the mortgages trustee or as the mortgages trustee may direct.
Borrower or landlord-arranged buildings insurance policies and the contingency
insurance policy
If a borrower elects not to take up a seller arranged insurance
policy, or if a borrower who originally had a seller arranged insurance policy
confirms that he or she no longer requires such insurance, that borrower is
sent an "alternative insurance requirements" form. The borrower is required to
acknowledge that it is responsible for arranging an alternative insurance
policy which covers the rebuilding cost of the property and to request joint
insured status for the seller.
Once an alternative insurance requirements form has been dispatched,
it is assumed that the borrower is making arrangements in accordance with
those requirements. If it transpires that the borrower has not complied with
those requirements and if the property is damaged while uninsured or partially
insured because of under insurance, the seller is entitled to make a claim
under the contingency insurance policy provided the seller has no prior
knowledge of the deficiency. The contingency insurance policy is an insurance
policy currently provided to the seller by AXA that insures the seller against
loss relating to mortgaged properties where borrowers have failed to make
their own property insurance arrangements. The contingency insurance policy
provides cover for the mortgages trustee. The administrator will make claims
in accordance with the contingency insurance policy and
87
hold the proceeds of claims on trust for the mortgages trustee or as the
mortgages trustee may direct.
In the case of leasehold properties where the lease requires the
landlord to insure the property, provision is made to deal with the insurance
in the mortgage conditions or the "General Instructions to Solicitors" or
other comparable or successor instructions or guidelines. Again, if it
transpires that the property is not insured and is damaged, the seller can
claim under the contingency insurance policy.
If a borrower who originally had seller arranged insurance fails to
pay a premium, but does not notify the seller that it wishes to make
alternative arrangements, it is assumed that the borrower requires seller
arranged insurance to continue and no alternative insurance requirements form
is sent to that borrower. The unpaid premium is added to the balance of the
relevant mortgage loan.
The seller may not be insured under any insurance policy which is not
arranged by the seller, and it may not have the benefit of any security over
such policies. The mortgages trustee therefore may not have an interest in
policies that were not arranged through the seller. See "Risk factors - The
mortgages trustee may not receive the benefit of claims made on the buildings
insurance".
Properties in possession policy
If the seller takes possession of a property from a borrower in
default, the seller has coverage through a properties in possession policy
from AXA. The policy provides the seller with rebuilding insurance up to an
amount equal to the actual rebuilding cost. The seller will assign its rights
under this policy to the mortgages trustee for any mortgage loan which is in a
mortgage portfolio and is a property in possession. Amounts paid under the
properties in possession policy are generally utilized to fund the
reinstatement of the property or are otherwise paid to the seller to reduce
the amount of the mortgage loan. This policy is subject to a (GBP)50,000
deductible in the aggregate in any one period of insurance.
MIG policies
A mortgage indemnity guarantee, or MIG, policy is an agreement
between a lender and an insurance company to underwrite the amount of each
relevant mortgage loan which exceeds a specified LTV ratio. Although since
January 1, 2003 the seller is no longer required to take out a MIG policy with
respect to any mortgage loan originated on or after January 1, 2003, each
mortgage loan originated prior to January 1, 2003, that had an LTV ratio in
excess of 75% contains a condition that the seller take out mortgage indemnity
insurance with Northern Rock Mortgage Indemnity Company Limited ("NORMIC").
However, under the terms of these MIG policies, the MIG coverage for a
mortgage loan will be cancelled in the event a further advance is granted with
respect to such mortgage loan on or after January 1, 2003.
This insurance is intended to provide only limited cover in the event
of losses being incurred in excess of the relevant LTV ratio following
repossession and sale of a mortgaged property from a borrower, and is further
limited in that such insurance is subject to certain caps on claims that may
be made under the MIG policy by the seller and/or its relevant subsidiary.
Firstly, each mortgage loan that is subject to a MIG policy is subject to a
cap on claims made in respect of that mortgage loan, regardless of whether or
not that mortgage loan is included in the mortgage portfolio. In addition, all
mortgage loans that were originated in any one year and that are subject to a
MIG policy are also subject to an aggregate cap on claims that can be made in
respect of that group of mortgage loans. However, the aggregate cap in respect
of mortgage loans originated in any one year is proportioned between mortgage
loans that are included in the mortgage portfolio and mortgage loans that are
not included in the mortgage portfolio. As each proportionate
88
aggregate cap is applicable either to mortgage loans included in the mortgage
portfolio or mortgage loans that are not included in the mortgage portfolio,
any losses on mortgage loans outside of the mortgage portfolio will not reduce
the amount of MIG coverage remaining on those mortgage loans included in the
mortgage portfolio which continue to have MIG coverage. The MIG policy will
not cover all losses suffered in relation to the mortgage loans which continue
to have MIG coverage and each such mortgage loan is only covered for a ten
year period following completion of the mortgage loan or further advance. In
addition, the mortgages trustee is not required to maintain a mortgage
indemnity policy with the current insurer, and the seller is not required to
maintain the same level of coverage under the mortgage indemnity insurance
policies for mortgage loans that it may originate in the future and assign to
the mortgages trust. See "Risk factors - The mortgages trustee is not required
to maintain mortgage indemnity insurance with the current insurer, and the
seller is not required to maintain the same level of mortgage indemnity
insurance coverage for new mortgage loans that it originates in the future,
which may adversely affect the funds available to pay the notes".
The insured under each MIG policy is the seller and/or its relevant
subsidiary. The related borrower has no interest in this policy. The seller
will formally assign its interest in each MIG policy to the mortgages trustee
to the extent that it relates to the mortgage loans from time to time
comprised in the mortgage portfolio. Practically speaking, this will have
little effect on the way in which claims are made and paid under the policies
as they will continue to be administered by the seller acting in its capacity
as administrator. To the extent that claims relate to mortgage loans in the
mortgage portfolio, their proceeds will be paid by the seller into the
mortgages trustee transaction account and all other claims will be paid into
the seller's account.
NORMIC is a Guernsey limited liability company and a wholly-owned
insurance subsidiary of the seller. NORMIC's registered number in Guernsey is
28379, and its address is P.O. Box 384, The Albany, South Esplanade, St. Peter
Port, Guernsey, Channel Islands. NORMIC does not have a public credit rating
by any of Moody's, Standard & Poor's or Fitch. The seller does not guarantee
the liabilities of NORMIC and is under no legal obligation to support NORMIC
in the discharge of those liabilities. The seller however, contingently liable
to NORMIC to pay up any unpaid amount in respect of the seller's shareholding
in NORMIC. The unpaid share capital is immaterial in relation to NORMIC's
overall exposure.
The seller has warranted that each of the mortgage indemnity policies
relating to a mortgaged property is in force and all premiums thereon have
been paid. The seller also has warranted that, so far as the seller is aware,
there has been no breach of any term of the mortgage indemnity policies which
would entitle the relevant insurer to avoid the same. Management of the seller
believes that financial information relating to NORMIC is not material to an
investor's decision to purchase the notes.
Scottish mortgage loans
A portion of the mortgage loans in the mortgage portfolio are, and in
any additional mortgage portfolio may be, secured over properties in Scotland.
Under Scots law, the only means of creating a fixed charge or security over
heritable or long leasehold property is the statutorily prescribed standard
security. In relation to the Scottish mortgage loans, references in this
prospectus to a "mortgage" are to be read as references to such standard
security and references to a "mortgagee" are to be read as references to the
security holder (under Scots law, termed the "heritable creditor").
In practice, the seller has advanced and intends to advance mortgage
loans on a similar basis both in England and Wales and in Scotland. While
there are certain differences in law and procedure in connection with the
enforcement and realization of Scottish mortgages, the seller does not
consider that these differences make Scottish mortgages significantly
different from or less effective than the English mortgages. For further
89
information on Scottish mortgages, see "Material legal aspects of the mortgage
loans and the related security - Scottish mortgages".
90
91
Certain characteristics of United Kingdom residential mortgage market
CPR rates
The following table sets out the quarterly CPR rates experienced in
respect of residential mortgage loans by building societies since 1964. The
prospectus supplement for each issuance of notes will contain information
updating the historical CPR rates with data available as at the date of such
prospectus supplement.
four quarter four quarter
CPR for the rolling CPR for the rolling
Date quarter (%) average (%) Date quarter (%) average (%)
- --------------------------- ----------- ------------ ----------------------- ----------- ------------
March 1964 11.29 12.27 June 1964 12.30 12.41
September 1964 12.68 12.41 December 1964 12.82 12.27
March 1965 11.12 12.23 June 1965 10.80 11.86
September 1965 10.66 11.35 December 1965 11.51 11.02
March 1966 10.45 10.85 June 1966 11.39 11.00
September 1966 11.71 11.27 December 1966 10.60 11.04
March 1967 9.49 10.80 June 1967 10.95 10.69
September 1967 11.65 10.67 December 1967 11.51 10.90
March 1968 10.18 11.07 June 1968 10.57 10.98
September 1968 10.91 10.79 December 1968 10.24 10.48
March 1969 9.15 10.22 June 1969 10.23 10.13
September 1969 10.65 10.07 December 1969 10.01 10.01
March 1970 8.92 9.95 June 1970 10.68 10.06
September 1970 11.60 10.30 December 1970 11.46 10.66
March 1971 9.33 10.76 June 1971 11.44 10.96
September 1971 12.17 11.10 December 1971 12.30 11.31
March 1972 10.72 11.66 June 1972 11.81 11.75
September 1972 12.24 11.77 December 1972 11.74 11.63
March 1973 10.11 11.48 June 1973 10.54 11.16
September 1973 11.06 10.86 December 1973 10.55 10.56
March 1974 7.94 10.02 June 1974 7.94 9.37
September 1974 9.58 9.01 December 1974 10.83 9.07
March 1975 9.96 9.58 June 1975 12.23 10.65
September 1975 12.76 11.44 December 1975 12.21 11.79
March 1976 10.10 11.82 June 1976 11.48 11.64
September 1976 11.86 11.41 December 1976 11.70 11.28
March 1977 8.00 10.76 June 1977 9.84 10.35
September 1977 12.13 10.42 December 1977 12.66 10.66
March 1978 11.30 11.48 June 1978 12.19 12.07
September 1978 11.71 11.97 December 1978 11.19 11.60
March 1979 9.33 11.11 June 1979 10.12 10.59
September 1979 11.36 10.50 December 1979 11.07 10.47
March 1980 8.03 10.15 June 1980 8.66 9.78
September 1980 9.87 9.41 December 1980 10.48 9.26
March 1981 9.97 9.75 June 1981 11.78 10.53
September 1981 12.53 11.19 December 1981 11.82 11.53
March 1982 9.63 11.44 June 1982 12.91 11.72
September 1982 13.96 12.08 December 1982 14.20 12.68
March 1983 12.55 13.41 June 1983 12.76 13.37
September 1983 12.48 13.00 December 1983 11.86 12.41
March 1984 10.40 11.88 June 1984 12.13 11.72
September 1984 12.40 11.70 December 1984 11.87 11.70
March 1985 10.02 11.61 June 1985 11.67 11.49
September 1985 13.46 11.76 December 1985 13.68 12.21
March 1986 11.06 12.47 June 1986 15.53 13.43
September 1986 17.52 14.45 December 1986 15.60 14.93
March 1987 10.57 14.81 June 1987 14.89 14.65
September 1987 16.79 14.46 December 1987 16.18 14.61
March 1988 13.55 15.35 June 1988 16.03 15.64
92
four quarter four quarter
CPR for the rolling CPR for the rolling
Date quarter (%) average (%) Date quarter (%) average (%)
- --------------------------- ----------- ------------ ----------------------- ----------- ------------
September 1988 18.23 16.00 December 1988 12.60 15.10
March 1989 8.85 13.93 June 1989 13.04 13.18
September 1989 11.53 11.51 December 1989 10.38 10.95
March 1990 8.91 10.97 June 1990 9.37 10.05
September 1990 9.66 9.58 December 1990 10.58 9.63
March 1991 9.07 9.67 June 1991 10.69 10.00
September 1991 11.57 10.48 December 1991 10.24 10.39
March 1992 9.14 10.41 June 1992 9.12 10.02
September 1992 9.75 9.56 December 1992 7.96 8.99
March 1993 8.53 8.84 June 1993 9.97 9.05
September 1993 10.65 9.28 December 1993 10.01 9.79
March 1994 8.97 9.90 June 1994 10.48 10.03
September 1994 11.05 10.13 December 1994 10.68 10.30
March 1995 9.15 10.34 June 1995 10.51 10.35
September 1995 11.76 10.53 December 1995 11.61 10.76
March 1996 10.14 11.01 June 1996 11.32 11.21
September 1996 13.20 11.57 December 1996 12.58 11.81
March 1997 9.75 11.71 June 1997 15.05 12.65
September 1997 12.18 12.39 December 1997 11.17 12.04
March 1998 10.16 12.14 June 1998 12.05 11.39
September 1998 13.79 11.79 December 1998 13.42 12.36
March 1999 11.14 12.60 June 1999 14.39 13.19
September 1999 15.58 13.63 December 1999 14.94 14.01
March 2000 13.82 14.68 June 2000 13.87 14.55
September 2000 14.90 14.38 December 2000 15.57 14.54
March 2001 15.49 14.95 June 2001 17.39 15.84
September 2001 19.17 16.91 December 2001 19.04 17.77
March 2002 18.70 18.58 June 2002 19.91 19.21
September 2002 22.41 20.02 December 2002 22.16 20.80
March 2003 19.52 21.00 June 2003 20.19 21.07
September 2003 21.66 20.88 December 2003 21.34 20.67
March 2004 [o] [o] June 2004 [o] [o]
- ----------
Source of repayment and outstanding mortgage information: Bank of England
House price index
UK residential property prices, as measured by the Nationwide House
Price Index and Halifax House Price Index (collectively the "Housing
Indices"), have generally followed the UK Retail Price Index over an extended
period. Nationwide is a UK building society and Halifax is a UK bank.
The housing market has been through three economic cycles since 1976.
High year to year increases in the Housing Indices occurred in the late 1970s
and late 1980s with greatest decrease in the early 1990s. The Housing Indices
have generally increased since 1996.
The following table sets out the quarterly housing price indices
experienced in respect of residential mortgage loans by building societies
since 1964. The prospectus supplement for each issuance of notes will contain
information updating the historical housing price indices with data available
as at the date of such prospectus supplement.
UK Retail Nationwide House Halifax House
Price Index Price Index Price Index
----------------------- ---------------------- ------------------------
% annual % annual % annual
Time in Quarters Index change/1/ Index change/1/ Index change/1/
- ----------------------- ---------- ---------- ---------- ---------- ---------- ---------
1973 Q4 N/A N/A 19.5 N/A N/A N/A
93
UK Retail Nationwide House Halifax House
Price Index Price Index Price Index
----------------------- ---------------------- ------------------------
% annual % annual % annual
Time in Quarters Index change/1/ Index change/1/ Index change/1/
- ----------------------- ---------- ---------- ---------- ---------- ---------- ---------
1974 Q1 N/A N/A 19.8 N/A N/A N/A
1974 Q2 N/A N/A 20.0 N/A N/A N/A
1974 Q3 N/A N/A 20.2 N/A N/A N/A
1974 Q4 N/A N/A 20.4 4.4 N/A N/A
1975 Q1 31.5 N/A 20.7 4.5 N/A N/A
1975 Q2 34.8 N/A 21.4 6.8 N/A N/A
1975 Q3 35.6 N/A 21.9 7.9 N/A N/A
1975 Q4 37.0 N/A 22.5 10.1 N/A N/A
1976 Q1 38.2 19.3 23.0 10.3 N/A N/A
1976 Q2 39.5 12.7 23.4 9.0 N/A N/A
1976 Q3 40.7 13.4 23.9 8.9 N/A N/A
1976 Q4 42.6 14.1 24.4 7.8 N/A N/A
1977 Q1 44.6 15.5 24.8 7.4 N/A N/A
1977 Q2 46.5 16.3 25.3 7.8 N/A N/A
1977 Q3 47.1 14.6 25.9 7.8 N/A N/A
1977 Q4 47.8 11.5 26.2 7.4 N/A N/A
1978 Q1 48.6 8.6 27.6 10.8 N/A N/A
1978 Q2 50.0 7.3 28.9 13.3 N/A N/A
1978 Q3 50.8 7.6 31.7 20.4 N/A N/A
1978 Q4 51.8 8.0 33.6 24.6 N/A N/A
1979 Q1 53.4 9.4 35.5 25.3 N/A N/A
1979 Q2 55.7 10.8 38.1 27.5 N/A N/A
1979 Q3 59.1 15.1 40.9 25.3 N/A N/A
1979 Q4 60.7 15.9 43.8 26.7 N/A N/A
1980 Q1 63.9 18.0 45.2 24.3 N/A N/A
1980 Q2 67.4 19.1 46.6 20.2 N/A N/A
1980 Q3 68.5 14.8 47.1 14.3 N/A N/A
1980 Q4 69.9 14.1 46.9 6.7 N/A N/A
1981 Q1 72.0 11.9 47.3 4.5 N/A N/A
1981 Q2 75.0 10.7 48.1 3.2 N/A N/A
1981 Q3 76.3 10.8 48.3 2.3 N/A N/A
1981 Q4 78.3 11.3 47.5 1.3 N/A N/A
1982 Q1 79.4 9.8 48.2 1.9 N/A N/A
1982 Q2 81.9 8.8 49.2 2.4 N/A N/A
1982 Q3 81.9 7.1 49.8 3.2 N/A N/A
1982 Q4 82.5 5.2 51.0 7.2 N/A N/A
1983 Q1 83.1 4.6 52.5 8.4 97.1 N/A
1983 Q2 84.8 3.5 54.6 10.4 99.4 N/A
1983 Q3 86.1 5.0 56.2 12.1 101.5 N/A
1983 Q4 86.9 5.2 57.1 11.2 102.3 N/A
1984 Q1 87.5 5.2 59.2 12.0 104.1 7.0
1984 Q2 89.2 5.1 61.5 11.9 106.0 6.4
1984 Q3 90.1 4.5 62.3 10.4 108.4 6.6
1984 Q4 90.9 4.5 64.9 12.8 111.0 8.2
1985 Q1 92.8 5.9 66.2 11.2 113.5 8.6
1985 Q2 95.4 6.7 68.2 10.3 115.4 8.5
1985 Q3 95.4 5.7 69.2 10.5 116.8 7.5
1985 Q4 96.1 5.6 70.7 8.5 120.6 8.3
1986 Q1 96.7 4.1 71.1 7.1 124.0 8.8
1986 Q2 97.8 2.5 73.8 8.0 128.1 10.4
1986 Q3 98.3 3.0 76.3 9.7 132.2 12.4
1986 Q4 99.6 3.6 79.0 11.1 136.8 12.6
1987 Q1 100.6 4.0 81.6 13.7 142.3 13.8
1987 Q2 101.9 4.1 85.8 15.0 146.7 13.6
1987 Q3 102.4 4.1 88.6 15.0 151.5 13.6
1987 Q4 103.3 3.6 88.5 11.4 158.0 14.4
1988 Q1 104.1 3.4 90.0 9.8 167.0 16.0
94
UK Retail Nationwide House Halifax House
Price Index Price Index Price Index
----------------------- ---------------------- ------------------------
% annual % annual % annual
Time in Quarters Index change/1/ Index change/1/ Index change/1/
- ----------------------- ---------- ---------- ---------- ---------- ---------- ---------
1988 Q2 106.6 4.5 97.6 13.0 179.4 20.1
1988 Q3 108.4 5.7 108.4 20.1 197.4 26.5
1988 Q4 110.3 6.6 114.2 25.5 211.8 29.3
1989 Q1 112.3 7.6 118.8 27.8 220.7 27.9
1989 Q2 115.4 7.9 124.2 24.1 226.1 23.1
1989 Q3 116.6 7.3 125.2 14.4 225.5 13.3
1989 Q4 118.8 7.4 122.7 7.2 222.5 4.9
1990 Q1 121.4 7.8 118.9 0.1 223.7 1.4
1990 Q2 126.7 9.3 117.7 -5.4 223.3 -1.2
1990 Q3 129.3 10.3 114.2 -9.2 222.7 -1.2
1990 Q4 129.9 8.9 109.6 -11.3 223.0 0.2
1991 Q1 131.4 7.9 108.8 -8.8 223.1 -0.3
1991 Q2 134.1 5.7 110.6 -6.2 221.9 -0.6
1991 Q3 134.6 4.0 109.5 -4.2 219.5 -1.4
1991 Q4 135.7 4.4 107.0 -2.4 217.7 -2.4
1992 Q1 136.7 4.0 104.1 -4.4 213.2 -4.5
1992 Q2 139.3 3.8 105.1 -5.1 208.8 -6.1
1992 Q3 139.4 3.5 104.2 -5.0 206.9 -5.9
1992 Q4 139.2 2.5 100.1 -6.7 199.5 -8.7
1993 Q1 139.3 1.9 100.0 -4.0 199.6 -6.6
1993 Q2 141.0 1.2 103.6 -1.4 201.7 -3.5
1993 Q3 141.9 1.8 103.2 -1.0 202.6 -2.1
1993 Q4 141.9 1.9 101.8 1.7 203.5 2.0
1994 Q1 142.5 2.3 102.4 2.4 204.6 2.5
1994 Q2 144.7 2.6 102.5 -1.1 202.9 0.6
1994 Q3 145.0 2.2 103.2 0.0 202.7 0.0
1994 Q4 146.0 2.8 104.0 2.1 201.9 -0.8
1995 Q1 147.5 3.4 101.9 -0.5 201.8 -1.4
1995 Q2 149.8 3.5 103.0 0.5 199.3 -1.8
1995 Q3 150.6 3.8 102.4 -0.8 197.8 -2.4
1995 Q4 150.7 3.2 101.6 -2.3 199.2 -1.3
1996 Q1 151.5 2.7 102.5 0.6 202.1 0.1
1996 Q2 153.0 2.1 105.8 2.7 206.7 3.6
1996 Q3 153.8 2.1 107.7 5.1 208.8 5.4
1996 Q4 154.4 2.4 110.1 8.0 213.9 7.1
1997 Q1 155.4 2.5 111.3 8.3 216.7 7.0
1997 Q2 157.5 2.9 116.5 9.6 220.2 6.3
1997 Q3 159.3 3.5 121.2 11.8 222.6 6.4
1997 Q4 160.0 3.6 123.3 11.4 225.4 5.2
1998 Q1 160.8 3.4 125.5 12.0 228.4 5.3
1998 Q2 163.4 3.7 130.1 11.0 232.1 5.3
1998 Q3 164.4 3.2 132.4 8.8 234.8 5.3
1998 Q4 164.4 2.7 132.3 7.0 237.2 5.1
1999 Q1 164.1 2.0 134.6 7.0 238.6 4.4
1999 Q2 165.6 1.3 139.7 7.1 245.5 5.6
1999 Q3 166.2 1.1 144.4 8.6 255.5 8.4
1999 Q4 167.3 1.7 148.9 11.8 264.1 10.7
2000 Q1 168.4 2.6 155.0 14.1 273.1 13.5
2000 Q2 171.1 3.3 162.0 14.8 272.8 10.5
2000 Q3 171.7 3.3 161.5 11.2 275.9 7.7
2000 Q4 172.2 2.9 162.8 9.0 278.6 5.3
2001 Q1 172.2 2.2 167.5 7.8 281.7 3.1
2001 Q2 174.4 1.9 174.8 7.6 293.2 7.2
2001 Q3 174.6 1.7 181.6 11.8 302.4 9.2
2001 Q4 173.4 0.7 184.6 12.5 311.8 11.3
2002 Q1 174.5 1.3 190.2 12.7 327.3 15.0
2002 Q2 176.2 1.0 206.5 16.6 343.7 15.9
95
UK Retail Nationwide House Halifax House
Price Index Price Index Price Index
----------------------- ---------------------- ------------------------
% annual % annual % annual
Time in Quarters Index change/1/ Index change/1/ Index change/1/
- ----------------------- ---------- ---------- ---------- ---------- ---------- ---------
2002 Q3 177.6 1.7 221.1 19.7 366.1 19.1
2002 Q4 178.5 2.9 231.3 22.6 392.1 22.9
2003 Q1 179.9 3.0 239.3 22.9 405.6 21.4
2003 Q2 181.3 2.9 250.1 19.2 419.8 20.0
2003 Q3 182.5 2.7 258.9 15.8 435.3 17.3
2003 Q4 183.5 2.8 267.1 14.4 455.2 14.9
2004 Q1 [o] [o] [o] [o] [o] [o]
2004 Q2 [o] [o] [o] [o] [o] [o]
__________________________
1 The percentage annual change is calculated in accordance with the
following formula: In (x/y) where "x" is equal to the current quarter's
index value and "y" is equal to the index value of the previous year's
corresponding quarter.
Source: Office for National Statistics, Nationwide, Halifax.
96
The administrator and the administration agreement
The administrator
The mortgages trustee, the seller, Funding and Funding 2 have
appointed Northern Rock plc under the terms of the administration agreement as
the initial administrator of the mortgage loans. The administrator performs
the day-to-day servicing of the mortgage loans through its retail branches,
mortgage service centers and telephone banking and operations centers. The
administrator will continue to administer other mortgage loans in addition to
those mortgage loans included in the mortgage portfolio. The administrator's
registered office is Northern Rock House, Gosforth, Newcastle upon Tyne NE3
4PL, United Kingdom.
This section describes the administrator's procedures in relation to
mortgage loans generally. A description of the administrator's obligations
under the administration agreement follows in the next section. The
administrator is continually reviewing the way in which it conducts its
mortgage loan administration business in order to ensure that it remains
up-to-date and cost effective in a competitive market, and the administrator
may therefore change its administration processes from time to time.
Administration of mortgage loans
Administration procedures include monitoring compliance with and
administering the mortgage loan features and facilities applicable to the
mortgage loans, responding to customer inquiries and management of mortgage
loans in arrears. See "- The administration agreement".
Under the terms and conditions of the mortgage loans, borrowers
generally must pay the monthly payment required under the terms and conditions
of the mortgage loans on each monthly payment due date. Interest accrues in
accordance with the terms and conditions of each mortgage loan and is
collected from borrowers monthly.
In the case of variable rate mortgage loans, the administrator
determines the standard variable rate from time to time. In the case of
variable rate mortgage loans which are assigned to the mortgages trustee,
except in certain limited circumstances, the administrator will continue to
determine the standard variable rate applicable to such mortgage loans on
behalf of the mortgages trustee, Funding and/or the security trustee. The
administrator will take all necessary steps under the mortgage loans to notify
borrowers of any change in the interest rates applicable to the mortgage loans
(whether or not due to a change in the standard variable rate) and will
continue to notify borrowers of any such change under the terms of the
administration agreement.
Payments of interest and, in the case of repayment mortgage loans,
principal, are payable monthly in advance. Where a borrower defaults in the
payment of interest and/or principal under a mortgage loan, the administrator
will follow the usual arrears procedures described under "- Arrears and
default procedures" below.
Arrears and default procedures
The administrator collects all payments due under or in connection
with mortgage loans in accordance with its administration procedures in force
from time to time, but having regard to the circumstances of the relevant
borrower in each case. In accordance with standard market practice in the UK
mortgage loan servicing business, the administrator identifies a mortgage loan
as being "in arrears" when, on any due date, the overdue amounts which were
due on previous due dates equal, in the aggregate, one or more full monthly
payments. In making an arrears determination, the administrator calculates as
of the date of determination the difference between:
97
o the sum of all monthly payments that were due and payable by a
borrower on any due date up to that date of determination (less
the aggregate amount of all authorized underpayments made by
such borrower up to such date of determination); and
o the sum of all payments actually made by that borrower up to
that date of determination.
The administrator will determine that a mortgage loan is in arrears if
the result arrived at by dividing that difference (if any) by the amount of
the required monthly payment equals or exceeds 1. A mortgage loan will
continue to be in arrears for each calendar month in which the result of the
foregoing arrears calculation equals or exceeds 1, which result means that the
borrower has missed payments that in the aggregate equal or exceed one monthly
payment, and subsequent payments by that borrower (if any) have not reduced
the amount of missed payments to less than one monthly payment. As the
administrator determines its arrears classification based upon the number of
full monthly payments that have been missed by a borrower, a borrower that has
missed payments that in the aggregate equal or exceed 2 monthly payments (but
for which the aggregate of missed payments is less than 3 monthly payments)
would be classified by the administrator as being between 2-3 months in
arrears, and so on. For example, suppose a borrower has made four monthly
payments (either in consecutive months or throughout any period of time) each
in an amount less than the required monthly amount, and the difference, for
the purposes of arrears calculation, between the sum of the payments due and
payable by that borrower and the sum of the payments actually made by that
borrower (that difference then divided by that borrower's required monthly
payment) is less than 1. The administrator would not classify that borrower as
being in arrears. However, if that borrower makes another payment (for the
purposes of our example, on the payment date in January of a particular year)
that is less than the required monthly amount and which deficient payment,
when aggregated with that borrower's prior deficient payments, results in the
foregoing arrears calculation equalling or exceeding 1, that borrower will be
classified as being one month in arrears as of February 1 of that same year.
Furthermore, if the result of the foregoing arrears calculation continues to
equal or exceed 1 (but remains less than 2) until March 1 of that same year,
that borrower will continue to be classified as being one month in arrears
during that time period. The administrator will not classify the borrower as
being two months in arrears until the beginning of the month following the
monthly payment date in which the result of the arrears calculation equals or
exceeds 2.
This formula that the administrator uses to determine arrears means
that there may be mortgage loans in the mortgage portfolio on which borrowers
have paid less than the monthly payment due, but which have not been
classified as being in arrears, as the aggregate of the amount of deficient
payments does not equal or exceed one monthly payment. This also means that
there may be a significant period of time between the due date on which a
borrower pays less than the monthly payment due on that due date and the date
that the aggregate amount of those deficient payments equals or exceeds one
monthly payment, at which time the administrator will classify that mortgage
loan as being in arrears. In addition, there may be a significant period of
time between the classification of a borrower as being, for example, one month
in arrears, and (assuming the borrower continues to make deficient monthly
payments) the time at which those deficient payments in the aggregate result
in the administrator classifying the borrower as being two months in arrears.
The arrears are reported at each calendar month end. After the
arrears are first reported the borrower is contacted and asked for payment of
the arrears. The administrator will continue to contact the borrower asking
for payment of the arrears. The administrator classifies a mortgage loan that
is in arrears as "non-performing" if the related borrower has not made any
payment within any of the three consecutive calendar months prior to the date
of determination.
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In the case of any flexible and non-flexible mortgage loan and
subject to the terms and conditions of the mortgage loan arrears are
capitalized upon receipt of three consecutive full monthly payments.
In seeking to control and manage arrears, the administrator from time
to time enters into arrangements with borrowers regarding the arrears,
including:
o arrangements to make each monthly payment as it falls due plus
an additional amount to pay the arrears over a period of time;
o arrangements to pay only a portion of each monthly payment as
it falls due; and
o a deferment for a period of time of all payments, including
interest and principal or parts of any of them.
The administrator may vary any of these arrangements from time to
time at its discretion, the primary aim being to rehabilitate the borrower and
recover the arrears.
Legal proceedings do not usually commence until the arrears are equal
to at least three times the monthly payment then due. However, in many cases
legal proceedings may commence later than this. Once legal proceedings have
commenced, the administrator may send further letters to the borrower
encouraging the borrower to enter into discussions to pay the arrears. The
administrator may still enter into an arrangement with a borrower at any time
prior to a court hearing, or it may adjourn a court hearing. If the
administrator applies to the court for an order for possession following a
default of the borrower, the court has discretion as to whether it will grant
the order requiring the borrower to vacate the mortgaged property, and
discretion as to the terms upon which the order is granted. If after the
possession order has been granted the borrower does not voluntarily vacate the
property, then the administrator will be required to request a warrant for
execution by a court officer of the possession order. On average, the
equivalent of 12 monthly payments may have been missed prior to the
administrator obtaining possession, assuming no prior mortgage or the
imposition of defenses. Where a court order for possession is deferred to
allow time for payment and the borrower subsequently defaults in making the
payment, the administrator may take any action it considers appropriate,
including entering into an arrangement with the borrower. In all cases, the
administrator has a duty of care to the borrower to act reasonably.
The administrator has discretion to deviate from these arrears
procedures. In particular, the administrator may deviate from these procedures
where a borrower suffers from a mental or physical infirmity, is deceased or
where the borrower is otherwise prevented from making payment due to causes
beyond the borrower's control. This is the case for both sole and joint
borrowers.
After the administrator has been granted possession, the
administrator may take any action it considers appropriate, subject to any
fiduciary duties which the administrator may owe to the borrower, including
but not limited to:
o securing, maintaining or protecting the property and putting it
into a suitable condition for sale;
o creating (other than in Scotland) any estate or interest on the
property, including a leasehold; o disposing of the property
(in whole or in parts) or of any interest in the property, by
auction, private sale or otherwise, for a price it considers
appropriate; and
o letting the property for any period of time.
Subject as provided above, the administrator has discretion as to the
timing of any of these actions, including whether to postpone the action for
any period of time. The administrator may also carry out works on the property
as it considers appropriate, including the demolition of the whole or any part
of it.
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The period between the administrator obtaining possession and sale of
a mortgaged property is generally between three and nine months. However, you
should note that the administrator's ability to exercise its power of sale in
respect of a mortgaged property is dependent upon mandatory legal restrictions
as to notice requirements. In addition, there may be factors outside the
administrator's control, such as whether the borrower contests the sale and
the market conditions at the time of sale, that may affect the length of time
between the administrator's decision to exercise its power of sale and final
completion of the sale.
The administrator will apply the net proceeds of sale of the
mortgaged property against the sums owed by the borrower to the extent
necessary to discharge the mortgage including any accumulated fees and
interest. Where those proceeds are insufficient to cover all amounts owing
under the mortgage loan, the administrator will make a claim under the MIG
policy, if appropriate. Where the funds arising from application of these
procedures are insufficient to pay all amounts owing in respect of a mortgage
loan, the funds are applied first in paying principal, and secondly in paying
interest and costs.
At this point the administrator will close the borrower's account.
However, the borrower remains liable for any deficit remaining after the
mortgaged property is sold but before the proceeds of any MIG insurance are
applied. The administrator may pursue the borrower to the extent of any
deficiency resulting from the sale if the administrator deems it appropriate
to do so.
These arrears and security enforcement procedures may change over
time as a result of a change in the administrator's business practices,
legislative or regulatory changes or business codes of practice.
Arrears experience
Each prospectus supplement relating to the issuance of a series and
class of notes will contain tables summarizing, in respect of the seller's
overall mortgage portfolio, then up-to-date information on the seller's
experience administering mortgage loans in arrears and its repossession
experience for residential mortgage loans originated by the seller. The tables
will include information in respect of the seller's experience in
administering mortgage loans secured by mortgaged properties located in
England, Wales and Scotland.
There can be no assurance that the arrears and repossession
experience with respect to the mortgage loans comprising the trust property
will correspond to the experience of the administrator's overall mortgage
portfolio. Moreover, if the property market experiences an overall decline in
property values so that the value of the properties in the trust falls below
the current balances of the mortgage loans comprising the overall pool, the
actual rates of arrears and repossessions could be significantly higher than
those previously experienced by the administrator. In addition, other adverse
economic conditions, whether or not they affect property values, may
nonetheless affect the timely payment by borrowers of principal and interest
and, accordingly, the rates of arrears, repossessions and losses with respect
to the mortgage loans in the trust property. You should note that the United
Kingdom experienced relatively low and stable interest rates during the
periods covered in the preceding tables. If interest rates were to rise, it is
likely that the rate of arrears and repossessions likewise would rise.
Northern Rock's level of mortgage arrears has been on a downward
trend since the recession in the UK in the early 1990s. Between June 1996 and
December 2000, interest rate increases, and the reduction (and ultimate
elimination) of benefits offered by the Mortgage Interest Relief At Source
scheme, have contributed to slowing that downward trend.
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House price inflation has indirectly contributed to the improved
arrears situation by enabling borrowers to sell at a profit if they encounter
financial hardship. Recently, house price inflation has broken through its
historical upward trend line and is expected to moderate. If it does not, then
there is potential for a boom-bust situation similar to that which occurred in
the period from 1988 to 1990, where housing prices rose substantially faster
than inflation as housing turnover increased to record levels. At that time,
the UK economy grew rapidly, which led to falling unemployment and relatively
high rates of real income growth. These fed into higher demand for housing and
house prices rose rapidly. Demand was further increased by changes in taxation
legislation with regard to tax relief on mortgage payments in 1988. When
monetary policy was tightened subsequently (in terms of both "locking in"
sterling to the European Exchange Rate Mechanism and higher interest rates),
the pace of economic activity first slowed and then turned into recession.
Rising unemployment combined with high interest rates led to a fall in housing
demand and increased default rates and repossessions. The ability of borrowers
to refinance was limited as house prices began to fall and many were in a
position of negative equity (borrowings greater than the resale value of the
property) in relation to their mortgage.
The performance of Northern Rock's new business and the arrears
profiles are monitored monthly against various triggers. Whenever arrears rise
and a trigger is exceeded the cause is reviewed and acted upon. In a
continuing effort to reduce the level of mortgage arrears and to improve
collection performance, Northern Rock has developed behavioral scoring systems
to target differing groups of customers in arrears according to risk.
For statistical information on the levels of arrears experience for
the mortgage loans in the administrator's mortgage portfolio see the
prospectus supplement for the notes you are considering an investment in.
The administration agreement
The following section describes, in summary, the material terms of
the administration agreement. The description does not purport to be complete
and is subject to the provisions of the administration agreement, a form of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
Appointment
On March 26, 2001, each of the mortgages trustee, Funding and the
seller appointed Northern Rock under the administration agreement to be their
agent to exercise their respective rights, powers and discretions in relation
to the mortgage loans and their related security and to perform their
respective duties in relation to the mortgage loans and their related
security. On the Funding 2 program date, Funding 2 became a party to the
administration agreement and appointed Northern Rock to exercise its rights,
power and discretions in relation to the mortgage loans and their related
security and to perform its duties in relation to the mortgage loans and their
related security. The Funding 2 security trustee also became party to the
administration agreement on the Funding 2 program date and has consented to
the appointment. The administrator will continue to administer mortgage loans
which have not been assigned to the mortgages trustee. The administrator has
agreed to administer the mortgage loans assigned to the mortgages trustee in
the same manner as it administers mortgage loans which have not been assigned
to the mortgages trustee but remain on the books of the seller.
Subject to the provisions of the administration agreement, the
mortgage loans, the mortgages and the transaction documents, the administrator
has the power to do or cause to be done any and all things which it reasonably
considers necessary, convenient or incidental to the administration of the
mortgage loans and their related security or the exercise of such rights,
powers and discretions.
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The administrator has agreed to comply with any reasonable
directions, orders and instructions which any of the mortgages trustee,
[Funding, Funding 2] or the seller may from time to time give to it in
accordance with the provisions of the administration agreement (and, in the
event of any conflict, those of the mortgages trustee shall prevail).
The administrator has agreed to administer and service the mortgage
loans and their related security in accordance with:
o the terms and conditions of the mortgage loans and the mortgages;
o the administrator's administration procedures. The
administrator's administration procedures are the
administration, arrears and enforcement policies and procedures
from time to time pursuant to which the administrator
administers and enforces mortgage loans and their related
security which are beneficially owned by the seller; and
o the terms and provisions of the administration agreement.
Undertakings by the administrator
Under the administration agreement, the administrator has undertaken,
among other things:
(A) to determine and set the interest rates applicable to the mortgage
loans which have been assigned to the mortgages trustee including the
standard variable rate, except in the limited circumstances set out
in the administration agreement when the mortgages trustee, [Funding,
Funding 2 and/or the security trustee and/or the Funding 2 security
trustee] will be entitled to do so. The administrator may not at any
time, without the prior consent of the mortgages trustee, [Funding,
Funding 2 and the security trustee and/or the Funding 2 security
trustee], set or maintain the standard variable rate and other
discretionary rates or margins for mortgage loans which form part of
the mortgages trust at rates which are higher than the then
prevailing rates for mortgage loans which are beneficially owned by
the seller outside the mortgages trust;
(B) to determine on each payment date, having regard to the aggregate of:
(1) the income which Funding and Funding 2 would expect to receive
during the next succeeding interest period;
(2) the standard variable rate for mortgage loans forming part of
the mortgages trust and the variable mortgage rates in respect
of such mortgage loans which the administrator proposes to set
under the administration agreement; and
(3) all other resources available to Funding and Funding 2 including
(in the case of Funding 2) the Funding 2 reserve fund, the
Funding 2 liquidity reserve fund, if any; and
whether:
(i) Funding would receive an amount of income during that loan
interest period which is less than the amount which is the
aggregate of (a) the amount of interest which will be
payable by Funding in order to fund (whether by payment to
a swap provider or otherwise) the amount of interest
payable in respect of the class A notes of the Funding
issuers and all amounts ranking higher in priority to such
amounts on the payment date falling at the end of that
loan interest period and (b) all other amounts payable by
Funding which rank equally with or in priority to interest
due on the intercompany loan in respect of interest which
is payable on the class A notes of the Funding issuers;
and
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(ii) Funding 2 would receive an amount of income during that
loan interest period which is less than the amount which
is the aggregate of (a) the amount of interest which will
be payable by Funding 2 in order to fund (whether by
payment to a swap provider or otherwise) the amount of
interest payable in respect of the class A notes of the
issuer and all amounts ranking higher in priority to such
amounts on the payment date falling at the end of that
loan interest period and (b) all other amounts payable by
Funding 2 which rank equally with or in priority to
interest due on the global intercompany loan in respect of
interest which is payable by the issuer on the class A
notes.
If the administrator determines that there will be a revenue
shortfall in the foregoing amounts, it will give written notice to
the mortgages trustee, [Funding, Funding 2, the security trustee and
the Funding 2 security trustee], within one London business day of
such determination, of the amount of the revenue shortfall and
recommend the standard variable rate and the other discretionary
rates or margins which would, in the administrator's opinion, need to
be set in relation to the mortgage loans within the mortgages trust
in order for no revenue shortfall to arise, having regard to the
obligations of Funding 2 and/or Funding, as applicable. If the
mortgages trustee, [Funding, Funding 2 and/or the security trustee
and/or the Funding 2 security trustee] notify the administrator that,
having regard to the obligations of Funding and Funding 2, the
standard variable rate and the other discretionary rates or margins
for mortgage loans within the mortgages trust should be increased,
the administrator will take all steps which are necessary including
publishing any notice required under the mortgage conditions to
effect such increase in those rates or margins. The mortgages
trustee, [Funding, Funding 2 and/or the security trustee and/or the
Funding 2 security trustee] may terminate the authority of the
administrator to set the standard variable rate and the other
discretionary rates or margins applicable to mortgage loans included
in the mortgages trust in certain limited circumstances set out in
the administration agreement including upon the occurrence of any
administrator termination event (as described below), in which case
the mortgages trustee shall set such standard variable rate and the
other discretionary rates or margins;
(C) except as provided in relation to re-fixed mortgage loans, not to
issue to any borrower an offer for a further advance or a product
switch without having received confirmation that the seller has
elected to purchase the relevant mortgage loan(s) together with its
related security from the mortgages trustee in accordance with the
terms of the mortgage sale agreement;
(D) sixty days prior to the end of the relevant fixed rate period in
respect of any fixed rate mortgage loan included in the mortgages
trust and on behalf of the mortgages trustee, to offer to re-sell to
the seller all fixed rate mortgage loans which become "re-fixed"
during the three month period immediately following the end of the
then current fixed rate period. Where any "re-fix" takes place this
will constitute a product switch as described above and if the seller
does not purchase such mortgage loans and their related security, the
administrator will take all steps to set the existing borrowers'
re-fix rate at the higher of the rate recommended by the
administrator (having regard to the obligations of Funding and
Funding 2), the rate notified to it by the mortgages trustee
[,Funding and Funding 2] and the rates notified to it by the trustee
or trustees of any other securitizations of the seller which include
fixed rate mortgage loans;
(E) to take all steps necessary under the mortgage conditions and
applicable law to notify borrowers of each change in interest rates,
whether due to a change in the standard variable rate (including any
such change effected at the request of the mortgages trustee,
Funding, Funding 2, the security trustee and/or the Funding 2
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security trustee) or as a consequence of the mortgage conditions. The
administrator will also notify the mortgages trustee, Funding,
Funding 2, the security trustee and the Funding 2 security trustee of
any change in the standard variable rate;
(F) to maintain such records as are necessary to enforce each mortgage
loan and its related security and to keep and maintain, on a loan by
loan basis, records and accounts on behalf of the mortgages trustee
in relation to the mortgage loans;
(G) to keep or cause to be kept the mortgage loan files and title deeds
in safe custody and to the order of the mortgages trustee, [Funding,
Funding 2, the security trustee and/or the Funding 2 security
trustee] and in such a manner that they are readily identifiable and
accessible;
(H) to provide the mortgages trustee, [Funding, Funding 2, the security
trustee and/or the Funding 2 security trustee] and their agents with
access to the title deeds and mortgage loan files at all reasonable
times;
(I) to assist the cash manager in the preparation of a quarterly report
substantially in the form set out in the cash management agreement
on, among other things, arrears. The administrator will regularly
give to the mortgages trustee and the beneficiaries written details
of mortgage loans that are in arrears;
(J) to take all reasonable steps to collect and recover payments due
under or in respect of the mortgage loans and the related security,
including instituting proceedings and enforcing any relevant mortgage
loan, mortgage or any other related security in accordance with the
seller's administration procedures but having regard to the
circumstances of the relevant borrower in each case; and
(K) to not knowingly fail to comply with any legal requirements in the
performance of its obligations under the administration agreement.
Collection of payments
The administrator has undertaken to ensure that all payments due
under the mortgage loans which are included in the trust property will be made
by the relevant borrower by direct debit or, if such payment is late or
borrowers choose not to pay by direct debit, by check or other means into
accounts in the name of the administrator held with Barclays Bank plc, City
Group Office, Percy Street, Newcastle upon Tyne NE99 1JP and Lloyds TSB Bank
plc, City Office, Bailey Drive, Gillingham Business Park, Kent ME8 0LS (each a
"collection bank") and other accounts (each a "collection account") which the
administrator may utilize from time to time in accordance with the collection
bank agreement and the administration agreement, all of which will be held on
trust by the seller.
The administrator has agreed to use its reasonable endeavors to
credit any monthly payment made by a borrower to the relevant collection
account within the following time limits:
o in the case of direct debit payment, by close of business on the
London business day which immediately follows the day on which
such amounts are received;
o in the case of standing order, by close of business on the
second London business day following the day on which such
amounts are received;
o in the case of payment by cash, transfer payment from another
account of the seller or check where reference to the relevant
borrower is provided or payment made by way of paying-in book,
by close of business on the London business day which
immediately follows the day on which such amounts are received;
and
o in the case of any payment by check where a reference to the
relevant borrower is not provided, by close of business on the
next London business day after notification from the relevant
collection bank of the identity of the borrower,
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provided, however, that in any event the administrator has agreed to credit
monthly payments made by a borrower to the relevant collection account within
three London business days of receiving that monthly payment.
Payments from borrowers under mortgage loans originated by the seller
which are not intended to be assigned to the mortgages trustee are also paid
into and flow through the collection accounts.
Amounts paid into the collection accounts are held on trust by the
administrator for the relevant beneficiaries including the mortgages trustee.
The trusts in favor of the mortgages trustee are in respect of all amounts
credited to the collection accounts which represent receipts in respect of
mortgage loans which are assigned to the mortgages trustee and included in the
trust property.
The collection accounts are operated by the administrator in
accordance with the collection bank agreement. Under the collection bank
agreement, until the collection banks receive notice that, amongst other
things, a global intercompany loan enforcement notice has been served or that
the appointment of the administrator has been terminated, each collection bank
has agreed to operate the collection accounts in accordance with the
instructions of the administrator. If the short term, unsecured, unguaranteed
and unsubordinated debt obligations of Barclays Bank plc or Lloyds TSB Bank
plc are not rated at least "A-1+" by Standard & Poor's, "P-1" by Moody's and
"F1+" by Fitch, the administrator will arrange for the transfer of the credit
balance on such accounts to another bank which has the required ratings. The
long term and short term, unsecured, unguaranteed and unsubordinated debt
obligations of Barclays Bank plc and Lloyds TSB Bank plc are rated as of the
cut-off date "AA" and "A-1+" and "AA" and "A-1+", respectively, by Standard &
Poor's, "Aa1" and "P-1" and "Aaa" and "P-1", respectively, by Moody's and
"AA+" and "F1+" and "AA+" and "F1+", respectively, by Fitch. Amounts standing
to the credit of the collection accounts that represent amounts collected in
respect of mortgage loans that have been assigned to the mortgages trust are
transferred by the administrator to the mortgages trustee transaction account
every three London business days.
Amounts standing to the credit of the mortgages trustee transaction
account are transferred (subject to retaining a minimum balance of (GBP)1 in
such account) on a weekly basis by the cash manager to the mortgages trustee
GIC account or, at the cash manager's option, invested in authorized
investments, provided that the yield on those authorized investments expressed
as an annual percentage rate of return is not less than the interest rate on
the mortgages trustee GIC account at the time the investment decision is made.
Any amounts invested in authorized investments, including the interest accrued
on such amounts, are transferred to the mortgages trustee GIC account on the
related distribution date.
In the case of monthly payments which are made by direct debit, the
administrator initially credits the applicable collection account with the
full amount of the direct debit. If an unpaid direct debit is returned in
circumstances where the administrator has credited to the mortgages trustee
transaction account the amount of the monthly payment, the administrator is
permitted to reclaim from the mortgages trustee transaction account the
corresponding amounts previously credited.
Any amount standing to the credit of the mortgages trustee GIC
account accrues interest at a margin below LIBOR for three-month sterling
deposits.
Redemption
Under the administration agreement, the administrator is responsible
for handling the procedures connected with the redemption of mortgage loans
and is authorized to release the relevant title deeds to the person or persons
entitled thereto upon redemption.
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Fees
The administrator is entitled to receive a fee for servicing the
mortgage loans. On each distribution date the mortgages trustee pays to the
administrator an administration fee of 0.08% per annum (inclusive of VAT) on
the amount of the Funding share and the Funding 2 share of the trust property
as determined on that distribution date in respect of the then current trust
calculation period, but only to the extent that the mortgages trustee has
sufficient funds to pay such amount in accordance with the mortgages trust
allocation of revenue receipts. The unpaid balance (if any) is carried forward
until the next succeeding distribution date and, if not paid before such time,
is payable on the later of (i) latest occurring final repayment date of the
Funding intercompany loans, or on their earlier repayment in full by Funding
or (ii) the final repayment date of the global intercompany loan, or on its
earlier repayment in full by Funding 2. The administration agreement also
provides for the administrator to be reimbursed for all reasonable
out-of-pocket expenses and charges properly incurred by the administrator in
the performance of its services under the administration agreement.
Removal or resignation of the administrator
The appointment of the administrator may be terminated by the
mortgages trustee, [Funding, Funding 2 the security trustee or the Funding 2
security trustee] immediately upon written notice to the administrator, on the
occurrence of certain events (each an "administrator termination event")
including:
o the administrator fails to pay any amount due and payable by it
and such failure is not remedied for a period of 5 London
business days after the administrator becomes aware of the
default;
o subject as provided further in the transaction documents, the
administrator fails to comply with any of its other material
obligations under the administration agreement which in the
opinion of the [security trustee/Funding 2 security trustee] is
materially prejudicial to the interests of the holders of the
notes, and such failure is not remedied for a period of 20 days
after the administrator becomes aware of the default;
o if at any time required under any UK mortgage regulatory regime
the administrator fails to obtain or maintain the necessary
license or regulatory approval enabling it to continue
administering mortgage loans; or
o the occurrence of an insolvency event in relation to the
administrator.
Upon termination of the administrator, the [security trustee/Funding
2 security trustee] will agree to use its reasonable endeavors to appoint a
substitute administrator.
In addition, subject to the fulfillment of certain conditions
including, without limitation, that a substitute administrator has been
appointed by the mortgages trustee, [Funding, Funding 2, the security trustee
and the, Funding 2, security trustee] (and in the event of failure to agree,
by the [security trustee/Funding 2 security trustee]), the administrator may
voluntarily resign by giving not less than 12 months' notice of termination to
the mortgages trustee, [Funding, Funding 2] and the seller.
Any such substitute administrator (whether appointed upon a
termination of the appointment of, or the resignation of, the administrator)
is required to:
o if possible, have experience administering mortgage loans
secured on residential mortgaged properties in England, Wales
and Scotland; and
o enter into an agreement on substantially the same terms as the
provisions of the administration agreement.
In addition, the then current ratings (if any) of the notes, the
previous notes or any new notes may not adversely be affected as a result of
the appointment of the substitute
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administrator, unless otherwise agreed by an extraordinary resolution of the
holders of the relevant class of notes.
Forthwith upon termination of the appointment of the administrator,
the administrator must deliver the title deeds, the mortgage loan files and
all books of account and other records maintained by the administrator
relating to the mortgage loans and/or the related security to, or at the
direction of, the mortgages trustee.
The administration agreement will terminate automatically upon a
termination of the mortgages trust when neither Funding nor Funding 2 has any
interest in the trust property.
Delegation by the administrator
The administrator may, in some circumstances including with the prior
written consent of the mortgages trustee, [Funding and Funding 2 and after
consultation with the security trustee and the Funding 2 security trustee],
delegate or subcontract the performance of any of its obligations or duties
under the administration agreement. Upon the appointment of any such delegate
or sub-contractor the administrator will nevertheless remain responsible for
the performance of those duties to Funding, Funding 2, the mortgages trustee
and the security trustee and the Funding 2 security trustee.
Delegation by the Funding 2 security trustee to an authorized third party
Subject as provided in the transaction documents, the Funding 2
security trustee is entitled pursuant to the administration agreement to
delegate certain of its functions and rights under the transaction documents
to one or more authorized third parties whom the rating agencies have
previously confirmed in writing to the Funding 2 security trustee and the
issuer will not result in the ratings on the notes being downgraded, qualified
or withdrawn. The Funding 2 security trustee is obliged to use reasonable
endeavors to procure the appointment of an authorized third party and in the
event of any such appointment is not required to monitor or supervise the
third party's performance and is not responsible for any act or omission of
such third party or for any loss caused thereby.
Governing law
The administration agreement is governed by English law.
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Assignment of the mortgage loans and related security
The following section describes, in summary, the material terms of
the mortgage sale agreement. The description does not purport to be complete
and is subject to the provisions of the mortgage sale agreement, a form of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
The mortgage sale agreement
Under the mortgage sale agreement dated March 26, 2001 entered into
between the seller, the mortgages trustee, the security trustee and Funding,
the seller assigned the initial mortgage portfolio together with all related
security to the mortgages trustee. The mortgage sale agreement has been
amended and restated on certain dates subsequent to the initial closing date,
and the seller has assigned further mortgage portfolios with all related
security to the mortgages trustee pursuant to such amended and restated
mortgage sale agreement. On the Funding 2 program date, Funding 2 became a
party to the amended and restated mortgage sale agreement. In addition to
providing for the assignment of the initial mortgage portfolio and the further
mortgage portfolios and related security, the mortgage sale agreement also
sets out or provides for the following:
o the representations and warranties given by the seller in
relation to the mortgage loans and the related security (and the
representations and warranties to be given by the seller as of
each assignment date in relation to any new mortgage loans and
the related security assigned to the mortgages trustee on that
assignment date);
o the assignment of other mortgage loans and their related
security to the mortgages trust;
o (i) the purchase of mortgage loans together with their related
security which are subject to a product switch or in respect of
which a further advance is made or where the borrower takes a
personal secured loan or (ii) the repurchase of mortgage loans
together with their related security where the seller has
breached any of its representations and warranties in respect of
such mortgage loans or their related security (the repurchase to
include all mortgage loans of a borrower included in the trust
property, including personal secured loans, if such a breach
occurs in respect of any mortgage loan of such borrower);
o the making of re-draws in respect of flexible mortgage loans
contained in the trust property; and
o the circumstances for the transfer of legal title to the
mortgage loans to the mortgages trustee.
In relation to Scottish mortgage loans, the mortgage sale agreement
provides for the transfer and assignment of the beneficial interest in such
mortgage loans and their related security to be effected by a declaration of
trust by the seller in favour of the mortgages trustee and for the transfer
and assignment of the beneficial interest in any other Scottish mortgage loans
and their related security to be effected by further declarations of trust
(and in relation to Scottish mortgage loans, references in this prospectus to
the "assignment" of mortgage loans are to be read as references to the
transfer of the beneficial interest therein by the making of such declarations
of trust and the terms "assign" and "assigned" shall in that context be
construed accordingly) (see "-Transfer of legal title to the mortgages
trustee").
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Representations and warranties
The mortgage sale agreement contains representations and warranties
given by the seller to the mortgages trustee, Funding , Funding 2, the
security trustee and the Funding 2 security trustee in relation to each
mortgage loan assigned, or to be assigned, to the mortgages trustee pursuant
to that agreement (except as otherwise provided below). None of the mortgages
trustee, Funding, Funding 2, the security trustee, the Funding 2 security
trustee or the issuer have carried out or will carry out any searches,
inquiries or independent investigations of the type which a prudent purchaser
or mortgagee would normally be expected to carry out. Each is relying entirely
on the seller's representations and warranties under the mortgage sale
agreement. The seller's material warranties under the mortgage sale agreement
include, among others, substantially the following:
o subject to completion of any registration which may be pending
at H.M. Land Registry or the Registers of Scotland, the seller
is the absolute legal and beneficial owner of the mortgage
loans, the related security and all property to be sold by the
seller pursuant to the mortgage sale agreement;
o each related mortgage secures the repayment of all advances,
interest, costs and expenses payable by the relevant borrower to
the seller under the relevant mortgage loan in priority to any
other charges registered against the relevant property;
o subject to completion of any registration which may be pending
at H.M. Land Registry (in England and Wales) or the Registers of
Scotland (in Scotland), each mortgage (other than a mortgage in
respect of a personal secured loan) either constitutes, or will
constitute, following registration at H.M. Land Registry or the
Registers of Scotland, (in England and Wales) a first ranking
charge by way of legal mortgage or (in Scotland) a first ranking
standard security over the relevant mortgaged property;
o each relevant mortgaged property is located in England, Wales
or Scotland;
o prior to making each mortgage loan, the seller instructed or
required to be instructed on its behalf solicitors to carry out
all investigations, searches and other actions in relation to
the relevant mortgaged property that would have been undertaken
by the seller acting in accordance with standards consistent
with those of a reasonable and prudent mortgage lender, lending
to borrowers in England and Wales or Scotland, as applicable,
when advancing money in an amount equal to such advance to an
individual to be secured on a mortgaged property of the kind
permitted under the lending criteria;
o the seller's lending criteria are consistent with the criteria
that would be used by a reasonable and prudent mortgage lender;
o in relation to each mortgage loan, the borrower has a good and
marketable title to the relevant mortgaged property;
o prior to making a mortgage loan, an independent valuer from the
panel of valuers appointed by the seller or an employee valuer
of the seller valued the relevant mortgaged property, and the
results of such valuation would be acceptable to a reasonable
and prudent mortgage lender;
o prior to making a mortgage loan, the nature and amount of such
mortgage loan, the circumstances of the relevant borrower and
nature of the relevant mortgaged property satisfied the lending
criteria in force at that time in all material respects;
o no payment of interest (or in the case of repayment mortgage
loans, principal and interest) equivalent to an amount in excess
of one month's installment at the applicable rate in respect of
a mortgage loan was at any time during the 12 months before the
relevant closing or assignment date, as the case may be, in
arrears;
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o so far as the seller is aware, no borrower is in material
breach of its mortgage loan;
o the first payment due has been paid by the relevant borrower in
respect of each mortgage loan and each mortgage loan is fully
performing;
o each insurance contract arranged by the seller in respect of any
mortgaged property is in full force and effect and all premiums
due on or before the date of the mortgage sale agreement have
been paid in full and the seller is not aware of any
circumstances giving the insurer under any such insurance
contract the right to avoid or terminate such policy in so far
as it relates to the mortgaged properties or the mortgage loans;
o where the lending criteria required that a mortgage loan was
covered by a MIG insurance contract with NORMIC, that mortgage
loan is covered by such an insurance contract;
o the seller has procured that full and proper accounts, books and
records have been kept showing clearly all material
transactions, payments, receipts and proceedings relating to
that mortgage loan and its mortgage;
o each borrower is a natural person, and no borrower is, as of the
assignment date, an employee or an officer of the seller;
o all formal approvals, consents and other steps necessary to
permit a legal or an equitable or beneficial transfer or a
transfer of the servicing away from the seller of the mortgage
loans and their related mortgages to be sold under the mortgage
sale agreement have been obtained or taken and there is no
requirement in order for such transfer to be effective to notify
the borrower before, on or after any such equitable or
beneficial transfer or before any legal transfer of the mortgage
loans and their related mortgages;
o in relation to any cashback mortgage loan, the seller paid to
the relevant borrower the full amount of the cashback payment
either upon completion of the relevant mortgage loan or, if
subsequent to completion, prior to the assignment of such
mortgage loan to the mortgages trustee;
o no mortgage loan has a current balance of more than (GBP)500,000;
o in respect of any mortgage loan where the borrower also has a
personal secured loan or in respect of any personal secured
loan, the combined LTV of the maximum amount of credit provided
under such personal secured loan and other mortgage loans
secured on the same property is not greater than 95 per cent.;
o each mortgage loan was originated by the seller in sterling and
is denominated in sterling (or was originated and is denominated
in euro at any time when the euro has been adopted as the lawful
currency of the UK) and is currently repayable in sterling.
Notwithstanding the foregoing, the above representations and
warranties in respect of each mortgage loan will not apply in their entirety
to personal secured loans.
Repurchase by the seller
The seller has agreed in the mortgage sale agreement to repurchase
any mortgage loan together with its related security in the circumstances
described below.
If a mortgage loan (including any personal secured loan) its related
security does not materially comply on the date of its assignment with the
representations and warranties given by the seller under the mortgage sale
agreement and the seller does not remedy such breach within 28 days of
receiving written notice of such breach from any of the mortgages trustee,
[Funding, Funding 2, the security trustee or the Funding 2
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security trustee], then, at the direction of [Funding, Funding 2, the security
trustee or the Funding 2 security trustee], the seller must repurchase from
the mortgages trustee (i) the relevant mortgage loan and its related security
and (ii) any other mortgage loans (including any personal secured loans) of
the relevant borrower and their related security that are included in the
trust property.
For so long as the seller is the administrator it must notify the
mortgages trustee, [Funding, Funding 2, the security trustee and the Funding 2
security trustee] of any material breach of a warranty as soon as the
administrator becomes aware of such breach.
The repurchase price payable upon the repurchase of any mortgage loan
and its related security is an amount (not less than zero) equal to the
current balance on such mortgage loan as of the date of completion of such
repurchase plus all unpaid interest (including all accrued interest and
arrears of interest) and expenses payable thereon to the date of repurchase.
If the seller fails to pay the consideration due for any repurchase or
otherwise fails to complete such repurchase in accordance with the terms of
the mortgage sale agreement, then the seller share of the trust property shall
be deemed to be reduced by an amount equal to that consideration. If on any
date on which the seller is obliged to repurchase any mortgage loan or
mortgage loans pursuant to the mortgage sale agreement, the seller assigns new
mortgage loans together with their related security to the mortgages trustee
in accordance with the terms of the mortgage sale agreement (as described
below), the seller shall be entitled to set-off against the repurchase price
payable by it on such repurchase the amount of any initial purchase price
payable for any such new mortgage loans and shall pay or be paid a net amount.
Product switches, further advances and personal secured loans
Except as described below with respect to re-fixed mortgage loans,
under the mortgage sale agreement, the mortgages trustee has agreed not to
(and has agreed to procure that the administrator does not) issue to a
borrower an offer for a further advance or a product switch without having
received confirmation from the seller that it has elected to purchase the
relevant mortgage loan together with its related security in accordance with
the terms of the mortgage sale agreement. Upon receipt of such confirmation
the mortgages trustee (or the administrator on behalf of the mortgages
trustee) may then issue an offer for a further advance or a product switch and
accept the mortgage documentation duly completed by the borrower. The
mortgages trustee may not itself make any further advance or product switch
(other than in relation to a re-fixed mortgage loan).
A mortgage loan will be subject to a "product switch" if there is any
variation of the financial terms and conditions of the mortgage loan other
than:
o a variation in the financial terms and conditions of the
mortgage loan involving a permitted product switch (as described
below);
o a change between interest-only and repayment mortgage loans;
o a transfer of equity;
o a release of a party to a mortgage loan or a release of part of
the land subject to the mortgage;
o any variation agreed with borrowers to control or manage
arrears on a mortgage loan;
o any variation which extends the maturity date of the mortgage
loan unless, while the global intercompany loan is outstanding,
it is extended beyond January 2044;
o any variation imposed by statute; and
o any variation of the interest rate payable where that rate is
offered to the borrowers of more than 10% by current balance of
the mortgage loans in the trust property in any interest period.
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A "permitted product switch" is a variation in the financial terms
and conditions of a mortgage loan in which a borrower exchanges its then
current mortgage loan product for a different mortgage loan product offered by
the seller, provided that the related borrower has made at least one monthly
payment on its then current mortgage loan product, and provided further that
the new mortgage loan for which the prior mortgage loan is to be exchanged is
a permitted replacement mortgage loan. A "permitted replacement mortgage loan"
is a mortgage loan:
o that is subject to a variable rate of interest; and
o that has a maturity date prior to January 2039.
In addition, each of the conditions for the assignment of new
mortgage loans and their related security as set forth under "- Assignment of
new mortgage loans and their related security" must be satisfied in order for
a permitted product switch to occur, provided that conditions (a), (c), (k),
(n) and (o) in that section will only be required to have been satisfied on
the date of the most recent assignment of mortgage loans to the mortgages
trust. The purchase obligations of the seller set forth under "- Repurchase by
the seller" will continue to apply to any permitted replacement mortgage loan.
A mortgage loan will be subject to a "further advance", for the
purposes of this prospectus, if an existing borrower requests further monies
to be advanced to him or her under a mortgage loan either in circumstances
which do not amount to a re-draw under a flexible loan or where such mortgage
loan is not a flexible mortgage loan, and in either case such request is
granted.
Except as provided below with respect to re-fixed mortgage loans, if
the administrator and the mortgages trustee are notified or are otherwise
aware that a borrower has requested a further advance or a product switch and
the mortgages trustee has received confirmation of the seller's election to
purchase the mortgage loan and its related security, the mortgages trustee
shall at any time upon notice from the seller assign to the seller and the
seller shall purchase such mortgage loan together with its related security in
accordance with the mortgage sale agreement at a price not less than the
current balance on such mortgage loan as of the date of completion of such
purchase plus all unpaid interest (including all accrued interest and arrears
of interest) and expenses payable on such mortgage loan to the date of
purchase.
In the case of fixed rate mortgage loans, a borrower may have the
right, under the terms of such fixed rate mortgage loan, to elect to "re-fix"
such fixed rate mortgage loan at the applicable fixed rate then being offered
to the seller's existing borrowers for the applicable requested period within
three months following the end of the fixed rate period. Sixty days prior to
the end of the relevant fixed rate period, the mortgages trustee may offer to
re-sell to the seller all fixed rate mortgage loans which become "re-fixed"
during the three month period immediately following the end of the then
current fixed rate period. The seller may accept this offer by payment to the
mortgages trustee on the date on which the relevant mortgage loan becomes a
re-fixed mortgage loan of the purchase price payable for that re-fixed
mortgage loan as described below.
If such fixed rate mortgage loan becomes re-fixed during the relevant
three month period and the seller pays the purchase price for that re-fixed
mortgage loan, the mortgages trustee shall assign to the seller and the seller
shall purchase such re-fixed mortgage loan and its related security in
accordance with the mortgage sale agreement. The price payable on such
purchase shall be at least equal to the current balance on the relevant
mortgage loan as at the date of completion of the purchase plus all unpaid
interest (including all accrued interest and arrears of interest) and expenses
in respect of such mortgage loan.
If the seller does not pay to the mortgages trustee the purchase
price to purchase any mortgage loan which becomes re-fixed during such three
month period, the administrator may agree to a borrower's request to re-fix
any such mortgage loan if required
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by the terms of the mortgage. In any event the seller has agreed under the
mortgage sale agreement to set the existing borrowers' re-fix rate for the
three month period immediately following expiry of the relevant fixed rate
period at a rate not less than that notified from time to time to the seller
by the mortgages trustee, Funding, Funding 2 or the administrator as being
required by the mortgages trustee, Funding or Funding 2.
Amongst other things, upon a fixed rate mortgage loan becoming
re-fixed as stated above without having been purchased by the seller:
(1) the notional amount of the Funding 2 basis rate swap will
automatically be reduced by the current balance of such re-fixed
mortgage loan;
(2) Funding 2 will be obliged to enter into a new hedging
arrangement in respect of such mortgage loans with either an
existing swap counterparty, in which case such hedging will be
fixed at such fixed rate as such swap counterparty, on the basis
of fixed rates being offered in the swap market, determines to
be the fixed rate applicable to the relevant fixed rate period
of the relevant mortgage loans (which may be different from the
fixed rate being offered to the seller's existing borrowers) or
at Funding 2's option, another counterparty whose rating will
not affect the then current ratings of the notes; and
(3) if required, the seller will set the existing borrowers' re-fix
rate at the rate notified to it by the mortgages trustee,
[Funding, Funding 2] or the administrator as being required by
the mortgages trustee, [Funding or Funding 2].
The seller currently intends to purchase from the mortgages trustee
mortgage loans that become subject to further advances. If a borrower takes a
personal secured loan after that borrower's existing mortgage loan has been
assigned to the mortgages trustee, the seller currently intends to purchase
that borrower's existing mortgage loan and any personal secured loan
previously assigned to the mortgages trustee. However, in the future these
mortgage loans may remain within (and the further advances or such personal
secured loans may be assigned to and form part of) the trust property.
Re-draws under flexible mortgage loans
Only the seller is responsible for funding all future re-draws in
respect of flexible mortgage loans contained in the trust property. The seller
share of the trust property increases by the amount of any re-draw.
Further draws under personal secured loans
Only the seller is responsible for funding all further draws in
respect of personal secured loans contained in the trust property. The seller
share of the trust property increases by the amount of any further draw.
Assignment of new mortgage loans and their related security
The seller is entitled under the terms of the mortgage sale agreement
to assign new mortgage loans and their related security to the mortgages
trustee subject to the fulfillment of certain conditions (which may be varied
or waived by the mortgages trustee with the prior approval of the rating
agencies or their confirmation that there will be no adverse effect on the
previous notes) on or as at the relevant assignment date, including the
following:
(a) the aggregate arrears of interest in respect of all the mortgage
loans in the mortgages trust, as a percentage of the aggregate gross
interest due on all mortgage loans during the previous 12 months,
does not exceed 2% or such other percentage as is then acceptable to
the then current rating agencies at such time ("arrears of interest"
for the purpose of this clause, in respect of a mortgage loan on any
date, shall mean the aggregate amount overdue on that date, but only
where such
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aggregate amount overdue equals or exceeds an amount equal to the
monthly payment then due on the mortgage loan and such amount
has been overdue for an entire calendar month);
(b) the long term, unsecured, unsubordinated and unguaranteed debt
obligations of the seller are rated no lower than "A3" by Moody's and
"A-" by Fitch (at the time of and immediately following the
assignment of the new mortgage loans to the mortgages trustee);
(c) on the relevant assignment date, the aggregate current balance of the
mortgage loans in the mortgages trust which are then in arrears for
at least 3 months is less than 4% of the aggregate current balance of
all mortgage loans in the mortgages trust on such date, unless the
rating agencies have confirmed that the then current ratings of the
notes will not be adversely affected;
(d) the seller originated the new mortgage loans in accordance with its
lending criteria in force at the time of origination of the relevant
mortgage loan or with material variations from such lending criteria
provided that the then current rating agencies have been notified of
any such material variation;
(e) no new mortgage loan has on the relevant assignment date an aggregate
amount in arrears which is greater than the amount of the monthly
payment then due;
(f) the rating agencies have not provided written confirmation to the
mortgages trustee, the security trustee and the issuer that the
assignment to the mortgages trustee of new mortgage loans on the
assignment date will adversely affect the then current ratings of the
existing notes of the issuer (provided that at a time when a the
issuer issues new notes the rating agencies will have provided
written confirmation that the then current ratings of the existing
notes have not been downgraded or otherwise adversely affected);
(g) the aggregate current balance of new mortgage loans transferred in
any one interest period does not exceed 10% of the aggregate current
balance of the mortgage loans in the mortgages trust as at the
beginning of that interest period;
(h) the Funding 2 reserve fund is fully funded on the relevant assignment
date up to the relevant required amount (or, if the Funding 2 reserve
fund is not so fully funded on such relevant assignment date, no
payments have been made from the Funding 2 reserve fund);
(i) no global intercompany loan enforcement notice has been served in
respect of the global intercompany loan;
(j) the assignment of new mortgage loans does not result in the product
of the weighted average repossession frequency ("WAFF") and the
weighted average loss severity ("WALS") for the mortgage loans in the
mortgages trust after such purchase, calculated on such assignment
date in the same way as for the initial mortgage portfolio (or as
agreed by the administrator and the rating agencies from time to
time), exceeding the product of the WAFF and WALS for the mortgage
loans in the mortgages trust calculated on the most recent preceding
closing date, plus 0.35% [include Fitch tests];
(k) new mortgages loans may only be assigned to the mortgages trustee if
(to the extent necessary) the issuer has entered into appropriate
hedging arrangements in respect of such mortgage loans;
(l) no event of default under the transaction documents shall have
occurred which is continuing at the relevant assignment date;
(m) the weighted average yield on the mortgage loans in the mortgages
trust together with the new mortgage loans to be assigned to the
mortgages trustee on the relevant
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assignment date is not less than LIBOR for three-month sterling
deposits plus 0.50%, taking into account the weighted average yield
on the mortgage loans and the margins on the basis rate swaps as at
the relevant assignment date;
(n) the assignment of new mortgage loans on the relevant assignment date
does not result in the weighted average LTV ratio of the mortgage
loans and the new mortgage loans, after application of the LTV test
on the relevant assignment date, exceeding the LTV ratio (based on
the LTV test), as determined in relation to the mortgage loans in the
mortgages trust on the most recent preceding closing date, plus
0.25%;
(o) each new mortgage loan has a maturity date prior to January 2044;
(p) the related borrower under each new mortgage loan has made at least
one monthly payment;
(q) for so long as any notes issued by the issuer have a final maturity
date earlier than January [2041] are outstanding, the assignment of
new mortgage loans to the mortgages trustee may only occur if,
following such assignment, the aggregate number of repayment mortgage
loans in the mortgage portfolio is greater than or equal to 25% of
the aggregate number of mortgage loans in the mortgage portfolio;
(r) the rating agencies have provided written confirmation that the then
current ratings on the notes would not be adversely affected by the
assignment to the mortgages trustee of a new mortgage loan in respect
of a mortgage loan product having characteristics and/or features
that differ materially from the characteristics and/or features of
the mortgage loans in the initial mortgage portfolio; and
(s) each new mortgage loan and its related security must comply at the
relevant assignment date with the representations and warranties set
out in the mortgage sale agreement, which are described earlier in
this section under "- Representations and Warranties";
PROVIDED THAT, if an initial purchase price for the new mortgage
loans is payable to the seller by the mortgages trustee on the relevant
assignment date, only the conditions set out in paragraphs (e), (f), (i), (k),
(l), (m), (o), (p), (q), (r) and (s) are required to be satisfied to effect an
assignment of the new mortgage loans.
In addition, no assignment of new mortgage loans may occur after [the
earlier to occur of]:
o a step-up date in respect of the notes of any Funding
issuer, if the option to redeem such notes on that step-up
date pursuant to the terms and conditions of such notes is
not exercised; or
o the date falling 12 months after the occurrence of a step-up
date in respect of the notes of the issuer, if the option to
redeem such notes by such date pursuant to the terms and
conditions of such notes is not exercised.
Any new mortgage loans and related security so assigned will be held
by the mortgages trustee on trust for Funding, Funding 2 and the seller in
accordance with the terms of the mortgages trust deed.
The mortgage sale agreement provides that the seller may not assign
new mortgage loans to the mortgages trustee during any trust calculation
period prior to the distribution date occurring in that trust calculation
period, and that the seller may only make one assignment of new mortgage loans
to the mortgages trustee during any trust calculation period.
To the extent that Funding or Funding 2 makes an initial contribution
on an assignment date to increase the Funding share or the Funding 2 share of
the trust property,
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the consideration for the assignment of the new mortgage
loans and their related security to the mortgages trustee will consist of:
o the payment by the mortgages trustee to the seller of the
initial purchase price for the assignment to the mortgages
trustee of the new mortgage loans. The initial purchase price
will be paid by the mortgages trustee out of funds received by
the mortgages trustee in respect of the initial contribution of
Funding for the Funding share of the new trust property or the
initial contribution of Funding 2 for the Funding 2 share of
the new trust property, as the case may be, pursuant to the
mortgages trust deed, which initial contribution will be funded
out of the proceeds of any new loan tranche paid by the issuer
to Funding 2 (or, in the case of Funding, the proceeds of an
intercompany loan from a new Funding issuer);
o the covenant of the mortgages trustee to pay or procure the
payment to the seller of amounts of deferred purchase price in
accordance with the provisions of the mortgage sale agreement
and the mortgages trust deed, which payment also satisfies the
obligation of Funding or Funding 2, as the case may be, to make
deferred contributions to the mortgages trustee for the Funding
share or Funding 2 share of the trust property, as the case may
be. Amounts of deferred purchase price will be payable to the
seller to the extent of available funds only after paying or
providing for prior ranking claims and only out of excess
income to which Funding or Funding 2, as applicable, is
entitled in accordance with and subject to the priority of
payments set out in "The mortgages trust - Mortgages trust
allocation of revenue receipts"; and/or
o the covenant of the mortgages trustee to hold the trust
property on trust for Funding (as to the Funding share),
Funding 2 (as to the Funding 2 share) and the seller (as to the
seller share of the trust property) in accordance with the
terms of the mortgages trust deed.
In the mortgage sale agreement, the seller has undertaken to use
reasonable efforts to assign to the mortgages trustee, and the mortgages
trustee has undertaken to use reasonable efforts to acquire from the seller
and hold in accordance with the terms of the mortgages trust deed, until the
earlier of the payment date falling in [July 2010] (or such later date as may
be notified by [Funding or Funding 2]) and the occurrence of a trigger event,
sufficient new mortgage loans and their related security so that the
overcollateralization test is not breached on three consecutive distribution
dates. However, the seller shall not be obliged to assign to the mortgages
trustee, and the mortgages trustee shall not be obliged to acquire, new
mortgage loans and their related security if, in the opinion of the seller,
such assignment would adversely affect the business of the seller. If Funding
2 enters into a new global intercompany loan or Funding enters into a new
Funding intercompany loan, then the period during which the seller covenants
to use reasonable efforts to maintain the aggregate current balance of
mortgage loans in the mortgages trust at a certain level prior to a trigger
event may be extended.
The overcollateralization test shall be calculated on each
distribution date and shall be breached on any distribution date where the
aggregate current balance of mortgage loans in the mortgage portfolio on such
distribution date is less than an amount equal to the product of 1.05 and the
principal amount outstanding of all notes of all issuers on such distribution
date provided that where the notes outstanding are controlled amortization
notes, the principal amount outstanding of such notes will be calculated on a
straight-line basis by applying the appropriate constant payment rate
applicable to each series of notes on a monthly, rather than quarterly, basis.
Transfer of legal title to the mortgages trustee
The English mortgage loans in the mortgage portfolio and their
related security have been assigned to the mortgages trustee by way of
equitable assignment. The transfer by
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the seller to the mortgages trustee of the beneficial interest in the Scottish
mortgage loans in the mortgage portfolio and their related security has been
given effect by a declaration of trust by the seller. In each case this means
that legal title to the mortgage loans and their related security will remain
with the seller until such time as certain additional steps have been taken
including the giving of notices of the assignment to the borrowers.
In relation to mortgages of registered land in England and Wales and
any land in Scotland, until such time as transfers and assignations of such
mortgages in favor of the mortgages trustee have been completed and registered
at H.M. Land Registry and the Registers of Scotland (as applicable), the
assignment of the mortgages to the mortgages trustee takes effect in equity
(in England and Wales only) and transfers beneficial title only (in England,
Wales and Scotland). In the case of mortgages of unregistered land in England
and Wales, in order for legal title to pass to the mortgages trustee,
conveyances of the relevant mortgages would have to be completed in favor of
the mortgages trustee.
Under the mortgage sale agreement none of the seller, the mortgages
trustee, [Funding, Funding 2, the security trustee or the Funding 2 security
trustee] will require notification of such assignments to the borrowers or the
execution and completion of such transfers, assignations and conveyances in
favor of the mortgages trustee or the registration of such transfers in order
to effect the transfer of legal title to the mortgage loans and their related
security (including, where appropriate, their registration), except in the
limited circumstances described below.
The execution of transfers and assignations of the mortgages to the
mortgages trustee and the notifications of assignments of mortgage loans to
the borrowers will be required to be completed within 20 business days of
receipt of written notice from the mortgages trustee, [Funding, Funding 2, the
security trustee and/or the Funding 2 security trustee] upon the occurrence of
any of, amongst other things:
o the valid service of a global intercompany loan enforcement
notice or [(unless the sole reason for service of any issuer
enforcement notice is default by an issuer swap provider)] an
issuer enforcement notice;
o unless otherwise agreed by the rating agencies, the termination
of the seller's role as administrator under the administration
agreement and failure of any substitute administrator to assume
the duties of the administrator;
o the seller being required, by an order of a court of competent
jurisdiction, or by a change in law occurring after the initial
closing date, or by a regulatory authority or organization whose
members include mortgage lenders of which the seller is a member
or with whose instructions it is customary for the seller to
comply, to perfect the transfer of legal title to the mortgage
loans and related security in favor of the mortgages trustee;
o the security under the Funding 2 deed of charge or any material
part of such security being in jeopardy and it being necessary
to perfect the transfer of legal title to the mortgage loans in
favor of the mortgages trustee in order to reduce such jeopardy
materially;
o the occurrence of an insolvency event in relation to the seller;
or
o notice in writing from the seller to the mortgages trustee,
Funding and Funding 2 (with a copy to the security trustee and
the Funding 2 security trustee) requesting such transfer.
If the seller ceases to have a long term unsecured, unsubordinated
and unguaranteed credit rating by Standard & Poor's of at least "BBB-", by
Moody's of at least "Baa3" and by Fitch of at least "BBB-" (unless Standard &
Poor's, Moody's and Fitch confirm that the then current ratings of the notes
will not be adversely affected) the seller will be obliged to give notice only
of the transfer of the equitable and beneficial interest in
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the mortgage loans to the borrowers but will not be required to complete any
other steps necessary to perfect legal title to the mortgage loans in favor of
the mortgages trustee.
Title deeds
The title deeds and mortgage loan files relating to the mortgage
loans are currently held by or to the order of the seller or by solicitors
acting for the seller in connection with the creation of the mortgage loans
and their related security. Under the administration agreement the
administrator has undertaken that all the title deeds and mortgage loan files
at any time in its possession or under its control or held to its order
relating to the mortgage loans which are at any time assigned to the mortgages
trustee will be held to the order of the mortgages trustee. The administrator
will keep, or cause to be kept, the title deeds and mortgage loan files
relating to each mortgage loan and each mortgaged property in safe custody and
shall not part with possession, custody or control of them except in the
limited circumstances specified in the administration agreement.
Governing law
The mortgage sale agreement is governed by English law (other than
certain aspects relating to the Scottish mortgage loans and their related
security which are governed by Scots law).
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The mortgages trust
The following section contains a summary of the material terms of the
mortgages trust deed. The summary does not purport to be complete and is
subject to the provisions of the mortgages trust deed, a form of which has
been filed as an exhibit to the registration statement of which this
prospectus is a part.
General legal structure
The mortgages trust was formed on March 26 2001 as a trust under
English law with the mortgages trustee as trustee for the benefit of the
seller and Funding as beneficiaries. On the Funding 2 program date, Funding 2
was added as a further beneficiary of the mortgages trust. This section
describes the material terms of the mortgages trust, including how money is
distributed from the mortgages trust to Funding, Funding 2 and the seller.
Under the terms of the mortgages trust deed, as of the Funding 2
program date, the mortgages trustee has agreed to hold all of the trust
property on trust absolutely for Funding (as to the Funding share), Funding 2
(as to the Funding 2 share) and for the seller (as to the seller share). The
"trust property" consists of:
o the sum of (GBP)100 settled by Law Debenture Corporate Services
Limited on trust on the date of the mortgages trust deed;
o the mortgage portfolio, including the mortgage loans and their
related security, the rights under any MIG policies and the
other seller arranged insurance policies;
o any new mortgage portfolio that is assigned to the mortgages
trustee by the seller after the Funding 2 program date,
including the mortgage loans and their related security, the
rights under any MIG policies and the other seller arranged
insurance policies;
o any permitted replacement mortgage loan and its related security
(including the rights under any related MIG policy and other
seller arranged insurance policies) relating to any permitted
product switch effected in relation to any mortgage loan and
assigned to the mortgages trustee in accordance with the
mortgage sale agreement and thereby included in the trust
property;
o any interest and principal paid by borrowers on their mortgage
loans on or after the relevant assignment date;
o any other amounts received under the mortgage loans and related
security on or after the relevant assignment date excluding
third party amounts;
o any re-draws under flexible mortgage loans included in the
trust property;
o any further draws under personal secured loans included in the
trust property;
o any further advances made by the seller to existing borrowers
which are assigned to the trust in accordance with the mortgage
sale agreement;
o any contribution paid by Funding, [Funding 2] or the seller to
the mortgages trustee for application in accordance with the
terms of the mortgages trust but only up to the time of such
application;
o amounts on deposit (and interest earned on such amounts) in the
mortgages trustee transaction account and the mortgages trustee
GIC account; and
o the proceeds of sale of any mortgage loan and its related
security pursuant to the mortgage sale agreement or other
proceeds of sale of any trust property;
less
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o any actual losses in relation to the mortgage loans and any
actual reductions occurring in respect of the mortgage loans as
described in paragraph (1) in "- Adjustments to trust property"
below; and
o distributions of principal made from time to time to the
beneficiaries of the mortgages trust.
In the case of Scottish mortgage loans and their related security, the
interest of the mortgages trustee therein comprises its beneficial interest
under the relevant declaration of trust over such Scottish mortgage loans and
their related security, as described under "Assignment of the mortgage loans
and related security - the mortgage sale agreement".
In addition, the outstanding principal balances of any Together
Connections mortgage loans and Connections mortgage loans included in the
trust property (and therefore the aggregate amount of the trust property) will
be reduced from time to time by the amount of any Together Connections Benefit
and Connections Benefit applied to those Together Connections mortgage loans
or Connections mortgage loans, respectively, as described under "The mortgage
loans - Characteristics of the mortgage loans - Mortgage loan products offered
by the seller".
Funding 2 is not entitled to particular mortgage loans and their
related security separately from Funding and/or the seller. Instead, each of
the beneficiaries has an undivided interest in all of the mortgage loans and
their related security constituting the trust property.
The beneficial interest of Funding, Funding 2 and the seller,
referred to as the Funding share, the Funding 2 share and the seller share
respectively will represent pro rata interests in the trust property.
Fluctuation of the seller share/Funding share/Funding 2 share of the trust
property
The Funding share, the Funding 2 share and the seller share of the
trust property fluctuate depending on a number of factors including:
o the allocation of principal receipts from the mortgage loans to
Funding, Funding 2 and/or the seller on each distribution date;
o losses arising on the mortgage loans;
o the assignment of new mortgage loans and their related security
to the mortgages trustee;
o any of the beneficiaries increasing its beneficial interest in,
and hence its share of, the trust property by making
contributions (excluding, in the case of Funding and Funding 2
any deferred contribution) to the mortgages trustee in
accordance with the mortgages trust deed;
o a borrower making a re-draw under a flexible mortgage loan; o a
borrower making a further draw under a personal secured loan; o
the capitalization of arrears in respect of any mortgage loan;
o the seller making a further advance to an existing borrower.
Although the seller does not currently intend either to assign
to the mortgages trustee further advances made in respect of a
mortgage loan following the assignment of that mortgage loan to
the mortgages trustee or to retain mortgage loans subject to
such further advances within the mortgages trust, it may do so
in the future; and
[o the mortgages trustee making a [special distribution] to any
beneficiary on a distribution date.]
Neither the Funding share, nor the Funding 2 share of the trust
property may be reduced below zero. The seller will not be entitled to receive
principal receipts which would
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reduce the seller share of the trust property to an amount less than the
minimum seller share unless and until both the Funding share and the Funding 2
share of the trust property have been reduced to zero or following the
occurrence of an asset trigger event.
Funding 2 will use the proceeds of loan tranches advanced to it by
the issuer (less any amount utilised to fund the Funding 2 reserve fund) to
make contributions to the mortgages trustee or to refinance an existing loan
tranche. Any such contribution made by Funding 2 to the mortgages trustee will
fall into one of two categories:
o an "initial contribution", which is to fund the payment to the
seller by the mortgages trustee of (and is equal to) the initial
purchase price in respect of any new mortgage portfolio assigned
to the mortgages trustee; and
o a "further contribution" which is consideration payable by
Funding 2 to the mortgages trustee to increase the Funding 2
share of the trust property in accordance with the terms of the
mortgages trust deed (excluding any initial contribution or
deferred contribution) and which will be applied by the
mortgages trustee in making a special distribution to the seller
(which will reduce the seller share of the trust property) or to
Funding (which will reduce the Funding share of the trust
property).
The cash manager will recalculate the Funding share, the Funding 2
share and the seller share:
o on each distribution date;
o on any date on which Funding and/or Funding 2 makes a
contribution (excluding any deferred consideration) to the
mortgages trustee in connection with the purchase of an
increased beneficial interest in the trust property by Funding
and/or Funding 2, respectively, on which date the mortgages
trustee will also pay to the seller an initial consideration
equal to the amount of such further contribution or pay to the
seller and/or Funding a special distribution equal to the amount
of the further contribution (each such date, a "contribution
date"); and
o on the date of each assignment of any new mortgage portfolio to
the mortgages trustee (each such date, an "assignment date").
The reason for the recalculation on a contribution date or an
assignment date is to determine the percentage shares of each beneficiary in
the trust property which will reflect additional contributions to the
mortgages trust by Funding or Funding 2 and the assignment of the new mortgage
loans to the trust property.
When the cash manager recalculates the share and the share percentage
of each beneficiary on a distribution date, that recalculation will apply for
the then current trust calculation period. However, if during that trust
calculation period the seller assigns a new mortgage portfolio to the
mortgages trustee and/or if Funding or Funding 2 makes a contribution
(excluding any deferred contribution) to the mortgages trustee, the
recalculation made by the cash manager on that distribution date will only
apply from the beginning of that then current trust calculation period to (but
excluding) that assignment date or contribution date, as applicable. The new
recalculation made by the cash manager on that relevant assignment date or
contribution date will apply from (and including) that assignment date or
contribution date (as applicable) to the end of that then current trust
calculation period. The portion of a trust calculation period that is less
than a full trust calculation period is called an "interim calculation
period".
The percentage shares that each of the beneficiaries have in the
trust property will determine their entitlement to interest and principal
receipts from the mortgage loans in the trust property and also the allocation
of losses arising on the mortgage loans for each trust calculation period or
interim calculation period, as applicable. The method for determining those
new percentage shares is set out in the next three sections.
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Funding 2 share of trust property (distribution date recalculation)
On each distribution date (also referred to in this section as the
"relevant distribution date") the interest of Funding 2 in the trust property
will be recalculated for the then current trust calculation period or related
interim calculation period, as applicable, in accordance with the following
formula:
o The current Funding 2 share of the trust property will be an
amount equal to:
A-B-C+D
o The current Funding 2 share percentage of the trust property
will be an amount equal to:
A-B-C+D
-------x 100
G
expressed as a percentage and rounded upwards to five decimal places,
where,
A = the amount of the Funding 2 share of the trust property as
determined on the later of the distribution date, or the
assignment date or contribution date (if any), immediately
preceding the relevant distribution date;
B = the amount of any principal receipts on the mortgage loans
distributed to Funding 2 on the relevant distribution date (as
described under "- Mortgages trust allocation and distribution
of mortgages trustee principal receipts prior to the occurrence
of a trigger event" and "- Mortgages trust allocation and
distribution of mortgages trustee principal receipts after the
occurrence of a trigger event");
C = the amount of losses sustained on the mortgage loans during
the immediately preceding trust calculation period and the
amount of any reductions occurring in respect of the mortgage
loans as described in paragraphs (1) to (5) in "- Adjustments to
trust property" below, in each case allocated to Funding 2 in
the trust calculation period ending on the relevant distribution
date;
E = the amount of any capitalized arrears which have been
allocated to Funding 2 in the immediately preceding trust
calculation period; and
G = the amount of the mortgages trustee retained principal
receipts (if any) plus the aggregate current balance of all of
the mortgage loans in the trust property as at the last day of
the immediately preceding trust calculation period after making
the distributions, allocations and additions referred to in "B",
"C" and "D" above (or, if applicable, on the relevant assignment
date or contribution date) and after taking account of the
following (being "trust property calculation adjustments"):
(i) any distribution of principal receipts to the seller,
Funding 2 and Funding,
(ii) the amount of any losses or capitalized arrears allocated to
the seller, Funding 2 and Funding,
(iii) the adjustments referred to in paragraphs (1) to (5) in "-
Adjustments to trust property" below,
(iv) the amount of any other additions to or removals from the
trust property (including any additions to the trust
property resulting from re-draws and further draws made by
borrowers but excluding the addition of mortgage loans on
an assignment date and any initial contributions or
further contributions made by Funding or Funding 2), and
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(v) any reduction in the outstanding principal balances of
Together Connections mortgage loans and Connections
mortgage loans resulting from borrowers being allocated a
portion of the related Together Connections Benefit and
Connections Benefit, respectively, under such mortgage
loans.
Funding 2 share of trust property (assignment date and contribution date
recalculation)
On each assignment date or contribution date (also referred to in this
section as the "relevant recalculation date"), the interest of Funding 2 in
the trust property will be recalculated for the related interim calculation
period, for the sole purposes of calculating the distributions to be made from
the trust property and determining the amount of losses to be allocated to
Funding 2 on the immediately succeeding distribution date, in accordance with
the following formula:
o The current Funding 2 share of the trust property will be an
amount equal to:
A+E+F
o The current Funding 2 share percentage of the trust property
will be an amount equal to:
A+E+F
-----x 100
H
where,
A = the amount of the Funding 2 share of the trust property as
determined on the distribution date immediately preceding the
relevant recalculation date;
E = the amount of any initial contribution paid by Funding 2 to
the mortgages trustee on that recalculation date in respect of
the Funding 2 share of any new trust property;
F = the amount of any further contribution paid by Funding 2 to
the mortgages trustee on that relevant recalculation date to
increase Funding 2's beneficial interest in the trust property;
and
H = the amount of the mortgages trustee retained principal
receipts (if any) plus the aggregate current balance of all of
the mortgage loans in the trust property as at the immediately
preceding distribution date (after making the distributions,
allocations and additions on that preceding distribution date)
plus the aggregate current balance of the new mortgage loans
assigned to the mortgages trustee on that relevant recalculation
date and after taking account of trust property calculation
adjustments.
Adjustments to trust property
If any of the following events occurs during a trust calculation
period, then the aggregate current balance of the mortgage loans in the trust
property will be reduced or deemed to be reduced for the purposes of making
the trust property calculation adjustments:
(1) any borrower exercises a right of set-off so that the amount of
principal and interest owing under a mortgage loan is reduced
but no corresponding payment is received by the mortgages
trustee. In this event, the aggregate current balance of the
mortgage loans in the trust property will be reduced by an
amount equal to the amount of such set-off; and/or
(2) a mortgage loan or its related security is (i) in breach of the
loan warranties contained in the mortgage sale agreement or (ii)
the subject of a product switch,
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further advance or the subject of an offer by the seller to the
borrower of a personal secured loan in respect of which the
seller has elected to purchase the relevant mortgage loan or
mortgage loans and their related security, and in the case of
(i) above the seller fails to repurchase and in the case of
(ii) above the seller fails to purchase, the mortgage loan or
mortgage loans under the relevant mortgage account and their
related security (including any personal secured loans and any
further draws made thereunder secured over the same property)
as required by the terms of the mortgage sale agreement. In
this event, the aggregate current balance of the mortgage loans
in the trust property will be deemed to be reduced, for the
purposes of making the trust property calculation adjustments,
by an amount equal to the current balance of the relevant
mortgage loan or mortgage loans under the relevant mortgage
account (together with arrears of interest and accrued
interest); and/or
(3) the security trustee and/or the Funding 2 security trustee are
notified that a flexible mortgage loan or part thereof has been
determined by a court judgment on the point or a determination
by a relevant regulatory authority (whether or not in relation
to an analogous flexible mortgage loan product of another UK
mortgage lender):
(a) to be unenforceable; and/or
(b) not to fall within the first ranking charge by way of legal
mortgage or first ranking standard security over the
relevant mortgaged property, in which event, the aggregate
current balance of the mortgage loans in the trust property
will be deemed to be reduced, for the purposes of making the
trust property calculation adjustments, by an amount equal
to that portion of the current balance of the flexible
mortgage loan which is so determined to be unenforceable or
not to fall within the first ranking charge by way of legal
mortgage or first ranking standard security over the
relevant mortgaged property; and/or
(4) (i) in respect of breaches of the loan warranties contained in
the mortgage sale agreement, the seller would be required to
repurchase a mortgage loan and its related security and (ii) in
respect of a mortgage loan subject to a product switch, further
advance or in respect of which the seller has offered to the
borrower a personal secured loan, the seller elects to purchase
the relevant mortgage loan and its related security (including
any personal secured loans and any further draws made thereunder
secured over the same property), in each case as required by the
terms of the mortgage sale agreement, but the mortgage loan is
not capable of being repurchased or purchased, as applicable. In
this event, the aggregate current balance of the mortgage loans
in the trust property will be deemed to be reduced, for the
purposes of making the trust property calculation adjustments,
by an amount equal to the current balance of the relevant
mortgage loan (together with arrears of interest and accrued
interest); and/or
(5) the seller breaches any other material warranty under the
mortgage sale agreement and/or (for so long as the seller is the
administrator) the administration agreement, which will also be
grounds for terminating the appointment of the administrator. In
this event, the aggregate current balance of the mortgage loans
in the trust property will be deemed to be reduced by an amount
equal to the resulting loss incurred by Funding, Funding 2 and
the seller.
The reductions set out in paragraphs (1) to (5) (as well as any
resulting loss in respect thereof) and any losses arising in respect of any
personal secured loans will be made on the relevant date on which the cash
manager makes the relevant trust property calculation adjustments first to the
seller's share (including the minimum seller share) of the trust property
only, and thereafter will be made to the Funding and Funding 2 shares of the
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trust property. Any subsequent recoveries on mortgage loans which have been
subject to a setoff or in respect of which the seller share of the trust
property has otherwise been reduced or deemed reduced pursuant to paragraphs
(1) to (5) above or any recovery in respect of any personal secured loan will
constitute a revenue receipt under the relevant mortgage loan. Such revenue
receipt will belong to Funding and Funding 2 (but only if and to the extent
that the related reductions were applied against Funding's and Funding 2's
shares of the trust property) and thereafter will belong to the seller (and to
the extent received by the mortgages trustee will be returned to the seller).
The trust property (and the seller share of the trust property) will
also be adjusted to account for the allocation of any Together Connections
Benefit to a Together Connections mortgage loan and any Connections Benefit to
a Connections mortgage loan, as described below under "- Additions to, and
reductions from, the trust property" and "- Increasing and decreasing the
seller share of the trust property".
Funding share of the trust property
The Funding share of the trust property is calculable and
recalculable in an identical manner to that set out above for the Funding 2
share except that references to Funding 2 are to be read as references to
Funding.
Weighted average Funding 2 share percentage and weighted average Funding share
percentage
On any distribution date with respect to which (i) the seller had
assigned new mortgage loans to the mortgages trustee during the immediately
preceding trust calculation period, or (ii) Funding or Funding 2 had made a
contribution (excluding any deferred contribution) to the mortgages trustee in
connection with the purchase of an increased beneficial interest in the trust
property by Funding or Funding 2 during the immediately preceding trust
calculation period, the cash manager will calculate (for the sole purpose of
making the distributions to be made on that distribution date) the weighted
average of the current Funding share percentages and Funding 2 share
percentages that were calculated previously in respect of each interim
calculation period occurring in that immediately preceding trust calculation
period. The calculation will be based on the relative lengths of the foregoing
interim calculation periods. The calculation will be based on the relative
lengths of the foregoing interim calculation periods. The "weighted average
Funding 2 share percentage" for any such distribution date will be equal to,
in respect of the distribution or allocation (as applicable) of each of
revenue receipts, principal receipts and losses to be made on that
distribution date, the formula set forth below:
(AxB) + (CxD)
where,
A = the related current Funding 2 share percentage for interim
calculation period 1;
B = the number of days in interim calculation period 1 divided by
the number of days in the trust calculation period;
C = the related Funding 2 share percentage for interim
calculation period 2; and
D = the number of days in interim calculation period 2 divided by
the number of days in the trust calculation period;
The "weighted average Funding share percentage" for any such
distribution date is calculable in an identical manner to that set out above
for the weighted average Funding 2 share percentage except that references to
Funding 2 are to be read as references to Funding.
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Seller share of trust property (distribution date recalculation)
On each relevant distribution date, the current seller share of the
trust property will be recalculated for the then current trust calculation
period or related interim calculation period, as applicable, in accordance
with the following formula:
o the aggregate amount of the trust property as at the relevant
distribution date minus the sum of the current Funding share and
the current Funding 2 share,
On each relevant distribution date, the current seller share
percentage of the trust property will be recalculated for the then current
trust calculation period or related interim calculation period, as applicable,
in accordance with the following formula:
o 100% minus the sum of the current Funding share percentage and
the current Funding 2 share percentage,
Seller share of trust property (assignment date and contribution date
recalculation)
On each relevant recalculation date, the current seller share of
the trust property will be recalculated for the related interim calculation
period in accordance with the following formula:
o the aggregate amount of the trust property as at the relevant
recalculation date minus the sum of the current Funding share
and the current Funding 2 share,
On each relevant recalculation date, the current seller share
percentage of the trust property will be recalculated for the related interim
calculation period in accordance with the following formula:
o 100% minus the sum of the current Funding share percentage and
the current Funding 2 share percentage,
Weighted average seller share percentage
On any distribution date with respect to which (i) the seller had
assigned new mortgage loans to the mortgages trustee during the immediately
preceding trust calculation period, or (ii) Funding or Funding 2 have made a
further contribution to the mortgages trustee in connection with the purchase
of an increased beneficial interest in the trust property by Funding or
Funding 2 during the immediately preceding trust calculation period, the cash
manager will calculate (for the sole purpose of making the distributions to be
made on that distribution date) the weighted average of the current seller
share percentages that were calculated previously in respect of each interim
calculation period occurring in that immediately preceding trust calculation
period and will be a percentage equal to, in respect of the distribution of
each of revenue receipts, principal receipts and losses to be made on that
distribution date, 100% minus the sum of the weighted average Funding share
percentage and the weighted average Funding 2 share percentage.
Minimum seller share
The seller share of the trust property includes an amount known as
the "minimum seller share". The amount of the minimum seller share will
fluctuate depending on changes to the characteristics of the mortgage loans in
the trust property. The seller will not be entitled to receive principal
receipts which would reduce the seller share of the trust property to an
amount less than the minimum seller share unless and until both the Funding
share and the Funding 2 share of the trust property have been reduced to zero
or following the occurrence of an asset trigger event. The minimum seller
share will be the amount determined on each distribution date in accordance
with the following formula:
W + X + Y + Z
where,
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W = 100% of the sum of the average cleared credit balance of all
applicable accounts linked to Together Connections mortgage
loans and Connections mortgage loans in respect of each calendar
month or part of any such calendar month;
X = 2.0% of the aggregate current balance of mortgage loans in the
trust property;
Y = the product of: p x q x r where:
p = 8.0%;
q = the sum of (i) the "flexible cash re-draw capacity", being
an amount equal to the difference between (1) the maximum
amount of cash re-draws that borrowers may make under
flexible mortgage loans included in the trust property
(whether or not drawn) as at the last day of the immediately
preceding trust calculation period and (2) the aggregate
current balance of cash re-draws which form part of the
trust property as at the last day of the immediately
preceding trust calculation period; and (ii) the "further
draw capacity" being an amount equal to the difference
between (1) the maximum amount of credit extended to
borrowers under personal secured loans which are flexi-plan
loans included in the trust property as at the last day of
the immediately preceding trust calculation period and (2)
the aggregate current balance of personal secured loans
which are flexi-plan loans which form part of the trust
property as at the last day of the immediately preceding
trust calculation period; and
r = 3.0; and
Z = the aggregate current balance of (1) re-draws and (2) personal
secured loans in the trust property as at the last day of the
immediately preceding trust calculation period.
The purpose of "W" is to mitigate the risks relating to borrowers
holding deposits in Northern Rock bank accounts that are linked to Together
Connections mortgage loans and Connections mortgage loans, and the purpose of
"X" is to mitigate the risks relating to borrowers holding deposits in
Northern Rock bank accounts that are not linked to Together Connections
mortgage loans and Connections mortgage loans (see "Risk factors - There may
be risks associated with the fact that the mortgages trustee has no legal
title to the mortgage loans and their related security, which may adversely
affect payments on the notes"). The purpose of the calculation in "Y" is to
mitigate the risk of the seller failing to fund a re-draw under a flexible
mortgage loan or a further draw under a personal secured loan in the trust
property. The purpose of "Z" is to mitigate enforceability and priority risks
relating to (a) re-draws under the flexible mortgage loans and (b) further
draws under personal secured loans in the trust property.
Cash management of trust property - revenue receipts
Under the cash management agreement, the cash manager is responsible
for distributing revenue receipts on behalf of the mortgages trustee on each
distribution date in accordance with the order of priority described in the
following section. For further information on the role of the cash manager,
see "Cash management for the mortgages trustee and Funding".
Mortgages trust allocation of revenue receipts
"Mortgages trustee available revenue receipts" are calculated by the
cash manager on each distribution date and are an amount equal to the sum of
(in each case in the period prior to the end of the immediately preceding
trust calculation period):
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o revenue receipts on the mortgage loans (which shall include, in
respect of any non-flexible mortgage loan only, the amount of
any overpayment made by the borrower in respect of such mortgage
loan as is equal to the amount of any underpayment of interest
made by such borrower in respect of such mortgage loan in the
immediately preceding trust calculation period provided that
such underpayment of interest is made prior to December 31 in
the year in which such overpayment is received from the
borrower);
o interest payable to the mortgages trustee on the mortgages
trustee transaction account and the mortgages trustee GIC
account; and
o payments made by the seller to the mortgages trustee to fund any
non- cash redraw in respect of any flexible mortgage loan;
less
o amounts due to third parties (also known as "third party
amounts") including:
(1) payments of insurance premiums, if any, due to the seller in
respect of any seller arranged insurance policy and/or to the
MIG provider to the extent not paid or payable by the
seller (or to the extent such insurance premiums have been
paid by the seller in respect of any further advance which
is not purchased by the seller to reimburse the seller);
(2) amounts under an unpaid direct debit which are repaid by the
administrator to the bank making such payment if such bank
is unable to recoup that amount itself from its customer's
account;
(3) other charges which are due to the seller; and/or
(4) recoveries in respect of amounts deducted from mortgage
loans as described in paragraphs (1) to (5) under "-
Adjustments to trust property" above, which will belong to
and be paid to Funding, Funding 2 and/or the seller as
described therein, which amounts may be paid daily from
monies on deposit in the mortgages trustee transaction
account or the mortgages trustee GIC account; and
o amounts distributed on each previous distribution date in
accordance with the mortgages trust allocation of revenue
receipts.
On each distribution date, the cash manager will apply mortgages
trustee available revenue receipts in the following order of priority (the
"mortgages trust allocation of revenue receipts"):
(A) first, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to:
(1) the mortgages trustee under the provisions of the mortgages
trust deed;
(2) to third parties from the mortgages trustee in respect of
the mortgages trust but only if:
(a) payment is not due as a result of a breach by the
mortgages trustee of the documents to which it is a
party; and/or
(b) payment has not already been provided for elsewhere;
(B) second, in payment of amounts (inclusive of VAT) due to the
administrator or the cash manager or to become due to the
administrator or the cash manager prior to the next following
distribution date under the provisions of the administration
agreement or the cash management agreement, as the case may be;
and
(C) third, in no order of priority between them but in proportion to
the respective amounts due:
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(1) to the seller in an amount determined by multiplying the
total amount of the remaining mortgages trustee available
revenue receipts by the seller share percentage of the trust
property;
(2) (a) in no order of priority between them but in proportion
to the respective amounts due:
(i) to Funding in an amount equal to the lesser of:
(x) that portion of mortgages trustee available revenue
receipts required to be applied by Funding pursuant
to the payment priorities in the Funding deed of
charge, prior to the enforcement of the Funding
security up to and including the provision for
payment to the Funding reserve ledger on such
distribution date or following the enforcement of
the Funding security (save for certain exclusions
set out in the mortgages trust deed); and
(y) an amount determined by multiplying the total
amount of the remaining mortgages trustee available
revenue receipts by the Funding share percentage of
the trust property;
(ii) to Funding 2 in an amount equal to the lesser of:
(x) the aggregate of the amounts to be applied on the
immediately succeeding payment date as set forth
under the Funding 2 pre-enforcement revenue
priority of payments through and including item (S)
thereof or, as the case may be, the Funding 2
post-enforcement priority of payments (but
excluding any principal amount due under the global
intercompany loan (save that, for the avoidance of
doubt, such exclusion shall not apply in respect of
any Funding 2 available revenue receipts which are
applied by Funding 2 to credit the principal
deficiency subledger and thereby reduce the
principal payable under the related loan tranche)
and any amount of deferred contribution under item
[(M)] of the Funding 2 post-enforcement priority of
payments), less all other amounts (not derived from
the distribution of mortgages trustee available
revenue receipts under the mortgages trust) which
will constitute Funding 2 available revenue
receipts on the immediately succeeding payment
date, such amount not to be less than zero, and
(y) an amount determined by multiplying the total
amount of the remaining mortgages trustee available
revenue receipts by the Funding 2 share percentage
of the trust property; and
(b) in no order of priority between them to Funding and Funding 2,
to the extent not already paid pursuant to (C) above, up to the
amounts set forth in (2)(a)(i)(x) and (2)(a)(ii)(x) above,
respectively; provided, that if remaining mortgages trustee
available revenue receipts are insufficient on such distribution
date to satisfy in full the amounts set forth in such sections
above, then to Funding and Funding 2 pro rata, based on the
proportion that the Funding share or the Funding 2 share (as
applicable) of the trust property bears to the aggregate of the
Funding share and the Funding 2 share of the trust property and
the remaining mortgages trustee available revenue receipts will
continue to be allocated on such distribution date in accordance
with this item 2(b) until such receipts are fully allocated;
(c) in no order of priority between them but in proportion to the
respective amounts due:
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(i) to Funding an amount equal to that portion of mortgages
trustee available revenue receipts equal to the amount
required to be applied by Funding pursuant to the payment
priorities in the Funding deed of charge prior to the
enforcement of the [Funding security] following the
provision for payments to the Funding reserve ledger or
following the enforcement of the Funding security (save for
certain exclusions set out in the mortgages trust deed);
(ii) to Funding 2 in an amount equal to the aggregate of the
amounts to be applied on the immediately succeeding payment
date as set forth under the Funding 2 pre-enforcement
revenue priority of payments following item [(S)] thereof
or, as the case may be, the Funding 2 post-enforcement
priority of payments (but excluding any principal amount due
under the global intercompany loan (save that, for the
avoidance of doubt, such exclusion shall not apply in
respect of any Funding 2 available revenue receipts which
are applied by Funding 2 to credit the principal deficiency
subledger and thereby reduce the principal payable under the
related loan tranche) and any amount of deferred
contribution under item [(X)] of the Funding 2
pre-enforcement revenue priority of payments and/or item
[(M)] of the Funding 2 post-enforcement priority of
payments), less all other amounts (not derived from the
distribution of mortgages trustee available revenue receipts
under the mortgages trust) which will constitute Funding 2
available revenue receipts on the immediately succeeding
payment date, such amount not to be less than zero,
provided, that if remaining mortgages trustee available revenue
receipts are insufficient on such distribution date to satisfy
in full the amounts set forth in 2(c)(i) and 2(c)(ii) above,
then to Funding and Funding 2 pro rata, based on the proportion
that the Funding share or the Funding 2 share (as applicable) of
the trust property bears to the aggregate of the Funding share
and the Funding 2 share of the trust property and the remaining
mortgages trustee revenue receipts will continue to be allocated
on such distribution date in accordance with this item 2(c)
until such receipts are fully allocated.
(D) fourth, to allocate the seller an amount equal to YY - ZZ, where
"YY" is the amount of the mortgages trustee available revenue
receipts and "ZZ" is the amount of such mortgages trustee
available revenue receipts applied and/or allocated under (A)
through (C) above; and
provided that, if an assignment date or a contribution date has
occurred during the trust calculation period immediately preceding
that distribution date, then the cash manager will use (i) the
weighted average seller share percentage (instead of the seller share
percentage) in determining the amount of mortgages trustee available
revenue receipts to distribute to the seller on that distribution
date, (ii) the weighted average Funding 2 share percentage (instead
of the Funding 2 share percentage) in determining the amount of
mortgages trustee available revenue receipts to distribute to Funding
2 on that distribution date and (iii) the weighted average Funding
share percentage (as calculated pursuant to the mortgages trust deed)
in determining the amount of mortgages trustee available revenue
receipts to distribute to Funding on that distribution date.
Amounts due to the mortgages trustee and the administrator will
include VAT, if applicable, payable under United Kingdom tax law. At the date
of this prospectus, VAT is calculated at the rate of 17.5% of the amount to be
paid. Payment of VAT will reduce the amounts ultimately available to pay
interest on the notes.
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Cash management of trust property - principal receipts
Under the cash management agreement, the cash manager is also
responsible for distributing principal receipts on behalf of the mortgages
trustee on each distribution date in accordance with the order of priority
described in the next two following sections. To understand how the cash
manager will distribute principal receipts on the mortgage loans on each
distribution date (the "mortgages trustee principal priority of payments") you
need to understand the definitions set out below.
The "final repayment date" means, in respect of the global
intercompany loan, the payment date in [o] 2055.
A "trigger event" means an asset trigger event and/or a non-asset
trigger event.
An "asset trigger event" is the event that occurs when an amount is
debited to the AAA principal deficiency subledger. For more information on the
principal deficiency ledger, see "Credit structure".
A "non-asset trigger event" means any of the following events:
o an insolvency event occurs in relation to the seller;
o the seller's role as administrator is terminated and a new
administrator is not appointed within 60 days; or
o on the distribution date immediately succeeding a seller share
event distribution date, the current seller share is equal to or
less than the minimum seller share (determined using the amounts
of the current seller share and minimum seller share that would
exist after making the distributions of mortgages trustee
principal receipts due on that distribution date on the basis
that the cash manager assumes that those mortgages trustee
principal receipts are distributed in the manner described under
"- Mortgages trustee allocation and distribution of mortgages
trustee principal receipts prior to the occurrence of a trigger
event").
A "seller share event" will occur if, on a distribution date, (i) the
result of the calculation of the current seller share on that distribution
date would be equal to or less than the minimum seller share for such
distribution date (determined using the amounts of the current seller share
and minimum seller share that would exist after making the distributions of
mortgages trustee principal receipts due on that distribution date on the
basis that the cash manager assumes that those mortgages trustee principal
receipts are distributed in the manner described under "- Mortgages trustee
allocation and distribution of mortgages trustee principal receipts prior to
the occurrence of a trigger event"), and (ii) a seller share event has not
occurred on the immediately preceding distribution date).
A "seller share event distribution date" is a distribution date on
which a seller share event occurs.
Mortgages trust allocation and distribution of mortgages trustee principal
receipts prior to the occurrence of a trigger event
Prior to the occurrence of a trigger event (and whether or not there
has been any enforcement of the Funding 2 security or the issuer security) the
cash manager on behalf of the mortgages trustee will allocate and distribute
mortgages trustee principal receipts on each distribution date (or, in respect
of any initial consideration or [special distribution], on any contribution
date) as follows:
(A) first, to the seller the amount of any initial consideration [or
special distribution] which is then allocable and payable to the
seller in accordance with the mortgages trust deed;
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(B) second, to Funding the amount of any special distribution which
is then allocable and payable to Funding in accordance with the
mortgages trust deed;
(C) third, in no order of priority between them but in proportion to
the respective amounts due:
(1) to Funding in an amount equal to the lesser of:
(a) the amount of mortgage trustee principal receipts
required to be applied by Funding under the terms
of the Funding intercompany loans as determined
pursuant to the mortgages trust deed; and
(b) an amount determined by multiplying the total
amount of remaining mortgages trustee principal
receipts by the Funding share percentage of the
trust property;
(2) to Funding 2 in an amount equal to the lesser of:
(a) if Funding 2 has a repayment requirement on that
distribution date (as to which, see "Cashflows -
Funding allocation of mortgages trustee available
principal receipts"), the amount of such repayment
requirement; and
(b) an amount determined by multiplying the total
amount of remaining mortgage trustee principal
receipts by the Funding 2 share percentage of the
trust property;
(D) fourth, in no order between them but in proportion to the
respective amounts due to Funding and Funding 2, to the extent
not already paid pursuant to (C) above, up to the amounts set
forth in (C)(1)(a) and (C)(2)(a) above, respectively, provided,
that if remaining mortgages trustee principal receipts are
insufficient on such distribution date to fully satisfy the
amounts set forth in (C)(i)(a) and (B)(2)(a) above, then to
Funding and Funding 2 pro rata according to their respective
shares of the trust property as determined pursuant to the
mortgages trust deed; and
(E) fifth, to allocate to the seller the amount equal to AA - BB,
where "AA" is the amount of mortgages trustee principal receipts
and "BB" is the amount of such mortgages trustee principal
receipts applied and/or allocated under (A) through (D) above;
provided that, if an assignment date or a contribution date has
occurred during the trust calculation period immediately preceding
that distribution date, then the cash manager will use (i) the
weighted average Funding 2 share percentage (instead of the Funding 2
share percentage) in determining the amount of mortgages trustee
principal receipts to distribute to Funding 2 on that distribution
date and (ii) the weighted average Funding share percentage (as
calculated pursuant to the mortgages trust deed) in determining the
amount of mortgages trustee principal receipts to distribute to
Funding on that distribution date.
PROVIDED THAT in relation to (A) through (D) above the following
rules shall apply:
(1) If the notes have become immediately due and payable as a result
of the service of an issuer enforcement notice or if the global
intercompany loan has become immediately due and payable as a
result of the service of a global intercompany loan enforcement
notice, principal payments in respect of the global intercompany
loan may be made in excess of any bullet repayment loan amount,
scheduled repayment loan amount or controlled amortization loan
amount and paragraph (C)(2)(a) above shall no longer apply and,
except following a non-asset trigger event, the amount of
principal receipts to be distributed to Funding 2
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on that distribution date may not exceed the amount determined
under paragraph (C)(2)(b) above.
(2) If a series and class of notes have become immediately due and
payable as a result of the service of an issuer enforcement
notice or if the global intercompany loan has become immediately
due and payable as a result of the service of a global
intercompany loan enforcement notice, then for the purpose of
calculating the amount under paragraph (C)(2)(b) above, that
amount will be reduced to the extent of any remaining amounts
standing to the credit of the Funding 2 reserve ledger and/or
the Funding 2 liquidity reserve ledger (if any) which are to be
utilized on the immediately succeeding payment date to repay
principal on the global intercompany loan, but only to the
extent that those amounts would not otherwise be payable on that
global intercompany loan on that payment date.
(3) The amount of mortgages trustee principal receipts payable to
Funding 2 on a distribution date will be reduced in proportion
to the aggregate of mortgages trustee available revenue receipts
allocable to Funding 2 on such distribution date which are to be
applied on the immediately succeeding payment date in reduction
of deficiencies recorded on the principal deficiency ledger, but
only to the extent that the mortgages trustee available revenue
receipts which are to be so applied on that payment date would
not otherwise be payable as principal of the relevant notes on
that payment date.
(4) On a seller share event distribution date, the cash manager
shall deposit all mortgages trustee principal receipts remaining
after (D) above (the "mortgages trustee retained principal
receipts") in the mortgages trustee GIC account and make a
corresponding credit to the principal ledger.
(5) Neither the Funding 2 share nor the Funding share may be reduced
below zero.
(6) Funding 2 will not be entitled to receive and the cash manager
shall procure that Funding 2 does not receive any amount of
principal receipts from the mortgages trustee on a distribution
date (except for that part of any repayment requirement
constituting the cash accumulation requirement) which is not
required by Funding 2 to repay principal falling due on any loan
tranche on the immediately succeeding payment date in order to
fund payments of principal falling due on any notes on that
payment date.
(7) The mortgages trustee will not distribute any overpayment (other
than a capital payment) in respect of any non-flexible mortgage
loans until the first distribution date following December 31 of
the year in which such overpayment is received; provided that if
a borrower has made an underpayment of principal on such non-
flexible mortgage loan following the overpayment then the
mortgages trustee will distribute principal in an amount up to
the amount of such underpayment (but not exceeding the amount of
the overpayment previously made) on the next-occurring
distribution date.
Mortgages trust allocation and distribution of mortgages trustee principal
receipts on or after the occurrence of a trigger event
On each distribution date on or after the occurrence of a non-asset
trigger event and until the occurrence of an asset trigger event, the cash
manager will allocate and distribute all mortgages trustee principal receipts
to Funding and to Funding 2, pro rata according to their respective shares of
the trust property until the Funding share and the Funding 2 share of the
trust property are zero. Following the occurrence of a non-asset trigger
event, the notes will be subject to prepayment risk (that is, they may be
repaid earlier than expected). See "Risk factors - The occurrence of a
non-asset trigger event may accelerate the repayment of certain notes and/or
delay the repayment of other notes".
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On each distribution date on or after the occurrence of an asset
trigger event, the cash manager will allocate and distribute all mortgages
trustee principal receipts as follows:
(A) if the immediately preceding distribution date was a seller
share event distribution date, all of the mortgages trustee
retained principal receipts to Funding 2 and Funding pro rata
according to their respective shares of the trust property as
determined pursuant to the mortgages trust deed; and then
(B) with no order of priority between them but in proportion to the
respective amounts due to Funding, Funding 2, and the seller
according to the Funding share percentage of the trust property,
the Funding 2 share percentage of the trust property and the
seller share percentage of the trust property, respectively,
until the Funding share and Funding 2 share of the trust
property are zero, even though those payments may reduce the
seller share of the trust property to an amount less than the
minimum seller share. Notwithstanding the foregoing, if an
assignment date or a contribution date has occurred during the
trust calculation period immediately preceding any such
distribution date, the cash manager will apply all mortgages
trustee principal receipts remaining after (A) above among
Funding, Funding 2, and the seller in no order of priority
between them but in proportion to the weighted average Funding
share percentage, the weighted average Funding 2 share
percentage (as calculated pursuant to the mortgage trust deed)
and weighted average seller share percentage, each in respect of
mortgages trustee principal receipts, for that distribution date
until the Funding share and Funding 2 share of the trust
property is zero.
Following the occurrence of an asset trigger event, certain series
and classes of notes will be subject to prepayment risk (that is, they may be
repaid earlier than expected) and other series and classes of notes will be
subject to extension risk (that is, they may be repaid later than expected).
See "Risk factors - The occurrence of an asset trigger event or enforcement of
the issuer security may accelerate the repayment of certain notes and/or delay
the repayment of other notes".
Overpayments
An overpayment in respect of any non-flexible mortgage loan which
does not constitute a capital payment in respect of any mortgage loan will not
become available for distribution to the beneficiaries as principal receipts
until the first distribution date following December 31 of the year in which
such overpayment is received, save to the extent that any such overpayment by
a borrower is applied in reduction of an underpayment by such borrower in
respect of such mortgage loan prior to such date. Any such overpayment shall
be retained in the mortgages trustee GIC account and the cash manager will
maintain a separate ledger to record its receipt and subsequent payment from
time to time. Where any such overpayment has been made in error the
administrator will be authorized to refund the amount of such overpayment to
the relevant borrower at any time prior to December 31 of the year in which
such overpayment was made.
An overpayment in respect of any flexible mortgage loan will not be
retained by the mortgages trustee but will be distributed to the beneficiaries
on the immediately succeeding distribution date as principal receipts.
Losses
All losses arising on the mortgage loans (other than any personal
secured loans) will, save as otherwise provided, be applied in reducing
proportionately the Funding share of the trust property, the Funding 2 share
of the trust property and the seller share of the trust property. Save as
otherwise provided, the Funding 2 share of losses will be determined on any
distribution date by multiplying the amount of losses in the immediately
preceding trust
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calculation period by the Funding 2 share percentage (as determined on the
immediately preceding distribution date) until the Funding 2 share of the
trust property is zero. However, if an assignment date or a contribution date
has occurred during the trust calculation period immediately preceding a
distribution date, then the amount of losses shall be multiplied by the
weighted average Funding 2 share percentage (as calculated on that
distribution date) in respect of losses rather than the current Funding 2
share percentage. The remainder of the losses shall be allocated to Funding
and to the seller.
Losses arising on any personal secured loans in the trust property
will be applied first to reduce the seller's share of the trust property
(including the minimum seller share) until the seller's share is reduced to
zero, and only thereafter to reduce the Funding share and the Funding 2 share
of the trust property (on a pro rata basis).
For a description of how losses on the mortgage loans that have been
allocated to Funding 2 on any date will be allocated to the loan tranches of
the global intercompany loan, see "The global intercompany loan agreement -
Allocation of losses".
Disposal of trust property
The trust property is held on trust for the benefit of Funding,
Funding 2 and the seller. Subject as provided otherwise in the mortgages trust
deed and the other transaction documents, the mortgages trustee will not be
entitled to dispose of the trust property or create any security interest over
the trust property.
If an event of default occurs under the global intercompany loan
agreement (a "global intercompany loan event of default") and the Funding 2
security trustee enforces the security granted by Funding 2 over its assets
under the Funding 2 deed of charge and/or the second priority Funding 2 deed
of charge, including its share of the trust property, then the Funding 2
security trustee will be entitled, among other things, to sell the Funding 2
share of the trust property. For further information on the security granted
by Funding 2 over its assets, see "Security for Funding 2's obligations".
Additions to, and reductions from, the trust property
The trust property may be increased from time to time by the
assignment of new mortgage loans and their related security to the mortgages
trustee. The mortgages trustee will hold the new mortgage loans and their
related security on trust for Funding, Funding 2 and the seller according to
the terms of the mortgages trust deed. For further information on the
assignment of new mortgage loans and their related security to the mortgages
trustee, see "Assignment of the mortgage loans and related security".
If a borrower makes a re-draw under a flexible mortgage loan included
in the mortgages trust, then the seller will be solely responsible for funding
that re-draw. As a result, the size of the trust property and the seller share
of the trust property will increase by, in the case of a cash re-draw, the
principal amount of such cash re-draw and, in the case of a non-cash re-draw,
the amount of any further contribution made by the seller to the mortgages
trustee of the unpaid interest element in respect of such non-cash re-draw.
However, if an insolvency event occurs in respect of the seller, then the
seller may continue to make payments to the mortgages trustee in an amount
equal to the unpaid interest element in respect of such non-cash re-draw in
the same manner and for the same purposes as described above, but it is not
obliged to do so.
If at any time the administrator agrees to a further advance being
made under a mortgage loan included in the mortgages trust, then the seller
will be solely responsible for funding that further advance. If at some future
date the seller decides to assign such further advance to the mortgages
trustee or not purchase the mortgage loan that is subject to such further
advance from the mortgages trustee, the trust property and the seller share of
the trust property will increase by the principal amount of the further
advance made by the seller.
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In addition to the reductions or deemed reductions to the trust
property described above under "- Adjustments to trust property", the
application of any Together Connections Benefit in relation to Together
Connections mortgage loans and any Connections Benefit in relation to
Connections mortgage loans included in the mortgages trust will also reduce
the size of the trust property (and, as described below under "- Increasing
and decreasing the seller share of the trust property", the seller share of
the trust property only). This will occur because the outstanding principal
balances of any Together Connections mortgage loans and Connections mortgage
loans included in the trust property (and therefore the aggregate amount of
the trust property) will be reduced from time to time by the amount of any
Together Connections Benefit applied to those Together Connections mortgage
loans and any Connections Benefit applied to those Connections mortgage loans,
as described under "The mortgage loans - Characteristics of the mortgage loans
- - Mortgage loan products offered by the seller".
Arrears
The aggregate current balance of the mortgage loans in the mortgages
trust will be increased at any time by the amount in which the mortgage loans
that have been assigned to the mortgages trust are in arrears and those
arrears have been capitalized. Such increase shall be allocated to Funding,
Funding 2 and the seller at any time in proportion to their respective
percentage shares in the trust property as determined in respect of the trust
calculation period or interim calculation period, as the case may be, in which
the arrears occur.
Increasing and decreasing the seller share of the trust property
If a borrower makes a non-cash re-draw in respect of any flexible
mortgage loan under the mortgages trust deed the seller as beneficiary has
agreed under the mortgages trust to fund such non-cash re-draw in the
mortgages trust by making a further contribution to the mortgages trustee of
an amount equal to the unpaid interest element in respect of such non-cash
re-draw. Accordingly, the size of the trust property and the seller share of
the trust property will increase by an amount equal to the further
contribution made by the seller. Any such payment received by the mortgages
trustee will be treated as revenue receipts in the mortgages trust and will be
distributed on the immediately succeeding distribution date among the
beneficiaries in accordance with the mortgages trust allocation of revenue
receipts.
The seller will also fund cash re-draws in respect of flexible
mortgage loans and further draws under personal secured loans held in the
mortgages trust by payment of the amount of the cash re-draw or further draw
to the relevant borrower. Accordingly, the size of the trust property and the
seller share of the trust property will automatically increase by the amount
of any cash re-draw or further draw so made.
In addition to the reductions or deemed reductions to the seller
share of the trust property described above under "- Adjustments to trust
property", the application of any Together Connections Benefit in relation to
Together Connections mortgage loans and any Connections Benefit in relation to
Connections mortgage loans included in the mortgages trust that reduces the
size of the trust property will also reduce the seller share of the trust
property. This will occur because the outstanding principal balances of any
Together Connections mortgage loans and Connections mortgage loans included in
the trust property (and therefore the aggregate amount of the trust property)
will be reduced from time to time by the amount of any Together Connections
Benefit applied to those Together Connections mortgage loans and any
Connections Benefit applied to those Connections mortgage loans, as described
under "The mortgage loans - Characteristics of the mortgage loans - Mortgage
loan products offered by the seller". The amount of any such reduction will be
applied against the seller share of the trust property only.
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Increasing the Funding 2 share of the trust property
If Funding 2 enters into a new loan tranche, then it may apply the
proceeds of that loan tranche as an initial contribution or a further
contribution to the mortgages trust to increase its beneficial interest in,
and the Funding 2 share of, the trust property. Funding 2 will be permitted to
do this only if it meets certain conditions, including among others:
o that no global intercompany loan enforcement notice has been
served under any global intercompany loan;
o that as at the most recent payment date no deficiency was
recorded on the principal deficiency ledger;
o that no event of default under the transaction documents shall
have occurred which is continuing;
o that the rating agencies have not confirmed in writing to the
security trustee, the Funding 2 security trustee or the issuer
that the proposed increase in the Funding 2 share would
adversely affect the then current ratings by the rating
agencies of the existing notes of the issuer and of the Funding
issuers; and
o that, as of the last day of the immediately preceding trust
calculation period, the aggregate current balance of mortgage
loans in the mortgages trust which were then in arrears for at
least 3 months is less than 4% of the aggregate current balance
of all mortgage loans in the mortgages trust as of such date,
unless the rating agencies have confirmed that the then current
ratings of the notes will not be adversely affected.
Under the mortgages trust deed, Funding, Funding 2 and the seller
have agreed that principal receipts held by the mortgages trustee on any date
in respect of any initial contribution or further contribution paid by Funding
2 to the mortgages trustee on that date will be allocated and paid by the
mortgages trustee to the seller as initial consideration or to the seller or
Funding as a special distribution from the mortgages trust on such date
whether or not such date is a distribution date. The payment of any such
initial consideration or special distribution will reduce the seller share or
the Funding share of the trust property, as applicable.
Termination of the mortgages trust
The mortgages trust will terminate on the date on which there is no
remaining trust property or, if earlier, such date as may be requested in
writing by the seller to the mortgages trustee being on or after the date on
which the global intercompany loan has been repaid in full or there is no
further claim under the global intercompany loan or both the Funding share and
the Funding 2 share of the trust property have been reduced to zero or such
other date which may be agreed between the mortgages trustee, Funding, Funding
2 and the seller so long as all amounts due from Funding and Funding 2 to
their respective secured creditors have been repaid in full.
Retirement of mortgages trustee
The mortgages trustee is not entitled to retire or otherwise
terminate its appointment. The seller, Funding and Funding 2 cannot replace
the mortgages trustee.
Governing law
The mortgages trust deed is governed by English law.
[The Funding beneficiary deed
Under the terms of the Funding beneficiary deed, Funding, Funding 2,
the security trustee and the Funding 2 security trustee have agreed as to,
amongst other
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things, arrangements amongst them in respect of certain commercial decisions
(relating to authorizations, consents, waivers, instructions or other acts) to
be made from time to time in respect of the transaction documents. The Funding
beneficiary deed is governed by English law.]
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The global intercompany loan agreement
The following section describes, the material terms of the global
intercompany loan agreement. The description does not purport to be complete
and is subject to the provisions of the global intercompany loan agreement, a
form of which has been filed as an exhibit to the registration statement of
which this prospectus is a part.
The facility
Under the terms of the global intercompany loan agreement the issuer
will lend to Funding 2, from time to time on the relevant closing date for
each series and class of notes an aggregate amount in sterling equal to the
proceeds of the issue of such notes. Each such advance of funds will be a
separate loan tranche under the global intercompany loan. Each loan tranche
will relate to a particular series and class of notes. The loan tranche
supplement will set forth the terms of each loan tranche. For this purpose,
the proceeds of notes in a specified currency other than sterling will be
converted into sterling at the relevant currency swap rate. Funding 2 will
then use the proceeds of each loan tranche to:
o make contributions (excluding deferred contributions) to the
mortgages trustee to acquire and/or increase its beneficial
interest in the trust property pursuant to the mortgages trust
deed;
o fund the Funding 2 reserve fund or to make a deposit into the
Funding 2 GIC account; or
o make a payment back to us to refinance an existing loan tranche.
Upon receipt of a contribution from Funding 2 which constitutes an
initial contribution, the mortgages trustee will pay such funds to the seller
as initial consideration, which will reduce the seller share of the trust
property. Upon receipt of a contribution from Funding 2 which constitutes a
further contribution, the mortgages trustee will pay such funds to the seller
and/or Funding as a special distribution, which will reduce the seller share
and/or the Funding share (as applicable) of the trust property. The global
intercompany loan agreement is governed by English law.
[Each loan tranche will constitute a separate debt due from Funding 2
to the issuer.]
Loan tranche ratings assigned to the loan tranches
The designated loan tranche ratings of the AAA loan tranches reflect
the ratings expected to be assigned to any class A notes, by the rating
agencies on the relevant closing date except that money market classes will
have different short-term ratings. The designated loan tranche ratings of the
AA loan tranches reflect the rating expected to be assigned to any class B
notes by the rating agencies on the relevant closing date. The designated loan
tranche ratings of the A loan tranches reflect the rating expected to be
assigned to any class M notes by the rating agencies on the loan tranches on
the relevant closing date. The designated ratings of the BBB loan tranches
reflect the rating expected to be assigned to any class C notes by the rating
agencies on the relevant closing date. The designated loan tranche ratings of
the BB, loan tranches reflect the rating expected to be assigned to any class
D notes by the rating agencies on the relevant closing date. If, after any
closing date, the rating agencies subsequently change the ratings assigned to
a series and class of notes, then this will not affect the loan tranche
ratings of the loan tranches under the global intercompany loan.
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Issuance of loan tranches
We may advance loan tranches to Funding 2 and issue corresponding
series and classes of notes from time to time without obtaining the consent of
existing noteholders. We will not be obliged to advance loan tranches to
Funding 2 unless on the applicable closing date certain conditions have been
met, including:
(a) the related series and class of notes has been issued and
the proceeds have been received by us or on our behalf;
(b) [one or more deeds of accession relating to the Funding 2
deed of charge have been executed by the parties to the
Funding 2 deed of charge];
(c) each of the applicable transaction documents has been
executed by the relevant parties to those documents; and
(d) Funding 2 has delivered a solvency certificate to the
security trustee in form and substance satisfactory to the
security trustee;
Representations, warranties and covenants
Under the global intercompany loan agreement, Funding 2 will make
standard representations and warranties to the issuer.
In addition to standard covenants, Funding 2 will give the following
undertakings:
o it will not create or permit to subsist any security interest
over or in respect of any of its assets (unless arising by
operation of law) other than as provided for pursuant to the
transaction documents;
o it will not sell, assign, transfer, lease or otherwise dispose
of or grant any option over all or any of its assets, properties
or undertakings or any interest, estate, right, title or benefit
to or in such assets, properties or undertakings other than as
provided for pursuant to the transaction documents;
o it will not enter into any amalgamation, demerger, merger or
reconstruction, nor acquire any assets or business nor make any
investments other than as contemplated in the transaction
documents;
o except as provided or contemplated under the transaction
documents it will not incur any indebtedness or give any
guarantee or indemnity in respect of any obligation of any other
person;
o it will not pay any dividend or make any other distribution in
respect of any of its shares other than in accordance with the
Funding 2 deed of charge, or issue any new shares or alter any
rights attaching to its issued shares as at the date of the
intercompany loan agreement;
o it will not carry on any business or engage in any activity
other than as contemplated by the transaction documents or which
is not incidental to or necessary in connection with any of the
activities in which the transaction documents provide or
envisage that Funding 2 will engage; and
o save for the issuer (and any other issuer created in the
future), it will not have any subsidiaries or subsidiary
undertakings as defined in the Companies Act 1985 (as amended).
Payment of interest
Payment of interest and fees on each loan tranche of the global
intercompany loan will be made only from and to the extent of distributions
received by Funding 2 in respect of the Funding 2 share of the trust property
in respect of revenue receipts on the dates and in the priorities set forth in
"Cashflows - Distribution of Funding 2 available revenue/receipts" and in the
applicable loan tranche supplement.
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The interest rates applicable to the loan tranches from time to time
will be determined by reference to LIBOR for [one]-month sterling deposits
(other than, in each case, in respect of the first interest period) plus or
minus, in each case, a margin which will differ for each separate loan
tranche. LIBOR for an interest period will be determined on the relevant
interest determination date.
Subject as provided above and to the limited recourse provisions
described below, in addition, on each payment date or as and when required
Funding 2 will pay an additional fee to the issuer. This fee will be equal to
the amount required by the issuer to pay or provide for all other amounts (but
excluding interest and principal due on the notes and tax that can be met out
of the issuer's profits) if any, falling due on that payment date as set forth
in the items under "Cashflows - Distribution of issuer available revenue
receipts prior to enforcement of the issuer security" or in the relevant items
under such other issuer priority of payments as may apply on that payment
date.
Repayment of the global intercompany loan
Payment of principal on the global intercompany loan on any payment
date will be made only from and to the extent of distributions received by
Funding 2 in respect of the Funding 2 share of the trust property in respect
of principal receipts on the dates and in the priorities set forth in
"Cashflows - Distribution of Funding 2 available principal receipts" and in
the applicable prospectus supplement.
Due and payable dates of loan tranches
The loan tranche supplement for each loan tranche will set forth (i)
the bullet repayment dates, (ii) the scheduled repayment dates, (iii) the
dates and amounts for payment of controlled amortization amounts and (iv) the
first payment date on which a series and class of original pass-through notes
is scheduled to be paid, as applicable. A loan tranche will become "due and
payable" on the earlier to occur of:
(1) any date set out in the prospectus supplement;
(2) the date upon which a trigger event occurs;
(3) the date upon which an issuer enforcement notice is served
on the issuer under the issuer deed of charge;
(4) the date upon which a [note acceleration notice] in relation
to the related series and class of notes is served on the
issuer under the [issuer deed of charge];
(5) the date upon which a global intercompany loan enforcement
notice is served on Funding 2 under the Funding 2 deed of
charge; and
(6) the date upon which a step-up date, if any, occurs in
relation to the relevant loan tranche.
In each case, when a loan tranche becomes due and payable, it shall
continue to be due and payable until it is fully repaid. If there are
insufficient funds available to repay a loan tranche on a Funding 2 payment
date upon which that loan tranche is due and payable, then the shortfall will
be repaid on subsequent Funding 2 payment dates from Funding 2 available
principal receipts until that loan tranche is fully repaid.
Funding 2 may, as a general matter, make a repayment on a loan
tranche if, following such payment, each tier of loan tranches retains its
required amount of subordination. This general requirement is expressed in the
"repayment tests" set out in part B of Rule (1) in "Cashflows - Distribution
of Funding 2 available principal receipts prior to the enforcement of the
Funding 2 security - Rules for application of Funding 2
141
principal receipts" below, which must be satisfied in respect of any payment
of principal on a loan tranche:
Limited recourse
Funding 2 will only be obliged to pay amounts to the issuer in
respect of any loan tranche under the global intercompany loan agreement to
the extent it has funds to do so after making payments ranking in priority to
amounts due on such loan tranches (including amounts due on loan tranches of a
more senior ranking).
If on the final repayment date of a loan tranche, there is a
shortfall between the amount of interest and/or principal due on that loan
tranche and the amount available to Funding 2 to make that payment, then that
shortfall shall not be due and payable to the issuer until the time (if ever)
when Funding 2 has enough money available to pay the shortfall on that loan
tranche (after making any other payments due that rank higher in priority to
that loan tranche).
If, on the final repayment date of the global intercompany loan there
is a shortfall between the amount required to pay all outstanding interest
and/or principal on any AA loan tranches, any A loan tranches, any BBB loan
tranches and/or any BB loan tranches and the amount available to Funding 2 to
make those payments, then the shortfall shall be deemed to be not due and
payable under the global intercompany loan agreement and any claim that the
issuer may have against Funding 2 in respect of that shortfall will be
extinguished.
If, on the final repayment date of the global intercompany loan,
there is a shortfall between the amount required to pay all interest on and/or
principal of the then outstanding loan tranches and the amount available to
Funding 2 to pay amounts due under the global intercompany loan in respect
thereof, then Funding 2 will not be obliged to pay that shortfall to the
issuer under the global intercompany loan agreement and any claim that the
issuer may have against Funding 2 in respect of that shortfall will be
extinguished.
Following enforcement of the Funding 2 security and distribution of
the proceeds in accordance with the terms of the Funding 2 deed of charge all
outstanding claims of the issuer will be extinguished.
Global Intercompany loan events of default
The global intercompany loan agreement will contain events of default
(each, a "global intercompany loan event of default") including, among others,
the following events:
o Funding 2 does not pay any amount payable under the global
intercompany loan agreement for a period of 5 London business
days after such amount has become due and payable in accordance
with the terms of the global intercompany loan agreement
(subject always to the limited recourse provisions set out in
the global intercompany loan agreement); or
o Funding 2 does not comply in any material respect with any of
its obligations under the transaction documents (except for its
payment obligations under the global intercompany loan
agreement) and, if capable of remedy, such non-compliance is not
remedied within 20 London business days of Funding 2 becoming
aware of it or of receiving notice from the Funding 2 security
trustee requiring it to be remedied; or
o a representation or warranty of Funding 2 made or repeated in
connection with any of the transaction documents is incorrect in
any material respect when made or deemed to be made or repeated;
or
o an insolvency event occurs in relation to Funding 2; or
o it is, or becomes, unlawful for Funding 2 to perform its
obligations under any of the transaction documents; or
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o the Funding 2 deed of charge is no longer binding or enforceable
against Funding 2 or is no longer effective to create the
security intended to be created by it.
If a global intercompany loan event of default occurs and is
continuing under the global intercompany loan agreement then the Funding 2
security trustee may, by delivery of an intercompany loan enforcement notice
to Funding 2, declare the global intercompany loan to be immediately due and
payable and/or declare the global intercompany loan to be due and payable on
demand of the Funding 2 security trustee.
You should be aware that the non-payment by Funding 2 of any amount
due under the global intercompany loan agreement in circumstances where
Funding 2 does not have sufficient funds available to make the relevant
payment to the issuer or where the repayment tests are not satisfied will not
be an intercompany loan event of default. Our ability to repay each series and
class of notes will depend, among other things, upon payments received by the
issuer from Funding 2 under the related loan tranches pursuant to the global
intercompany loan agreement. See "Risk factors - Funding 2 is not required to
make payments on the global intercompany loan if it does not have enough money
to do so, which could adversely affect the payment on the notes" and "- Our
recourse to Funding 2 under the global intercompany loan is limited, which
could adversely affect the payment on the notes".
Funding 2's bank accounts
Funding 2 currently maintains the "Funding 2 GIC account" in its name
with Northern Rock. A separate "Funding 2 reserve ledger" is maintained to
record amounts standing to the credit of the Funding 2 reserve fund from time
to time. Among other things, Funding 2 may use amounts credited to the Funding
2 reserve ledger from time to time to [pay the start-up costs in connection
with the issuance of new notes and to cover losses and shortfalls of the
issuer as part of fees payable under the global intercompany loan agreement].
See "Credit Structure - Funding 2 reserve fund".
On each distribution date the Funding 2 share of each of the
mortgages trustee available revenue receipts and mortgages trustee available
principal receipts payable to Funding 2 under the mortgages trust will be
initially deposited in the Funding 2 GIC account. On each distribution date
any balance remaining in the cash accumulation ledger will be initially
deposited in the Funding 2 GIC account. On each payment date, amounts required
to meet Funding 2's obligations to its various creditors will, with the
consent of the security trustee, be transferred from the Funding 2 GIC account
to the "Funding 2 transaction account" and applied by the cash manager in
accordance with the relevant Funding 2 priority of payments. Amounts
representing Funding 2's profits will be retained in the Funding 2 transaction
account.
The Funding 2 GIC account referred to above will be maintained with
Northern Rock but may be required to be transferred to the stand-by GIC
provider or other bank in certain circumstances, including if the short-term,
unguaranteed and unsecured ratings ascribed to Northern Rock fall below "A-1+"
(or in the circumstances described below, "A-1") by Standard & Poor's, "F1" by
Fitch and "P-1" by Moody's, provided that where the relevant deposit amount is
less than 20% of the amount of the Funding 2 share of the trust property, then
the short-term, unguaranteed and unsecured rating required to be ascribed to
Northern Rock by Standard & Poor's shall be at least "A-1".
143
Cashflows
Distributions of Funding 2 available revenue receipts prior to the enforcement
of the Funding 2 security
Definition of Funding 2 available revenue receipts
"Funding 2 available revenue receipts" in respect of any payment date
will be calculated by the cash manager on the distribution date immediately
preceding such payment date and will be an amount equal to the sum of:
(1) all mortgages trustee available revenue receipts distributed to
Funding 2 during the interest period ending on the relevant
payment date;
(2) other net income of Funding 2 including all amounts of interest
received on the Funding 2 GIC account and the Funding 2
transaction account, and/or all income from authorized
investments, on each distribution date during the interest
period ending on such payment date, in each case to be received
on or prior to such payment date; and
(3) [amounts received from the Funding 2 basis rate swap provider
under the Funding 2 basis rate swap agreement (excluding swap
collateral excluded amounts) and any early termination amounts
(other than such early termination amounts applied or to be
applied by Funding 2 in the purchase of one or more replacement
hedge transactions) recovered by Funding 2 under the Funding 2
basis rate swap agreement);
(4) [(only to the extent required after making the calculation set
out in rule (2) of "Rules for application of Funding 2 available
revenue receipts") the aggregate of amounts standing to the
credit of the Funding 2 principal ledger or the cash
accumulation ledger (as applicable) which are to be applied on
the relevant payment date to pay items (H), (J), (M), (O), and
(Q) of the Funding 2 pre-enforcement revenue priority of
payments;]
(5) the amount standing to the credit of the Funding 2 reserve
ledger, subject to any limits or conditions on the purposes for
which the Funding 2 reserve fund may be utilized; and
(6) the amount standing to the credit of the Funding 2 liquidity
reserve fund, if any subject to any limits or conditions on the
purposes for which the Funding 2 liquidity reserve fund may be
utilized.
(7) in so far as is needed, any amount available to be drawn under
the Funding 2 liquidity facility (if any) for the payment of
interest and expenses.
The limits and conditions on the utilization of the Funding 2 reserve
fund and the Funding 2 liquidity reserve fund, if any, are described under
"Credit structure - Funding 2 reserve fund" and "- Funding 2 liquidity reserve
fund"
Rules for application of Funding 2 available revenue receipts
The Funding 2 deed of charge sets out certain rules for the
application by Funding 2, or the cash manager on its behalf, of Funding 2
available revenue receipts on each payment date. The principal rules are as
follows:
(1) If on any payment date any Funding 2 available revenue receipts
are applied by Funding 2 in reducing any deficiency recorded on
the principal deficiency subledger of any tier of loan tranches
(but only to the extent of any deficiency
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which has arisen as a result of losses on the mortgage loans
allocated by Funding 2 to that principal deficiency subledger
but not as a result of any other principal deficiency of any
other tier of loan tranche), then the Funding 2 available
revenue receipts, so applied shall constitute repayments of
principal under the relevant tier of loan tranches and shall
reduce the outstanding principal balance of those loan tranches
accordingly.
(2) To the extent that, on any payment date Funding 2 available
revenue receipts will be insufficient to pay items [(H), (J),
(M), (O) and (Q)] of the Funding 2 pre-enforcement revenue
priority of payments, then the cash manager shall provide for
that deficit by applying amounts standing to the credit of [(a)
first,] the Funding 2 principal ledger and (b) second, any
amounts standing to the credit of the cash accumulation ledger
as applicable. Funding 2 principal receipts may not be used to
pay interest on any loan tranche if such payment would create or
increase a principal deficiency in respect of a higher ranking
tier of loan tranches.
Distribution of Funding 2 available revenue receipts prior to enforcement of
the Funding 2 security
This section sets out the order of priority of payments of Funding 2
available revenue receipts as at the Funding 2 program date.
On each payment date or, in respect of amounts due to third parties
by Funding 2 under item (B), when due, prior to enforcement of the Funding 2
security, the cash manager will, subject to the rules for application of
Funding 2 available revenue receipts, apply Funding 2 available revenue
receipts, in the following order of priority (the "Funding 2 pre-enforcement
revenue priority of payments"):
(A) first, to pay amounts due to the security trustee (together with
interest and (to the extent not already inclusive) VAT on those
amounts) and to provide for any amounts due or to become due during
the following interest period to the Funding 2 security trustee,
under the Funding 2 deed of charge or any other transaction document;
(B) second, to pay amounts due to the issuer in respect of the issuer's
obligations specified in items (A) through (D) of the issuer
pre-enforcement revenue priority of payments or, as the case may be,
items (A) through (C) of the issuer post-enforcement priority of
payment, as described under "- Distribution of issuer available
revenue receipts prior to the enforcement of the issuer security" and
- "Distribution of issuer available principal receipts and issuer
available revenue receipts following enforcement of the issuer
security";
(C) third, to pay amounts due to any third party creditors of Funding 2
(other than those referred to later in this order of priority of
payments or in the Funding 2 pre-enforcement principal priority of
payments) of which the cash manager has notice prior to the relevant
payment date, which amounts have been incurred without breach by
Funding 2 of the transaction documents to which it is a party (and
for which payment has not been provided for elsewhere) and to provide
for any such amounts expected to become due and payable by Funding 2
during the following interest period and to pay or discharge any
liability of Funding 2 for corporation tax on any chargeable income
or gain of Funding 2;
(D) fourth, to pay amounts due to the Funding 2 liquidity facility
provider under the Funding 2 liquidity facility agreement, if any,
(except for amounts drawn thereunder to repay principal due on the
bullet [repayment notes] and any Funding 2 liquidity facility
subordinated amounts);
(E) fifth, towards payment of amounts due to the cash manager under the
cash management agreement (together with (to the extent not already
inclusive) VAT on those amounts);
145
(F) sixth, in no order of priority among them, but in proportion to the
respective amounts due, towards payment of amounts, if any, due to
(i) the account bank under the terms of the bank account agreement,
(ii) the stand-by account bank under the terms of the stand-by bank
account agreement and (iii) the corporate services provider under the
terms of the corporate services agreement;
(G) seventh, towards payment of all amounts (including such part of any
termination payment) due to the Funding 2 basis rate swap provider
under the Funding 2 basis rate swap agreement including any
termination payment but excluding any Funding 2 basis rate swap
excluded termination amount);
(H) eighth, in no order of priority among them but in proportion to the
respective amounts due, towards payment of interest due and payable
on the AAA loan tranches;
(I) ninth, towards a credit to the AAA principal deficiency subledger in
an amount sufficient to eliminate any debit on that ledger;
(J) tenth, in no order of priority among them but in proportion to the
respective amounts due, towards payment of interest due and payable
on the AA loan tranches;
(K) eleventh, after taking account of the replenishment of the Funding 2
liquidity reserve fund on that payment date from Funding 2 available
principal receipts, replenishing the Funding 2 liquidity reserve
fund, if any, established in respect of the issuer up to the Funding
2 liquidity reserve required amount [but only to the extent that
there are class [o] notes outstanding on such payment date];
(L) twelfth, towards a credit to the AA principal deficiency subledger in
an amount sufficient to eliminate any debit on that ledger;
(M) thirteenth, in no order of priority among them but in proportion to
the respective amounts due, towards payment of interest due and
payable on the A loan tranches;
(N) fourteenth, towards a credit to the A principal deficiency subledger
in an amount sufficient to eliminate any debit on that ledger;
(O) fifteenth, in no order of priority among them but in proportion to
the respective amounts due, towards payment of interest due and
payable on the BBB loan tranches;
(P) sixteenth, towards a credit to the BBB principal deficiency subledger
in an amount sufficient to eliminate any debit on that ledger;
(Q) seventeenth, in no order of priority among them but in proportion to
the respective amounts due, towards payment of interest due and
payable on the BB loan tranches;
(R) eighteenth, towards a credit to the BB principal deficiency subledger
in an amount sufficient to eliminate any debit on that ledger;
(S) nineteenth, after taking account any replenishment of the Funding 2
reserve fund on that payment date from Funding 2 available principal
receipts, to credit the Funding 2 reserve ledger [up to an amount no
less than the Funding 2 reserve required amount and no greater than
the Funding 2 target reserve amount] (each as defined in "Credit
structure - Funding 2 reserve fund") or if a Funding 2 step-up
trigger event has occurred, to credit the Funding 2 reserve ledger
with such additional amount as set out in "Credit structure - Funding
2 reserve fund";
(T) [twentieth, to the issuer in respect of its obligations (if any) to
make a termination payment to any issuer swap provider (but excluding
any [issuer swap excluded termination amount]);
(U) twenty-first, in no order of priority among them but in proportion to
the amounts due, to pay amounts due (without double counting) to:
146
o the issuer in respect of its obligations (if any) to pay any
issuer swap provider following a swap provider default;
o the Funding 2 liquidity facility provider, if any, any Funding 2
liquidity facility subordinated amounts due under the Funding 2
liquidity facility agreement;
o the Funding 2 basis rate swap provider following a swap provider
default.
(V) twenty-second, in no order of priority among them but in proportion
to the amounts due, towards payment of interest and principal
amounts due to the start-up loan provider(s) under the start-up loan
agreement(s);
(W) twenty-third, towards payment to Funding 2 of an amount equal to
0.01% per annum of the Funding 2 available revenue receipts
(excluding, for this purpose, amounts standing to the credit of the
Funding 2 reserve ledger), which amount will be retained by Funding 2
as profit, less corporation tax in respect of those profits provided
for or paid at item (B) above;
(X) then, towards payment of any deferred contribution due to the
mortgages trustee pursuant to the terms of the mortgages trust deed;
and
(Y) last, towards payment to the shareholders of Funding 2 of any
dividend declared by Funding 2.
If any swap collateral available revenue amounts (as defined in the
glossary) are received by Funding 2 on a payment date, such swap collateral
available revenue amounts shall be applied by the cash manager on that payment
date in the same manner as it would have applied the receipts which such swap
collateral available revenue amounts replace.
Distribution of issuer available revenue receipts prior to enforcement of the
issuer security
Definition of issuer available revenue receipts
"Issuer available revenue receipts" for the issuer in respect of any
payment date will be calculated by the issuer cash manager on the distribution
date immediately preceding that payment date and will be an amount equal to
the sum of:
o interest, fees and any other amount (excluding principal) paid
by Funding 2 on the relevant payment date in respect of the
global intercompany loan;
o interest payable on the issuer transaction account and any
income from authorized investments made with funds standing to
the credit of the issuer transaction account, in each case which
has been or will be received on or before the relevant payment
date; and
On each distribution date the issuer cash manager will calculate
whether there will be an excess or a deficit of issuer available revenue
receipts to pay items [(A) through (L)] of the issuer pre-enforcement revenue
priority of payments.
Distribution of issuer available revenue receipts prior to enforcement of the
issuer security
The issuer cash management agreement sets out the order of priority
of distribution by the issuer cash manager, prior to the enforcement of the
issuer security, of issuer available revenue receipts on each payment date.
The order of priority will be as described in this section as supplemented by
the prospectus supplement related to each series and class of notes.
On (i) each payment date or (ii) the date when due in respect of
amounts due to third parties under paragraph (C) below, the issuer cash
manager will apply issuer available
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revenue receipts in the following order of priority (the "issuer
pre-enforcement revenue priority of payments"):
(A) first, to pay amounts due to the note trustee, together with interest
and (to the extent not already inclusive) VAT on those amounts, and
to provide for any amounts due or to become due during the following
interest period to the note trustee, under the trust deed, the issuer
deed of charge or any other transaction document;
(B) second, in no order of priority among them but in proportion to the
respective amounts due, to pay amounts due to the agent bank, the
paying agents, the transfer agent and the registrar together with
interest and (to the extent not already inclusive) VAT on those
amounts, and to provide for any costs, charges, liabilities and
expenses due or to become due during the following interest period to
the agent bank, the paying agents, the transfer agent and the
registrar, under the paying agent and agent bank agreement;
(C) third, to pay amounts due to any third party creditors of the issuer
(other than those referred to later in this order of priority of
payments or in the issuer pre-enforcement principal priority of
payments), of which the issuer cash manager has notice prior to the
relevant payment date, which amounts have been incurred without
breach by the issuer of the transaction documents to which it is a
party and for which payment has not been provided for elsewhere and
to provide for any such amounts expected to become due and payable
during the following interest period by the issuer and to pay or
discharge any liability of the issuer for corporation tax on any
chargeable income or gain of the issuer;
(D) fourth, in no order or priority among them but in proportion to the
respective amounts due, to pay amounts due to the issuer cash manager
under the issuer cash management agreement, the corporate services
provider under the corporate services agreement and the issuer
account bank under the issuer bank account agreement together with
(to the extent not already inclusive) VAT on those amounts, and to
provide for any amounts due, or to become due in the immediately
succeeding interest period, to the issuer cash manager under the
issuer cash management agreement, to the corporate services provider
under the corporate services agreement and to the issuer account bank
under the issuer bank account agreement;
(E) fifth, from amounts received by the issuer from Funding 2 in respect
of each AAA loan tranche (and, in respect of (ii) below, the amounts,
excluding principal, received from the issuer swap provider(s) under
the relevant issuer swap agreement(s)):
(i) to pay the amounts due and payable to the relevant issuer swap
provider(s) (if any) in respect of the related series of class A
notes (including any termination payment but excluding any
issuer swap excluded termination amount) in accordance with the
terms of the relevant issuer swap agreement(s);
(ii) to pay interest due and payable on the related series of class A
notes;
(F) sixth, from amounts received by the issuer from Funding 2 in respect
of each AA loan tranche (and, in respect of (ii) below, the amounts,
excluding principal, received from the issuer swap provider(s) under
the relevant issuer swap agreement(s)):
(i) to pay the amounts due and payable to the relevant issuer swap
provider(s) (if any) in respect of the related series of class B
notes (including any termination payment but excluding any
issuer swap excluded termination amount) in accordance with the
terms of the relevant issuer swap agreement(s);
(ii) to pay interest due and payable on the related series of class B
notes;
148
(G) seventh, from amounts received by the issuer from Funding 2 in
respect of each A loan tranche (and, in respect of (ii) below, the
amounts, excluding principal, received from the issuer swap
provider(s) under the relevant issuer swap agreement(s)):
(i) to pay the amounts due and payable to the relevant issuer swap
provider(s) (if any) in respect of the related series of class M
notes (including any termination payment but excluding any
issuer swap excluded termination amount) in accordance with the
terms of the relevant issuer swap agreement(s);
(ii) to pay interest due and payable on the related series of class M
notes;
(H) eighth, from amounts received by the issuer from Funding 2 in respect
of each BBB loan tranche (and, in respect of (ii) below, the amounts,
excluding principal, received from the issuer swap provider(s) under
the relevant issuer swap agreement(s)):
(i) to pay the amounts due and payable to the relevant issuer swap
provider(s) (if any) in respect of the related series of class C
notes (including any termination payment but excluding any
issuer swap excluded termination amount) in accordance with the
terms of the relevant issuer swap agreement(s);
(ii) to pay interest due and payable on the related series of class C
notes;
(I) ninth, from amounts received by the issuer from Funding 2 in respect
of each BB loan tranche (and, in respect of (ii) below, the amounts,
excluding principal, received from the issuer swap provider(s) under
the relevant issuer swap agreement(s)):
(i) to pay the amounts due and payable to the relevant issuer swap
provider(s) (if any) in respect of the related series of class D
notes (including any termination payment but excluding any
issuer swap excluded termination amount) in accordance with the
terms of the relevant issuer swap agreement(s);
(ii) to pay interest due and payable on the related series of class D
notes;
(J) tenth, in no order of priority among them but in proportion to the
respective amounts due, to pay to any issuer swap excluded
termination payments to the issuer swap providers;
(K) eleventh, to pay to the issuer an amount equal to 0.01% per annum of
the interest received under the intercompany loan, which will be
retained by the issuer as profit, less corporation tax in respect of
those profits provided for or paid at item (C) above; and
(L) last, to pay to shareholders of the issuer any dividend declared by
the issuer.
If any swap collateral available revenue amounts are received by the
issuer on a payment date, such swap collateral available revenue amounts shall
be applied by the issuer cash manager on that payment date in the same manner
as it would have applied the receipts which such swap collateral available
revenue amounts replace.
Distribution of Funding 2 available principal receipts prior to the
enforcement of the Funding 2 security
Funding 2 allocation of mortgages trustee principal receipts
Prior to each distribution date, the cash manager will determine
whether such distribution date is within a cash accumulation period relating
to a bullet repayment loan amount, (each a "cash accumulation amount") and
will ascertain Funding 2's repayment requirement.
The cash accumulation period will be calculated separately for each
cash accumulation amount.
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The loan tranche supplement for each loan tranche will set out the
scheduled repayment dates and relevant accumulation amounts in relation to
bullet loan tranches.
"cash accumulation period" means in relation to a bullet repayment
loan amount:
(a) the commencement of the anticipated cash accumulation period
relating to the relevant accumulation amount; and
(b) [six] months prior to the scheduled repayment date of that
bullet repayment loan amount; and
ending when Funding 2 has fully repaid that bullet repayment loan
amount.
"anticipated cash accumulation period" means, on any trust
determination date, the anticipated number of months required to accumulate
sufficient principal receipts to pay the relevant accumulation amount in
relation to the relevant cash accumulation amount, which will be equal to:
J + K - L
--------------------
M x (N x O)
calculated in months and rounded up to the nearest whole number, where:
J = the relevant accumulation amount;
K = the aggregate principal amount outstanding on that trust
determination date of:
o each bullet repayment loan amount that was not fully repaid on its
scheduled repayment date; and
o each other bullet repayment loan amount, the scheduled
repayment date of which falls on or before the scheduled
repayment date of the relevant accumulation amount;
L = the amounts standing to the credit of the cash accumulation
ledger at the start of that trust determination date;
M = means the sum of each monthly CPR on the 12 most recent
trust determination dates which have occurred prior to that
date divided by 12;
N = [0.85]; and
O = the aggregate outstanding principal balance of the mortgage
loans comprising the trust property on the previous trust
determination date.
"monthly CPR" means, on any trust determination date, the total
mortgages trustee principal receipts received by the mortgages trustee during
the immediately preceding trust calculation period date divided by the
aggregate outstanding principal balance of the mortgage loans comprised in the
trust property as at the immediately preceding trust determination date.
"cash accumulation requirement" means on a trust determination date:
o the outstanding principal amounts in relation to each cash
accumulation amount;
o [plus amounts due in items [payments to Funding 2 reserve fund and
the Funding 2 liquidity reserve fund] of the Funding 2
pre-enforcement principal priority of payments;]
o less the amount standing to the credit of the cash accumulation
ledger at the last payment date (which amount was not to be
distributed on that payment date to fund the cash accumulation
requirement of any loan tranche);
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The "cash accumulation ledger" means a ledger maintained by the cash
manager for Funding 2, which records amounts accumulated by Funding 2 to pay
relevant accumulation amounts.
"repayment requirement" means, on any trust determination date, the
amount, if any, equal to the sum of:
o the cash accumulation requirement;
o the controlled amortization requirement;
o the scheduled repayment requirement; and
o the pass-through requirement.
"controlled amortization requirement" means, on a trust determination
date, the outstanding principal amounts in relation to each controlled
amortization loan amount which is due and payable on any of the three payment
dates immediately following such trust determination date;
"pass through requirement" means, on any trust determination date, the
lesser of:
o the aggregate of the outstanding principal balance of each
[pass-through] loan tranche which has become due and payable;
and
o the product of:
(a) the Funding 2 share percentage as at the start of the
immediately preceding trust calculation period (provided
that if an assignment date or a contribution date has
occurred during such trust calculation period then the
weighted average Funding 2 share percentage will be used);
(b) the aggregate amount of principal receipts received by the
mortgages trustee during the immediately preceding trust
calculation period; and
(c) the outstanding principal balance of the [pass-through
loan tranches] which are due and payable (in the case of
Rule (2)) or the [pass-through loan tranches] related to
the series and class of notes whose security is being
enforced (in the case of Rule (3)), each as of the most
recent payment date,
divided by the aggregate outstanding principal balance of the
global intercompany loan of the most recent payment date;
"scheduled repayment requirement" means, on a trust determination
date, the outstanding principal amounts in relation to each scheduled
repayment loan installment which is due and payable on any of the three
payment dates immediately following such trust determination date;
On each distribution date, all mortgages trustee principal receipts
received by Funding 2 from the mortgages trustee shall be deposited in the
Funding 2 GIC account and [(excluding any amount constituting the cash
accumulation requirement)] credited by the cash manager (on behalf of Funding
2) to the Funding 2 principal ledger. The cash manager shall credit all such
mortgages trustee principal receipts constituting the cash accumulation
requirement to the cash accumulation ledger.
Definition of Funding 2 available principal receipts
"Funding 2 available principal receipts" in respect of a payment date
will be calculated by the cash manager or otherwise on behalf of Funding 2
(or, following enforcement of the Funding 2 security, the Funding 2 security
trustee) on the distribution date immediately preceding that payment date and
will be an amount equal to the sum of:
o all Funding 2 principal receipts standing to the credit of the
cash accumulation ledger which are to be applied on the next
payment date to repay a bullet
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repayment loan amount or to make a payment under items (A), (B)
or (C) of the Funding 2 pre-enforcement principal priority of
payments and, if such payment date occurs on or after a trigger
event, the remainder of such receipts standing to the credit of
the cash accumulation ledger;
o all other mortgages trustee principal receipts received by
Funding 2 from the mortgages trustee during the interest period
ending on the relevant payment date standing to the credit of
the Funding 2 principal ledger;
o the amounts, if any, credited to the principal deficiency ledger
pursuant to items [(I), (L), (N),(P) (R)] of the Funding 2
pre-enforcement revenue priority of payments;
o in so far as needed to make a Funding 2 reserve principal
payment, any amount available to be drawn under the Funding 2
reserve fund less any amounts applied or to be applied on the
relevant payment date in payment of interest and expenses under
the Funding 2 pre-enforcement revenue priority of payments, plus
any amounts to be credited to the Funding 2 reserve fund ledger
under item (B) of the relevant Funding 2 pre-enforcement
principal priority of payments on the relevant payment date;
o in so far as needed to make a Funding 2 liquidity reserve
principal payment, any amount available to be drawn under the
Funding 2 liquidity reserve fund less any amounts applied or to
be applied on the relevant payment date in payment of interest
and expenses under the Funding 2 pre-enforcement revenue
priority of payments, plus any amounts to be credited to the
Funding 2 liquidity reserve fund ledger under item (C) of the
relevant Funding 2 pre-enforcement principal priority of
payments on that relevant payment date;
o in so far as needed to make a Funding 2 liquidity facility
principal payment, any amount available to be drawn under the
Funding 2 liquidity facility less any amounts applied or to be
applied on the relevant payment date in payment of interest and
expenses under the Funding 2 pre-enforcement revenue priority
of payments, plus any amounts to be repaid to the Funding 2
liquidity facility provider under item (A) of the relevant
Funding 2 pre-enforcement principal priority of payments on
that relevant payment date, to the extent that such amounts are
available to be drawn; less
o amounts to be applied on the relevant payment date to any items
[(H), (J), (M), (O) and (Q)] of the Funding 2 pre-enforcement
revenue priority payments.
The repayment of any loan tranche prior to the occurrence of a
trigger event, enforcement of the issuer security by the note trustee under
the issuer deed of charge or enforcement of the Funding 2 security by the
Funding 2 security trustee under the Funding 2 deed of charge will be made in
accordance with the terms of the global intercompany loan agreement.
The following sections set out various priorities of payments for
Funding available principal receipts under the following circumstances, and
are collectively referred to as the "Funding 2 pre-enforcement principal
priority of payments".
o repayment of loan tranches of each tier prior to the occurrence
of a trigger event and prior to the service on Funding 2 of a
global intercompany loan enforcement notice or the service on
the issuer of an issuer enforcement notice;
o repayment of loan tranches of each tier following the occurrence
of a non-asset trigger event but prior to the service on Funding
2 of a global intercompany loan enforcement notice or the
service on the issuer of an issuer enforcement notice;
o repayment of loan tranches of each tier following the occurrence
of an asset trigger event but prior to the service on Funding 2
of a global intercompany loan
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enforcement notice or the service on the issuer of an issuer
enforcement notice; and
o repayment of loan tranches of each tier following the service on
the issuer of an issuer enforcement notice but prior to the
service on Funding 2 of a global intercompany loan enforcement
notice.
Repayment of loan tranches of each series prior to the occurrence of a trigger
event and prior to the service on Funding 2 of an global intercompany loan
enforcement notice or the service on the issuer of an issuer enforcement
notice
On each payment date prior to the occurrence of a trigger event or
the service on Funding 2 of a global intercompany loan enforcement notice or
the service on the issuer of an issuer enforcement notice, the cash manager
shall apply Funding 2 available principal receipts in the following order of
priority:
(A) first, in accordance with the terms of the Funding 2
liquidity facility agreement, towards repayment of the
amounts outstanding under the Funding 2 liquidity facility
(if any) that were drawn in order to make Funding 2
liquidity facility principal payments;
(B) second, to the extent that monies have been drawn from the
Funding 2 reserve fund to make Funding 2 reserve principal
payments, towards the replenishment of the Funding 2 reserve
fund up to the Funding 2 reserve required amount;
(C) third, if a Funding 2 liquidity facility reserve event has
occurred and is continuing (i) to initially fund the Funding
2 liquidity reserve fund up to the Funding 2 liquidity
reserve required amount and (ii) once it has been initially
funded, to the extent that Funding 2 available revenue
receipts are insufficient to do so, to replenish the Funding
2 liquidity reserve fund up to the Funding 2 liquidity
reserve required amount;
(D) fourth, towards repayment of all AAA loan tranches that are
then due and payable in an order of priority based on their
final repayment date, so that the earliest maturing term AAA
loan tranche is paid first (and if any AAA loan tranches
have the same final repayment date, then those loan tranches
will be paid in no order of priority among them but in
proportion to their respective amounts due), in each case
subject to Rules (1), (2) and (3) below;
(E) fifth, towards repayment of all AA loan tranches that are
then due and payable in no order of priority among them but
in proportion to the respective amounts due, in each case
subject to Rules (1), (2) and (3) below;
(F) sixth, towards repayment of all A loan tranches that are
then due and payable in no order of priority among them but
in proportion to the respective amounts due, in each case
subject to Rules (1), (2) and (3) below;
(G) seventh, towards repayment of all BBB loan tranches that are
then due and payable in no order of priority among them but
in proportion to the respective amounts due, in each case
subject to Rules (1), (2) and (3) below;
(H) eighth, towards repayment of all BB loan tranches that are
then due and payable in no order among them but in
proportion to the respective amounts due and payable, in
each case subject to Rules (1), (2) and (3) below;
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(I) ninth, towards a credit to the cash accumulation ledger
until the balance is equal to Funding 2's cash accumulation
requirement (as calculated after any payments are made at
item (D) of this priority of payments); and
(J) tenth, the remainder shall be credited to the Funding 2
principal ledger.
In the applicable circumstances, the following rules apply in
determining the amounts to be paid under items (D), (E), (F), (G) and (H) of
the priority of payments set out above and below:
Rules for application of Funding 2 available principal receipts
The Funding 2 deed of charge sets out certain rules for application
by Funding 2, or the cash manager on its behalf of Funding 2 available
principal receipts on each payment date. The principal rules are as follows:
(1) Deferral of repayment of pass-through loan tranches, and
scheduled repayment loan installments and/or controlled amortization
loan amounts in certain circumstances
(A) If on a payment date:
(1) there is a debit balance on the BB principal
deficiency subledger, the BBB principal deficiency
subledger, the A principal deficiency subledger or
the AA principal deficiency subledger after
application of the Funding 2 available revenue
receipts on that Funding 2 payment date; or
(2) the [adjusted Funding 2 reserve fund level is less than
the Funding 2 reserve fund threshold; or
(3) the aggregate outstanding principal balance of
mortgage loans in the mortgages trust, in respect
of which the aggregate amount in arrears is more
than three times the monthly payment then due, is
more than [4] per cent. of the aggregate
outstanding principal balance of mortgage loans in
the mortgages trust.
then until the relevant circumstances as described in sub-paragraphs
(1), (2) or (3) above has been cured or otherwise ceases to exist,
if:
(a) any AAA loan tranche (whether or not such AAA loan tranche
is then due and payable) remains outstanding after making
the payments under item (D) of the above priority of
payments, the AA loan tranches will not be entitled to
principal repayments under item (E) of the above priority of
payments;
(b) any term AAA loan tranche or any AA loan tranche (whether or
not such AAA loan tranche or AA loan tranche is then due and
payable ) remains outstanding after making the payments
under items (D) and (E) of the above priority of payments,
then the A loan tranches will not be entitled to principal
repayments under item (F) of the priority of payments set
out above;
(c) any AAA loan tranche, any AA loan tranche, any A loan
tranche (whether or not such AAA loan tranche, AA loan
tranche or A loan tranche is then due and payable) remains
outstanding after making the payments under items (D), (E)
and (F) of the above priority of payments, then the BBB loan
tranches
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will not be entitled to principal repayments under
item (G) of the priority of payments set out above; and/or
(d) any AAA loan tranche, any AA loan tranche, any A loan
tranche or any BBB loan tranche (whether or not such AAA
loan tranche, AA loan tranche, A loan tranche or BBB loan
tranche is then due and payable) remains outstanding after
making the payments under items (D), (E), (F) and (G) of the
above priority of payments, then the BB loan tranches will
not be entitled to principal repayments under item (H) of
the priority of payments set out above.
(B) On a payment date:
(1) for any AA loan tranche, the amount of principal due and
payable (or any part thereof) in respect of the AA loan
tranche may only be paid if, after giving effect to such
payment and the payment to be made in such date in respect
of the related series and class of notes, the class A
available subordinated amount is at least equal to the class
A required subordinated amount;
(2) for any A loan tranche, the amount of principal due and
payable (or any part thereof) in respect of the A loan
tranche may only be paid if, after giving effect to such
payment and the payment to be made in such date in respect
of the related series and class of notes, the class A
available subordinated amount is at least equal to the class
A required subordinated amount and the class B available
subordinated amount is at least equal to the class B
required subordinated amount;
(3) for any BBB loan tranche, the amount of principal due and
payable (or any part thereof) in respect of the BBB loan
tranche may only be paid if, after giving effect to such
payment and the payment to be made in such date in respect
of the related series and class of notes, the class A
available subordinated amount is at least equal to the class
A required subordinated amount, the class B available
subordinated amount is at least equal to the class B
required subordinated amount and the class M available
subordinated amount is at least equal to the class M
required subordinated amount; and
(4) for any BB loan tranche, the amount of principal due and
payable (or any part thereof) in respect of the BB loan
tranche may only be paid if, after giving effect to such
payment and the payment to be made in such date in respect
of the related series and class of notes, the class A
available subordinated amount is at least equal to the class
A required subordinated amount, the class B available
subordinated amount is at least equal to the class B
required subordinated amount, the class M available
subordinated amount is at least equal to the class M
required subordinated amount and the class C available
subordinated amount is at least equal to the class C
required subordinated amount,
save that, in calculating the class A available subordinated amount,
the class B available subordinated amount, the class M available
subordinated amount, and the class C available subordinated amount
for the purposes of (1), (2), (3) and (4) above, the Funding 2 target
reserve amount shall be replaced with the Funding 2 required reserve
amount.
See "Issuance of notes - issuance" for a description of the various
required subordinated amounts and available subordinated amounts.
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(C) If on any payment date:
(1) one or more bullet repayment loan amounts are within a cash
accumulation period at that time;
(2) the quarterly CPR is less than [15] per cent.; and
(3) there is a cash accumulation shortfall at that time
then, on or before their step-up dates, the original scheduled
repayment loan tranches, the original controlled amortization loan
tranches and the original pass-through loan tranches will be entitled
to principal repayments under items (D), (E), (F), (G) and (H) (as
applicable) of the priority of payments above only if there is no
cash accumulation shortfall.
In this prospectus:
"cash accumulation liability" means on any payment date prior to any
payment under item (D) of the above priority of payments the aggregate of each
relevant accumulation amount at that time of each bullet repayment loan amount
which is within a cash accumulation period;
"cash accumulation shortfall" means at any time that the cash
accumulation ledger amount is less than the cash accumulation liability;
"cash accumulation ledger amount" means at any time the amount
standing to the credit of the cash accumulation ledger at that time
(immediately prior to any drawing to be applied on that payment date and prior
to any payment under item (I) of the above priority of payments);
(2) Repayment of pass-through loan tranches after the occurrence of a step-up
date
[Following the occurrence of the step-up date under a loan tranche
("loan tranche A") but prior to the time which Rule (3) becomes applicable and
provided that the Funding 2 share of the trust property is greater than zero,
the aggregate amount repaid on a payment date in relation to loan tranche A
(other than bullet loan tranches or scheduled repayment loan tranches or
controlled amortization loan tranches) under items (D), (E), (F), (G) and (H)
of the priority of payments set out above shall be limited to an amount
calculated as follows:
A x B x C
---------
D
where, in respect of any distribution date:
A = the aggregate amount of mortgages trustee principal
receipts received by the mortgages trustee in the relevant
trust calculation period (excluding any initial contribution
or further contribution);
B = the Funding 2 share percentage calculated as at the start
of the relevant trust calculation period or, as applicable
the weighted average Funding 2 share percentage;
C = the outstanding principal balance of loan tranche A;
D = the aggregate outstanding principal balance of the global
intercompany loan.
(3) Repayment of loan tranches after a note acceleration notice has been
served in respect of one or more series and classes of notes
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If a [note acceleration notice] has been served in respect of one or
more series and classes of notes (but not all series and classes of notes)
then this Rule (3) will apply. In these circumstances:
(i) acceleration of the notes in respect of which a note
acceleration notice has been served will not result in
automatic enforcement of the issuer security or the Funding
2 security;
(ii) any loan tranche relating to the series and class of notes
which have been accelerated will become immediately due and
payable ("loan tranche B");
(iii) [the cash manager shall apply the appropriate amount of
Funding 2 available principal receipts allocated to repay
any loan tranche B of a particular tier at the relevant
level of the applicable Funding 2 priority of payments to
repay such loan tranche, and any other loan tranche that is
a loan tranche B or a pass-through loan tranche in that
tier, in no order of priority between them but in proportion
to the respective amounts due (that is, those loan tranches
will not be repaid in order of priority based upon their
final repayment date); and]
(iv) the aggregate amount payable on a payment date in relation
to any loan tranche B under items (D), (E), (F), (G) and (H)
of the priority of payments set out above shall calculated
as if such loan tranche was a pass-through loan tranche.
Allocations involving Rule (2) or Rule (3)
Where Rule (2) or Rule (3) applies at a level of any priority of
payments, the funds available for making payments at that level shall first be
allocated without reference to Rule (2) or Rule (3) (as applicable). However,
if the amount so allocated to one or more loan tranches exceeds the amount
permitted under Rule (2) or Rule (3) (as applicable) to be paid in respect of
those loan tranches (the "capped loan tranches"), the excess shall then be
reallocated among any other relevant loan tranches at that level using the
method of allocation as applies at that level but without reference to the
capped loan tranches in calculating such reallocation. If a further such
excess arises as a result of the reallocation process, the reallocation
process shall be repeated at that level in relation to each such further
excess that arises until no further funds can be allocated at that level
following which the remaining excess shall then be applied at the next level
of that priority of payments.[?]]
Repayment of loan tranches of each series following the occurrence of a
non-asset trigger event but prior to the service on Funding 2 of a global
intercompany loan enforcement notice or the service on the issuer of an issuer
enforcement notice
Following the occurrence of a non-asset trigger event (where no asset
trigger event has occurred) under the mortgages trust deed but prior to the
service on Funding 2 of a global intercompany loan enforcement notice under
the Funding 2 deed of charge [or the service on the issuer of an issuer
enforcement notice under the issuer deed of charge], the bullet loan tranches
and the scheduled repayment loan tranches and the controlled amortization loan
tranches in respect of the global intercompany loan will be deemed to be
pass-through loan tranches and on each payment date Funding 2 will be required
to apply Funding 2 available principal receipts in the following order of
priority:
(A) first, in accordance with the terms of the Funding 2
liquidity facility agreement, towards repayment of the
amounts outstanding under the Funding 2 liquidity facility
(if any) that were drawn in order to make Funding 2
liquidity facility principal payments;
157
(B) second, to the extent that monies have been drawn from the
Funding 2 reserve fund to make Funding 2 reserve principal
payments, towards the replenishment of the Funding 2 reserve
fund up to the Funding 2 reserve required amount;
(C) third, if a Funding 2 liquidity facility reserve event has
occurred and is continuing (i) to initially fund the Funding
2 liquidity reserve fund up to the Funding 2 liquidity
reserve required amount and (ii) once it has been initially
funded, to the extent that Funding 2 available revenue
receipts are insufficient to do so, to replenish the Funding
2 liquidity reserve fund up to the Funding 2 liquidity
reserve required amount;
(D) fourth, in order of their final repayment date, beginning
with the earliest such date (and if two or more AAA loan
tranches have the same final repayment date, in proportion
to the amounts due) to repay the AAA loan tranches until the
AAA loan tranches are fully repaid;
(E) fifth, in no order of priority among them but in proportion
to the amounts due, to repay the AA loan tranches until the
AA loan tranches are fully repaid;
(F) sixth, in no order of priority among each of them but in
proportion to the amounts due, to repay the A loan tranches
until the A loan tranches are fully repaid;
(G) seventh, in no order of priority among them but in
proportion to the amounts due, to repay the BBB loan
tranches until the BBB loan tranches are fully repaid; and
(H) eighth, in no order of priority among them but in proportion
to the amounts due, to repay the BB loan tranches until the
BB loan tranches are fully repaid,
To the extent not repaid earlier, the full outstanding principal
balance on a loan tranche will become due and payable on the final repayment
date of that loan tranche.
Repayment of loan tranches of each series following the occurrence of an asset
trigger event but prior to the service on Funding 2 of a global intercompany
loan enforcement notice or the service on the issuer of an issuer enforcement
notice
Following the occurrence of an asset trigger event (whether or not a
non-asset trigger event occurs or has occurred) but prior to the service on
Funding 2 of a global intercompany loan enforcement notice under the Funding 2
deed of charge or the service on the issuer of an issuer enforcement notice
under the issuer deed of charge, the bullet loan tranches and the scheduled
repayment loan tranches and the controlled amortization loan tranches in
respect of the global intercompany loan will be deemed to be pass-through loan
tranches and on each Funding 2 payment date Funding 2 will be required to
apply Funding 2 available principal receipts in the following order of
priority:
(A) first, in accordance with the terms of the Funding 2
liquidity facility agreement, towards repayment of the
amounts outstanding under the Funding 2 liquidity facility
(if any) that were drawn in order to make Funding 2
liquidity facility principal payments;
(B) second, to the extent that monies have been drawn from the
Funding 2 reserve fund to make Funding 2 reserve principal
payments, towards the replenishment of the Funding 2 reserve
fund up to the Funding 2 reserve required amount;
(C) third, if a Funding 2 liquidity facility reserve event has
occurred and is continuing (i) to initially fund the Funding
2 liquidity reserve fund up to the Funding 2 liquidity
reserve required amount and (ii) once it has been initially
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funded, to the extent that Funding 2 available revenue
receipts are insufficient to do so, to replenish the Funding
2 liquidity reserve fund up to the Funding 2 liquidity
reserve required amount;
(D) fourth, in no order of priority among them, but in
proportion to the amounts due to repay the AAA loan tranches
until the AAA loan tranches are fully repaid;
(E) fifth, in no order of priority among them, but in proportion
to the amounts due, to repay the AA loan tranches until the
AA loan tranches are fully repaid;
(F) sixth, in no order of priority among them, but in proportion
to the amounts due, to repay the A loan tranches until the A
loan tranches are fully repaid; and
(G) seventh, in no order of priority among them, but in
proportion to the amounts due, to repay the BBB loan
tranches until the BBB are fully repaid; and
(H) eighth, in no order of priority among them, but in
proportion to the amounts due to repay the BB loan tranches
until the BB loan tranches are fully repaid.
Repayment of loan tranches of each series following the service on the issuer
of an issuer enforcement notice but prior to the service on Funding 2 of a
global intercompany loan enforcement notice
If an issuer enforcement notice is served on the issuer under the
issuer deed of charge, then that will not result in automatic enforcement of
the Funding 2 security under the Funding 2 deed of charge. In those
circumstances, however, the bullet loan tranches and any scheduled repayment
loan tranches and the controlled amortization loan tranches under the global
intercompany loan will be deemed to be pass-through loan tranches and on each
payment date Funding 2 will be required to apply Funding 2 available principal
receipts in the following order of priority:
(A) first, in accordance with the terms of the Funding 2
liquidity facility agreement, towards repayment of the
amounts outstanding under the Funding 2 liquidity facility
(if any) that were drawn in order to make Funding 2
liquidity facility principal payments;
(B) second, to the extent that monies have been drawn from the
Funding 2 reserve fund to make Funding 2 reserve principal
payments, towards the replenishment of the Funding 2 reserve
fund up to the Funding 2 reserve required amount;
(C) third, if a Funding 2 liquidity facility reserve event has
occurred and is continuing (i) to initially fund the Funding
2 liquidity reserve fund up to the Funding 2 liquidity
reserve required amount and (ii) once it has been initially
funded, to the extent that Funding 2 available revenue
receipts are insufficient to do so, to replenish the Funding
2 liquidity reserve fund up to the Funding 2 liquidity
reserve required amount;
(D) fourth, in no order of priority among them, but in
proportion to the amounts due, to repay the AAA loan
tranches until the AAA loan tranches are fully repaid;
(E) fifth, in no order of priority among them, but in proportion
to the amounts due, to repay the AA loan tranches until the
AA loan tranches are fully repaid;
(F) sixth, in no order of priority among them, but in proportion
to the amounts due, to repay the A loan tranches until the A
loan tranches are fully repaid; and
159
(G) seventh, in no order of priority among them, but in
proportion to the amounts due, to repay the BBB loan
tranches until the BBB loan tranches are fully repaid; and
(H) eighth, in no order of priority among them, but in
proportion to the amounts due to repay the BB loan tranches
until the BB loan tranches are fully repaid.
Repayment of loan tranches when Funding 2 receives the amount outstanding
under the global intercompany loan
If Funding 2 receives the proceeds of a new loan tranche which is to
be used to refinance another loan tranche as described in "The global
intercompany loan agreement - Issuance of new loan tranches" (such proceeds
being a "full repayment amount"), then Funding 2 will not apply the full
repayment amount as described above in "Distribution of Funding 2 available
principal receipts". Rather, Funding 2 will apply the full repayment amount to
repay the relevant loan tranche. If at any time only one loan tranche is
outstanding, then Funding 2 shall apply the full repayment amount first to
repay the Funding 2 liquidity facility provider any amounts outstanding under
the Funding 2 liquidity facility to the extent that such funds were drawn in
order to repay the principal amounts of any previous bullet loan tranches made
under any of the previous loan tranches and the remainder shall be applied to
repay the relevant loan tranche.
Distribution of issuer available principal receipts
Definition of issuer available principal receipts
Prior to enforcement of the issuer security, "issuer available
principal receipts" for the issuer in respect of any payment date will be
calculated by the issuer cash manager on the distribution date immediately
preceding that payment date and will be an amount equal to the sum of all
principal amounts to be repaid by Funding 2 to the issuer under the global
intercompany loan on that payment date.
Distribution of issuer available principal receipts prior to enforcement of
the issuer security
Prior to enforcement of the issuer security, the issuer, or the issuer
cash manager on its behalf, will apply issuer available principal receipts on
each payment date in the following manner (the "issuer pre-enforcement
principal priority of payments"):
o The class A notes:
from amounts received by the issuer from Funding 2 in respect of each AAA
loan tranche (and, in respect of (ii) below, the principal amounts
received (if any) from the issuer swap provider(s) under the relevant
issuer swap agreement(s)):
(i) to pay amounts due and payable (in respect of principal) on such
payment date to the relevant issuer swap provider(s) in respect of
the related series of class A notes in accordance with the terms of
the relevant issuer swap agreement(s); and
(ii) to pay amounts due and payable on such payment date on the related
series of class A notes;
o The class B notes:
from amounts received by the issuer from Funding 2 in respect of each AA
loan tranche (and, in respect of (ii) below, the principal amounts
received (if any) from the issuer swap provider(s) under the relevant
issuer swap agreement(s)):
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(i) to pay amounts due and payable (in respect of principal) on such
payment date to the relevant issuer swap provider(s) in respect of
the related series of class B notes in accordance with the terms of
the relevant issuer swap agreement(s); and
(ii) to pay amounts due and payable on such payment date on the related
series of class B notes;
o The class M notes:
from amounts received by the issuer from Funding 2 in respect of each A
loan tranche (and, in respect of (ii) below, the principal amounts
received (if any) from the issuer swap provider(s) under the relevant
issuer swap agreement(s)):
(i) to pay amounts due and payable (in respect of principal) on such
payment date to the relevant issuer swap provider(s) in respect of
the related series of class M notes in accordance with the terms of
the relevant issuer swap agreement(s); and
(ii) to pay amounts due and payable on such payment date on the related
series of class M notes;
o The class C notes:
from amounts received by the issuer from Funding 2 in respect of each BBB
loan tranche (and, in respect of (ii) below, the principal amounts
received (if any) from the issuer swap provider(s) under the relevant
issuer swap agreement(s)):
(i) to pay amounts due and payable (in respect of principal) on such
payment date to the relevant issuer swap provider(s) in respect of
the related series of class C notes in accordance with the terms of
the relevant issuer swap agreement(s); and
(ii) to pay amounts due and payable on such payment date on the related
series of class C notes;
o The class D notes:
from amounts received by the issuer from Funding 2 in respect of each BB
loan tranche (and, in respect of (ii) below, the principal amounts
received (if any) from the issuer swap provider(s) under the relevant
issuer swap agreement(s)):
(i) to pay amounts due and payable (in respect of principal) on such
payment date to the relevant issuer swap provider(s) in respect of
the related series of class D notes in accordance with the terms of
the relevant issuer swap agreement(s); and
(ii) to pay amounts due and payable on such payment date on the related
series of class D notes.
If any swap collateral available principal amounts are received by
the issuer on a payment date, such swap collateral available principal amounts
shall be applied by the issuer cash manager on that payment date in the same
manner as it would have applied the receipts which such swap collateral
available principal amounts replace.
Distribution of Funding 2 available principal receipts and Funding 2 available
revenue receipts following enforcement of the Funding 2 security
The Funding 2 deed of charge sets out the order of priority of
distribution by the security trustee, following service of a global
intercompany loan enforcement notice, of
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amounts received or recovered by the Funding 2 security trustee or a receiver
appointed on its behalf.
The Funding 2 security trustee (or the cash manager on its behalf)
will apply amounts received or recovered following enforcement of the Funding
2 security on each payment date in accordance with the following order of
priority (known as the "Funding 2 post-enforcement priority of payments"):
(A) first, to pay amounts due to the Funding 2 security trustee and any
receiver appointed by the Funding 2 security trustee, together with
interest and (to the extent not already inclusive) VAT on those
amounts, and to provide for any amounts due or to become due to the
Funding 2 security trustee and the receiver in the following interest
period under the Funding 2 deed of charge or any other transaction
document;
(B) second, towards payment of amounts due and payable to the cash
manager and any costs, charges, liabilities and expenses then due or
to become due and payable to the cash manager under the cash
management agreement, together with (to the extent not already
inclusive) VAT on those amounts;
(C) third, in no order of priority among them but in proportion to the
respective amounts due, towards payment of amounts (if any) due to
(i) the account bank under the terms of the bank account agreement,
(ii) the stand-by account bank under the terms of the stand-by bank
account agreement and (iii) the corporate services provider under the
terms of the corporate services agreement;
(D) fourth, towards payment of amounts (if any) due to the Funding 2
liquidity facility provider under the Funding 2 liquidity facility
(if any) (except for any Funding 2 liquidity subordinated amounts);
(E) fifth, towards payment of amounts due to the Funding 2 basis rate
swap provider under the Funding 2 basis rate swap agreement
(including any termination payment but excluding any Funding 2 basis
rate swap excluded termination amount);
(F) sixth, in no order of priority between them but in proportion to the
respective amounts due towards payment of amounts of interest,
principal and fees due on the AAA loan tranches;
(G) seventh, in no order of priority between them but in proportion to
the respective amounts due towards payment of amounts of interest,
principal and fees due on the AA loan tranches;
(H) eighth, in no order of priority between them but in proportion to the
respective amounts due towards payment of amounts of interest,
principal and fees due on the A loan tranches;
(I) ninth, in no order of priority between them but in proportion to the
respective amounts due towards payment of amounts of interest,
principal and fees due on the BBB loan tranches;
(J) tenth, in no order of priority between them but in proportion to the
respective amounts due towards payment of amounts of interest,
principal and fees due on the BB loan tranches;
(K) eleventh, in no order of priority between them but in proportion to
the respective amounts due, towards payment of amounts due (without
double counting) to:
(i) the issuer in respect of its obligations (if any) to pay any
issuer provider following a swap provider default;
(ii) the Funding 2 liquidity facility provider, if any, any
Funding 2 liquidity facility subordinated amounts due under
the Funding 2 liquidity facility agreement;
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(iii) the Funding 2 basis rate swap provider following a swap
provider default;
(L) twelfth, in no order of priority between them but in proportion to
the respective amounts due, towards payment of amounts due to the
start-up loan provider(s) under the start-up loan agreement(s);
(M) thirteenth, towards payment of any deferred contribution due to the
mortgages trustee under the mortgages trust deed; and
(N) last, to pay any amount remaining following the application of
principal and revenue set forth in items (A) through (M) above, to
Funding 2;
Distribution of issuer available principal receipts and issuer available
revenue receipts following enforcement of the issuer security
Following enforcement of the issuer security, "issuer available
principal receipts" for the issuer in respect of any payment date means the
sum calculated by or on behalf of the note trustee on the distribution date
immediately preceding such payment date as the amount to be repaid by Funding
2 to the issuer under the global intercompany loan agreement during the
relevant interest period and/or the sum otherwise recovered by the note
trustee (or the receiver appointed on its behalf) representing the outstanding
principal balance of the notes.
The issuer deed of charge sets out the order of priority of
distribution by or on behalf of the note trustee, following enforcement of the
issuer security, of amounts received or recovered by the note trustee (or a
receiver appointed on its behalf) pursuant to the issuer deed of charge. If
the Funding 2 security is enforced under the Funding 2 deed of charge, then
there will be an event of default in respect of the issuer security under the
issuer deed of charge.
On each payment date the note trustee (or the issuer cash manager on
its behalf) will apply amounts received or recovered following enforcement of
the issuer security as follows:
(A) first, to pay amounts due to the note trustee (and any receiver
appointed by the note trustee) together with the interest and VAT on
those amounts and to provide for any amounts then due or to become
due and payable to the note trustee and the receiver under the
provisions of the trust deed, the issuer deed of charge and any other
transaction document;
(B) second, to pay, in no order of priority among them but in proportion
to the respective amounts due, the agent bank, the paying agents, the
transfer agent and the registrar, together with interest and VAT on
those amounts and to provide for any costs, charges, liabilities and
expenses then due or to become due and payable to them under the
provisions of the paying agent and agent bank agreement;
(C) third, in no order of priority among them but in proportion to the
respective amounts due, towards payment of amounts (together with VAT
on those amounts) due and payable to the issuer cash manager under
the issuer cash management agreement, to the corporate services
provider under the corporate services agreement and to the issuer
account bank under the issuer bank account agreement;
(D) fourth, subject to item (E) below, in no order of priority among them
but in proportion to the respective amounts due, to pay amounts due
to the issuer swap providers for each series of class A notes
(including any termination payment but excluding any issuer swap
excluded termination amount);
(E) fifth, in no order of priority among them but in proportion to the
respective amounts due, to pay interest due or overdue on, and to
repay principal of, the applicable series of class A notes provided
that if the amounts available for distribution under this item (E)
(on the assumption that no amounts are due and payable under item (D)
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and no amounts are received from any issuer swap provider) would be
insufficient to pay the sterling equivalent of the amounts due and
payable on the class A notes, the shortfall shall be divided amongst
all class A notes on a pro rata basis and the amount payable by the
issuer to the issuer swap provider in respect of the any series class
A notes of under paragraph (D) above shall be reduced by the amount
of the shortfall applicable to that series of class A notes;
(F) sixth, subject to item (G) below, in no order of priority among them
but in proportion to the respective amounts due, to pay amounts due
to the issuer swap providers for each series of class B notes
(including any termination payment but excluding any issuer swap
excluded termination amount);
(G) seventh, in no order of priority among them but in proportion to the
respective amounts due, to pay interest due or overdue on, and to
repay principal of, the applicable series of class B notes provided
that if the amounts available for distribution under this item (G)
(on the assumption that no amounts are due and payable under item (F)
and no amounts are received from any issuer swap provider) would be
insufficient to pay the sterling equivalent of the amounts due and
payable on the class B notes, the shortfall shall be divided amongst
all class B notes on a pro rata basis and the amount payable by the
issuer to the issuer swap provider in respect of the any series class
B notes of under paragraph (F) above shall be reduced by the amount
of the shortfall applicable to that series of class B notes;
(H) eighth, subject to item (I) below, in no order of priority among them
but in proportion to the respective amounts due, to pay amounts due
to the issuer swap providers for each series of class M notes
(including any termination payment but excluding any issuer swap
excluded termination amount);
(I) ninth, in no order of priority among them but in proportion to the
respective amounts due, to pay interest due or overdue on, and to
repay principal of, the applicable series of class M notes provided
that if the amounts available for distribution under this item (I)
(on the assumption that no amounts are due and payable under item (H)
and no amounts are received from any issuer swap provider) would be
insufficient to pay the sterling equivalent of the amounts due and
payable on the class M notes, the shortfall shall be divided amongst
all class M notes on a pro rata basis and the amount payable by the
issuer to the issuer swap provider in respect of the any series class
M notes of under paragraph (H) above shall be reduced by the amount
of the shortfall applicable to that series of class M notes;
(J) tenth, subject to item (K) below, in no order of priority among them
but in proportion to the respective amounts due, to pay amounts due
to the issuer swap providers for each series of class C notes
(including any termination payment but excluding any issuer swap
excluded termination amount);
(K) eleventh, in no order of priority among them but in proportion to the
respective amounts due, to pay interest due or overdue on, and to
repay principal of, the applicable series of class C notes provided
that if the amounts available for distribution under this item (K)
(on the assumption that no amounts are due and payable under item (J)
and no amounts are received from any issuer swap provider) would be
insufficient to pay the sterling equivalent of the amounts due and
payable on the class C notes, the shortfall shall be divided amongst
all class C notes on a pro rata basis and the amount payable by the
issuer to the issuer swap provider in respect of the any series class
C notes of under paragraph (J) above shall be reduced by the amount
of the shortfall applicable to that series of class C notes;
(L) twelfth, subject to item (M) below, in no order of priority among
them but in proportion to the respective amounts due, to pay amounts
due to the issuer swap providers for
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each series of class D notes (including any termination payment but
excluding any issuer swap excluded termination amount);
(M) thirteenth, in no order of priority among them but in proportion to
the respective amounts due, to pay interest due or overdue on, and to
repay principal of, the applicable series of class D notes provided
that if the amounts available for distribution under this item (M)
(on the assumption that no amounts are due and payable under item (L)
and no amounts are received from any issuer swap provider) would be
insufficient to pay the sterling equivalent of the amounts due and
payable on the class D notes, the shortfall shall be divided amongst
all class D notes on a pro rata basis and the amount payable by the
issuer to the issuer swap provider in respect of the any series class
D notes of under paragraph (L) above shall be reduced by the amount
of the shortfall applicable to that series of class D notes;;
(N) fourteenth, on the payment date falling in December of each year, to
pay to the issuer account bank an amount equal to the amount of any
debit balance in the issuer transaction account as permitted by the
issuer account bank and outstanding at such payment date;
(O) fifteenth, in no order of priority among them but in proportion to
the respective amounts due, to pay any issuer swap excluded
termination payments to the issuer swap providers, and
(P) last, to pay any amount remaining following the application of
principal and revenue set forth in items (A) through (O) above, to
the issuer.
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Credit structure
The notes will be an obligation of the issuer only and will not be
obligations of, or the responsibility of, or guaranteed by, any other party.
However, there are ten main features of the transaction which enhance the
likelihood of timely receipt of payments to noteholders, as follows:
o Funding 2 available revenue receipts are expected to exceed
interest and fees payable to the issuer under the global
intercompany loan;
o a revenue shortfall in Funding 2 available revenue receipts may
be met from Funding 2 available principal receipts;
o payments on the class D notes will be subordinated to payments
on the class A notes, the class B notes, the class M notes and
the class C notes;
o payments on the class C notes will be subordinated to payments
on the class A notes, the class B notes and the class M notes;
o payments on the class M notes will be subordinated to payments
on the class A notes and the class B notes;
o payments on the class B notes will be subordinated to payments
on the class A notes;
o the mortgages trustee GIC account and the Funding 2 GIC account
each earn interest at a specified rate;
o a reserve fund will be available to Funding 2 to meet revenue
shortfalls in fees and interest due on the global intercompany
loan and principal of the bullet loan tranches that are AAA loan
tranches;
o Funding 2 will be obliged to establish Funding 2 liquidity
reserve fund for the issuer if the seller ceases to have a
long-term unsecured, unsubordinated and unguaranteed credit
rating by Moody's of at least "A3" or at least "A-" by Fitch
(unless the relevant rating agency confirms that the then
current ratings of the notes will not be adversely affected by
the ratings downgrade of the seller); and
o start-up loans will be provided to Funding 2 from time to time
meet the costs of setting up the structure and to partially fund
the Funding 2 reserve fund.
o Funding 2 may establish a liquidity facility to pay interest
and principal on loan tranches.
Each of these factors is considered more fully in the remainder of
this section.
Credit support for the notes provided by mortgages trustee available revenue
receipts
The interest rates charged on the mortgage loans vary according to
product type. It is anticipated, however, that during the life of the notes
issued under the program, the Funding 2 share of revenue receipts received
from borrowers on the mortgage loans will, assuming that all of the mortgage
loans are fully performing, be greater than the sum of the interest which
Funding 2 is required to pay on the global intercompany loan in order to fund
(by payment to a swap provider or otherwise) the interest payments due on such
notes and the other costs and expenses of the structure.
The actual amount of any excess will vary during the life of the
notes. The key factors determining such variation are as follows:
o the weighted average interest rate on the mortgage portfolio;
and
o the level of arrears experienced.
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On any distribution date, any excess will be available to meet the
payments referred to in the mortgages trust allocation of revenue receipts and
the payment of amounts of deferred contribution to the mortgages trustee
which, in turn, will fund the payment of deferred purchase price to the
seller. Any deferred contribution so paid to the mortgages trustee cannot
subsequently be reclaimed by Funding 2.
Interest rate on the mortgage portfolio
The weighted average interest rate on the mortgage portfolio will
depend on:
o the standard variable rate or other interest rate payable on,
and the aggregate current balance of, the variable rate mortgage
loans included in the trust property from time to time; and
o the fixed rates of interest payable on, and the aggregate
current balance of, the fixed rate mortgage loans included in
the trust property from time to time.
Funding 2 has entered into the Funding 2 basis rate swap agreement to
hedge against the variances on the rates payable on the mortgage loans. See
"The swap agreements".
Scheduled and unscheduled repayments will also affect the weighted
average interest rate on the mortgage portfolio. For historical data on the
level of scheduled and unscheduled repayments in the UK housing market, see
"Characteristics of United Kingdom residential mortgage market - CPR rates".
Level of arrears experienced
If the level of arrears of interest payments made by the borrowers
results in Funding 2 experiencing an income deficit on any payment date, then
the Funding 2 reserve fund and the Funding 2 liquidity reserve fund, if any,
established by Funding 2 may be utilized by Funding 2 in making payments of
interest (or, in limited circumstances, payments of principal following the
enforcement of the Funding 2 security) to the issuer under the global
intercompany loan on that payment date.
Funding 2 reserve fund
The Funding 2 reserve fund has been established:
o to help meet any deficit in Funding 2 available revenue receipts
and thereby to help meet any deficit recorded on the principal
deficiency ledger; and
o to fund reserves and other expenses in connection with the
issuance of notes by the issuer.
o to help meet any deficit in Funding 2 available principal
receipts available for:
(a) prior to the occurrence of a trigger event, repayment of
principal due and payable in respect of a bullet loan
tranche; and
(b) on or after the occurrence of a trigger event, repayment
of principal due and payable in respect of bullet loan
tranches on their respective final maturity dates,
in each case, prior to the service of a global intercompany loan
enforcement notice ("Funding 2 reserve principal payments")
The Funding 2 reserve fund is funded from Funding 2 available revenue
receipts which are distributed to Funding 2 from the mortgages trust and
deposited in the Funding 2
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GIC account. The Funding 2 reserve ledger is maintained by the cash manager to
record the balance from time to time of the Funding 2 reserve fund.
On each payment date funds standing to the credit of the Funding 2
reserve fund will be added to certain other income of Funding 2 in calculating
Funding 2 available revenue receipts which are available to make payments of
interest and fees on the global intercompany loan.
Prior to enforcement of the Funding 2 security, amounts standing to
the credit of the Funding 2 reserve fund may be utilized through their
inclusion in the calculation of Funding 2 available revenue receipts to meet,
and thereby to satisfy, any deficit on each principal deficiency ledger.
The Funding 2 reserve fund will be funded and replenished from:
o [Funding 2 available revenue receipts in accordance with item
[(S)] of the Funding 2 pre-enforcement revenue priority of
payments up to and an amount no less than the Funding 2 reserve
required amount and no greater than the Funding 2 target reserve
amount; and
o following the occurrence of a Funding 2 stop-up trigger event,
any Funding 2 available revenue receipts to be paid in
accordance with item [(U)] of the Funding 2 pre-enforcement
revenue priority of payments, up to and including an additional
amount equal to the sum of the Funding 2 reserve required amount
and the product of [ ]% and the principal amount outstanding
under the global intercompany loan.
Each prospectus supplement will specify the Funding 2 target reserve
percentage. The Funding 2 target reserve amount, on any date, is the product
of (a) Funding 2 target reserve percentage and (b) the principal amount
outstanding of the global intercompany loan (including the balances of any
loan tranches issued on such date). The Funding 2 reserve required amount is
calculated as (i) the Funding 2 target reserve amount less (ii) excess spread.
[Excess spread is calculated, on any date, as (1) the weighted average yield
on the mortgage loans in the mortgage trust at such date, together with new
mortgage loans (if any) to be assigned to the mortgages trustee on such date
and taking into account the margins on the basis rate swaps as at such date
less (2) the weighted average yield of the outstanding notes at such date,
including any notes issued on such date and taking into account the margins on
the issuer swaps as at such date].
All amounts in the Funding 2 reserve fund as of each closing date may
be used to pay a portion of the costs and expenses in connection with the
issuance of the notes on that date.
The seller, Funding 2, the rating agencies and the Funding 2 security
trustee may agree to increase, decrease or amend the calculation of the
Funding 2 reserve required amount from time to time. The prior consent of the
creditors of Funding 2 will not be required in relation to such increase,
decrease or amendment provided the rating agencies have confirmed the ratings
of the notes will not be adversely affected.
Funding 2 liquidity reserve fund
Funding 2 will be required to establish a liquidity reserve fund for
the issuer if the long-term, unsecured, unsubordinated and unguaranteed debt
obligations of the seller cease to be rated at least A3 by Moody's or A- by
Fitch (unless Moody's or Fitch, as applicable, confirms that the then current
ratings of the notes will not be adversely affected by the ratings downgrade)
(a "Funding 2 liquidity rating event").
Prior to enforcement of the Funding 2 security, the Funding 2
liquidity reserve fund may be used:
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o to help meet any deficit in Funding 2 available revenue receipts
to pay amounts due on the global intercompany loan, but only to
the extent that such amounts are necessary to fund the payment
by the issuer of interest and fees due on the relevant payment
date in respect of the class A notes and/or the class B notes
and to help meet any deficit recorded on the principal
deficiency ledger in respect of the class A notes; and
o (provided that there are no class A notes outstanding) to help
meet any deficit in Funding 2 available revenue receipts which
are allocated to the issuer to pay all interest and fees due on
the global intercompany loan.
o to help meet any deficit in Funding 2 available principal
receipts available for:
(a) prior to the occurrence of a trigger event, repayment
of principal due and payable in respect of a bullet loan
tranche; and
(b) on or after the occurrence of a trigger event, repayment
of principal due and payable in respect of bullet loan
tranches on their respective final maturity dates,
in each case, prior to the service of a global intercompany loan
enforcement notice ("Funding 2 liquidity reserve principal payments")
The Funding 2 liquidity reserve fund, if any, will be funded
initially from Funding 2 available principal receipts to be paid in accordance
with item [o] the Funding 2 principal priority of payments. The Funding 2
liquidity reserve fund will be funded up to the "Funding 2 liquidity reserve
required amount", being an amount as of any payment date equal to the excess,
if any, of [3]% of the aggregate outstanding balance of the notes on that
payment date over amounts standing to the credit of the Funding 2 reserve fund
on that payment date.
The Funding 2 liquidity reserve fund will be deposited in Funding 2's
name in the Funding 2 GIC account into which the Funding 2 reserve fund also
will be deposited. All interest or income accrued on the amount of the Funding
2 liquidity reserve fund while on deposit in the Funding 2 GIC account will
belong to Funding 2. The cash manager will maintain a separate Funding 2
liquidity reserve ledger to record the balance from time to time of the
Funding 2 liquidity reserve fund.
On each payment date prior to enforcement of the Funding 2 security,
funds standing to the credit of the Funding 2 liquidity reserve fund will be
added to certain other income of Funding 2 in calculating Funding 2 available
revenue receipts to make payments due under the global intercompany loan
agreement.
Once it has been initially funded, the Funding 2 liquidity reserve
fund will be replenished from any Funding 2 available revenue receipts or
Funding 2 available principal receipts. Funding 2 available revenue receipts
will only be applied to replenish the Funding 2 liquidity reserve fund after
paying amounts due on the global intercompany loan to the extent that such
amounts will fund the payment of interest due on the AAA loan tranches, the AA
loan tranches and the reduction of any deficiency on the principal deficiency
subledger for the AAA loan tranches (but not to fund any payment which would
reduce any deficiency on the principal deficiency subledgers for the AA loan
tranches, the A loan tranches, the BBB loan tranches or the BB loan tranches
as described under "Cashflows - Distribution of Funding 2 available revenue
receipts prior to enforcement of the Funding 2 security"). Funding 2 available
principal receipts will be applied, if necessary, on any payment date to
replenish the issuer liquidity reserve fund as described under "Cashflows -
Distribution of Funding 2 available principal receipts prior to enforcement of
the Funding 2 security".
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Following enforcement of the Funding 2 security, amounts standing to
the credit of the Funding 2 liquidity reserve ledger may be applied in making
payments of principal due under the global intercompany loan.
Principal deficiency ledger
An principal deficiency ledger has been established to record:
o any principal losses on the mortgage loans allocated to Funding 2;
o the application of Funding 2 available principal receipts to
meet any deficiency in Funding 2 available revenue receipts as
described under "- Use of principal receipts to pay Funding 2
income deficiency"; and
o the application of Funding 2 available principal receipts to
fund the liquidity reserve fund as described under "Cashflows -
Distribution of Funding 2 available principal receipts prior to
enforcement of the Funding 2 security".
The principal deficiency ledger is divided into five subledgers which
will correspond to each of the AAA loan tranches, the AA loan tranches, the A
loan tranches, the BBB loan tranches, and the BB loan tranches respectively.
Losses on the mortgage loans or the application of principal receipts
to pay interest on the global intercompany loan or the application by Funding
2 of Funding 2 available principal receipts to fund the liquidity reserve fund
will be recorded as follows:
o first, on the BB principal deficiency subledger until the
balance of that subledger is equal to the aggregate outstanding
balance of all BB loan tranches;
o second, on the BBB principal deficiency subledger, until the
balance of that subledger is equal to the aggregate outstanding
balance of all BBB loan tranches;
o third, on the A principal deficiency subledger, until the
balance of that subledger is equal to the aggregate outstanding
balance of all A loan tranches;
o fourth, on the AA principal deficiency subledger, until the
balance of that subledger is equal to the aggregate outstanding
balance of all AA loan tranches; and
o last, on the AAA principal deficiency subledger, at which point
there will be an asset trigger event.
As described under "Cashflows - Distribution of Funding 2 available
revenue receipts prior to enforcement of the Funding 2 security", Funding 2
available revenue receipts may, on each payment date, be applied as follows:
o first, on the AAA principal deficiency subledger;
o second, on the AA principal deficiency subledger;
o third, on the A principal deficiency subledger;
o fourth, on the BBB principal deficiency subledger; and
o last, on the BB principal deficiency subledger.
Use of Funding 2 principal receipts to pay Funding 2 income deficiency
On the distribution date immediately preceding each payment date, the
cash manager will calculate whether there will be an excess or a deficit of
Funding 2 available revenue receipts to pay items [(A) through (Q)] of the
Funding 2 pre-enforcement revenue priority of payments.
If there is a deficit in the amount of Funding 2 available revenue
receipts to pay items [(A) through (H), (J), (M) and (O) and (Q)] of the
Funding 2 pre-enforcement revenue
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priority of payments, then the cash manager shall pay or provide for that
deficit by the application of funds which constitute Funding 2 available
principal receipts, if any, and the cash manager shall make a corresponding
debit entry in the relevant principal deficiency subledger, as described under
"- Principal deficiency ledger".
Funding 2 available principal receipts may not be used to pay
interest on any loan tranche if and to the extent that would result in a
deficiency being recorded, or an existing deficiency being increased, on a
principal deficiency subledger relating to a higher ranking loan tranche, and
may not be used to make up any deficit other than in respect of items [(A)
through (Q)] of the Funding 2 pre-enforcement revenue priority of payments.
Principal therefore may not be used to pay interest on a loan tranche if the
balance on the relevant principal deficiency subledger for such loan tranche
is equal to the principal amount outstanding on such loan tranche.
The cash manager shall apply any Funding 2 available revenue receipts
to extinguish any balance on the principal deficiency ledger, as described
under "- Principal deficiency ledger".
Priority of payments among the class A notes, the class B notes, the class M
notes, the class C notes and the class D notes
The order of payments of interest to be made on the classes of notes
will be prioritized so that interest payments on the class D notes will be
subordinated to interest payments on the class C notes, the class M notes, the
class B notes and the class A notes, interest payments on the class C notes
will be subordinated to interest payments on the class M notes, the class B
notes and the class A notes, interest payments on the class M notes will be
subordinated to interest payments on the class B notes and the class A notes
and interest payments on the class B notes will be subordinated to interest
payments on the class A notes, in each case in accordance with the issuer
priority of payments.
Any revenue shortfall in payments of interest due on the class B
notes, the class M notes, the class C notes or the class D notes on any
payment date will be deferred until the immediately succeeding payment date.
On that immediately succeeding payment date, the amount of interest due on the
relevant class of notes will be increased to take account of any deferred
interest. If on that payment date there is still a revenue shortfall, that
revenue shortfall will be deferred again. This deferral process will continue
until the final repayment date of the notes, at which point if there is
insufficient money available to us to pay interest on the class B notes, the
class M notes, the class C notes or the class D notes, then you may not
receive all interest amounts payable on those classes of notes.
We are not able to defer payments of interest due on any payment date
in respect of the class A notes. The failure to pay interest on the class A
notes will be an event of default under the notes.
The class A notes, the class B notes, the class M note, the class C
notes and the class D notes will be constituted by the trust deed and will
share the same security. Upon enforcement of that security or the occurrence
of a trigger event, the class A notes of each series will rank in priority to
each series of class B notes, each series of class M notes, each series of
class C notes and each series of class D notes; the class B notes of each
series will rank in priority to each series of class M notes, each series of
class C notes, each series of class M notes will rank in priority to each
series of class C notes and each series of class D notes and each series of
class C notes will rank in priority to each series of class D notes.
Mortgages trustee GIC account and Funding 2 GIC account
All amounts held by the mortgages trustee which are not invested in
authorized investments will be deposited in the mortgages trustee GIC account
with the mortgages trustee GIC provider. The mortgages trustee GIC account is
subject to a guaranteed
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investment contract such that the mortgages trustee GIC provider has agreed to
pay a variable rate of interest on funds in the mortgages trustee GIC account
of [0.15]% per annum below LIBOR for three-month sterling deposits.
The mortgages trustee GIC account is currently maintained with
Northern Rock but may be required to be transferred to the stand-by GIC
provider or other bank in certain circumstances, including if the short-term,
unguaranteed and unsecured ratings ascribed to Northern Rock fall below "A-1+"
(or in the circumstances described below, "A-1") by Standard & Poor's, "F1" by
Fitch and "P-1" by Moody's, provided that where the relevant deposit amount is
less than 20% of the [aggregate of the amounts of the Funding share and the
Funding 2 share in the trust property], then the short-term, unguaranteed and
unsecured rating required to be ascribed to Northern Rock by Standard & Poor's
shall be at least "A-1".
Save as provided below, all amounts held by Funding 2 which are not
invested in authorized investments will be deposited in the Funding 2 GIC
account. The Funding 2 GIC account is maintained with the Funding 2 GIC
provider. The Funding 2 GIC account is subject to a guaranteed investment
contract such that the Funding 2 GIC provider has agreed to pay a variable
rate of interest on funds in the Funding 2 GIC account of [0.15]% per annum
below LIBOR for three-month sterling deposits.
[Funding 2 liquidity facility
Funding 2 may, at any time after the Funding 2 program date and with
the prior written consent of the Funding 2 security trustee, establish the
Funding 2 liquidity facility, which may be available to make payments on the
loan tranches and/or other senior expenses of Funding 2.
The consent of noteholders will not be obtained in relation to the
establishment of the Funding 2 liquidity facility.
The terms of the Funding 2 liquidity facility will be agreed with the
Funding 2 liquidity facility provider at the time Funding 2 enters into an
applicable agreement. It is expected that the terms of such agreement would
require the Funding 2 liquidity facility provider to make available to Funding
2, on the satisfaction of certain conditions, but subject to certain
restrictions and limitations, a facility to be utilized towards the making of
payments of interest and repayments of principal in respect of the loan
tranches.
Interest or fees payable on any Funding 2 liquidity facility will be
senior to amounts due to the Funding 2 basis rate swap provider under the
applicable Funding 2 pre-enforcement revenue priority of payments and under
the Funding 2 post-enforcements revenue priority of payments.
Repayment of amounts drawn down under any Funding 2 liquidity
facility will be made prior to making payments on the loan tranches.
Any Funding 2 liquidity facility provider will be a secured creditor
of Funding 2 pursuant to the Funding 2 deed of charge. All amounts owing to
the Funding 2 liquidity facility provider will, on the service of a global
intercompany loan enforcement notice on Funding 2, rank in priority to all
amounts of interest and principal in respect of the global intercompany loan.]
Start-up loan
The following section contains a summary of the material terms of the
[NR start-up loan agreement]. The summary does not purport to be complete and
is subject to the provisions of the [NR start-up loan agreement], a form of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
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General description
Pursuant to the [NR start-up loan agreement], Northern Rock plc has
agreed to make available to Funding 2 a start-up loan tranche on each closing
date.
At any time after the Funding 2 program date, Funding 2 may, with the
prior written consent of the Funding 2 security trustee, enter into a new
start-up loan agreement with a new start-up loan provider under which such
start-up loan provider will also agree to make available to Funding 2 a
start-up loan tranche on each closing date.
Each start-up loan tranche will be used to fund (in whole or in part)
the Funding 2 reserve fund, and to meet the costs and expenses incurred by
Funding 2 in connection with the acquisition by Funding 2 of the additional
Funding 2 share of the trust property and the fees payable under the global
intercompany loan agreement which will enable the issuer to meet its costs in
relation to the issuance of notes on that date. The amount of each start-up
loan tranche to be made to Funding 2 will be described in the applicable
prospectus supplement.
Each start-up loan tranche will constitute a separate debt, due from
Funding 2 to the start-up loan provider. The aggregate of the start-up loan
tranches, at any time, will constitute the start-up loan.
Interest on the start-up loan
Each start-up loan tranche will bear interest at a rate which will be
described in the applicable prospectus supplement until repaid. Any unpaid
interest will be added to the principal amount owed and will bear interest.
Interest is payable by Funding 2 on each payment date.
Repayment of start-up loan
Funding 2 will repay the start-up loan only to the extent that it has
Funding 2 available revenue receipts after making payments ranking in priority
to payments to the start-up loan provider(s) as described under "Cashflows -
Distribution of Funding 2 available revenue receipts prior to enforcement of
the Funding 2 security" or "Cashflows - Distribution of Funding 2 available
principal receipts and Funding 2 available revenue receipts following
enforcement of the Funding 2 security". Amounts due to the start-up loan
provider(s) are payable on any payment date (and in no order of priority among
them, but in proportion to the amounts due) after amounts of interest due to
the issuer on the global intercompany loan. Funding 2 will have no further
recourse to the start-up loan provider(s) after it has repaid the start-up
loan.
Event of default
It will be an event of default under any start-up loan agreement if
Funding 2 has available funds to pay amounts due to the start-up loan
provider(s) and it does not pay them.
Acceleration
Subject to the Funding 2 deed of charge, the start-up loan will
become immediately due and payable upon service of a global intercompany loan
enforcement notice.
Governing law
Each start-up loan agreement will be governed by English law.
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The Funding bridge loan
The residuals bridge loan
At any time after the Funding 2 program date, Funding 2 may, with the
prior written consent of the Funding 2 security trustee, enter into a
residuals bridge loan agreement with, amongst others, a residuals bridge loan
provider under which such residuals bridge loan provider will agree, from time
to time, to make available residuals bridge loans to Funding 2.
Interest on the residuals bridge loan
Each residuals start-up loan tranche will bear interest at a rate to
be agreed between the residuals bridge loan provider, Funding 2 and the
Funding 2 security trustee Interest will payable by Funding 2 from such funds
and on dates to be agreed between the residuals loan provider, Funding 2 and
the Funding 2 security trustee.
Repayment of residuals bridge loan
Funding 2 will repay the residuals bridge loan in such manner and
from such funds as may be agreed between the residuals loan provider, Funding
2 and the Funding 2 security trustee.
The Funding bridge loan
At any time after the Funding 2 program date, Funding 2 may, with the
prior written consent of the Funding 2 security trustee, enter into a Funding
bridge loan agreement with, amongst others, Funding and the security trustee
under which Funding 2 will, from time to time, use the proceeds of a residuals
bridge loan to make an advance to Funding.
Interest on the Funding bridge loan
Each Funding bridge loan will bear interest at a rate to be agreed
between the Funding, Funding 2, the security trustee and the Funding 2
security trustee. Interest will payable by Funding from such funds and on
dates to be agreed between Funding, Funding 2, the security trustee and the
Funding 2 security trustee.
Repayment of Funding bridge loan
Funding 2 will repay the Funding bridge loan in such manner and from
such funds as may be agreed between Funding, Funding 2, the security trustee
and the Funding 2 security trustee.
Amendments to transaction documents
In order for Funding 2 to be able to receive residuals bridge loans
from the residuals bridge loan provider and to make Funding bridge loans to
Funding, certain amendments would be required to be made to a number of
transaction documents, including (but without limitation):
o the cash management agreement so as to provide for the making of
the Funding bridge loan, the receipt of payments if interest and
principal in respect thereof and the making of payments of
interest and principal in respect of the residuals bridge loan;
o the Funding 2 deed of charge, so as to provide for the manner in
which payments interest and principal in relation to the
residuals bridge loan will be made prior to the enforcement of
the Funding 2 security and to allow the residuals bridge loan
provider to become a Funding 2 secured creditor.
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The prior consent of the noteholders to the amendments to the
transaction documents will not be obtained. However, before such amendments
are made, Funding 2 will be required to satisfy certain conditions, including
the obtaining a written confirmation from each of the rating agencies that the
then current ratings of any notes outstanding at such time will not be
adversely affected as a result of such amendments.
It is expected that Funding 2 will become a secured creditor of
Funding in order to secure the obligations owed by Funding to it under the
Funding bridge loan. It is expected that Funding will only be obliged to pay
amounts to Funding 2 to the extent that it has funds to do so after making
payments ranking in priority to the Funding bridge loan.
Governing law
Each of the residuals bridge loan agreement and the Funding bridge
loan agreement will be governed by English law.
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The swap agreements
The following section describes, in summary, the material terms of
the swap agreements. The description does not purport to be complete and is
subject to the provisions of each of the swap agreements, forms of which have
been filed as exhibits to the registration statement of which this prospectus
is a part.
The Funding 2 basis rate swap
Some of the mortgage loans in the mortgage portfolio pay a variable
rate of interest for a period of time which may either be linked to the
seller's standard variable rate or linked to an interest rate other than the
seller's standard variable rate, such as a variable rate offered by a basket
of UK mortgage lenders or a rate that tracks the Bank of England base rate.
Other mortgage loans pay a fixed rate of interest for a period of time.
The amount of revenue receipts that Funding 2 receives will fluctuate
according to the interest rates applicable to the mortgage loans in the
mortgages trust. The amount of interest payable by Funding 2 to the issuer
under the global intercompany loan, from which the issuer will fund, inter
alia, its payment obligations under the currency swaps and the notes, will be
made in sterling.
To provide a hedge against the possible variance between:
(1) the seller's standard variable rate payable on the variable rate
mortgage loans, the rates of interest payable on the flexible
mortgage loans which pay variable rates of interest no higher
than the rate offered by a basket of UK mortgage lenders or a
rate which tracks the Bank of England base rate and the fixed
rates of interest payable on the fixed rate mortgage loans; and
(2) a margin over the LIBOR based rate for one-month sterling
deposits,
Funding 2 will enter into the Funding 2 basis rate swap with the
Funding 2 basis rate swap provider and the note trustee.
Under the Funding 2 basis rate swap, the following amounts will be
calculated in respect of each calculation period:
o the amount (known as the "calculation period swap provider
amount") produced by applying, on set monthly dates during the
relevant period, LIBOR for three-month sterling deposits (which
is set at the beginning of each applicable quarter) plus a
spread to the notional amount of the Funding 2 basis rate swap
as defined later in this section; and
o the amount (known as the "calculation period Funding 2 amount")
produced by applying, on set monthly dates during the relevant
period, a rate equal to the weighted average of:
(1) the average of the standard variable mortgage rates or their
equivalent charged to existing borrowers on residential
mortgage loans as published from time to time, after
excluding the highest and the lowest rate, of Abbey National
plc, Alliance & Leicester plc, Bradford & Bingley, HBOS plc,
Lloyds TSB Bank plc, National Westminster Bank plc and
Woolwich plc;
(2) in respect only of any flexible mortgage loans the
difference between (a) the average of the standard variable
mortgage rates or their equivalent charged to existing
borrowers on residential mortgage loans as published from
time to time, after excluding the highest and the lowest
rate, of Abbey National plc, Alliance & Leicester plc,
Bradford & Bingley, HBOS plc, Lloyds TSB Bank plc,
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National Westminster Bank plc and Woolwich plc, and (b)
the weighted average of the discount to the average
interest rate calculated in (a) above in respect of the
flexible mortgage loans; and
(3) the weighted average of the rates of interest payable on the
fixed rate mortgage loans, other than fixed rate mortgage
loans which have become re-fixed mortgage loans since the
immediately preceding payment date,
to the notional amount of the Funding 2 basis rate swap.
After these two amounts are calculated in relation to a payment date,
the following payments will be made on that payment date:
o if the calculation period swap provider amount is greater than
the calculation period Funding 2 amount, then the Funding 2
basis rate swap provider will pay the difference (after such
difference is adjusted to take account of amounts payable by the
basis rate swap provider and the issuer under the basis rate
swap (as described below)) to Funding 2;
o if the calculation period Funding 2 amount is greater than the
calculation period swap provider amount, then Funding 2 will pay
the difference (after such difference is adjusted to take
account of amounts payable by the Funding 2 basis rate swap
provider and Funding 2 under the Funding 2 basis rate swap) to
the Funding 2 basis rate swap provider; and
o if the calculation period swap provider amount is equal to the
calculation period issuer amount, neither party will make any
payment to the other party.
If a payment is to be made by the Funding 2 basis rate swap provider,
once received by Funding 2 that payment will be included in the issuer
available revenue receipts and will be applied on the relevant payment date
according to the relevant Funding 2 priority of payments. If a payment is to
be made by Funding 2, it will be made according to the relevant Funding 2
priority of payments.
The "notional amount of the Funding 2 basis rate swap" in respect of
any applicable date will be an amount in sterling equal to:
o [the aggregate outstanding principal balance of the global
intercompany loan on the immediately preceding payment date];
[plus
o the aggregate outstanding principal balance of the loan tranches
in the period between the applicable date and the immediately
preceding payment date;]
less
o the balance of the principal deficiency ledger on such
immediately preceding payment date;
less
o the aggregate outstanding principal balance on such immediately
preceding payment date of fixed rate mortgage loans which have
become re-fixed mortgage loans since that payment date.
In the event that the Funding 2 basis rate swap is terminated prior
to the service of a global intercompany loan enforcement notice or the final
repayment of the global intercompany loan, Funding 2 shall use its best
efforts to enter into a replacement swap on terms acceptable to the rating
agencies and the note trustee and with a swap provider whom the rating
agencies have previously confirmed in writing to Funding 2 and the note
trustee will not cause the then current ratings of the issuer's notes to be
downgraded, withdrawn or qualified.
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Under the terms of the Funding 2 basis rate swap, in the event that
the relevant rating of the basis rate swap provider (or any provider of credit
support) is downgraded by a rating agency below the rating(s) specified in the
Funding 2 basis rate swap agreement (in accordance with the requirements of
the rating agencies) for the Funding 2 basis rate swap provider and, where
applicable, the then-current ratings of the notes would or may, as applicable,
be adversely affected as a result of the downgrade, the Funding 2 basis rate
swap provider will, as a result of the downgrade, be required to take certain
remedial measures which may include providing collateral for its obligations
under the basis rate swap, arranging for its obligations under the Funding 2
basis rate swap to be transferred to an entity with the ratings required by
the relevant rating agency, procuring another entity with the ratings required
by the relevant rating agency to become a co-obligor in respect of its
obligations under the Funding 2 basis rate swap or taking such other action as
it may agree with the relevant rating agency. A failure to take such steps
will allow Funding 2 to terminate the Funding 2 basis rate swap.
The issuer swaps
To protect the issuer against certain interest rate, currency and/or
other risks in respect of amounts received by the issuer from Funding 2 and
amounts payable by the issuer under each series and class of notes, the issuer
will, on the closing date for a series and class of notes (and where it is
required to hedge such risks) enter into an issuer swap agreement with the
note trustee and an issuer swap provider.
Under each issuer swap:
(a) the issuer will pay to the issuer swap provider:
(i) on the applicable closing date, where a series and
class of notes has been issued in a specified
currency other than sterling, an amount in the
specified currency equal to the net proceeds of the
issue of such notes;
(ii) on each payment date, where a series and class of
notes has been issued in a specified currency other
than sterling, an amount in sterling equal to the
principal payment (in the specified currency) to be
made on the relevant series and class of notes on
that payment date, such amount to be calculated by
reference to the relevant specified currency swap
rate;
(iii) on each payment date, an amount in sterling based
on [three month sterling LIBOR (or an interpolated
sterling LIBOR rate, as applicable)]; and
(b) the issuer swap provider will pay to the issuer:
(i) on the applicable closing date, where a series and
class of notes has been issued in a specified
currency other than sterling, an amount in sterling
equal to the net proceeds of the issue of such
notes, converted from the specified currency into
sterling at the specified currency swap rate;
(ii) on each payment date, where a series and class of
notes has been issued in a specified currency other
than sterling, an amount in the specified currency
equal to the principal payments to be made on the
relevant series and class of notes on that payment
date;
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(iii) on each payment date, an amount in the specified
currency equal to the interest to be paid in the
specified currency on the relevant series and class
of notes on that payment date.
In the event that any issuer swap is terminated prior to the service
of an issuer enforcement notice or the final maturity date in respect of the
applicable series and class of notes, the issuer shall use its best efforts to
enter into a replacement issuer swap in respect of that series and class of
notes. Any replacement issuer swap must be entered into on terms acceptable to
the rating agencies and the note trustee and with a replacement issuer swap
provider that the rating agencies have confirmed will not cause the then
current ratings of the applicable notes to be downgraded, withdrawn or
qualified.
Under the terms of each issuer swap, in the event that the relevant
rating of any issuer swap provider (or any provider of credit support) is
downgraded by a Rating Agency below the rating(s) specified in the relevant
issuer swap agreement (in accordance with the requirements of the rating
agencies) for that issuer swap provider and, where applicable, the-then
current ratings of the notes would or may, as applicable, be adversely
affected as a result of the downgrade, any issuer swap provider will, as a
result of the downgrade, be required to take certain remedial measures which
may include providing collateral for its obligations under the relevant issuer
swap agreement, arranging for its obligations under the relevant issuer swap
agreement to be transferred to an entity with the ratings required by the
relevant rating agency, procuring another entity with the ratings required by
the relevant rating agency to become a co-obligor in respect of its
obligations under the relevant issuer swap or taking such other action as it
may agree with the relevant rating agency. A failure to take such steps will
allow the issuer to terminate the relevant issuer swap agreement.
Termination of the swaps
A swap could also terminate in certain other circumstances set out in
the relevant swap agreement, which include the following circumstances, each
referred to as a "swap early termination event":
o at the option of one party to the swap, if there is a failure by
the other party to pay any amounts due and payable in accordance
with the terms of that swap. Certain amounts may be due but not
payable in accordance with the terms of the swap as described
below under "- Limited recourse and swap payment obligation";
o [if an event of default under the notes occurs and the note
trustee serves an issuer enforcement notice;]
o upon the occurrence of an insolvency of one of the parties or
its guarantor, if applicable, or the merger of the relevant swap
provider or its guarantor, if applicable, without an assumption
of the obligations under the swaps, or changes in law resulting
in the obligations of one of the parties becoming illegal; and
Upon the occurrence of a swap early termination event in relation to
the Funding 2 basis rate swap agreement, Funding 2 or the Funding 2 basis rate
swap provider may be liable to make a termination payment to the other.
Upon the occurrence of a swap early termination event in relation to
an issuer swap agreement, the issuer or the relevant swap provider may be
liable to make a termination payment to the other. This termination payment
will be calculated and made in sterling. The amount of any termination payment
will be based on the market value of the terminated swap based on market
quotations of the cost of entering into a swap with the same terms and
conditions that would have the effect of preserving the respective full
payment obligations of the parties (or based upon loss in the event that no
market quotation can be obtained). Any such termination payment could be
substantial.
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If any termination payment is due by the issuer to an issuer swap
provider, then pursuant to its obligations under the global intercompany loan,
Funding 2 shall pay to the issuer the amount required by the issuer to pay the
termination payment due to the relevant swap provider. If the default was
caused by the issuer swap provider, any such termination payment will be made
by the issuer to the issuer swap provider only after paying interest amounts
due on the notes, However, if the issuer causes a default to occur that
results in a termination payment becoming due from the issuer to an issuer
swap provider, such payment will be made by the issuer in the same priority as
it pays the relevant interest amounts due on that series and class of notes.
The issuer shall apply amounts received from Funding 2 under the global
intercompany loan in respect of termination payments in accordance with the
issuer pre-enforcement revenue priority of payments, the pre-enforcement
principal priority of payments, the relevant priority of payments following
the occurrence of a trigger event, or, as the case may be, the issuer
post-enforcement priority of payments. The application by the issuer of
termination payments due to a swap provider may affect the funds available to
pay amounts due to the noteholders (see "Risk factors - You may be subject to
exchange rate risks").
If the Funding 2 basis rate swap provider causes a default to occur
that results in a termination payment becoming due from Funding 2 to the
Funding 2 basis rate swap provider, such payment will be made only after
paying interest amounts due on the global intercompany loan and after
providing for any debit balance on the principal deficiency ledger. However,
if Funding 2 causes a default to occur that results in a termination payment
becoming due from Funding 2 to the basis rate swap provider, such payment will
be made [in priority to the payment of interest amounts due on the global
intercompany loan. The application by Funding 2 of termination payments due to
a Funding 2 basis rate swap provider may affect the funds available to pay
amounts due to noteholders (see "Risk factors - Termination payment on the
Funding 2 basis rate swap may adversely affect the funds available to make
payments on the notes").
If Funding 2 receives a termination payment from the Funding 2 basis
rate swap provider, then Funding 2 shall use those funds towards meeting its
costs in effecting applicable hedging transactions until a replacement swap is
entered into and/or to acquire a replacement swap. The issuer will not receive
extra amounts (over and above interest and principal payable on the notes) as
a result of Funding 2 receiving a termination payment.
If the issuer receives a termination payment from an issuer swap
provider, then the issuer shall use those funds towards meeting its costs in
effecting currency exchanges or interest rate exchanges, as applicable at the
spot rate of exchange until a new issuer swap is entered into and/or to
acquire a new issuer swap. You will not receive extra amounts (over and above
interest and principal payable on the notes) as a result of the issuer
receiving a termination payment.
Taxation
Neither Funding 2 nor the issuer is not obliged under any of the
swaps to gross up payments made by them if withholding taxes are imposed on
payments made under the swaps.
A swap provider is always obliged to gross up payments made by it to
Funding 2 or the issuer (as applicable) if withholding taxes are imposed on
payments made under the swaps.
Limited recourse and swap payment obligation
On any payment date, Funding 2 will only be obliged to pay an amount
to the Funding 2 basis rate swap provider to the extent that Funding 2 has
received sufficient funds in respect of the Funding 2 share of the trust
property to pay that amount to the Funding 2
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basis rate swap provider, subject to and in accordance with the relevant
Funding 2 priority of payments. Prior to the enforcement of the issuer
security, on any payment date the issuer will only be obliged to pay an amount
to an issuer swap provider in respect of an issuer swap agreement relating to
a series and class of notes to the extent that the issuer has received from
Funding 2 sufficient funds under the loan tranche related to such series and
class of notes to pay that amount to that issuer swap provider, subject to and
in accordance with the relevant issuer priority of payments. On any payment
date, each swap provider will only be obliged to pay to Funding 2 or the
issuer (as applicable) an amount that is proportionate to the amount of the
payment that it has received from Funding 2 or the issuer (as applicable) on
that payment date.
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Cash management for the mortgages trustee and Funding 2
The material terms of the cash management agreement are summarized in
this section. The summary does not purport to be complete and it is subject to
the provisions of the cash management agreement. A form of the cash management
agreement has been filed as an exhibit to the registration statement of which
this prospectus is a part.
Northern Rock has been appointed by the mortgages trustee, Funding,
Funding 2, the security trustee and the Funding 2 security trustee to provide
cash management services in relation to the mortgages trustee, Funding and
Funding 2.
Cash management services to be provided in relation to the mortgages trust
The cash manager's duties in relation to the mortgages trust include,
but are not limited to:
(A) determining the current shares and share percentages of Funding 2 and
the seller in the trust property (including the relevant weighted
average Funding 2 share percentage and the relevant weighted average
seller share percentage, as applicable) in accordance with the terms
of the mortgages trust deed;
(B) maintaining the following ledgers on behalf of the mortgages trustee:
o the Funding share/Funding 2 share/seller share ledger, which
will record the current shares of the seller, Funding and
Funding 2 in the trust property;
o the losses ledger, which will record losses on the mortgage loans;
o the principal ledger, which will record principal receipts on
the mortgage loans received by the mortgages trustee, payments
of principal from the mortgages trustee GIC account to Funding,
Funding 2 and the seller and any mortgages trustee retained
principal receipts;
o the revenue ledger, which will record revenue receipts on the
mortgage loans received by the mortgages trustee and payments of
revenue receipts from the mortgages trustee GIC account to
Funding, Funding 2 and the seller;
o the overpayments ledger, which will record each revenue receipt
and/or principal receipt paid by a borrower in excess of the
amount required under the terms of the relevant mortgage loan
(and in the case of any non-flexible mortgage loan by an amount
equal to or less than (GBP)199.99), and which will be
sub-divided into subledgers to record overpayments made on
non-flexible mortgage loans and flexible mortgage loans;
o the non-flexible underpayments ledger, which will record
underpayments on non-flexible mortgage loans;
o the re-draws ledger, which will record re-draws on the flexible
mortgage loans and which will be sub-divided into subledgers to
record cash re-draws and non-cash re-draws;
o the contributions ledger, which will record the making by
Funding, Funding 2 and the seller of contributions to the
mortgages trust and the application of such contributions in
accordance with the terms of the mortgages trust deed; and
o the further draw ledger which will record further draws on
personal secured loans.
(C) distributing the mortgages trustee available revenue receipts and
the mortgages trustee available principal receipts to Funding,
Funding 2 and the seller in accordance with the terms of the
mortgages trust deed;
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(D) providing the mortgages trustee, Funding, Funding 2, the security
trustee, the Funding 2 security trustee and the rating agencies with
a quarterly report in relation to the trust property; and
(E) providing the mortgages trustee and Funding 2 with quarterly
management accounts.
Cash management services to be provided to Funding 2
The cash manager's duties in relation to Funding 2 include, but are
not limited to:
(A) determining no later than the distribution date immediately
preceding the relevant payment date:
o the amount of Funding 2 available revenue receipts to be applied
to pay interest and fees in relation to the global intercompany
loan and any other global intercompany loan on that relevant
payment date; and
o the amount of Funding 2 available principal receipts to be
applied to repay the global intercompany loan [and any other
global intercompany loan] on that relevant payment date;
(B) maintaining the following ledgers on behalf of Funding 2:
o the Funding 2 principal ledger, which will record the amount of
principal receipts received by Funding 2 on each distribution
date;
o the Funding 2 revenue ledger, which will record all other
amounts received by Funding 2 on each distribution date;
o the Funding 2 reserve ledger, which will record the amount
credited to the Funding 2 reserve fund from time to time, and
subsequent withdrawals and deposits in respect of the Funding 2
reserve fund; and
o the global intercompany loan ledger(s), which will record
payments of interest and repayments of principal made under the
global intercompany loan and any other global intercompany loan;
(C) investing sums standing to the credit of the Funding 2 GIC account or
any other Funding 2 bank account in short-term authorized investments
(as defined in the glossary) on behalf of Funding 2 or the security
trustee (as the case may be);
(D) making withdrawals from the Funding 2 reserve account as and when
required;
(E) [reserved]
(F) making any required withdrawals under the Funding 2 liquidity reserve
fund(s), if any;
(G) applying the Funding 2 available revenue receipts and Funding 2
available principal receipts in accordance with the relevant order of
priority of payments for Funding 2 contained in the Funding 2 deed of
charge;
(H) providing Funding 2, the issuer, the security trustee and the rating
agencies with a quarterly report in relation to Funding 2;
(I) making all returns and filings in relation to Funding 2 and the
mortgages trustee and providing or procuring the provision of company
secretarial and administration services to them; and
(J) maintaining the Funding 2 principal deficiency ledger.
For the definitions of Funding 2 available revenue receipts, Funding 2
available principal receipts and the Funding 2 pre-enforcement priorities of
payments, see "Cashflows".
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Compensation of cash manager
The cash manager is paid an annual fee of (GBP)100,000 for its
services which is paid in four equal installments quarterly in arrears on each
payment date. The fee is inclusive of VAT. The fee is subject to adjustment if
the applicable rate of VAT changes.
In addition, the cash manager is entitled to be indemnified for any
expenses or other amounts properly incurred by it in carrying out its duties.
The cash manager is paid by the mortgages trustee, Funding 2 and Funding
proportionately in accordance with and subject to the terms of the mortgages
trust deed, the relevant Funding 2 priority of payments and the Funding
priority of payments, prior to amounts due to the issuer under the global
intercompany loan.
Resignation of cash manager
The cash manager may resign only on giving 12 months notice to the
[security trustee, the Funding 2 security trustee, Funding 2, Funding] and the
mortgages trustee and provided the [security trustee, the Funding 2 security
trustee, Funding, Funding 2] and the mortgages trustee each consent in writing
to the cash manager's resignation and provided that:
o a substitute cash manager has been appointed and a new cash
management agreement is entered into on terms satisfactory to
the [security trustee, the Funding 2 security trustee, the
mortgages trustee, Funding and Funding 2]; and
o the then current ratings of the issuer's notes and the Funding
issuers' notes would not be adversely affected as a result of
that replacement.
Termination of appointment of cash manager
The [security trustee/Funding 2 security trustee] may, upon written
notice to the cash manager, terminate the cash manager's rights and
obligations immediately if any of the following events occurs:
o the cash manager defaults in the payment of any amount due and
fails to remedy such default for a period of 5 London business
days after the earlier of becoming aware of the default and
receiving a written notice from the [security trustee/Funding 2
security trustee];
o the cash manager fails to comply with any of its other
obligations under the cash management agreement which in the
opinion of the security trustee, acting at the direction of the
note trustee, is materially prejudicial to the noteholders and
does not remedy that failure within 20 days after the earlier of
becoming aware of the failure and receiving written notice from
the [security/trustee Funding 2 security trustee]; or
o the cash manager suffers an insolvency event.
Upon termination of the appointment of the cash manager, the
[security trustee/Funding 2 security trustee] has agreed to use its reasonable
endeavors to appoint a substitute cash manager. Any such substitute cash
manager will be required to enter into an agreement on substantially the same
terms as the provisions of the cash management agreement and any termination
is conditional upon the rating agencies having previously confirmed in writing
to the issuer and the security trustee that the then current ratings of the
issuer's notes and the notes of the Funding issuers will not be downgraded,
withdrawn or qualified.
If the appointment of the cash manager is terminated or it resigns,
the cash manager must deliver its books of account relating to the mortgage
loans to or at the direction of the mortgages trustee, [Funding, Funding 2,
the security trustee or the Funding 2 security
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trustee], as the case may be. The cash management agreement will terminate
automatically when both Funding and Funding 2 have no further interest in the
trust property and the global intercompany loan and the Funding intercompany
loans have been repaid or otherwise discharged.
Governing law
The cash management agreement is governed by English law.
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Cash management for the issuer
The material terms of the issuer cash management agreement are
summarized in this section. The summary does not purport to be complete and it
is subject to the terms of the issuer cash management agreement. A form of the
issuer cash management agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part.
On the Funding 2 program date, the issuer and the note trustee
appointed Northern Rock to provide cash management services to the issuer.
Cash management services to be provided to the issuer
The issuer cash manager's duties include, but are not limited to:
(A) determining no later than the distribution date immediately
preceding the relevant payment date:
o the issuer available revenue receipts to be applied to pay
interest on the notes on that relevant payment date to the
applicable swap provider or to the noteholders, as applicable,
and to pay amounts due to other creditors of the issuer;
o the issuer available principal receipts to be applied to repay
principal of the notes on that relevant payment date; and
o such other amounts as are expressed to be calculations and
determinations made by the issuer cash manager under the
conditions of the notes;
(B) applying issuer available revenue receipts and issuer available
principal receipts in accordance with the relevant order of priority
of payments for the issuer set out in the issuer cash management
agreement;
(D) providing the issuer, Funding 2, the note trustee and the rating
agencies with quarterly reports in relation to the issuer;
(E) making all returns and filings required of the issuer and procuring
the provision of company secretarial and administration services to
the issuer;
(F) arranging payment of all fees to the London Stock Exchange plc or, as
applicable, the Financial Services Authority;
(G) performing, if necessary, all currency and interest rate conversions
free of charge, cost or expense at the relevant exchange rate,
whether it be a conversion from sterling to dollars or vice versa,
sterling to euro or vice versa, or floating rates of interest to
fixed rates of interest or vice versa; and
(H) calculating required subordination amounts and determining whether
issuance tests and conditions to the repayment in full of notes have
been met.
Issuer's bank account
As at the Funding 2 program date, the issuer maintains a bank account
with the issuer account bank (the "issuer transaction account"). The issuer
may, with the prior written consent of the note trustee, open additional or
replacement bank accounts.
If the short-term, unguaranteed and unsubordinated ratings of the
issuer account bank cease to be rated "A-1+" by Standard & Poor's, "P-1" by
Moody's or "F1+" by Fitch, then the issuer transaction account will be closed
and a new issuer transaction account opened with a bank that has the requisite
ratings.
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Compensation of issuer cash manager
The issuer cash manager will be paid for its services an annual fee
of (GBP)[o] which will be paid in four equal installments quarterly in arrears
on each payment date. The fee is inclusive of VAT. The fees will be subject to
adjustment if the applicable rate of VAT changes.
In addition, the issuer cash manager will be entitled to
reimbursement for any expenses or other amounts properly incurred by it in
carrying out its duties. The issuer cash manager will be paid by the issuer
prior to amounts due on the notes.
Resignation of issuer cash manager
The issuer cash manager may resign only on giving 12 months notice to
the note trustee and the issuer provided that we and the note trustee consent
in writing to the issuer cash manager's resignation and provided that:
o a substitute issuer cash manager has been appointed and a new
issuer cash management agreement is entered into on terms
satisfactory to the note trustee and the issuer; and
o that replacement would not adversely affect the then current
ratings of the notes.
Termination of appointment of issuer cash manager
The issuer or the note trustee may, upon written notice to the issuer
cash manager, terminate the issuer cash manager's rights and obligations
immediately if any of the following events occurs:
o the issuer cash manager defaults in the payment of any amount
due and fails to remedy such default for a period of 5 London
business days after the earlier of becoming aware of the default
and receiving written notice from us or the note trustee;
o the issuer cash manager fails to comply with any of its other
obligations under the issuer cash management agreement which in
the opinion of the note trustee is materially prejudicial to the
noteholders and does not remedy that failure within 20 days
after the earlier of becoming aware of the failure and receiving
a notice from the note trustee; or
o the issuer cash manager suffers an insolvency event.
Upon termination of the appointment of the issuer cash manager, the
note trustee will agree to use its reasonable endeavors to appoint a
substitute issuer cash manager. Any such substitute issuer cash manager will
be required to enter into an agreement on substantially the same terms as the
provisions of the issuer cash management agreement and any termination is
conditional upon the rating agencies having previously confirmed in writing to
the issuer and the note trustee that the then current ratings of the issuer's
notes will not be downgraded, withdrawn or qualified.
If the appointment of the issuer cash manager is terminated or the
issuer cash manager resigns, the issuer cash manager must deliver its books of
account relating to the notes to or at the direction of the note trustee. The
issuer cash management agreement will terminate automatically when the notes
have been fully redeemed.
Governing law
The issuer cash management agreement will be governed by English law.
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Security for Funding 2's obligations
To provide security for its obligations under the global intercompany
loan agreement and the other transaction documents, Funding 2 has entered into
the Funding 2 deed of charge with the Funding 2 secured creditors. A summary
of the material terms of the Funding 2 deed of charge is set out below. The
summary does not purport to be complete and is subject to the provisions of
the Funding 2 deed of charge. This prospectus forms part of the registration
statement and a form of the Funding 2 deed of charge has been filed as an
exhibit to that registration statement.
Funding 2 has covenanted in favor of the Funding 2 security trustee
for the benefit of the Funding 2 secured creditors (including the Funding 2
security trustee) that Funding 2 will pay all amounts due to each of the
Funding 2 secured creditors as they become due and payable (subject to the
limited recourse provisions of the global intercompany loan agreement and of
the other transaction documents) and that Funding 2 will comply with its other
obligations under the transaction documents.
Subject as provided in the following paragraph, Funding 2 has granted
the following security to be held by the Funding 2 security trustee for itself
and on trust for the benefit of the Funding 2 secured creditors:
o a first fixed charge over the Funding 2 share of the trust
property;
o an assignment by way of first fixed security of all of Funding
2's right, title, interest and benefit in the transaction
documents (including for the avoidance of doubt rights against
the mortgages trustee under the mortgages trust deed, but
excluding all of Funding 2's right, title, interest and benefit
in the Funding 2 deed of charge) to which Funding 2 is a party
from time to time;
o an assignment by way of fixed security over Funding 2's right,
title, interest and benefit in the Funding 2 GIC account, the
Funding 2 transaction account, and each other account (if any)
of Funding 2 and all amounts standing to the credit of those
accounts (including all interest accrued on such amounts);
o a first fixed charge (which may take effect as a floating
charge) of Funding 2's right, title, interest and benefit in all
authorized investments purchased from the Funding 2 GIC account,
the Funding 2 transaction account, any swap collateral account
and each other account (if any) of Funding 2 and all income on
such investments; and
o a first floating charge over all the assets and the undertaking
of Funding 2 which are not otherwise effectively subject to a
fixed charge or assignment by way of security as described in
the preceding paragraphs or as described in the following
paragraph (and also extending over all assets and undertaking of
Funding 2 situated in or governed by the law of Scotland whether
or not effectively charged or assigned by way of security as
aforesaid).
Security which is expressed to be fixed in nature may take effect as
floating security depending on the degree of control which the secured party
is given over the relevant assets and the degree to which the secured party
actually exercises such control.
In addition, Funding 2 has also granted second ranking fixed and
floating security over all of its assets in favor of the Funding 2 security
trustee, to secure the same obligations as under the Funding 2 deed of charge.
The second priority Funding 2 deed of charge is principally governed by
English law but contains certain Scots law provisions. It will be enforceable
in the same circumstances as the Funding 2 deed of charge and proceeds of
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enforcement thereof will be applied in the same order as those following
enforcement of the Funding 2 deed of charge.
[Nature of security - fixed charge or floating charge
Funding 2 may not deal with those of its assets which are subject to
a fixed charge without the consent of the Funding 2 security trustee.
Accordingly, Funding 2 will not be permitted to deal with the assets which are
expressed to be subject to a fixed charge in its ordinary course of business.
In this way, the security is said to "fix" over those assets which are
expressed to be subject to a fixed charge.
Unlike fixed charges, a floating charge does not attach to specific
assets but "floats" over a class of assets which may change from time to time.
Funding 2 is able to deal with assets which are subject to a floating charge
only and to give third parties title to those assets free from the floating
charge in the event of sale, discharge or modification, provided that such
dealings and transfers of title are in the ordinary course of Funding 2's
business. Assets which are acquired by Funding 2 after the Funding 2 program
date (including assets acquired upon the disposition of any other asset) and
which are not subject to any fixed charge mentioned in the section above will
be subject to the floating charge created by the Funding 2 deed of charge.
The existence of the floating charge will allow the Funding 2
security trustee to appoint a receiver as an administrative receiver of
Funding 2. The main advantage of the receiver being an administrative receiver
is that a person entitled to appoint an administrative receiver can prevent
the appointment of an administrator, ensuring that in the event of enforcement
proceedings commenced in respect of amounts due and owing by Funding 2, the
Funding 2 security trustee will be able to control those proceedings in the
best interest of the Funding 2 secured creditors. If an administrator of
Funding 2 were appointed this would prevent the appointment of a receiver and
freeze the enforcement of rights and remedies without the consent of the
administrator or leave of the court.
The floating charge created by the Funding 2 deed of charge may
"crystallize" and become a fixed charge over the relevant class of assets
owned by Funding 2 at the time of crystallization. Crystallization will occur
automatically following the occurrence of specific events set out in the
Funding 2 deed of charge, including, among other events, notice to Funding 2
from the Funding 2 security trustee following a global intercompany loan event
of default. A crystallized floating charge will continue to rank behind the
claims of preferential creditors (as referred to in this section) on
enforcement of the Funding 2 security.]
Funding 2 pre-enforcement and post-enforcement priority of payments
The Funding 2 deed of charge sets out the order of priority, as at
the Funding 2 program date, for the application by the cash manager, prior to
the service of a global intercompany loan enforcement notice, of amounts
standing to the credit of the Funding 2 transaction account on each payment
date. This order of priority is described under "Cashflows - Distribution of
Funding 2 available revenue receipts" and Cashflows - Distribution of Funding
2 available principal receipts prior to enforcement of the Funding 2
security".
The Funding 2 deed of charge sets out the order or priority, as at
the Funding 2 program date, for the application by the Funding 2 security
trustee (or the cash manager on behalf of the Funding 2 security trustee),
following service of a global intercompany loan enforcement notice, of amounts
received recovered by the Funding 2 security trustee or a
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receiver appointed on its behalf. This order of priority is described under
"Cashflows - Distribution of monies following enforcement of the Funding 2
security".
Enforcement
The Funding 2 deed of charge sets out the circumstances upon which
and the procedures by which the Funding 2 security trustee may take steps to
enforce the Funding 2 security. The Funding 2 security will become enforceable
upon the service on Funding 2 by the Funding 2 security trustee of a global
intercompany loan enforcement notice (see "The global intercompany loan
agreement - Intercompany loan events of default") provided that, if the
Funding 2 security has become enforceable otherwise than by reason of a
default in payment of any amount due in respect of the global intercompany
loan which would be utilized to fund the payment of any class A notes under
any loan tranche, the Funding 2 security trustee will not be entitled to
dispose of all or part of the assets comprised in the Funding 2 security
unless either:
o a sufficient amount would be realized to allow a full and
immediate discharge of such amount under the global
intercompany loan agreement as would be sufficient to fund the
payment in full of all amounts owing in respect of all class A
notes and all prior ranking amounts due by Funding 2; or
o the Funding 2 security trustee is of the opinion (which shall
be binding on the Funding 2 secured creditors), reached after
considering the advice of any financial or professional
advisers selected by the Funding 2 security trustee (and if the
Funding 2 security trustee is unable to obtain such advice
having made reasonable efforts to do this, this proviso shall
not apply), that the cash flow expected to be received by
Funding 2 will not, or that there is a significant risk that it
will not, be sufficient (as certified to it by Funding 2),
having regard to any other relevant actual, contingent or
prospective liabilities of Funding 2 to discharge in full over
time such amount under the global intercompany loan agreement
as would be sufficient to fund the payment in full of all
amounts owing in respect of all class A notes of the issuer and
all prior ranking amounts due by Funding 2; and
o the Funding 2 security trustee shall not be bound to make the
determination set out above unless it shall have been
indemnified and/or secured to its satisfaction against all
liabilities to which it may thereby become liable or which it
may incur by so doing.
Conflicts
The Funding 2 deed of charge provides that, when exercising its
discretion and/or when exercising the rights, benefits, powers, trusts,
authorities, directions and obligations expressed to be granted by the Funding
2 deed of charge, the Funding 2 security trustee shall act only at the request
or direction of the note trustee. The authority of the note trustee to direct
the Funding 2 security trustee to act derives from the issuer's assignment to
the note trustee of its rights under the global intercompany loan agreement.
Delegation by the Funding 2 security trustee to an authorised third party
Subject as provided further in the transaction documents, the Funding
2 security trustee shall be entitled to delegate certain of its functions and
rights under the transaction documents pursuant to the administration
agreement to one or more authorized third parties whom the rating agencies
have previously confirmed in writing to the Funding 2 security trustee and the
issuer will not result in the ratings on the notes being downgraded, qualified
or withdrawn. The Funding 2 security trustee shall be obliged to use
reasonable endeavors
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to procure the appointment of an authorized third party and in the event of
any such appointment shall not be required to monitor or supervise the third
party's performance and shall not be responsible for any act or omission of
such third party or for any loss caused thereby.
No enforcement by Funding 2 secured creditors
Each of the Funding 2 secured creditors (other than the Funding 2
security trustee and any receiver) has agreed under the Funding 2 deed of
charge that only the Funding 2 security trustee may enforce the security
created by the Funding 2 deed of charge.
Modification and waiver, fees, retirement and responsibilities of the Funding
2 security trustee
Modification and waiver
Without the consent of any of the Funding 2 secured creditors, the
Funding 2 security trustee (at the direction of the note trustee) may:
o agree to modifications to the transaction documents provided
that the Funding 2 security trustee is of the opinion that any
such modification would not materially harm the interests of the
noteholders or that such modification is of a formal, minor or
technical nature or is required by the rating agencies in
respect of any new issuer or new start-up loan provider or other
person which accedes to the Funding 2 deed of charge. Any such
modification will be binding on the Funding 2 secured creditors;
and
o authorize or waive a proposed or actual breach of any provisions
of the transaction documents provided that the Funding 2
security trustee is of the opinion that such breach would not
materially harm the interests of the noteholders. Any such
authorization or waiver will be binding on the Funding 2 secured
creditors.
Fees, expenses and indemnity
Funding 2 shall reimburse the Funding 2 security trustee for all its
costs and expenses properly incurred in acting as Funding 2 security trustee
(including but not limited to the cost of using its reasonable endeavors to
appoint and maintain an authorised third party). In addition, Funding 2 shall
pay to the Funding 2 security trustee a fee of such amount and on such dates
as will be agreed from time to time by the Funding 2 security trustee and
Funding 2. Funding 2 shall indemnify the Funding 2 security trustee from and
against all proceedings, claims, demands, losses, costs, charges, expenses and
liabilities incurred by it or to which it may become liable in connection with
the exercise of its trusts, powers, authorities and discretions, or otherwise
in respect of any matter done or not done relating to the transaction
documents, except where the same is caused by the fraud, gross negligence,
wilful default or breach of the terms of the Funding 2 deed of charge by the
Funding 2 security trustee or any of its officers or employees.
Retirement and removal
Subject to the appointment of a successor security trustee, the
Funding 2 security trustee may retire after giving three months' notice in
writing to Funding 2. If within 60 days of having given notice of its
intention to retire, Funding 2 has failed to appoint a replacement security
trustee, the outgoing security trustee will be entitled to appoint its
successor (provided that such successor is acceptable to the rating agencies
and agrees to be bound by the terms of the Funding 2 deed of charge). Funding
2 may remove the Funding 2 security trustee or appoint a new Funding 2
security trustee at any time provided that it has the approval, which must not
be unreasonably withheld or delayed, of each of the Funding 2
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secured creditors. In addition, the Funding 2 security trustee may subject to
conditions specified in the Funding 2 deed of charge, appoint a co-trustee to
act jointly with it.
Additional provisions of the Funding 2 deed of charge
The Funding 2 deed of charge contains a range of provisions limiting
the scope of the Funding 2 security trustee's duties and liabilities. These
provisions include, among others, that the Funding 2 security trustee:
o may rely on instructions or directions given to it by the note
trustee as being given on behalf of the relevant class of
noteholders without inquiry about compliance with the trust deed
and on the advice of any lawyer, banker, accountant or other
expert;
o is not responsible for the legality, admissibility in evidence,
adequacy or enforceability of the Funding 2 deed of charge or
any other transaction document;
o may rely on documents believed by it to be genuine provided by
any of the mortgages trustee, Funding 2 or the cash manager and
on the advice of any lawyer, banker, accountant or other expert;
o may assume that no global intercompany loan event of default has
occurred unless it has received notice from a Funding 2 secured
creditor stating that a global intercompany loan event of
default has occurred and describing that global intercompany
loan event of default;
o is not required to monitor or supervise the functions of the
account bank or of any other person under any transaction
document;
o has the power to determine all questions arising in relation to
the Funding 2 deed of charge or other transaction document and
every determination made shall bind all of the Funding 2 secured
creditors;
o each Funding 2 secured creditor must make its own independent
appraisal, without reliance on the Funding 2 security trustee,
as to the financial condition and affairs of Funding 2
o the Funding 2 security trustee will not be liable for any loss,
cost, damage or expense which may be caused by anything done or
not done by it under the Funding 2 deed of charge or any other
transaction document unless caused by the Funding 2 security
trustee's fraud, negligence, wilful default or breach of the
terms of the Funding 2 deed of charge;
o the Funding 2 security trustee may accept such title as Funding
2 has to the Funding 2 charged property and will not be required
to investigate or make inquiry into Funding 2's titles to such
property; and
o the Funding 2 security trustee will not be responsible for any
shortfall which may arise because it is liable to tax in respect
of the Funding 2 charged property or the proceeds of such
property.
The Funding 2 security trustee makes no statement or representation
in this prospectus, has not authorized or caused the issue of any part of it
and takes no responsibility for any part of it. The Funding 2 security trustee
does not guarantee the performance of the notes or the payment of principal or
interest on the notes.
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Governing law
The Funding 2 deed of charge will be governed by English law, except
for any terms of the second priority Funding 2 deed of charge which are
particular to the law of Scotland, all of which shall be governed by and
construed in accordance with Scots law.
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Security for the issuer's obligations
To provide security for its obligations under the notes and the other
transaction documents, the issuer has entered into the issuer deed of charge
with the issuer secured creditors. A summary of the material terms of the
issuer deed of charge is set out below. The summary does not purport to be
complete and is subject to the provisions of the issuer deed of charge. This
prospectus is a part of the registration statement, and a form of the issuer
deed of charge has been filed as an exhibit to that registration statement.
Covenant to pay
The issuer will covenant in favor of the note trustee for the benefit
of the issuer secured creditors (including the note trustee) that the issuer
will pay all amounts due to each of the issuer secured creditors as they
become due and payable and that the issuer will comply with its other
obligations under the transaction documents.
Issuer security
The issuer has granted the following security to be held by the note
trustee for itself and on trust for the benefit of the issuer secured
creditors (which definition includes the noteholders):
o an assignment by way of first fixed security of the issuer's
rights and claims in respect of all security and other rights
held on trust by the security trustee pursuant to the Funding 2
deed of charge;
o an assignment by way of first fixed security of the issuer's
right, title, interest and benefit in the transaction documents
to which it is a party, including the global intercompany loan
agreement, the Funding 2 deed of charge, each issuer swap
agreement, the paying agent and agent bank agreement, [the
programme agreement, each subscription agreement,] each
underwriting agreement, the corporate services agreement, the
issuer bank account agreement, the issuer cash management
agreement and the trust deed;
o an assignment by way of first fixed security over the issuer's
right, title, interest and benefit in the issuer transaction
accounts, any swap collateral account and each other account (if
any) of the issuer, and all amounts or securities standing to
the credit of those accounts (including all interest or other
income or distributions earned on such amounts or securities);
o a first fixed charge (which may take effect as a floating
charge) of the issuer's right, title, interest and benefit in
all authorized investments made by or on behalf of the issuer,
including all monies and income payable under those investments;
and
o a first floating charge over all the assets and undertaking of
the issuer which are not otherwise effectively subject to a
fixed charge or assignment by way of security as described in
the preceding paragraphs.
Nature of security - fixed charge or floating charge
For a description of the nature and certain consequences of taking
fixed charges and floating charges see "Security for Funding 2's obligations -
Funding 2 security - Nature of security - fixed charge or floating charge". We
expect that an appointment of an administrative receiver by the note trustee
under the issuer deed of charge will not be prohibited by Section 72A of the
Insolvency Act 1986 as the appointment will fall within the
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exception set out under Section 72B of the Insolvency Act 1986 (First
Exception: Capital Market).
Issuer pre-enforcement and post-enforcement priority of payments
The issuer cash management agreement sets out the order of priority
for the application of cash by the issuer cash manager prior to the service of
an issuer enforcement notice. This payment order of priority is described
under "Cashflows".
The issuer deed of charge sets out the order of priority for the
application by the note trustee (or the issuer cash manager on its behalf),
following service of an issuer enforcement notice, of amounts received or
recovered by the note trustee or a receiver appointed on its behalf. This
order of priority is described under "Cashflows".
Enforcement
The issuer deed of charge sets out the circumstances in which and the
procedures by which the note trustee may take steps to enforce the issuer
security.
The issuer security will become enforceable upon either (1) the
enforcement of the Funding 2 security or (2) [service of an issuer enforcement
notice by the note trustee].
Conflicts
The issuer deed of charge contains provisions which require the note
trustee to consider the interests of the noteholders as to the exercise of its
powers, trusts, authorities, duties and discretions. In the event of a
conflict between the interests of the noteholders and the interests of any
other issuer secured creditor, the note trustee is required to consider only,
unless stated otherwise, the interests of the noteholders. If, in the sole
opinion of the note trustee, there may be a conflict as among noteholders, the
note trustee will have regard to the interests of the class of noteholders
with the highest-ranking notes only. If there is a conflict between the
interests of the class A noteholders of one series and the class A noteholders
of another series, or conflict between the class B noteholders of one series
and the class B noteholders of another series, or conflict between the class M
noteholders of one series and the class M noteholders of another series, or
conflict between the class C noteholders of one series and the class C
noteholders of another series or conflict between the class D noteholders of
one series and the class D noteholders of another series then a resolution
directing the note trustee to take any action must be passed at a single
meeting comprising the holders of each series of the class A notes or, as
applicable, each series of the class B notes, each series of the class M
notes, each series of the class C notes or each series of the class D notes
subject to the conflict. In all cases, the note trustee will only be obliged
to act if it is indemnified to its satisfaction. For more information on how
the note trustee will resolve conflicts between noteholders, see "Description
of the US notes - 11. Meetings of noteholders, modifications and waiver".
No enforcement by issuer secured creditors
Each of the issuer secured creditors (other than the note trustee
acting on behalf of the noteholders) agrees under the issuer deed of charge
that only the note trustee may enforce the security created by the issuer deed
of charge and it will not take steps directly against the issuer to recover
amounts owing to it by the issuer unless the note trustee has become bound to
enforce the issuer security but has failed to do so within 30 days of becoming
so bound.
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Modification and waiver, fees, retirement and responsibilities of the note
trustee
Modification and waiver
Without the consent of any of the issuer secured creditors, the note
trustee may:
o agree to modifications to the transaction documents provided
that the note trustee is of the opinion that such modification
will not materially harm the interests of the noteholders or
that such modification is of a formal, minor or technical
nature. Any such modification will be binding on the issuer
secured creditors; and
o authorize or waive a proposed or actual breach of any provisions
of the notes or of any other transaction documents provided that
the note trustee is of the opinion that such breach will not
materially harm the interests of the noteholders. Any such
authorization or waiver will be binding on the issuer secured
creditors.
Fees, expenses and indemnity
The issuer will reimburse the note trustee for all costs and expenses
properly incurred in acting as note trustee. In addition, the issuer shall pay
to the note trustee a fee of such amount and on such dates as will be agreed
from time to time by the note trustee and the issuer. The issuer shall
indemnify the note trustee from and against all proceedings, claims, demands,
losses, costs, charges, expenses and liabilities incurred by it or to which it
may become liable in connection with the exercise of its trusts, powers,
authorities and discretions, or otherwise in respect of any matter done or not
done relating to the transaction documents, except where the same is caused by
the fraud, gross negligence, willful default or breach of the terms of the
issuer deed of charge by the note trustee or any of its officers or employees.
Retirement and removal
Subject to the appointment of a successor note trustee, the note
trustee may retire after giving three months' notice in writing to the issuer.
If within 60 days of having given notice of its intention to retire, the
issuer has failed to appoint a replacement note trustee, the outgoing note
trustee will be entitled to appoint a successor (provided that such successor
is acceptable to the rating agencies and agrees to be bound by the terms of
the issuer deed of charge). The issuer may remove the note trustee or appoint
a new note trustee at any time provided that it has the approval, which must
not be unreasonably withheld or delayed, of the issuer secured creditors. In
addition, the note trustee may, subject to the conditions specified in the
issuer deed of charge, appoint a co-trustee to act jointly with it.
Additional provisions of the issuer deed of charge
The issuer deed of charge will contain a range of provisions
regulating the scope of the note trustee's duties and liabilities. These
include the following:
o the note trustee is not responsible for the legality,
admissibility in evidence, adequacy or enforceability of the
issuer deed of charge or any other transaction document;
o the note trustee may assume that no note event of default has
occurred unless the note trustee has received notice from a
secured creditor of the issuer stating that a note event of
default has occurred and describing that note event of default;
o the note trustee is not required to monitor or supervise the
functions of the account bank or of any other person under any
transaction document;
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o the note trustee has the power to determine all questions
arising in relation to the issuer deed of charge or other
transaction document entered into by the issuer and every
determination made shall bind the note trustee and all of the
issuer secured creditors;
o each issuer secured creditor must make its own independent
appraisal, without reliance on the note trustee, as to the
financial condition and affairs of the issuer;
o the note trustee will not be liable for any loss, cost, damage
or expense which may be caused by anything done or not done by
it under the issuer deed of charge or any other transaction
document unless caused by the note trustee's fraud, gross
negligence, willful default or breach of the terms of the issuer
deed of charge;
o the note trustee may accept such title as the issuer has to the
issuer charged property and will not be required to investigate
or make inquiry into the issuer's title to such property;
o the note trustee will not be responsible for any shortfall which
may arise because it is liable to tax in respect of the issuer
charged property or the proceeds of such property; and
o [the note trustee is not required to take steps or action in
connection with the transaction documents (including enforcing
the issuer security) unless (1) it has been directed or
instructed to do so by an extraordinary resolution of a class of
noteholders or in writing by the holders of at least 25% of the
aggregate principal amount of the notes of a class then
outstanding or (if there are no remaining notes outstanding) by
any other issuer secured creditor provided that:
(1) the note trustee will not act at the direction or request of
the class B noteholders unless either to do so would not, in
its opinion, be materially prejudicial to the interests of
the class A noteholders or such action is sanctioned by an
extraordinary resolution of the class A noteholders;
(2) the note trustee will not act at the direction or request of
the class M noteholders unless either to do so would not, in
its opinion, be materially prejudicial to the interests of
the class A noteholders and/or the class B noteholders or
such action is sanctioned by extraordinary resolutions of
the class A noteholders and/or the class B noteholders, as
the case may be;
(3) the note trustee will not act at the direction or request of
the class C noteholders unless either to do so would not, in
its opinion, be materially prejudicial to the interests of
the class A noteholders and/or the class B noteholders
and/or the class M noteholders or such action is sanctioned
by extraordinary resolutions of the class A noteholders
and/or the class B noteholders and/or the class M
noteholders, as the case may be; and
(4) the note trustee will not act at the direction or request of
the class D noteholders unless either to do so would not, in
its opinion, be materially prejudicial to the interests of
the class A noteholders and/or the class B noteholders
and/or the class M noteholders and/or the class C
noteholders or such action is sanctioned by extraordinary
resolutions of the class A noteholders and/or the class B
noteholders and/or the class M noteholders and/or the class
C noteholders, as the case may be; and
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(5) it has been indemnified to its satisfaction against all
costs, liabilities and claims which it may incur or in
respect of which it may become liable.]
The note trustee makes no statement or representation in this
prospectus, has not authorized or caused the issue of any part of it and takes
no responsibility for any part of it. The note trustee does not guarantee the
performance of the notes or the payment of principal or interest on the notes.
Governing law
The issuer deed of charge will be governed by English law.
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Description of the trust deed
The principal agreement governing the notes is the trust deed dated
on or about the Funding 2 program date and made between the issuer and the
note trustee. A summary of the material terms of the trust deed is set out
below. The summary does not purport to be complete and it is subject to the
provisions of the trust deed. A form of the trust deed has been filed as an
exhibit to the registration statement and this prospectus forms part of the
registration statement.
The trust deed sets out the forms of the global note certificates and
the individual note certificates. It also sets out the terms and conditions of
the notes, and the conditions for the issue of individual note certificates
and/or the cancellation of any notes. The paying agent and agent bank
agreement contains detailed provisions regulating the appointments of the
paying agents and other agents.
The trust deed also contains covenants made by the issuer in favor of
the note trustee and the noteholders. The main covenants are that the issuer
will pay interest and repay principal of each of the notes when due. Some of
the covenants also appear in the terms and conditions of the notes (see
"Description of the US notes"). The issuer also covenants that it will do all
things necessary to maintain the listing on the official list of the UK
Listing Authority and to maintain trading of the notes on the London Stock
Exchange plc and to keep in place a common depository, paying agents and an
agent bank, and further covenants with the note trustee that it will comply
with and perform and observe all its obligations in the trust deed. The trust
deed provides for delivery to the note trustee of an annual statement signed
by an officer of the issuer to the effect that the issuer has fulfilled its
material obligations under the trust deed throughout the preceding financial
year, except as specified in such statement.
The trust deed provides that the class A noteholders' interests take
precedence for so long as the class A notes are outstanding and thereafter the
interests of class B noteholders take precedence for so long as the class B
notes are outstanding and thereafter the interests of class M noteholders take
precedence for so long as the class M notes are outstanding and thereafter the
interests of the class C noteholders take precedence for so long as the class
C notes are outstanding and thereafter the interests of the class D notes take
precedence for so long as the class D notes are outstanding. Certain basic
terms of each class of notes may not be amended without the consent of the
majority of the holders of that class of note and the consent of the majority
of the holders of the other classes of notes outstanding (see "Description of
the US notes").
The trust deed sets out the terms under which the note trustee is
appointed, the indemnification of the note trustee, the payment it receives
and the extent of the note trustee's authority to act beyond its statutory
powers under English law. The note trustee is also given the ability to
appoint a delegate or agent in the execution of any of its duties under the
trust deed. The trust deed sets out the circumstances in which the note
trustee may resign or retire.
The trust deed includes certain provisions required by the US Trust
Indenture Act of 1939. These provisions include, but are not limited to:
(a) maintenance of a noteholder list by the note trustee;
(b) provision of annual reports and other information by the issuer to
the note trustee;
(c) ability of noteholders to waive certain past defaults of the issuer;
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(d) duty of the note trustee (following a note event of default) to use
the same degree of care in exercising its responsibilities as would
be exercised by a prudent person conducting their own affairs;
(e) duty of the note trustee to notify all noteholders of any note event
of default of which it has actual knowledge; and
(f) right of the note trustee to resign at any time by notifying the
issuer in writing, and the ability of the issuer to remove the note
trustee under certain circumstances.
Finally, the trust deed provides that until the notes have been paid
in full, they shall be entitled to the benefit of and be bound by the terms
and conditions of the trust deed. The trust deed will be discharged with
respect to the collateral securing the notes upon the delivery to the note
trustee for cancellation of all the notes or, with certain limitations, upon
deposit with the note trustee of funds sufficient for the payment in full of
all the notes.
Trust Indenture Act prevails
The trust deed contains a stipulation that, if any provision of the
trust deed limits, qualifies or conflicts with another provision which is
required to be included in the trust deed by, and is not subject to a
contractual waiver under, the US Trust Indenture Act of 1939, as amended, the
required provision of that Act shall be deemed to be incorporated into the
trust deed and shall prevail.
Governing law
The trust deed will be governed by English law.
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The notes
Each issuance of notes will be authorized by a resolution of the
board of directors of the issuer prior to the relevant closing date. Each
issue of notes will be constituted by the trust deed, between the issuer and
the note trustee, as trustee for, among others, the holders for the time being
of the notes. The trust deed includes provisions which enable it to be
modified or supplemented and any reference to the trust deed is a reference
also to the document as modified or supplemented in accordance with its terms.
The material terms of the notes are described in this prospectus.
However, the statements set out in this section with regard to the notes and
the global note certificates representing the notes are subject to the
detailed provisions of the trust deed. The trust deed will include the forms
of the global note certificates and the forms of the individual note
certificates. A paying agent and agent bank agreement between the issuer, the
note trustee, Citibank, N.A. in London as "principal paying agent", the other
paying agents (together with the principal paying agent, called the "paying
agents"), the transfer agent, the registrar and the agent bank, regulates how
payments will be made on the notes and how determinations and notifications
will be made. The parties to the paying agent and agent bank agreement will
include, on an ongoing basis, any successor party appointed in accordance with
its terms.
Each class of each series of notes will be represented initially by a
global note certificate in registered form without interest coupons attached.
The US notes will initially be offered and sold pursuant to a registration
statement, of which this prospectus forms a part, filed with the SEC. The Reg
S notes, which are not being offered by this prospectus, will initially be
offered and sold outside the United States to non-US persons pursuant to
Regulation S under the Securities Act. The global note certificates
representing the US notes offered by this prospectus (the "US global note
certificates") will be deposited with Citibank, N.A., as the custodian for,
and registered in the name of Cede & Co., as nominee of The Depository Trust
Company, referred to in this prospectus as "DTC". On confirmation from the
custodian that it holds the US global note certificates, DTC will record
book-entry interests in the beneficial owner's account or the participant
account through which the beneficial owner holds its interests in the notes.
These book-entry interests will represent the beneficial owner's beneficial
interest in the relevant US global note certificates.
The amount of notes represented by each global note certificate is
evidenced by the register maintained for that purpose by the registrar.
Together, the notes represented by the global note certificates and any
outstanding individual note certificates will equal the aggregate principal
amount of the notes outstanding at any time. However, except as described
under "- Individual note certificates", individual note certificates shall not
be issued.
Beneficial owners may hold their interests in the global note
certificates only through DTC, Clearstream, Luxembourg or Euroclear, as
applicable, or indirectly through organizations that are participants in any
of those systems. Ownership of these beneficial interests in a global note
certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC, Clearstream, Luxembourg or
Euroclear (with respect to interests of their participants) and the records of
their participants (with respect to interests of persons other than their
participants). By contrast, ownership of direct interests in a global note
certificate will be shown on, and the transfer of that ownership will be
effected through, the register maintained by the registrar. Because of this
holding structure of the notes, beneficial owners of notes may look only to
DTC, Clearstream, Luxembourg or Euroclear, as applicable, or their respective
participants for their beneficial entitlement to those notes. The issuer
expects that DTC, Clearstream, Luxembourg or Euroclear will take any action
permitted to be taken by a beneficial owner of
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notes only at the direction of one or more participants to whose account the
interests in a global note certificate is credited and only in respect of that
portion of the aggregate principal amount of notes as to which that
participant or those participants has or have given that direction.
Beneficial owners will be entitled to the benefit of, will be bound
by and will be deemed to have notice of, all the provisions of the trust deed
and the paying agent and agent bank agreement. Beneficial owners can see
copies of these agreements at the principal office for the time being of the
note trustee, which is, as of the date of this document, The Bank of New York,
London Branch and at the specified office for the time being of each of the
paying agents. Pursuant to its obligations under the Listing Rules made by the
UK Listing Authority, the issuer will maintain a paying agent in the United
Kingdom until the date on which the notes are finally redeemed.
Payment
Principal and interest payments on the US notes will be made via the
paying agents to DTC or its nominee, as the registered holder of the US global
note certificates. DTC's practice is to credit its participants' accounts on
the applicable payment date according to their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive
payment on that payment date.
Payments by DTC, Clearstream, Luxembourg and Euroclear participants
to the beneficial owners of notes will be governed by standing instructions,
customary practice, and any statutory or regulatory requirements as may be in
effect from time to time, as is now the case with securities held by the
accounts of customers registered in "street name". These payments will be the
responsibility of the DTC, Clearstream, Luxembourg or Euroclear participant
and not of DTC, Clearstream, Luxembourg, Euroclear, any paying agent, the note
trustee or the issuer. None of the issuer, the note trustee, any underwriter
nor any paying agent will have any responsibility or liability for any aspect
of the records of DTC, Clearstream, Luxembourg or Euroclear relating to or
payments made by DTC, Clearstream, Luxembourg or Euroclear on account of
beneficial interests in the global note certificates or for maintaining,
supervising or reviewing any records of DTC, Clearstream, Luxembourg or
Euroclear relating to those beneficial interests.
Clearance and settlement
The clearing systems
DTC has advised us and the underwriters that it intends to follow the
following procedures:
DTC will act as securities depository for the US global note
certificates. The US notes represented by the US global note certificates will
be issued as securities registered in the name of Cede & Co. (DTC's nominee).
DTC has advised us that it is a:
o limited-purpose trust company organized under New York Banking
Law;
o "banking organization" within the meaning of New York Banking
Law;
o member of the Federal Reserve System;
o "clearing corporation" within the meaning of the New York
Uniform Commercial Code; and
o "clearing agency" registered under the provisions of Section
17A of the Exchange Act.
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DTC holds securities for its participants and facilitates the
clearance and settlement among its participants of securities transactions,
including transfers and pledges, in deposited securities through electronic
book-entry changes in its participants' accounts. This eliminates 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 others including securities brokers and dealers, banks and trust companies
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly. The rules applicable to DTC and its
participants are on file with the SEC.
Transfers between participants on the DTC system will occur under DTC
rules. Transfers between participants on the Clearstream, Luxembourg system
and participants in the Euroclear system will occur under their rules and
operating procedures.
Purchases of notes under the DTC system must be made by or through
DTC participants, which will receive a credit for the notes on DTC's records.
The ownership interest of each actual beneficial owner is in turn to be
recorded on the DTC participants' and indirect participants' records.
Beneficial owners will not receive written confirmation from DTC of their
purchase. However, beneficial 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 beneficial owner entered into the transaction. Transfer of
ownership interests in the US notes are to be accomplished by entries made on
the books of DTC participants acting on behalf of beneficial owners.
Beneficial owners will not receive certificates representing their ownership
interest in notes unless use of the book-entry system for the notes described
in this section is discontinued.
To facilitate subsequent transfers, all offered global note
certificates deposited with DTC are registered in the name of DTC's nominee,
Cede & Co. The deposit of these offered global note certificates with DTC and
their registration in the name of Cede & Co. effect no change in beneficial
ownership. DTC has no knowledge of the ultimate beneficial owners of the
notes. DTC's records reflect only the identity of the DTC participants to
whose accounts the beneficial interests are credited, which may or may not be
the actual beneficial owners of the notes. 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 beneficial owners will be governed
by arrangements among them and by any statutory or regulatory requirements in
effect from time to time.
Redemption notices for the US notes represented by the offered global
note certificates will be sent to DTC. If less than all of those notes are
being redeemed by investors, DTC's practice is to determine by lot the amount
of the interest of each participant in those notes to be redeemed.
Neither DTC nor Cede & Co. will consent or vote on behalf of the US
notes. Under its usual procedures, DTC will mail an omnibus proxy to the
issuer as soon as possible after the record date, which assigns the consenting
or voting rights of Cede & Co. to those DTC participants to whose accounts the
book-entry interests are credited on the record date, identified in a list
attached to the proxy.
The issuer understands that under existing industry practices, when
the issuer requests any action of noteholders or when a beneficial owner
desires to give or take any action which a noteholder is entitled to give or
take under the trust deed, DTC generally will give or take that action, or
authorize the relevant participants to give or take that action, and those
participants would authorize beneficial owners owning through those
participants to
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give or take that action or would otherwise act upon the instructions of
beneficial owners through them.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the issuer believes to be reliable,
but the issuer takes no responsibility for the accuracy thereof.
Clearstream, Luxembourg and Euroclear each hold securities for their
participating organizations and facilitate the clearance and settlement of
securities transactions between their respective participants through
electronic book-entry changes in accounts of those participants, thereby
eliminating the need for physical movement of securities. Clearstream,
Luxembourg and Euroclear provide various services including safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream, Luxembourg and Euroclear
also deal with domestic securities markets in several countries through
established depository and custodial relationships.
Clearstream, Luxembourg and Euroclear have established an electronic
bridge between their two systems across which their respective participants
may settle trades with each other. Transactions may be settled in Clearstream,
Luxembourg and Euroclear in any of numerous currencies, including United
States dollars and euro. Clearstream, Luxembourg is incorporated under the
laws of Luxembourg as a professional depository. Clearstream, Luxembourg
participants are financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, and
clearing corporations. Indirect access to Clearstream, Luxembourg is also
available to others, including banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Clearstream,
Luxembourg participant, either directly or indirectly.
The Euroclear system was created in 1968 to hold securities for its
participants and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment. The Euroclear system is operated by Euroclear Bank S.A./N.V. (the
"Euroclear operator"). All operations are conducted by the Euroclear operator.
All Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear operator.
Euroclear participants include banks - including central banks -
securities brokers and dealers and other professional financial
intermediaries. 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.
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. These terms and
conditions govern transfers of securities and cash within the Euroclear
system, withdrawal of securities and cash from the Euroclear system, and
receipts of payments for securities in the Euroclear system. All securities in
the Euroclear system are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
operator acts under these terms and conditions only on behalf of Euroclear
participants and has no record of or relationship with persons holding through
Euroclear participants.
As the holders of book-entry interests, beneficial owners will not
have the right under the trust deed to act on solicitations by the issuer for
action by noteholders. Beneficial owners will only be able to act to the
extent they receive the appropriate proxies to do so from DTC, Clearstream,
Luxembourg or Euroclear or, if applicable, their respective participants. No
assurances are made about these procedures or their adequacy for ensuring
timely exercise of remedies under the trust deed.
No beneficial owner of an interest in a note represented by a global
note certificate will be able to transfer that interest except in accordance
with applicable procedures, in
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addition to those provided for under the trust deed, of DTC, Clearstream,
Luxembourg and Euroclear, as applicable. The laws of some jurisdictions
require that some purchasers of securities take physical delivery of those
securities in definitive form. These laws and limitations may impair the
ability to transfer beneficial interests in a note represented by a global
note certificate. See "Risk Factors - You will not receive physical notes,
which may cause delays in distributions and hamper your ability to pledge or
resell the notes".
Clearance and settlement
Initial settlement
The offered global note certificates for each series and class of
notes will be delivered on the relevant closing date to Citibank, N.A., as
custodian for DTC. Customary settlement procedures will be followed for
participants of each system on that closing date. Notes will be credited to
investors' securities accounts on the relevant closing date against payment in
same-day funds.
Secondary trading
Secondary market sales of book-entry interests in US notes between
DTC participants will occur in the ordinary way in accordance with DTC rules
and will be settled using the procedures applicable to conventional United
States corporate debt obligations.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to
these procedures to facilitate transfers of interests in securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are not
obligated to perform these procedures. Additionally, these procedures may be
discontinued at any time. None of the issuer, any agent, the underwriters or
any affiliate of any of the foregoing, or any person by whom any of the
foregoing is controlled for the purposes of the Securities Act, will have any
responsibility for the performance by DTC, Clearstream, Luxembourg, Euroclear
or their respective direct or indirect participants or accountholders of their
respective obligations under the rules and procedures governing their
operations or for the sufficiency for any purpose of the arrangements
described in this prospectus.
Individual note certificates
Beneficial owners of US notes will only be entitled to receive
individual note certificates under the following limited circumstances:
o as a result of any amendment to, or change in, the laws or
regulations of the United Kingdom (or any political subdivision
thereof) or of any authority therein or thereof having power to
tax or in the interpretation or administration of such laws or
regulations which becomes effective on or after the relevant
closing date, the issuer or any paying agent is or will be
required to make any deduction or withholding from any payment
on the notes that would not be required if the notes were
represented by individual note certificates; or
o DTC notifies the issuer that it is unwilling or unable to hold
the offered global note certificates or is unwilling or unable
to continue as, or has ceased to be, a clearing agency
registered under the Exchange Act and, in each case, the issuer
cannot appoint a successor within 90 days of such notification.
In no event will individual note certificates in bearer form be
issued. Any individual note certificate will be issued in registered form in
minimum denominations as specified in the related prospectus supplement. Any
individual note certificates will be registered in that name or those names as
the registrar shall be instructed by DTC, Clearstream, Luxembourg and
Euroclear, as applicable. It is expected that these instructions will be based
upon
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directions received by DTC, Clearstream, Luxembourg and Euroclear from their
participants reflecting the ownership of book-entry interests. To the extent
permitted by law, the issuer, the note trustee and any paying agent shall be
entitled to treat the person in whose names any individual note certificate is
registered as the absolute owner thereof. The paying agent and agent bank
agreement contains provisions relating to the maintenance by a registrar of a
register reflecting ownership of the notes and other provisions customary for
a registered debt security.
Any person receiving individual note certificates will not be
obligated to pay or otherwise bear the cost of any tax or governmental charge
or any cost or expense relating to insurance, postage, transportation or any
similar charge, which will be solely the responsibility of the issuer. No
service charge will be made for any registration of transfer or exchange of
any individual note certificates.
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Description of the US notes
The following is a summary of the material terms and conditions of
the US notes , numbered 1 to [16]. This summary does not need to be read with
the actual terms and conditions of the US notes in order to learn all the
material terms and conditions of the US notes. The complete terms and
conditions of the US notes are set out in the trust deed, a form of which has
been filed as an exhibit to the registration statement, and in the event of a
conflict, the terms and conditions of the notes set out in the trust deed will
prevail.
References in this section to the "notes" mean collectively the class
A notes, the class B notes, the class M notes, the class C notes and the class
D notes of each series. Furthermore, this section, as elsewhere in this
prospectus, provides information on the Reg S notes that are not being offered
to the public in the United States by this prospectus. This information is
provided only to enhance your understanding of the US notes. You should be
aware that, as each series and class of notes will be the subject of the
following documents:
o a trust deed dated the Funding 2 program date between the note
trustee and us;
o a paying agent and agent bank agreement dated the Funding 2
program date between the principal paying agent, the agent
bank, the other paying agents, the transfer agent, the
registrar, the note trustee and us;
o an issuer deed of charge dated the Funding 2 program date
between the note trustee, the swap providers, certain other
parties and us; and
o if applicable, an issuer swap agreement, dated the closing date
related to the series and class of notes, between the issuer
swap provider, the note trustee and us.
When we refer to the parties to these documents, the reference
includes any successor to that party validly appointed.
Initially the parties will be as follows:
o Granite Master Issuer plc, as issuer;
o Citibank, N.A., as principal paying agent, US paying agent, agent
bank, transfer agent and registrar; and
o The Bank of New York, as Funding 2 security trustee and note
trustee.
The noteholders will be bound by and deemed to have notice of all of
the provisions of the trust deed, the issuer deed of charge, the global
intercompany loan agreement, the Funding 2 deed of charge, the issuer cash
management agreement, the paying agent and agent bank agreement and the issuer
swap agreements which are applicable to them. Noteholders can view drafts of
those documents at our registered office and the specified office of any of
the paying agents after the Funding 2 program date.
There is no English law that prohibits US residents from holding
notes solely because of their residence outside the UK.
There are no UK governmental laws or regulations other than in
relation to withholding tax, as described under "Material United Kingdom tax
consequences - Withholding tax", that restrict payments made to non-UK
resident noteholders.
1. Form, denomination, register, title and transfers
The US notes are being offered and sold to the public in the United
States and to institutional investors outside the United States.
The US notes are in global registered form, without coupons attached.
Transfers and exchanges of beneficial interests in notes represented by global
note
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certificates are made in accordance with the rules and procedures of DTC,
Euroclear and/or Clearstream, Luxembourg, as applicable.
Global note certificates will be exchanged for individual note
certificates in definitive registered form only under certain limited
circumstances. If individual note certificates are issued, they will be
serially numbered and issued in an aggregate principal amount equal to the
principal amount outstanding of the relevant global note certificates and in
registered form only.
The registrar will maintain a register in respect of the US notes in
accordance with the provisions of the paying agent and agent bank agreement.
References in this section to a "holder" of a US note means the person in
whose name such US note is for the time being registered in the register (or,
in the case of a joint holding, the first named thereof) and "noteholder"
shall be construed accordingly. A "note certificate" will be issued to each
noteholder in respect of its registered holding. Each note certificate will be
numbered serially with an identifying number that will be recorded in the
register.
The holder of each US note shall (except as otherwise required by
law) be treated as the absolute owner of such US note for all purposes
(whether or not it is overdue and regardless of any notice of ownership, trust
or any other interest therein, any writing on the note certificate relating
thereto (other than the endorsed form of transfer) or any notice of any
previous loss or theft of such note certificate) and no person shall be liable
for so treating such holder.
Subject to the provisions below, a US note may be transferred upon
surrender of the relevant note certificate, with the endorsed form of transfer
duly completed, at the specified offices of the registrar or any transfer
agent specified in the paying agent and agent bank agreement, together with
such evidence as the registrar or (as the case may be) such transfer agent may
reasonably require to prove the title of the transferor and the authority of
the individuals who have executed the form of transfer; provided, however,
that a US note may not be transferred unless the principal amount of US notes
transferred and (where not all of the US notes held by a holder are being
transferred) the principal amount of the balance of US notes not transferred
are authorized holdings. Where not all the US notes represented by the
surrendered note certificate are the subject of the transfer, a new note
certificate in respect of the balance of the US notes will be issued to the
transferor.
Within five commercial business days of such surrender of a note
certificate, the registrar will register the transfer in question and deliver
a new note certificate of a like principal amount to the US notes transferred
to each relevant holder at its specified office or (as the case may be) the
specified office of any transfer agent or (at the request and risk of any such
relevant holder) by uninsured first class mail (and by airmail if the holder
is overseas) to the address specified for the purpose by such relevant holder.
In this paragraph, "commercial business day" means a day on which commercial
banks are open for business (including dealings in foreign currencies) in the
city where the registrar or (as the case may be) the relevant transfer agent
has its specified office.
The transfer of a US note will be effected without charge by or on
behalf of us, the registrar or any transfer agent but against such indemnity
as the registrar or (as the case may be) such transfer agent may require in
respect of any tax or other duty of whatsoever nature which may be levied or
imposed in connection with such transfer.
Noteholders may not require transfers to be registered during the
period of 15 days ending on the due date for any payment of principal or
interest in respect of the US notes.
All transfers of US notes and entries on the register are subject to
the detailed regulations concerning the transfer of US notes scheduled to the
paying agent and agent bank agreement. We may change the regulations with the
prior written approval of the note trustee and the registrar. A copy of the
current regulations will be mailed (free of charge) by the registrar to any
noteholder who requests in writing a copy of such regulations.
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2. Status, security and priority
The notes of each series and class are our direct, secured and
unconditional obligations and will at all times rank equally, without
preference or priority amongst themselves.
Subject to the provisions of Condition 5 and subject to the other
payment conditions set out in the relevant Note Supplement and the other
Transaction Documents:
o the class A notes of each series will rank without preference or
priority between themselves but in priority to the class B
notes, the class M notes, the class C notes and the class D
notes of any series;
o the class B notes of each series will rank without preference or
priority between themselves but in priority to the class M
notes, the class C notes and the class D notes of any series;
o the class M notes of each series will rank without any
preference or priority between themselves but in priority to the
class C notes and the class D notes of any series; and
o the class C notes of each series will rank without any
preference or priority between themselves but in priority to the
class D notes of any series.
The note trustee is required to have regard to the interests of all
classes of noteholders equally. However, if there are any class A notes
outstanding and if there is or may be a conflict between the interests of the
class A noteholders and the interests of the class B noteholders and/or the
class M noteholders and/or the class C noteholders and/or the class D
noteholders, then the note trustee will have regard to the interests of the
class A noteholders only. If there are no class A notes outstanding and there
are any class B notes outstanding, and if there is or may be a conflict
between the interests of the class B noteholders and the interests of the
class M noteholders and/or the class C noteholders and/or the class D
noteholders, then the note trustee will have regard to the interests of the
class B noteholders only. If there are no class A notes outstanding and no
class B notes outstanding and there are any class M notes outstanding, and if
there is or may be a conflict between the interests of the class M noteholders
and the interests of the class C noteholders and/or the class D noteholders,
then the note trustee will have regard to the interests of the class M
noteholders only. If there are no class A notes outstanding, no class B notes
outstanding and no class M notes outstanding and there are class C notes
outstanding, and if there is or may be a conflict between the interests of the
class C noteholders and the interests of the class D noteholders, then the
note trustee will have regard to the interests of the class C noteholders
only.
Except in certain limited circumstances described in number 11, there
is no limitation on the power of class A noteholders to pass an effective
extraordinary resolution the exercise of which is binding on the class B
noteholders, the class M noteholders, the class C noteholders and the class D
noteholders. As described in number 11 there are provisions limiting the power
of the class B noteholders, the class M noteholders, the class C noteholders
and the class D noteholders to pass an effective extraordinary resolution,
depending on its effect on the class A noteholders. Likewise, except in the
limited circumstances described in number 11, there is no limitation on the
power of class B noteholders to pass an effective extraordinary resolution the
exercise of which is binding on the class M noteholders, the class C
noteholders and the class D noteholders. As described in number 11 there are
provisions limiting the power of the class M noteholders, the class C
noteholders and the class D noteholders to pass an effective extraordinary
resolution, depending on its effect on the class B noteholders. Likewise,
except in the limited circumstances described in number 11, there is no
limitation on the power of class M noteholders to pass an effective
extraordinary resolution the exercise of which is binding on the class C
noteholders and the class D noteholders. As described in number 11 there are
provisions limiting the power of the class C noteholders and the class D
noteholders to pass
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an effective extraordinary resolution, depending on its effect on the class M
noteholders. Likewise, except in the limited circumstances described in number
11, there is no limitation on the power of class C noteholders to pass an
effective extraordinary resolution the exercise of which is binding on the
class D noteholders. As described in number 11 there are provisions limiting
the power of the class D noteholders to pass an effective extraordinary
resolution, depending on its effect on the class C noteholders.
The note trustee is entitled to assume that any exercise by it of any
power, discretion or duty under the transaction documents will not be
materially prejudicial to the interests of the noteholders (or any series
and/or class of noteholders) if the rating agencies have confirmed that the
current ratings of the notes will not be adversely affected by that exercise.
The security for the payment of amounts due under the notes is
created by the issuer deed of charge. We have created the security in favor of
the note trustee who will hold it for itself and on behalf of the issuer
secured creditors (which definition includes the noteholders).
3. Covenants
If any note is outstanding, we will not, unless it is provided in or
permitted by the terms and conditions of the notes or the terms of the
transaction documents to which we are a party or by the written consent of the
note trustee:
o create or permit to subsist any mortgage, standard security,
pledge, lien, charge or other security interest on the whole or
any part of its present or future assets or undertakings;
o sell, assign, transfer, lease or otherwise dispose of or grant
any option or right to acquire over, all or any of its assets,
properties or undertakings or any interest or benefit in its
assets or undertakings;
o permit any other person other than itself and the note trustee
(as to itself and on behalf of the issuer secured creditors) to
have any equitable or beneficial interest in any of its assets
or undertakings;
o have an interest in any bank account other than our bank
accounts maintained pursuant to the transaction documents;
o carry on any business other than as described in this prospectus
(as revised supplemented and/or amended from time to time) or as
contemplated in the transaction documents relating to the issue
of the notes;
o incur any indebtedness in respect of borrowed money whatsoever
or give any guarantee or indemnity in respect of any
indebtedness or obligation of any person;
o consolidate with or merge with any person or transfer
substantially all of its properties or assets to any person;
o waive or consent to the modification or waiver of any of the
obligations relating to the issuer security;
o have any employees, premises or subsidiaries;
o pay any dividend or make any other distributions to its
shareholders or issue any further shares or alter any rights
attaching to its shares as at the date of the issuer deed of
charge;
o purchase or otherwise acquire any notes; or
o engage in any activities in the United States (directly or
through agents), or derive any income from United States sources
as determined under United States income tax principles, or hold
any property if doing so would cause it to be engaged in a trade
or business within the United States as determined under United
States income tax principles.
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4. Interest
(A) Interest on fixed rate notes
Each fixed rate note bears interest on its principal amount
outstanding from (and including) the interest commencement date at the rate(s)
per annum equal to the rate(s) of interest payable, subject as provided in the
terms and conditions, in arrear on the [payment date(s)] in each year up to
(and including) the final maturity date.
Except as provided in the applicable prospectus supplement, the
amount of interest payable on each payment date in respect of the fixed
interest period ending on (but excluding) such date will amount to the fixed
coupon amount. Payments of interest on any payment date will, if so specified
in the applicable prospectus supplement, amount to the broken amount so
specified.
As used in this summary, "fixed interest period" means the period
from (and including) a payment date (or the interest commencement date) to
(but excluding) the next (or first) payment date.
If interest is required to be calculated in respect of any note for a
period other than a fixed interest period, such interest shall be calculated
by applying the rate of interest specified in the applicable prospectus
supplement to the principal amount outstanding on such note, multiplying such
sum by the applicable day count fraction, and rounding the resultant figure to
the nearest sub-unit of the relevant specified currency, half of any such
sub-unit being rounded upwards or otherwise in accordance with applicable
market convention.
"day count fraction" means, in respect of the calculation of an
amount of interest in respect of a fixed rate note:
(i) if "Actual/Actual (ISMA)" is specified in the applicable
prospectus supplement:
(a) in the case of notes where the number of days in the
relevant period from (and including) the most recent
payment date (or, if none, the interest commencement
date) to (but excluding) the relevant payment date
(the "accrual period") is equal to or shorter than
the determination period during which the accrual
period ends, the number of days in such accrual
period divided by the product of (1) the number of
days in such determination period and (2) the number
of determination dates (as specified in the
applicable prospectus supplement) that would occur in
one calendar year; or
(b) in the case of notes where the accrual period is
longer than the determination period during which
the accrual period ends, the sum of:
(1) the number of days in such accrual period
falling in the determination period in which
the accrual period begins divided by the
product of (x) the number of days in such
determination period and (y) the number of
determination dates that would occur in one
calendar year; and
(2) the number of days in such accrual period
falling in the next determination period
divided by the product of (x) the number of
days in such determination period and (y) the
number of determination dates that would occur
in one calendar year; and
(ii) if "30/360" is specified in the applicable prospectus
supplement, the number of days in the period from (and
including) the most recent payment date (or, if none, the
interest commencement date) to (but excluding) the relevant
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payment date (such number of days being calculated on the
basis of a year of 360 days with 12 30-day months) divided
by 360.
(B) Interest on floating rate notes and index linked interest notes
(i) Payment dates
Each floating rate note and index linked interest note bears
interest on its principal amount outstanding from (and
including) the interest commencement date and such interest
will be payable in arrear on the applicable payment dates:
(a) the specified payment date(s) in each year
specified in the applicable prospectus supplement;
or
(b) if no specified payment date(s) is/are specified in
the applicable prospectus supplement, each date
(each such date, together with each specified
payment date, a "payment date") which falls the
number of months or other period specified as the
specified period in the applicable prospectus
supplement after the preceding payment date or, in
the case of the first payment date, after the
interest commencement date.
Such interest will be payable in respect of each interest
period.
If a business day convention is specified in the applicable
prospectus supplement and (x) if there is no numerically
corresponding day in the calendar month in which a payment
date should occur or (y) if any payment date would otherwise
fall on a day that is not a business day, then, if the
business day convention specified is:
(1) in any case where specified periods are specified
in accordance with paragraph (i)(b) above, the
"floating rate convention", such payment date (i)
in the case of (x) above, shall be the last day
that is a business day in the relevant month and
the provisions of (B) below shall apply [mutatis
mutandis] or (ii) in the case of (y) above, shall
be postponed to the next day which is a business
day unless it would thereby fall into the next
calendar month, in which event (A) such payment
date shall be brought forward to the immediately
preceding business day and (B) each subsequent
payment date shall be the last business day in the
month which falls the specified period after the
preceding applicable payment date occurred; or
(2) the "following business day convention", such
payment date shall be postponed to the next day
which is a business day; or
(3) the "modified following business day convention",
such payment date shall be postponed to the next
day which is a business day unless it would thereby
fall into the next calendar month, in which event
such payment date shall be brought forward to the
immediately preceding business day; or
(4) the "preceding business day convention", such
payment date shall be brought forward to the
immediately preceding business day.
(ii) Rate of interest
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The rate of interest payable from time to time in respect of
floating rate notes and index linked interest notes will be
determined in the manner specified in the applicable
prospectus supplement.
(a) ISDA Determination for floating rate notes
Where "ISDA Determination" is specified in the
applicable prospectus supplement as the manner in
which the rate of interest is to be determined, the
rate of interest for each interest period will be
the relevant ISDA rate plus or minus (as indicated
in the applicable prospectus supplement) the margin
(if any). For the purposes of this sub-paragraph
(a), "ISDA rate" for an interest period means a
rate equal to the floating rate that would be
determined by the principal paying agent or other
person specified in the applicable prospectus
supplement under an interest rate swap transaction
if the principal paying agent or that other person
were acting as calculation agent for that swap
transaction under the terms of an agreement
incorporating the ISDA definitions and under which:
(1) the floating rate option is as specified
in the applicable note supplement;
(2) the designated maturity is the period
specified in the applicable note
supplement; and
(3) the relevant reset date is either (i) if
the applicable floating rate option is
based on LIBOR or EURIBOR for a currency,
the first day of that interest period, or
(ii) in any other case, as specified in
the applicable prospectus supplement.
For the purposes of this sub-paragraph (a),
"floating rate", "calculation agent", "floating
rate option", "designated maturity" and "reset
date" have the meanings given to those terms in the
ISDA definitions.
(b) Screen Rate Determination for Floating Rate Covered
Bonds
Where "Screen Rate Determination" is specified in
the applicable prospectus supplement as the manner
in which the rate of interest is to be determined,
the rate of interest for each interest period will,
subject as provided below, be either:
(1) the offered quotation (if there is only
one quotation on the relevant screen
page); or
(2) the arithmetic mean (rounded if necessary
to the fifth decimal place, with 0.000005
being rounded upwards) of the offered
quotations,
(expressed as a percentage rate per annum) for the
reference rate which appears or appear, as the case
may be, on the relevant screen page as at 11.00
a.m. (London time, in the case of LIBOR, or
Brussels time, in the case of EURIBOR) on the
interest determination date in question plus or
minus the margin (if any), all as determined by the
principal paying agent. If five or more of such
offered quotations are
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available on the relevant screen page, the highest
(or, if there is more than one such highest
quotation, one only of such quotations) and the
lowest (or, if there is more than one such lowest
quotation, one only of such quotations) shall be
disregarded by the principal paying agent for the
purpose of determining the arithmetic mean (rounded
as provided above) of such offered quotations.
The issuer paying agent and agent bank agreement
contains provisions for determining the rate of
interest pursuant to this sub-paragraph (b) in the
event that the relevant screen page is not
available or if, in the case of (1) above, no such
offered quotation appears or, in the case of (2)
above, fewer than three such offered quotations
appear, in each case as at the time specified in
the preceding paragraph.
If the reference rate from time to time in respect
of floating rate notes is specified in the
applicable prospectus supplement as being other
than LIBOR or EURIBOR, the rate of interest in
respect of such notes will be determined as
provided in the applicable prospectus supplement.
(iii) Minimum rate of interest and/or maximum rate of interest
If the applicable prospectus supplement specifies a minimum
rate of interest for any interest period, then, in the event
that the rate of interest in respect of such interest period
determined in accordance with the provisions of paragraph
(ii) above is less than such minimum rate of interest, the
rate of interest for such interest period shall be such
minimum rate of interest.
If the applicable note supplement specifies a maximum rate
of interest for any interest period, then, in the event that
the rate of interest in respect of such interest period
determined in accordance with the provisions of paragraph
(ii) above is greater than such maximum rate of interest,
the rate of interest for such interest period shall be such
maximum rate of interest.
(iv) Determination of rate of interest and calculation of interest
amounts
The [principal paying agent/agent bank], in the case of
floating rate notes, and the calculation agent (as specified
in the applicable note supplement), in the case of index
linked interest notes, will at or as soon as practicable
after each time at which the rate of interest is to be
determined, determine the rate of interest for the relevant
interest period. In the case of index linked interest notes,
the calculation agent will notify the [principal paying
agent/agent bank] of the rate of interest for the relevant
interest period as soon as practicable after calculating the
same.
The [principal paying agent/agent bank] will calculate the
amount of interest payable on the floating rate notes or
index linked interest notes in respect of each specified
denomination (each an "interest amount") for the relevant
interest period. each interest amount shall be calculated by
applying the rate of interest to the principal amount
outstanding of each note, multiplying such sum by the
applicable day count fraction, and rounding the resultant
figure to the nearest sub-unit of the relevant specified
currency, half of any such sub-
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unit being rounded upwards or otherwise in accordance with
applicable market convention.
"day count fraction" means, in respect of the calculation of
an amount of interest in accordance with this paragraph (iv)
for any interest period:
(a) if "Actual/365" or "Actual/Actual (ISDA)" is
specified in the applicable prospectus supplement,
the actual number of days in the interest period
divided by 365 (or, if any portion of that interest
period falls in a leap year, the sum of (a) the
actual number of days in that portion of the
interest period falling in a leap year divided by
366 and (b) the actual number of days in that
portion of the interest period falling in a
non-leap year divided by 365);
(b) if "Actual/365 (Fixed)" is specified in the
applicable prospectus supplement, the actual number
of days in the interest period divided by 365;
(c) if "Actual/365 (Sterling)" is specified in the
applicable prospectus supplement, the actual number
of days in the interest period divided by 365 or,
in the case of a payment date falling in a leap
year, 366;
(d) if "Actual/360" is specified in the applicable
prospectus supplement, the actual number of days in
the interest period divided by 360;
(e) if "30/360", "360/360" or "Bond Basis" is specified
in the applicable prospectus supplement, the number
of days in the interest period divided by 360 (the
number of days to be calculated on the basis of a
year of 360 days with 12 30-day months (unless (a)
the last day of the interest period is the 31st day
of a month but the first day of the interest period
is a day other than the 30th or 31st day of a month,
in which case the month that includes that last day
shall not be considered to be shortened to a 30-day
month, or (b) the last day of the interest period is
the last day of the month of February, in which case
the month of February shall not be considered to be
lengthened to a 30-day month)); and
(f) if "30E/360" or "Eurobond Basis" is specified in the
applicable prospectus supplement, the number of days
in the interest period divided by 360 (the number of
days to be calculated on the basis of a year of 360
days with 12 30-day months, without regard to the
date of the first day or last day of the interest
period unless, in the case of the final interest
period, the final maturity date (or, as the case may
be, extended due for payment date) is the last day of
the month of February, in which case the month of
February shall not be considered to be lengthened to
a 30-day month).
(v) Notification of rate of interest and interest amounts
The [issuer/principal paying agent/agent bank] will cause
the rate of interest and each interest amount for each
interest period and the relevant payment date to be notified
to the note trustee, the issuer cash manager, the paying
agents, the registrar and to any stock exchange or other
relevant competent authority or quotation system on which
the relevant floating rate notes or index linked interest
notes are for the time being listed, quoted and/or traded
215
or by which they have been admitted to listing and to be
published in accordance with condition 14 as soon as
possible after their determination but in no event later
than the fourth business day thereafter by the principal
paying agent. each interest amount and payment date so
notified may subsequently be amended (or appropriate
alternative arrangements made by way of adjustment) without
notice in the event of an extension or shortening of the
interest period. Any such amendment or alternative
arrangements will be promptly notified to the note trustee
and each stock exchange or other relevant authority on which
the relevant floating rate notes or index linked interest
notes are for the time being listed or by which they have
been admitted to listing and to noteholders in accordance
with number 14.
(vi) Determination or calculation by note trustee
If for any reason at any relevant time after the closing
date, the [principal paying agent/agent bank] or, as the
case may be, the calculation agent defaults in its
obligation to determine the rate of interest or the
[principal paying agent/agent bank] defaults in its
obligation to calculate any interest amount in accordance
with sub-paragraph (ii)(a) or (b) above or as otherwise
specified in the applicable note supplement, as the case may
be, and in each case in accordance with paragraph (iv)
above, the note trustee shall determine the rate of interest
at such rate as, in its absolute discretion (having such
regard as it shall think fit to the foregoing provisions of
this condition, but subject always to any minimum rate of
interest or maximum rate of interest specified in the
applicable note supplement), it shall deem fair and
reasonable in all the circumstances or, as the case may be,
the note trustee shall calculate the interest amount(s) in
such manner as it shall deem fair and reasonable in all the
circumstances and each such determination or calculation
shall be deemed to have been made by the [principal paying
agent/agent bank] or the calculation agent, as the case may
be.
(vii) Certificates to be final
All certificates, communications, opinions, determinations,
calculations, quotations and decisions given, expressed,
made or obtained for the purposes of the provisions set out
in this number 4(b), whether by the [principal paying
agent/agent bank] or the calculation agent or the note
trustee shall (in the absence of willful default, bad faith
or manifest error) be binding on the us, the issuer cash
manager, the principal paying agent, the calculation agent,
the other paying agents, the note trustee and all
noteholders and (in the absence of willful default or bad
faith) no liability to us or the noteholders shall attach to
the [principal paying agent/agent bank] or the calculation
agent or the note trustee in connection with the exercise or
non-exercise by it of its powers, duties and discretions
pursuant to such provisions.
(C) Interest on dual currency interest notes
In the case of dual currency interest notes where the rate or amount
of interest falls to be determined by reference to an exchange rate, the rate
or amount of interest shall be determined in the manner specified in the
applicable prospectus supplement.
(D) Accrual of interest
Interest (if any) will cease to accrue on each note (or in the case
of the redemption of part only of a note, that part only of such note) on the
due date for redemption thereof
216
unless, upon due presentation thereof, payment of principal is improperly
withheld or refused in which event, interest will continue to accrue as
provided in the issuer trust deed.
5. Redemption, purchase and cancellation
(A) Final redemption
If the US notes have not previously been redeemed in full as
described in this number 5, we will redeem each series and class of notes at
their then principal amount outstanding together with all accrued interest on
the final maturity date in respect of such series and class of notes.
(B) Mandatory redemption of the notes in part
On each payment date, other than a payment date on which a series and
class of notes are to be redeemed under numbers 5(A), (D), (E) or (F), we
shall repay principal in respect of such series and class of notes in an
amount equal to the amount (if any) repaid on the corresponding payment date
in respect of the related loan tranche and pursuant to the global intercompany
loan agreement converted, where the specified currency is not sterling, into
sterling at the specified currency exchange rate. See "Cashflows -
Distribution of issuer available principal receipts".
(C) Note principal payments and principal amount outstanding
On the distribution date immediately preceding each payment date (the
"note determination date"), the issuer cash manager or we will determine the
following:
o the amount of each principal payment payable on each US note of
each series and class, called the "note principal payment";
o the principal amount outstanding of each US note of that series
and class on the note determination date which is the specified
denomination of each US note of that series and class as at the
applicable closing date less the aggregate of all note principal
payments that have been paid in respect of that note; and
o the fraction, or pool factor, obtained by dividing the principal
amount outstanding of each US note by the specified denomination
of each note of that series and class as at the applicable
closing date.
We will notify the amounts and dates determined to the agent bank,
paying agents, note trustee, the registrar and each stock exchange on which
the notes are listed and we shall also publish such amounts and dates in
accordance with number 14 by no later than the business day after relevant
payment date.
If we or the issuer cash manager fails to make a determination as
described, the note trustee will calculate the note principal payment,
principal amount outstanding and pool factor as described in this paragraph
(C) in the manner the note trustee in its discretion considers fair and
reasonable in the circumstances, having regard to paragraph (C) above, and
each of these determinations or calculations will be deemed to have been made
by us. If this happens, the issuer cash manager and the noteholders and we
will be bound by the determinations made.
(D) Optional Redemption in Full
We may, by giving not less than thirty and not more than sixty days
prior notice to the note trustee and the noteholders redeem a series and class
of at the then principal amount outstanding together with any accrued interest
on the following dates:
o the date specified as the "step-up date" in the applicable
prospectus supplement and on any payment date thereafter. This
gives us the option to redeem a series
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and class of notes on or after the step-up date for interest
for that series and class of notes; and
o any payment date on which the aggregate principal amount
outstanding of [a series and class of] notes is less than 10% of
the aggregate principal amount outstanding of such series and
class of notes as at the applicable closing date.
We may only redeem the notes as described above if it has prior to
the date of such notice provided to the note trustee a certificate to the
effect that it will have funds available to it to make the required payment of
principal and interest due in respect of the notes on the relevant payment
date, including any amounts required to be paid in priority to or in the same
priority as the notes outstanding in accordance with the issuer cash
management agreement, the note trustee is satisfied in accordance with the
transaction documents that the repayment tests will be satisfied following the
making of such redemptions and the note trustee is satisfied in accordance
with the transaction documents that such funds are available.
(E) Optional redemption for tax and other reasons
If we satisfy the note trustee that on the next payment date either:
(i) we would be required to withhold or deduct from amounts due on
the notes, any amount on account of any present or future taxes
or duties or governmental charges; or
(ii) Funding 2 would be required to withhold or deduct from amounts
due under the global intercompany loan agreement, any amount on
account of any present or future taxes or duties or governmental
charges; and
(iii) such obligation of us or Funding 2, as the case may be, cannot
be avoided by us or Funding 2, as the case may be, taking
reasonable measures available to it,
then we will use reasonable endeavors to arrange the substitution of a company
incorporated in another jurisdiction and approved by the note trustee in order
to avoid such a situation, provided that we will not be required to do so if
that would require registration of any new security under US securities laws
or would materially increase the disclosure requirements under US law or the
costs of issuance.
If we are unable to arrange a substitution as described above, then
we may, by giving not less than thirty and not more than sixty days' prior
notice to the note trustee and the noteholders, redeem all (but not some only)
of the notes at their principal amount outstanding together with any accrued
interest on the next following payment date, provided that, prior to giving
any such notice, we shall deliver to the note trustee (1) a certificate signed
by two of our directors stating that the circumstances referred to in (i) or
(ii) and (iii) above prevail and setting out details of such circumstances,
and (2) an opinion in form and substance satisfactory to the note trustee of
independent legal advisers of recognized standing to the effect that we have
or will become obliged to pay such additional amounts as a result of such
change or amendment. The note trustee shall be entitled to accept such
certificate and opinion as sufficient evidence of the satisfaction of the
circumstance set out in (i) or (ii) and (iii) above, in which event they shall
be conclusive and binding on the noteholders. We may only redeem the notes as
described above if we have prior to the date of such notice provided to the
note trustee a certificate to the effect that we will have funds available to
make the required payment of principal and interest due in respect of the
notes on the relevant payment date, including any amounts required to be paid
in priority to or in the same priority as the notes outstanding in accordance
with the issuer cash management agreement, the note trustee is satisfied in
accordance with the transaction documents that the repayment tests will be
satisfied following the making of such redemptions and the note trustee is
satisfied in accordance with the transaction documents that such funds are
available.
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In addition to the foregoing, if at any time it becomes unlawful for
us to make, fund or allow to remain outstanding the global intercompany loan,
then we may require Funding 2 upon giving not more than 60 nor less than 30
days' (or such shorter period as may be required under any relevant law) prior
written notice to the note trustee, to prepay the global intercompany loan on
any payment date subject to and in accordance with the provisions of the
global intercompany loan agreement to the extent necessary to cure such
illegality. Such monies received by us shall be used to prepay the notes in
full on that payment date.
(F) Optional Redemption for Implementation of New Basel Capital Accord
If the New Basel Capital Accord has been implemented in the United
Kingdom, whether by rule of law, recommendation or best practice or by any
other regulation, then on the payment date specified in the applicable
prospectus supplement (if any) and any payment date thereafter, we may, by
giving not more than 60 nor less than 30 days' (or such shorter period as may
be required under any relevant law) prior notice to the note trustee and the
noteholders, redeem all (but not some only) of a series and class of notes at
their principal amount outstanding together with any accrued interest on the
next following payment date, provided that an issuer enforcement notice has
not been served. We may only redeem the notes as described above if the note
trustee is satisfied in accordance with the transaction documents that we will
have funds available to make the required payment of principal and interest
due in respect of the notes on the relevant payment date, including any
amounts required to be paid in priority to or in the same priority as the
notes outstanding in accordance with the issuer pre-enforcement priority of
payments and the note trustee is satisfied in accordance with the transaction
documents that the repayment tests will be satisfied following the making of
such redemptions.
[(G) Late payment on zero coupon notes
If the amount payable in respect of any zero coupon note upon
redemption of such zero coupon note pursuant to paragraph (A), (B), (D), (E)
or (F) above or upon its becoming due and repayable as provided in number 9 is
improperly withheld or refused, the amount due and repayable in respect of
such zero coupon note shall be an amount (the "amortized face amount") equal
to the sum of:
(a) the reference price; and
(b) the product of the accrual yield (compounded annually) being
applied to the reference price from (and including) the
closing date of the applicable series and class of notes to
(but excluding) the date which is the earlier of:
(i) the date on which all amounts due in respect of
such zero coupon notes have been paid; and
(ii) the date on which the full amount of the moneys
payable in respect of such zero coupon notes has
been received by the principal paying agent or the
note trustee or the registrar and notice to that
effect has been given to the noteholders in
accordance with number 14.
or such other amount as is provided in the applicable prospectus
supplement].
6. Payments
Payments of principal and interest in respect of the notes will be
made to the persons in whose names the global note certificates are registered
on the register at the opening of business in the place of the registrar's
specified office on the fifteenth day before the due date for such payment.
Such date is called the "record date". Payments shall be made by wire transfer
of immediately available funds, if such registered holder shall have provided
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wiring instructions no less than five business days prior to the record date,
or otherwise by check mailed to the address of such registered holder as it
appears in the register at the opening of business on the record date. In the
case of the final redemption, and provided that payment is made in full,
payment will only be made against surrender of those global note certificates
to the registrar.
All payments on the US notes are subject to any applicable fiscal or
other laws and regulations. Noteholders will not be charged commissions or
expenses on these payments.
If the due date for payment of any amount on the US notes is not a
payment business day, noteholders will not be entitled to payment of the
amount due in that place until the next payment business day and noteholders
shall not be entitled to any further interest or other payment as a result of
that delay.
If a paying agent makes a partial payment on a US note, the registrar
will endorse on that US global note certificate a statement indicating the
amount and date of that payment.
If payment of principal of a US note is improperly withheld or
refused, the interest which continues to accrue will still be payable in
accordance with the usual procedures.
We can, at any time, vary or terminate the appointment of any paying
agent and can appoint successor or additional paying agents, registrar or
transfer agent. If we do this, we must ensure that we maintain a paying agent
in London, a paying agent in New York and a registrar. We will ensure that at
least 30 days' notice of any change in the paying agents, registrar or
transfer agent or their specified offices is given to noteholders in
accordance with number 14.
Subject as described earlier in relation to the deferral of interest,
if payment of interest on a note is not paid for any other reason when due and
payable, the unpaid interest will itself bear interest at the applicable rate
until both the unpaid interest and the interest on that interest are paid.
7. Prescription
Claims against us for payment of interest and principal on redemption
will become void if the relevant note certificates are not surrendered for
payment within the time limit for payment. That time limit is ten years from
the due date of such notes. If there is a delay in the paying agents or, as
applicable, the note trustee, receiving the funds, then the due date, for the
purposes of this time limit, is the date on which it notifies you, in
accordance with number 14, that it has received the relevant payment.
8. Taxation
Payments of interest and principal will be made without making any
withholding or deduction for any tax unless a withholding or deduction is
required by any applicable law. If a withholding or deduction for tax is made,
the relevant paying agent or we will account to the relevant authority for the
amount so withheld or deducted. Neither any paying agent nor we are is
required to make any additional payments to noteholders for such withholding
or deduction.
9. Events of default
(A) Note acceleration notice
The note trustee in its absolute discretion may give notice to us of
an issuer event of default (as defined below) in respect of a series and class
of notes (a "note acceleration notice"), and shall give such notice if it is
indemnified to its satisfaction and it is:
o requested to do so in writing by the holders of at least one
quarter of the aggregate principal amount outstanding of the
series and class of notes; or
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o directed to do so by an extraordinary resolution passed at a
meeting of the noteholders of such series and class.
If any of the following events occurs and is continuing it is called
an "issuer event of default":
o we fail to pay for a period of seven business days any amount of
principal of that series and class of notes when such payment
ought to have been paid in accordance with the conditions or we
fail to pay for a period of fifteen business days any amount of
interest on that series and class of notes when such payment
ought to have been paid in accordance with the conditions; or
o we fail to perform or observe any of its other obligations under
the notes of such series and class, the trust deed, the issuer
deed of charge or any other transaction document, and (except
where the note trustee certifies that, in its opinion, such
failure is incapable of remedy, in which case no notice will be
required) it remains unremedied for 30 days after the note
trustee has given notice of it to us requiring the same to be
remedied; and the note trustee has certified that the failure to
perform or observe is materially prejudicial to the interests of
the noteholders of such series and class; or
o except for the purposes of an amalgamation or restructuring as
described in the point immediately following, we cease or
threaten to cease carrying on all or a substantial part of our
business or we are deemed unable to pay our debts within the
meaning of section 123(1)(a), (b), (c) or (d) of the Insolvency
Act 1986 (as that section may be amended, modified or
re-enacted) or become unable to pay our debts within the meaning
of section 123(2) of the Insolvency Act 1986 (as that section
may be amended, modified or re-enacted); or
o an order is made or an effective resolution is passed for our
winding up except for the purposes of or pursuant to an
amalgamation, restructuring or merger previously approved by the
note trustee in writing or by an extraordinary resolution (as
defined in the trust deed) of the noteholders of such series and
class; or
o proceedings are otherwise initiated against us under any
applicable liquidation, insolvency, composition, reorganization
or other similar laws (including, but not limited to,
presentation of a petition for administration or the filing of
documents with the court for an administration) and (except in
the case of presentation of a petition for an administration
order) such proceedings are not, in the opinion of the note
trustee, being disputed in good faith with a reasonable
prospect of success, a formal notice is given of intention to
appoint an administrator in relation to us or an administration
order being granted or an administrative receiver or other
receiver, liquidator or other similar official being appointed
in relation to us or in relation to the whole or any
substantial part of the undertaking or assets of us, or an
encumbrancer taking possession of the whole or any substantial
part of the undertaking or assets of us, or a distress,
execution, diligence or other process being levied or enforced
upon or sued out against the whole or any substantial part of
the undertaking or assets of us and such possession or process
(as the case may be) not being discharged or not otherwise
ceasing to apply within 30 days, or we initiating or consenting
to judicial proceedings relating to itself under applicable
liquidation, insolvency, composition, reorganization or other
similar laws or making a conveyance or assignment for the
benefit of our creditors generally or a composition or similar
arrangement with the creditors or takes steps with a view to
obtaining a moratorium in respect of our indebtedness,
including without limitation, the filing of documents with the
court; or
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o if a global intercompany loan enforcement notice is served in
respect of any global intercompany loan agreement while any of
such series and class of notes are outstanding.
A note acceleration notice in respect of a series and class of notes
is a written notice from the note trustee to the Funding 2 security trustee
and to us declaring the notes of such series and class to be immediately due
and payable. When it is given, all notes of such series and class will become
immediately due and payable at their principal amount outstanding together
with accrued and unpaid interest without further action or formality.
10. Enforcement of notes
The note trustee may, at its discretion and without notice at any
time and from time to time, take such steps and institute such proceedings
against us or any other person as it may think fit to enforce the provisions
of the notes, the trust deed, the issuer deed of charge or any of the other
transaction documents. The note trustee may, at its discretion and without
notice, at any time after the service of a note acceleration notice give
notice (an "issuer enforcement notice") to the Funding 2 security trustee and
to us declaring each note of each series to be due and payable (and they shall
forthwith become due and payable). At any time after the service of an issuer
enforcement notice, the note trustee may, at its discretion and without
notice, take such steps as it may think fit to enforce the issuer security.
The note trustee shall not be bound to serve an issuer enforcement notice or
to take any such enforcement proceedings or steps unless:
o (subject in all cases to restrictions contained in the trust
deed or, as the case may be, the issuer deed of charge to
protect the interests of any higher ranking class of
noteholders) it shall have been so directed by an extraordinary
resolution (as described in number 11) of the class A
noteholders, the class B noteholders, the class M noteholders,
the class C noteholders or the class D noteholders or so
requested in writing by the holders of at least 25% in principal
amount outstanding of the class A notes, the class B notes, the
class M notes, the class C notes or the class D notes (as the
case may be); and
o it shall have been indemnified to its satisfaction.
Amounts available for distribution after enforcement of the issuer
security shall be distributed in accordance with the terms of the issuer deed
of charge.
No noteholder may institute any proceedings against us to enforce its
rights under or in respect of the notes or the trust deed unless (1) the note
trustee has become bound to institute proceedings and has failed to do so
within 30 days of becoming so bound and (2) such failure is continuing;
provided that, notwithstanding the foregoing and notwithstanding any other
provision of the trust deed, the right of any noteholder to receive payment of
principal of and interest on its notes on or after the due date for such
principal or interest, or to institute suit for the enforcement of payment of
that principal or interest, may not be impaired or affected without the
consent of that noteholder. In addition, no class B noteholder, class M
noteholder, class C noteholder or class D noteholder will be entitled to
commence proceedings for the winding up or administration of us unless there
are no outstanding notes of a class with higher priority, or if notes of a
class with higher priority are outstanding, there is consent of noteholders of
at least 25% of the aggregate principal amount of the class or classes of
notes outstanding (as defined in the trust deed) with higher priority.
In the event that:
o the issuer security is enforced and the note trustee determines
that (a) the proceeds of such enforcement, after distribution
of such proceeds to the persons entitled thereto ranking in
priority to the notes under the issuer deed of charge and to
the noteholders (to the extent entitled
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thereto) are insufficient to pay in full all principal and
interest and other amounts whatsoever due in respect of the
notes and any claims ranking equally with such claims and (b)
there are no further assets available to pay principal and
interest and other amounts whatsoever due in respect of the
notes; or
o within 20 days following the final maturity date of the latest
maturing note the note trustee certifies that there is no
further amount outstanding under the global intercompany loan,
then all interests in each global note certificate will be
automatically exchanged for equivalent interests in an equivalent
amount of notes in an equivalent principal amount outstanding in
individual note certificates and each such global note certificate
will be cancelled on the date of such exchange.
The note trustee is required to transfer or (as the case may be)
procure transfer of all (but not some only) of the notes, for the
consideration of one penny per note, to the post enforcement call
option holder pursuant to the option granted to it by the note
trustee (as agent for the noteholders). The option is granted to
acquire all of the notes plus accrued interest on the notes. This is
called the post enforcement call option. Immediately upon such
transfer, no such former noteholder shall have any further interest
in the notes. each of the noteholders acknowledges that the note
trustee has the authority and the power to bind the noteholders in
accordance with the terms and conditions set out in the issuer
post-enforcement call option agreement and each noteholder, by
subscribing for or purchasing notes, agrees to be so bound.
11. Meetings of noteholders, modifications and waiver
(1) Meetings of noteholders
The trust deed contains provisions for convening meetings of
noteholders to consider any matter affecting their interests, including the
sanctioning by extraordinary resolution of a modification of any provision of
the terms and conditions of the notes or the provisions of any of the
transaction documents.
Subject as provided in the following paragraph, the quorum for any
meeting of the noteholders of any series and class convened to consider an
extraordinary resolution will be two or more persons holding or representing
not less than half of the aggregate principal amount outstanding of the notes
of that series and class or, at any adjourned meeting, two or more persons
representing noteholders of that series and class, whatever the total
principal amount of the outstanding notes so represented.
Certain terms including the alteration of the amount, rate or timing
of payments on the notes, the currency of payment, the priority of payments or
the quorum or majority required in relation to these terms, require a quorum
for passing an extraordinary resolution of two or more persons holding or
representing in total not less than [three quarters/two thirds] of the
aggregate principal amount outstanding of the notes of the relevant series and
class or, at any adjourned meeting, at least one quarter of the total
principal amount of the notes outstanding of such series and class. These
modifications are called "basic terms modifications".
A resolution signed by or on behalf of all the noteholders of the
relevant series and class who for the time being are entitled to receive
notice of a meeting under the issuer trust deed shall for all purposes be as
valid and effective as an extraordinary resolution passed at a meeting of such
series and class of noteholders.
Subject as provided below in relation to an extraordinary resolution
concerning a basic terms modification, no extraordinary resolution of any
series and class of class B
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noteholders shall take effect while any class A notes remain outstanding
unless sanctioned by an extraordinary resolution of the class A noteholders of
each series, or the note trustee is of the opinion that it would not be
materially prejudicial to the interests of the class A noteholders of each
series.
Subject as provided below in relation to an extraordinary resolution
concerning a basic terms modification, no extraordinary resolution of any
series and class of class M noteholders shall take effect while any class A
notes or class B notes remain outstanding unless sanctioned by an
extraordinary resolution of the class A noteholders and an extraordinary
resolution of the class B noteholders of each series, or the note trustee is
of the opinion that it would not be materially prejudicial to the interests of
the class A noteholders and the class B noteholders of each series.
Subject as provided below in relation to an extraordinary resolution
concerning a basic terms modification, no extraordinary resolution of any
series and class of class C noteholders shall take effect while any class A
notes, class B notes or class M notes remain outstanding unless sanctioned by
an extraordinary resolution of the class A noteholders, an extraordinary
resolution of the class B noteholders and an extraordinary resolution of the
class M noteholders of each series, or the note trustee is of the opinion that
it would not be materially prejudicial to the interests of the class A
noteholders, the class B noteholders and the class M noteholders of each
series.
Subject as provided below in relation to an extraordinary resolution
concerning a basic terms modification, no extraordinary resolution of any
series and class of class D noteholders shall take effect while any class A
notes, class B notes, class M notes or class C notes remain outstanding unless
sanctioned by an extraordinary resolution of the class A noteholders, an
extraordinary resolution of the class B noteholders, an extraordinary
resolution of the class M noteholders and an extraordinary resolution of the
class C noteholders of each series, or the note trustee is of the opinion that
it would not be materially prejudicial to the interests of the class A
noteholders, the class B noteholders, the class M noteholders and the class C
noteholders of each series.
Furthermore, an extraordinary resolution of the noteholders of any
series and class concerning a basic terms modification will not be effective
unless it is also sanctioned by extraordinary resolutions of the noteholders
of all other series of notes of the applicable class (and the holders of each
series of notes (of any class), which in the opinion of the note trustee is or
may be prejudiced by such basic terms modifications.
(2) Programme Resolution
Notwithstanding the provisions set out in number 11(1), any
extraordinary resolution of the noteholders of the applicable class of notes
to direct the note trustee to take any enforcement action pursuant set out in
number 10 (a "programme resolution") shall only be capable of being passed at
a single meeting of the noteholders of all series of the applicable class of
notes. The quorum at any such meeting for passing a programme resolution shall
be two or more persons holding or representing more than half of the aggregate
principal amount outstanding of the notes of the applicable class or, at any
adjourned and reconvened meeting, two or more persons being or representing
noteholders of the applicable class of notes, whatever the aggregate principal
amount outstanding of such class of notes.
(3) Modifications and Waiver
The note trustee may agree, without the consent of the relevant
series and class of noteholders, (1) to any modification (other than a basic
terms modification) of, or to the waiver or authorization of any breach or
proposed breach of, the terms and conditions of one or more series of a
particular class or classes of notes or any of the transaction documents which
is not, in the opinion of the note trustee, materially prejudicial to the
interests of the noteholders of any series (2) to determine that any issuer
event of default, which is not, in
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the opinion of the note trustee, materially prejudicial to the interests of
the noteholders of any series, shall not be treated as such or (3) to any
modification of any of the terms and conditions or any of the transaction
documents which, in the opinion of the note trustee, is of a formal, minor or
technical nature or is to correct a manifest error, or an error established as
such to the satisfaction of the note trustee.
For the avoidance of doubt (in the context of deciding material
prejudice in respect of the above provisions), if the note trustee considers
in its sole opinion that the noteholders of the same class of one or more
series to which the modification or waiver relates are materially prejudiced,
the note trustee will not be able to sanction such modification or waiver
itself, and will instead require an extraordinary resolution of the
noteholders of the notes of such class outstanding to be passed by means of a
meeting. In accordance with the general provisions contained herein, such
extraordinary resolution must also be ratified by the noteholders of the notes
of the higher class or classes in order for the extraordinary resolution that
seeks approval of the modification or waiver to be valid and effective.
Any of these modifications, authorizations or waivers will be binding
on the noteholders and, unless the note trustee agrees otherwise, shall be
promptly notified to the noteholders and the rating agencies in accordance
with number 14 as soon as practicable thereafter.
Where the note trustee is required in connection with the exercise of
its powers to have regard to the interests of the noteholders of one class of
any series, it shall have regard to the interests of such noteholders as a
class. In particular, the note trustee shall not have regard to, or be liable
for, the consequences of such exercise for individual noteholders resulting
from their being domiciled or resident in or connected with any particular
territory. In connection with any such exercise, the note trustee shall not be
entitled to require, and no noteholder shall be entitled to claim, from us or
any other person, any indemnification or payment in respect of any tax
consequence of any such exercise upon individual noteholders.
12. Indemnification of the note trustee
The note trustee is entitled to be indemnified and relieved from
responsibility in certain circumstances, including provisions, among others,
relieving them from taking enforcement proceedings unless indemnified to its
satisfaction. The note trustee is also entitled to be paid its costs and
expenses in priority to any interest payments to noteholders.
The note trustee and its related companies are entitled to enter into
business transactions with us, Northern Rock plc or related companies of
either of them and to act as note trustee for the holders of any new notes and
for any person who is a party to any transaction document or whose obligations
are comprised in the issuer security or any of their subsidiary or associated
companies, without accounting for any profit resulting from those
transactions.
The note trustee will not be responsible for any loss or liability
suffered as a result of any assets in the issuer security being uninsured or
inadequately insured or being held by clearing operations or their operators
or by intermediaries on behalf of the note trustee.
Furthermore, the note trustee will be relieved of liability for
making searches or other inquiries in relation to the assets comprising the
issuer security. The note trustee does not have any responsibility in relation
to the legality and the enforceability of the trust arrangements and the
related issuer security. The note trustee will not be obliged to take any
action that might result in its incurring personal liabilities. The note
trustee is not obliged to monitor or investigate the performance of any other
person under the issuer related documents or the documents relating to the
global intercompany loan and the mortgages trust and is entitled to assume,
until it has actual knowledge to the contrary, that all such
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persons are properly performing their duties, unless it receives express
notice to the contrary.
The note trustee will not be responsible for any deficiency that may
arise because it is liable to tax in respect of the proceeds of any security.
Similar provisions in respect of the indemnification of the Funding 2
security trustee are set out in the transaction documents.
13. Replacement of notes
If individual note certificates are lost, stolen, mutilated, defaced
or destroyed, the noteholder can replace them at the specified office of any
paying agent. The noteholder will be required both to pay the expenses of
producing a replacement and to comply with the registrar's, the paying agent's
and our reasonable requests for evidence and indemnity. The noteholder must
surrender any defaced or mutilated note certificates before replacements will
be issued.
If a global note certificate is lost, stolen, mutilated, defaced or
destroyed, we will deliver a replacement global note certificate to the
registered holder upon satisfactory evidence and surrender of any defaced or
mutilated global note certificate. A replacement will only be made upon
payment of the expenses for a replacement and compliance with the registrar's,
the paying agents' and our reasonable requests as to evidence and indemnity.
14. Notice to noteholders
Any notice to noteholders shall be validly given if such notice is:
(i) sent to them by first class mail (or its equivalent) or (if
posted to a non-UK address) by airmail at the respective
addresses on the register; and
(ii) published in The Financial Times; and
(iii) for so long as amounts are outstanding on the US Notes, in a
daily newspaper of general circulation in New York (which is
expected to be The New York Times);
or, if any of such newspapers set out above shall cease to be
published or timely publication therein shall not be practicable, in a leading
English language daily newspaper having general circulation in the United
Kingdom or the United States (as applicable) provided that if, at any time, we
procure that the information concerned in such notice shall be published on
the relevant screen, publication in the newspapers set out above or such other
newspaper or newspapers shall not be required with respect to such
information.
Any notices so published shall be deemed to have been given on the
fourth day after the date of posting, or as the case may be, on the date of
such publication or, if published more than once on different dates, on the
first date on which publication shall have been made in the newspaper or
newspapers in which (or on the relevant screen on which) publication is
required.
While the Notes are represented by global note certificates, any
notice to noteholders will be validly given if such notice is provided in
accordance with the previous paragraph or (at our option) if delivered to DTC
(in the case of the [US notes]) or Euroclear and/or Clearstream, Luxembourg
(in the case of the [Reg S notes]). Any notice delivered to the DTC and/or
Euroclear and/or Clearstream, Luxembourg will be deemed to be given on the day
of delivery.
The note trustee shall be at liberty to sanction some other method of
giving notice to noteholders or any series or class or category of them if, in
its opinion, such other method is reasonable having regard to market practice
then prevailing and to the requirements of the
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stock exchanges on which the notes are then listed and provided that notice of
such other method is given to the noteholders in such manner as the note
trustee shall require.
[15. Further issues
We shall be at liberty from time to time, without the consent of the
Noteholders, to create and issue further notes of a certain class having terms
and conditions the same as the notes of any series of the same class or the
same in all respects save for the amount and date of the first payment of
interest thereon, issue date and/or purchase price and so that the same shall
be consolidated and form a single series and class with the outstanding notes
of such series and class.]
16. Governing law
The transaction documents and the notes will be governed by English
law, unless specifically stated to the contrary. Certain provisions in the
transaction documents relating to property situated in Scotland are governed
by Scots law. Unless specifically stated to the contrary (i) the courts of
England are to have non-exclusive jurisdiction to settle any disputes which
may arise out of or in connection with the transaction documents and the notes
and (ii) the parties to the transaction documents irrevocably submit to the
non-exclusive jurisdiction of the courts of England.
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Material legal aspects of the mortgage loans and the related security
The following discussion describes, in summary, the material legal
aspects in respect of the assignment of the mortgage loans and related
security and of English and Scottish residential property and mortgages. It is
a brief summary and not an exhaustive analysis of the relevant law.
English mortgage loans
General
The parties to a mortgage are the mortgagor, who is the borrower and
homeowner and who grants the mortgage over its property, and the mortgagee,
who is the lender. Each mortgage loan is secured by a mortgage on the property
(the mortgaged property). Since the most common form of creating a mortgage on
residential property, namely, by means of a legal charge by deed, means that a
mortgagor does not cease to be the owner of the property, generally a
mortgagor will be free to create further mortgages on the mortgaged property
(subject to any restrictions imposed by the mortgagee in the mortgage deed).
Each mortgage loan to be assigned to the mortgages trustee will be secured by
a mortgage which has a first ranking priority (except in the case of a
personal secured loan) over all other mortgages secured on the mortgaged
property and over all unsecured creditors of the borrower, except in respect
of certain statutory rights, such as the rights of the Inland Revenue, which
are granted statutory priority. There are two forms of title to land in
England and Wales: registered and unregistered. Both systems of title can
include both freehold and leasehold estates.
Registered title
Title to registered land is registered at H.M. Land Registry. The
registrar allocates a unique title number. Consequently if there are freehold
and leasehold registered interests then there will be more than one register
of title and more than one title number to a particular property. Each
individual register consists of three parts: the property register, the
proprietorship register and the charges register.
The property register describes the land and the type of estate,
freehold or leasehold. In some instances it may also refer to third party
rights that burden the property although these may also be mentioned in the
charges register as practice varies between the various District Land
Registries around the country.
The proprietorship register details the following:
o The class of registered title. There are three classes of
registered title for freehold and four classes for leasehold.
The most common title (and the best grade of title available) is
title absolute. A person registered with title absolute owns the
estate in the land free from all interests other than those
entered on the register, those classified as overriding
interests or minor interests (referred to below) and (in the
case of leasehold land) all express and implied covenants,
obligations and liabilities imposed by the lease or incidental
to the land.
o Restrictions on the ability of the registered proprietor to deal
with the property e.g. a restriction imposed by a mortgagee
prohibiting registration of subsequent mortgagees.
The charges register details security interests and encumbrances
registered against the property.
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The property is also identified by a plan retained at H.M. Land
Registry indicating the location of the related land (the "filed plan").
However, the filed plan is not conclusive as to matters such as the location
of boundaries.
The Land Registration Act 2002 provides that some interests in land
will bind the land even though they are not capable of registration at H.M.
Land Registry. These fall into two categories:
o Overriding interests; and
o adverse rights affecting the title to the estate or charge.
Title to registered land is established and evidenced by the entries
on the register and the title plan recorded at H.M. Land Registry containing
official copies of the entries on the register relating to that land.
Unregistered title
All land in England and Wales is now subject to compulsory
registration on the happening of any of a number of trigger events. The most
common trigger event is a sale of the land, but since April 1998 the triggers
have also included the creation of a first priority legal mortgage over
unregistered land. However, an increasingly small but still significant
proportion of land in England and Wales (typically where the land has been in
the same ownership for a number of years) is still unregistered. Title to
unregistered land is proved by establishing a chain of documentary evidence to
title going back at least 15 years. Where the land is affected by third party
rights, some of those rights or interests, including a legal mortgage where
the mortgagee has taken possession of the title deeds, can be proved by
documentary evidence or by proof of continuous exercise of the rights for a
prescribed period and do not require registration. However, other interests,
including equitable charges, must be registered at H.M. Land Charges Registry
in order to be effective against a subsequent purchaser or mortgagee of the
land.
Taking security over land
A legal mortgage of registered land may only be effected once the
charge has been registered with H.M. Land Registry. Prior to registration, it
will take effect only as an equitable mortgage or charge. A registered legal
mortgage is subject to pre-existing registered legal charges but has priority
over pre-existing charges which are not registered and mortgages registered
subsequent to it. Where land is registered therefore, a mortgagee must
register its mortgage at H.M. Land Registry in order to secure priority over
any subsequent mortgagee. Priority of mortgages (whether legal or equitable)
over registered land is generally governed by the date of registration of the
mortgage rather than the date of creation. However, a prospective mortgagee is
able to obtain a priority period within which to register its mortgage. If the
mortgagee submits a proper application for registration during this period,
its interest will take priority over any application for registration of any
interest which is received by H.M. Land Registry during this priority period.
In the system of unregistered land, the mortgagee protects its
interest by retaining possession of the title deeds to the mortgaged property.
Without the title deeds to the mortgaged property, the borrower is unable to
establish the necessary chain of ownership, and is therefore prevented from
dealing with its land without the consent of the mortgagee. Priority of
mortgages over unregistered land depends on a number of factors including,
whether the mortgagee has taken possession of the title deeds, whether the
interest is registerable and whether it has been registered at H.M. Land
Charges Registry and the date of creation of the charge. Generally speaking
where all else is equal between two competing mortgages, the priority will be
determined by the date of creation of the charge.
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The seller as mortgagee
The sale to the mortgages trustee of the mortgage loans together with
their related security will take effect in equity only and the mortgages
trustee will not apply to H.M. Land Registry or H.M. Land Charges Registry to
register or record its equitable interest in the mortgages. The consequences
of this are explained in the section "Risk factors - There may be risks
associated with the fact that the mortgages trustee has no legal title to the
mortgage loans and their related security, which may adversely affect payments
on the notes".
Enforcement of mortgages
If a borrower breaches the mortgage conditions of its mortgage loan,
the mortgage loan generally provides that all monies under the mortgage loan
will become immediately due and payable. The mortgagee would then be entitled
to recover all outstanding principal, interest and fees under the covenant of
the borrower contained expressly or impliedly in the mortgage deed to pay or
repay those amounts. In addition, the mortgagee would then be entitled to
enforce its mortgage in relation to the defaulted mortgage loan. Enforcement
may occur in a number of ways, including the following:
o The mortgagee may enter into possession of the mortgaged
property. If it does so, it does so in its own right and not as
agent of the mortgagor, and so may be personally liable for
mismanagement of the mortgaged property and to third parties as
occupier of the mortgaged property.
o The mortgagee may lease the mortgaged property to third parties.
o The mortgagee may foreclose on the mortgaged property. Under
foreclosure procedures, the mortgagor's title to the mortgaged
property is extinguished so that the mortgagee becomes the owner
of the mortgaged property. The remedy is, because of procedural
constraints, rarely used.
o The mortgagee may appoint a receiver to deal with income from
the mortgaged property or exercise other rights delegated to the
receiver by the mortgagee. A receiver is the agent of the
mortgagor and so, unlike when the mortgagee enters into
possession of the mortgaged property, in theory the mortgagee is
not liable for the receiver's acts or as occupier of the
mortgaged property. In practice, however, the receiver will
require indemnities from the mortgagee that appoints it. Similar
duties of care will apply to a sale by a receiver as set out
below in relation to a sale by a mortgagee.
o The mortgagee may sell the mortgaged property, subject to
various duties to ensure that the mortgagee exercises proper
care in relation to the sale. This power of sale arises under
the Law of Property Act 1925. The purchaser of a mortgaged
property sold pursuant to a mortgagee's power of sale becomes
the owner of the mortgaged property.
Notwithstanding the above, in order to enforce a power of sale in
respect of a mortgaged property, the mortgagee must generally obtain
possession of the mortgaged property (to sell the mortgaged property with
vacant possession) either voluntarily or by a court order. Actions for
possession are regulated by statute and the courts have certain powers to
adjourn possession proceedings, to stay any possession order or postpone the
date for delivery of possession. The court will exercise such powers in favor
of a borrower broadly where it appears to the court that the borrower is
likely to be able, within a reasonable time period, to pay any sums due under
the mortgage loan or to remedy any other breach of obligation under the
mortgage loan or its related security. If a possession order in favor of the
mortgagee is granted it may be suspended to allow the borrower more time to
pay. Once possession is obtained the mortgagee has a duty to the borrower to
take reasonable care to obtain a proper price for the mortgaged property.
Failure to do so will put the mortgagee at risk of an action by the borrower
for breach of such duty, although it is for
230
the borrower to prove breach of such duty. There is also a risk that a
borrower may also take court action to force the relevant mortgagee to sell
the property within a reasonable time.
Scottish mortgage loans
General
A standard security is the only means of creating a fixed charge over
heritable or long leasehold property in Scotland. Its form must comply with
the requirements of the Conveyancing and Feudal Reform (Scotland) Act 1970
(the "1970 Act"). There are two parties to a standard security. The first
party is the grantor, who is the borrower and homeowner. The grantor grants
the standard security over the property (the "secured property") and is
generally the only party to execute the standard security. The second party,
who is the lender, is termed the heritable creditor. As the grantor of a
standard security remains the owner of the secured property, generally the
grantor will be free to grant further standard securities over the secured
property (subject to any restriction imposed by the heritable creditor in the
standard security). Each Scottish mortgage loan (other than any personal
secured loan) in the mortgage portfolio will be secured by a standard security
which has a first ranking priority over all other standard securities granted
over the secured property and which will also rank in priority to all
unsecured creditors of the borrower.
The 1970 Act automatically imports a statutory set of "Standard
Conditions" into all standard securities, although the majority of these may
be varied by agreement between the parties. The seller, along with most major
lenders in the residential mortgage market in Scotland, has elected to vary
the Standard Conditions by means of its own set of Scottish mortgage
conditions, the terms of which are in turn imported into each standard
security. The main provisions of the Standard Conditions which cannot be
varied by agreement relate to enforcement, and in particular the notice and
other procedures required as a preliminary to the exercise of the heritable
creditor's rights on a default by the borrower.
Nature of property as security
While title to all land in Scotland is registered there are currently
two possible forms of registration namely the Land Register and Sasine
Register. Both systems of registration can include both heritable (the
Scottish equivalent to freehold) and long leasehold land.
Land Register
This system of registration was established by the Land Registration
(Scotland) Act 1979. Since that time it has been introduced on a county by
county basis, and with effect from 1 April 2003 has applied to the whole of
Scotland. Once a county has been designated as falling within the system, the
first sale of any parcel of land (including a long leasehold) therein or the
occurrence of certain other events in relation thereto (but not the granting
of a standard security alone) triggers its registration in the Land Register,
when it is given a unique title number. Title to the land is established by a
land certificate containing official copies of the entries on the Land
Register relating to that land. Similarly, the holder of any standard security
over the land in question receives a charge certificate containing official
copies of the entries relating to that security. A person registered in the
Land Register owns the land free from all interests other than those entered
on the Land Register, those classified as overriding interests and any other
interests implied by law.
The land certificate will reveal the present owners of the land,
together with any standard securities and other interests (other than certain
overriding interests) affecting the land. The land certificate will also
contain a plan indicating the location of the land. While this plan is not in
all circumstances conclusive as to the location of the boundaries of the
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land, it cannot be amended if this would be to the prejudice of a proprietor
in possession of the land, unless this indemnity has been expressly excluded
in the land certificate itself.
Sasine Register
Title to all land in Scotland where no event has yet occurred to
trigger registration in the Land Register falls to be recorded in the General
Register of Sasines. Title to such land is proved by establishing a chain of
documentary evidence of title going back at least ten years. Where the land is
affected by third party rights, some of those rights can be proved by
documentary evidence or by proof of continuous exercise of the rights for a
prescribed period and do not require registration. However, other rights
(including standard securities) would have to be recorded in the Sasine
Register in order to be effective against a subsequent purchaser of the land.
Taking security over land
A heritable creditor must register its standard security in the Land
Register or the Sasine Register (as applicable) in order to perfect its
security and to secure priority over any subsequent standard security. Until
such registration occurs, a standard security will not be effective against a
subsequent purchaser or the heritable creditor under another standard security
over the secured property. Priority of standard securities is (subject to
express agreement to the contrary between the security holders) governed by
the date of registration (being the date of creation) rather than the date of
execution. There is no equivalent in Scotland to the priority period system
which operates in relation to registered land in England and Wales.
The seller as heritable creditor
The sale of the Scottish mortgage loans by the seller to the
mortgages trustee will be given effect by a declaration of trust by the seller
(and any sale of Scottish mortgage loans in the future will be given effect by
further declarations of trust), by which the beneficial interest in the
Scottish mortgage loans will be transferred to the mortgages trustee. Such
beneficial interest (as opposed to the legal title) cannot be registered in
the Land or Sasine Registers. The consequences of this are explained in the
section "Risk Factors - There may be risks associated with the fact that the
mortgages trustee has no legal title to the mortgage loans and their related
security which may adversely affect payments on the notes".
Enforcement of mortgages
If a borrower defaults under a mortgage loan, the Scottish mortgage
conditions provide that all monies under the mortgage loan will become
immediately due and payable. The seller would then be entitled to recover all
outstanding principal, interest and fees under the obligation of the borrower
contained in the Scottish mortgage conditions to pay or repay those amounts.
In addition, the seller as heritable creditor may enforce its standard
security in relation to the defaulted mortgage loan. Enforcement may occur in
a number of ways, including the following (all of which arise under the 1970
Act):
(i) the heritable creditor may enter into possession of the secured
property. If it does so, it does so in its own right and not as
agent of the borrower, and so may be personally liable for
mismanagement of the secured property and to third parties as
occupier of the secured property;
(ii) the heritable creditor may lease the secured property to third
parties;
(iii) the heritable creditor may sell the secured property, subject
to various duties to ensure that the sale price is the best that
can reasonably be obtained. The purchaser of a property sold
pursuant to a heritable creditor's power of sale becomes the
owner of the property; and
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(iv) the heritable creditor may, in the event that a sale cannot be
achieved, foreclose on the secured property. Under foreclosure
procedures the borrower's title to the property is extinguished
so that the heritable creditor becomes the owner of the
property. This remedy is however rarely used.
In contrast to the position in England and Wales, the heritable
creditor has no power to appoint a receiver under the standard security.
Notwithstanding the above, in order to enforce its security in
respect of a secured property, the heritable creditor must generally obtain
possession of the secured property (for example, in order to sell the secured
property with vacant possession) either voluntarily or by a court order.
Actions for possession are regulated by statute (in particular the 1970 Act
and the Mortgage Rights (Scotland) Act 2001 (the "2001 Act")) and, since the
coming into effect of the 2001 Act on December 3, 2001, the courts have
certain powers to suspend the enforcement of the security. The court will
exercise such powers in favour of a borrower broadly where it appears to the
court that the borrower is likely to be able, within a reasonable time period,
to pay any sums due under the mortgage loan or to remedy any other breach of
obligation under the mortgage loan or its related security, or to permit the
borrower time to find alternative accommodation. Once possession is obtained
the heritable creditor has a duty to the borrower to obtain the best price
that can reasonably be obtained for the secured property. Failure to do so
will put the heritable creditor at risk of an action by the borrower for
breach of such duty, although it is for the borrower to prove breach of such
duty. There is also a risk that a borrower may also take court action to force
the relevant heritable creditor to sell the secured property within a
reasonable time.
Borrower's right of redemption
Under Section 11 of the Land Tenure Reform (Scotland) Act 1974 the
grantor of any standard security has an absolute right, on giving appropriate
notice, to redeem that standard security once it has subsisted for a period of
20 years subject only to the payment of certain sums specified in Section 11
of that Act. These specified sums consist essentially of the principal monies
advanced by the lender, interest thereon and expenses incurred by the lender
in relation to that standard security.
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Material United Kingdom tax consequences
The following section summarizes the material UK tax consequences of
the purchase, ownership and disposition of notes based on current law and
practice in the UK. Sidley Austin Brown & Wood, UK tax advisers to the issuer
("UK tax counsel"), has prepared and reviewed this summary and the opinions of
UK tax counsel are contained in this summary. The summary assumes that the
final documentation conforms with the description in the prospectus. The
summary also assumes that the representations made by each of Funding 2 and
us, respectively, to UK tax counsel that the profit in Funding 2's profit and
loss account will not exceed 0.01% of the Funding 2 available revenue receipts
and that the profit in the issuer's profit and loss account will not exceed
0.01% of the interest on the global intercompany loan account are correct. It
further assumes that all payments made pursuant to the final documentation are
calculated on arms' length terms. The summary does not purport to be a
complete analysis of all tax considerations of the purchase, ownership and
disposition of notes. It relates to the position of persons who are the
absolute beneficial owners of notes such as individuals, partnerships and non-
financial trade corporate entities, and may not apply to certain classes of
persons such as financial trade corporate entities (such as banks, securities
dealers and securities brokers), investment managers, insurance companies,
pension funds and UK unit and investment trusts. You should consult your own
tax adviser if you are uncertain of your current tax position.
Taxation of US residents
As discussed in more detail under "- Withholding tax" below, UK tax
counsel is of the opinion that a noteholder who is resident in the US for US
tax purposes may obtain payment of interest on his notes without deduction of
UK tax if and for so long as such notes are listed on a "recognised stock
exchange". If such notes cease to be listed on a recognised stock exchange, an
amount must generally be withheld on account of UK income tax at the lower
rate (currently 20%) from interest paid on them subject to any direction to
the contrary from the Inland Revenue in respect of such relief as may be
available pursuant to the provisions of an applicable double taxation treaty.
Residents of the US are generally not subject to tax in the UK on
payments of interest on notes under the double taxation treaty between the US
and the UK, subject to completion of administrative formalities, except where
such notes are effectively connected with a permanent establishment or a fixed
base of the noteholder situated in the UK. The benefit of the double taxation
treaty between the US and the UK is excluded in respect of any interest paid
under, or as part of, a conduit arrangement and is also subject to
comprehensive limitation on benefits provisions.
In addition, UK tax counsel is of the opinion that, as discussed in
more detail under "- Direct assessment of non-UK resident holders of notes to
UK tax on interest" below, a noteholder who is resident in the US for US tax
purposes and who is not resident in the UK for UK tax purposes will not be
subject to UK tax (other than any withholding tax, as regards which see above)
in respect of any payments on notes unless they are held by or for a trade,
profession or vocation carried on by him through a branch or agency (or, in
the case of a noteholder which is a company, for a trade carried on by it
through a permanent establishment) in the UK.
It is the opinion of UK tax counsel that US resident noteholders will
not be liable to UK tax in respect of a disposal of notes provided they are
not within the charge to UK corporation tax and (i) are not resident or
ordinarily resident in the UK, and (ii) do not carry on a trade, profession or
vocation in the UK through a branch or agency in connection with which
interest is received or to which such notes are attributable.
234
It is the opinion of UK tax counsel that, as discussed in more detail
below under "- UK taxation of Funding 2 and the issuer", Funding 2 and the
issuer will generally be subject to UK corporation tax, currently at a rate of
30%, on the profit reflected in their respective profit and loss accounts as
increased by the amounts of any non-deductible expenses or losses.
It is the opinion of UK tax counsel that, as discussed in more detail
below under "- UK taxation of the mortgages trustee", the mortgages trustee
will have no liability to UK tax in relation to amounts which it receives on
behalf of Funding 2 or the seller under the mortgages trust.
Except as described in the preceding paragraphs (and as further
developed in the corresponding opinions below), UK tax counsel will render no
opinions relating to notes, the parties to the transaction, or any aspects of
the transaction.
Withholding tax
For so long as notes are and continue to be listed on a "recognised
stock exchange" within the meaning of section 841 of the Income and
Corporation Taxes Act 1988 (the London Stock Exchange plc is such a recognised
stock exchange for this purpose) interest payments on each of such notes will
be treated as a "payment of interest on a quoted Eurobond" within the meaning
of section 349 of the Income and Corporation Taxes Act 1988. Under an Inland
Revenue interpretation, securities will be regarded as listed on a recognised
stock exchange if they are listed by a competent authority in a country which
is a member state of the European Union or which is part of the European
Economic Area and are admitted to trading on a recognised stock exchange in
that country. In these circumstances, payments of interest on notes may be
made without withholding or deduction for or on account of UK income tax
irrespective of whether such notes are in global form or in definitive form.
If notes cease to be listed on a recognised stock exchange, an amount
must be withheld on account of UK income tax at the lower rate (currently 20%)
from interest paid on them, subject to any direction to the contrary from the
Inland Revenue in respect of such relief as may be available pursuant to the
provisions of an applicable double taxation treaty or to the interest being
paid to the persons (including companies within the charge to UK corporation
tax) and in the circumstances specified in sections 349A to 349D of the Income
and Corporation Taxes Act 1988.
The European Union has adopted a Directive regarding the taxation of
savings income. Subject to a number of important conditions being met, it is
proposed that member states will be required from a date not earlier than
January 1, 2005, to provide to the tax authorities of other member states
details of payments of interest and other similar income paid by a person to
an individual in another member state, except that Austria, Belgium and
Luxembourg will instead impose a withholding system for a transitional period
unless during such period they elect otherwise.
Payments of interest and principal with respect to notes will be
subject to any applicable withholding taxes and the issuer will not be obliged
to pay additional amounts in relation thereto.
Direct assessment of non-UK resident holders of notes to UK tax on interest
Interest on notes constitutes UK source income and, as such, may be
subject to income tax by direct assessment even where paid without
withholding, subject to any direction to the contrary from the Inland Revenue
in respect of such relief as may be available pursuant to the provisions of an
applicable double taxation treaty.
235
However, interest with a UK source received without deduction or
withholding on account of UK tax will not be chargeable to UK tax in the hands
of a noteholder (other than certain trustees) who is not resident for tax
purposes in the UK unless that noteholder carries on a trade, profession or
vocation through a branch or agency (or, in the case of a noteholder which is
a company, which carries on a trade through a permanent establishment) in the
UK in connection with which the interest is received or to which the notes are
attributable. There are exemptions for interest received by certain categories
of agent (such as some brokers and investment managers).
Where interest has been paid under deduction of UK income tax,
noteholders who are not resident in the UK may be able to recover all or part
of the tax deducted if there is an appropriate provision under an applicable
double taxation treaty.
Taxation of returns: companies within the charge to UK corporation tax
In general, noteholders which are within the charge to UK corporation
tax in respect of notes will be charged to tax and obtain relief as income on
all returns, profits or gains on, and fluctuations in value of such notes
(whether attributable to currency fluctuations or otherwise) broadly in
accordance with their statutory accounting treatment.
Taxation of returns: other noteholders
Noteholders who are not within the charge to UK corporation tax and
who are resident or ordinarily resident in the UK for tax purposes or who
carry on a trade, profession or vocation in the UK through a branch or agency
in connection with which interest on the notes is received or to which the
notes are attributable will generally be liable to UK tax on the amount of any
interest received in respect of such notes.
As the US notes are denominated in US dollars [and the euro notes are
denominated in euro, the US notes and the [series 2 notes] will not be
regarded by the Inland Revenue as constituting "qualifying corporate bonds"
within the meaning of Section 117 of the Taxation of Chargeable Gains Act
1992. Accordingly, a disposal of any such notes may give rise to a chargeable
gain or an allowable loss for the purposes of the UK taxation of chargeable
gains.
It is expected that sterling notes will be regarded by the Inland
Revenue as constituting "qualifying corporate bonds" within the meaning of
Section 117 of the Taxation of Chargeable Gains Act 1992. Accordingly, a
disposal of any such notes is not expected to give rise to a chargeable gain
or an allowable loss for the purposes of the UK taxation of chargeable gains.
There are provisions to prevent any particular gain (or loss) from
being charged (or relieved) at the same time under these provisions and also
under the provisions of the "accrued income scheme" described below.
On a disposal of notes by a noteholder, any interest which has
accrued since the last payment date may be chargeable to tax as income under
the rules of the "accrued income scheme" if that noteholder is resident or
ordinarily resident in the UK or carries on a trade in the UK through a branch
or agency to which such notes are attributable.
Stamp duty and stamp duty reserve tax
No UK stamp duty or stamp duty reserve tax is payable on the issue or
transfer of notes, whether such US note is in global or definitive form.
UK taxation of Funding 2 and the issuer
It is the opinion of UK tax counsel that Funding 2 and the issuer
will generally be subject to UK corporation tax, currently at a rate of 30%,
on the profit reflected in their
236
respective profit and loss accounts as increased by the amounts of any
non-deductible expenses or losses. In respect of Funding 2, the profit in the
profit and loss account will not exceed 0.01% of the Funding 2 available
revenue receipts. In respect of the issuer, the profit in the profit and loss
account will not exceed 0.01% of the interest on the global intercompany loan.
Any liability to UK corporation tax will be paid out of the available revenue
receipts of Funding 2 and the issuer, respectively.
UK taxation of the mortgages trustee
It is the opinion of UK tax counsel that the mortgages trustee will
have no liability to UK tax in respect of any income, profit or gain arising
under these arrangements. Accordingly, the mortgages trustee will have no
liability to UK tax in relation to amounts which it receives on behalf of
Funding 2 or the seller under the mortgages trust.
237
Material United States tax consequences
General
The following section summarizes the material United States federal
income tax consequences of the purchase, ownership and disposition of the US
notes that may be relevant to a holder of US notes that is a "United States
person" (as defined later in this section) or that otherwise is subject to US
federal income taxation on a net income basis in respect of a US note (any
such United States person or holder, a "US holder"). In general, the summary
assumes that a holder acquires a US note at original issuance and holds such
note as a capital asset. It does not purport to be a comprehensive description
of all the tax considerations that may be relevant to a decision to purchase
the US notes. In particular, it does not discuss special tax considerations
that may apply to certain types of taxpayers, including dealers in stocks,
securities or notional principal contracts; traders in securities electing to
mark to market; banks, savings and loan associations and similar financial
institutions; taxpayers whose functional currency is other than the US dollar;
taxpayers that hold a US note as part of a hedge or straddle or a conversion
transaction, within the meaning of section 1258 of the US Internal Revenue
Code of 1986, as amended (the "Code"); and subsequent purchasers of US notes.
In addition, this summary does not describe any tax consequences arising under
the laws of any taxing jurisdiction other than the US federal government.
This summary is based on the US tax laws, regulations, rulings and
decisions in effect or available as of the date of this prospectus. All of the
foregoing are subject to change, and any change may apply retroactively and
could affect the continued validity of this summary.
Sidley Austin Brown & Wood LLP, US tax advisers to the issuer ("US
tax counsel"), has prepared and reviewed this summary of material US federal
income tax consequences. As described under "- Tax status of the issuer,
Funding 2, mortgages trustee and mortgages trust", US tax counsel is of the
opinion that the mortgages trustee acting as trustee of the mortgages trust,
Funding 2, and the issuer will not be subject to US federal income tax as a
result of their contemplated activities. As described further under "-
Characterization of the US notes", US tax counsel is also of the opinion that,
although there is no authority on the treatment of instruments substantially
similar to the [US notes], and while not free from doubt, the [US notes] will
be treated as debt for US federal income tax purposes. Except as described in
the two preceding sentences (and set forth in the corresponding opinions), US
tax counsel will render no opinions relating to the notes or the parties to
the transaction.
An opinion of US tax counsel is not binding on the US Internal
Revenue Service (the "IRS") or the courts, and no rulings will be sought from
the IRS on any of the issues discussed in this section. Accordingly, the
issuer suggests that persons considering the purchase of US notes consult
their own tax advisors as to the US federal income tax consequences of the
purchase, ownership and disposition of the [US notes], including the possible
application of state, local, non-US or other tax laws, and other US tax issues
affecting the transaction.
As used in this section the term "United States person" means (a) an
individual who is a citizen or resident of the United States, (b) an entity
treated as a corporation or partnership for United States federal income tax
purposes that is organized or created under the law of the United States, a
State thereof, or the District of Columbia, (c) any estate the income of which
is subject to taxation in the United States regardless of source, and (d) any
trust if a court within the United States is able to exercise primary
supervision over its administration and one or more United States persons have
the authority to control all substantial decisions of the trust, or the trust
was in existence on August 20, 1996 and is
238
eligible to elect, and has made a valid election, to be treated as a United
States person despite not meeting those requirements.
Tax status of the issuer, Funding 2, mortgages trustee and mortgages trust
Under the transaction documents, each of the issuer, Funding 2, and
the mortgages trustee, acting in its capacity as trustee of the mortgages
trust, covenants not to engage in any activities in the United States
(directly or through agents), not to derive any income from sources within the
United States as determined under US federal income tax principles, and not to
hold any mortgaged property if doing so would cause it to be engaged or deemed
to be engaged in a trade or business within the United States as determined
under US federal income tax principles. US tax counsel is of the opinion that,
assuming compliance with the transaction documents, none of the issuer,
Funding 2 or the mortgages trustee, acting in its capacity as trustee of the
mortgages trust, will be subject to US federal income tax. No elections will
be made to treat the issuer, Funding 2, or the mortgage trust or any of their
assets as a REMIC or a FASIT (two types of securitization vehicles having a
special tax status under the Code).
Characterization of the US notes
Although there is no authority regarding the treatment of instruments
that are substantially similar to the US notes, and while not free from doubt,
it is the opinion of US tax counsel that the US notes will be treated as debt
for US federal income tax purposes. The issuer intends to treat the US notes
as indebtedness of the issuer for all purposes, including US tax purposes. The
discussion in the next section assumes this result.
The US notes will not be qualifying real property mortgage loans in
the hands of domestic savings and loan associations, real estate investment
trusts, or REMICs under sections 7701(a)(19)(C), 856(c) or 860G(a)(3) of the
Code, respectively.
Taxation of US holders of the US notes
Qualified Stated Interest and Original Issue Discount ("OID"). The
issuer intends to treat interest on the [US notes] as "qualified stated
interest" under United States Treasury regulations relating to original issue
discount (hereafter, the "OID regulations"). As a consequence, discount on the
US notes arising from an issuance at less than par will only be required to be
accrued under the OID regulations if such discount exceeds a statutorily
defined de minimis amount. Qualified stated interest, which generally must be
unconditionally payable at least annually, is taxed under a holder's normal
method of accounting. De minimis OID is included in income on a pro rata basis
as principal payments are made on the US notes. It is possible that interest
on the US notes could be treated as OID because such interest is subject to
deferral in certain limited circumstances.
A US holder of a US note issued with OID must include OID in income
over the term of such US note under a constant yield method that takes into
account the compounding of interest. Under the Code, OID is calculated and
accrued using prepayment assumptions where payments on a debt instrument may
be accelerated by reason of prepayments of other obligations securing such
debt instrument. Moreover, the legislative history to the provisions provides
that the same prepayment assumptions used to price a debt instrument be used
to calculate OID, as well as to accrue market discount and amortize premium.
Here, prepayment of the mortgage loans is not expected to alter the scheduled
principal payments on the dollar notes and accordingly, the issuer intends to
assume that the US notes will have their principal repaid according to the
schedule for purposes of accruing any OID. No representation is made that the
mortgage loans will pay on the basis of such prepayment assumption or in
accordance with any other prepayment scenario.
239
As an alternative to the above treatments, US holders may elect to
include in gross income all interest with respect to the US notes, including
stated interest, acquisition discount, OID, de minimis OID, market discount,
de minimis market discount, and unstated interest, as adjusted by any
amortizable bond premium or acquisition premium, using the constant yield
method described above.
Sales and Retirement. In general, a US holder of a US note will have
a basis in such note equal to the cost of the note to such holder, and reduced
by any payments thereon other than payments of stated interest. Upon a sale or
exchange of the note, a US holder will generally recognize gain or loss equal
to the difference between the amount realized (less any accrued interest,
which would be taxable as such) and the holder's tax basis in the note. Such
gain or loss will be long-term capital gain or loss if the US holder has held
the note for more than one year at the time of disposition. In certain
circumstances, US holders that are individuals may be entitled to preferential
treatment for net long-term capital gains. The ability of US holders to offset
capital losses against ordinary income is limited.
Alternative Characterization of the US Notes. The proper
characterization of the arrangement involving the issuer and the holders of
the US notes is not clear because there is no authority on transactions
comparable to that contemplated herein. The issuer intends to treat the US
notes as debt of the issuer for all US federal income tax purposes.
Prospective investors should consult their own tax advisors with respect to
the potential impact of an alternative characterization of the US notes for US
tax purposes. One possible alternative characterization is that the IRS could
assert that the series 1 class C notes and series 2 class C notes or any other
class of notes should be treated as equity in the issuer for US federal income
tax purposes. If the series 1 class C notes and the series 2 class C notes or
any other class of notes were treated as equity, US holders of such notes
would be treated as owning equity in a passive foreign investment company
("PFIC") which, depending on the level of ownership of such US holder and
certain other factors, might also constitute an interest in a controlled
foreign corporation for such US holder. This would have certain timing and
character consequences for US holders and could require certain elections and
disclosures that would need to be made shortly after acquisition to avoid
potentially adverse US tax consequences.
If the issuer was treated as a PFIC, unless a United States person
makes a "QEF election" or "mark to market election", such person will be
subject to a special tax regime (i) in respect of gains realized on the sale
or other disposition of its US notes, and (ii) in respect of distributions on
its US notes held for more than one taxable year to the extent those
distributions constitute "excess distributions". Although not free from doubt,
the PFIC rules should not apply to gain realized in respect of any US notes
disposed of during the same taxable year in which such US notes are acquired.
An excess distribution generally includes dividends or other distributions
received from a PFIC in any taxable year to the extent the amount of such
distributions exceeds 125% of the average distributions for the three
preceding years (or, if shorter, the investor's holding period). Because the
US notes pay interest at a floating rate, it is possible that a United States
person will receive "excess distributions" as a result of fluctuations in the
rate of three-month US dollar LIBOR over the term of the US notes. In general,
under the PFIC rules, a United States person will be required to allocate such
excess distributions and any gain realized on a sale of its US notes to each
day during the such person's holding period for the US notes, and will be
taxable at the highest rate of taxation applicable to the US notes for the
year to which the excess distribution or gain is allocable (without regard to
the such person's other items of income and loss for such taxable year) (the
"deferred tax"). The deferred tax (other than the tax on amounts allocable to
the year of disposition or receipt of the distribution) will then be increased
by an interest charge computed by reference to the rate generally applicable
to underpayments of tax (which interest charge generally will be
non-deductible interest expense for individual taxpayers).
240
Backup withholding
Backup withholding of US Federal income tax may apply to payments
made in respect of the notes to registered owners who are not "exempt
recipients" and who fail to provide certain identifying information (such as
the registered owner's taxpayer identification number) in the required manner.
Generally, individuals are not exempt recipients, whereas corporations and
certain other entities generally are exempt recipients. Payments made in
respect of the US notes to a United States person must be reported to the IRS,
unless such person is an exempt recipient or establishes an exemption. With
respect to non-United States persons investing in the [US notes], to ensure
they qualify for an exemption, the paying agent will require such beneficial
holder to provide a statement from the individual or corporation that:
o is signed under penalties of perjury by the beneficial owner of
the note,
o certifies that such owner is not a United States person, and
o provides the beneficial owner's name and address.
Generally, this statement is made on an IRS Form W-8BEN ("W-8BEN"),
which is effective for the remainder of the year of signature plus three full
calendar years unless a change in circumstances makes any information on the
form incorrect. The noteholder must inform the paying agent within 30 days of
such change and furnish a new W-8BEN. A noteholder that is not an individual
or an entity treated as a corporation for US federal income tax purposes or
that is not holding the notes on its own behalf may have substantially
increased reporting requirements. For example, a non-US partnership or non- US
trust generally must provide the certification from each of its partners or
beneficiaries along with certain additional information. Certain securities
clearing organizations, and other entities who are not beneficial owners, may
be able to provide a signed statement to the paying agent. However, in such
case, the signed statement may require a copy of the beneficial owner's W-8BEN
(or the substitute form).
In addition, upon the sale of a note to (or through) a broker, the
broker must report the sale and backup withholding on the entire purchase
price, unless (i) the broker determines that the seller is a corporation or
other exempt recipient, (ii) the seller certifies (as described above) that
such seller is a non-United States person and certain other conditions are met
or (iii) the broker has the taxpayer identification number of the recipient
properly certified as correct.
Any amounts withheld under the backup withholding rules from a
payment to a beneficial owner would be allowed as a refund or a credit against
such beneficial owner's US federal income tax provided the required
information is furnished to the IRS.
Prospective investors should consult their own tax advisors with
respect to the foregoing withholding tax requirements.
The US federal income tax discussion set forth above is included for
general information only and may not be applicable depending upon an owner's
particular situation. Holders of US notes should consult their own tax
advisors with respect to the tax consequences to them of the ownership and
disposition of US notes, including the tax consequences under state, local,
foreign and other tax laws and the possible effects of changes in federal and
other tax laws.
241
Material Jersey (Channel Islands) tax considerations
Tax status of the mortgages trustee and the mortgages trust
It is the opinion of Jersey (Channel Islands) tax counsel that the
mortgages trustee will be resident in Jersey for taxation purposes and will be
liable to income tax in Jersey at a rate of 20% in respect of the profits it
makes from acting as trustee of the mortgages trust. The mortgages trustee
will not be liable for any income tax in Jersey in respect of any income it
receives in its capacity as mortgages trustee on behalf of the beneficiaries
of the mortgages trust.
242
ERISA Considerations
The US notes are eligible for purchase by employee benefit plans and
other plans subject to the US Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and/or the provisions of Section 4975 of the Code and by
governmental plans that are subject to state, local or other federal law of
the United States that is substantially similar to ERISA or Section 4975 of
the Code, subject to consideration of the issues described in this section.
ERISA imposes certain requirements on "employee benefit plans" (as defined in
Section 3(3) of ERISA) subject to ERISA, including entities such as collective
investment funds and separate accounts whose underlying assets include the
assets of such plans (collectively, "ERISA Plans") and on those persons who
are fiduciaries with respect to ERISA Plans. Investments by ERISA Plans are
subject to ERISA's general fiduciary requirements, including the requirements
of investment prudence and diversification and the requirement that an ERISA
Plan's investments be made in accordance with the documents governing the
Plan. The prudence of a particular investment must be determined by the
responsible fiduciary of an ERISA Plan by taking into account the ERISA Plan's
particular circumstances and all of the facts and circumstances of the
investment including, but not limited to, the matters discussed under "Risk
factors" and the fact that in the future there may be no market in which such
fiduciary will be able to sell or otherwise dispose of the notes.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those plans
that are not subject to ERISA but which are subject to Section 4975 of the
Code, such as individual retirement accounts (together with ERISA Plans, the
"Plans")) and certain persons (referred to as "parties in interest" or
"disqualified persons") having certain relationships to such Plans, unless a
statutory or administrative exemption is applicable to the transaction. A
party in interest or disqualified person who engages in a prohibited
transaction may be subject to excise taxes and other penalties and liabilities
under ERISA and the Code.
The seller, the issuer, the administrator, the mortgages trustee,
Funding 2 or any other party to the transactions contemplated by the
transaction documents may be parties in interest or disqualified persons with
respect to many Plans. Prohibited transactions within the meaning of Section
406 of ERISA or Section 4975 of the Code may arise if any of the [US notes] is
acquired or held by a Plan with respect to which the issuer, the
administrator, the mortgages trustee, Funding 2 or any other party to such
transactions, is a party in interest or a disqualified person. Certain
exemptions from the prohibited transaction provisions of Section 406 of ERISA
and Section 4975 of the Code may be applicable, however, depending in part on
the type of Plan fiduciary making the decision to acquire any such notes and
the circumstances under which such decision is made. Included among these
exemptions are Prohibited Transaction Class Exemption ("PTCE") 91-38 (relating
to investments by bank collective investment funds), PTCE 84-14 (relating to
transactions effected by a "qualified professional asset manager"), PTCE 95-60
(relating to transactions involving insurance company general accounts), PTCE
90-1 (relating to investments by insurance company pooled separate accounts)
and PTCE 96-23 (relating to transactions determined by in-house asset
managers). There can be no assurance that any of these class exemptions or any
other exemption will be available with respect to any particular transaction
involving the notes.
Each purchaser and subsequent transferee of any US note will be
deemed by such purchase or acquisition of any such note to have represented
and warranted, on each day from the date on which the purchaser or transferee
acquires such note through and including the date on which the purchaser or
transferee disposes of such note, either that (A) it is not an ERISA Plan or
other Plan, an entity whose underlying assets include the assets of any such
ERISA Plan or other Plan, or a governmental plan which is subject to any
federal, state
243
or local law of the United States that is substantially similar to the
provisions of section 406 of ERISA or section 4975 of the Code or (B) its
purchase, holding and disposition of such note will not result in a prohibited
transaction under section 406 of ERISA or section 4975 of the Code (or, in the
case of a governmental plan, any substantially similar federal, state or local
law of the United States) for which an exemption is not available.
In addition, the US Department of Labor has promulgated a regulation,
29 C.F.R. Section 2510.3-101 (the "Plan Asset Regulation"), describing what
constitutes the assets of a Plan with respect to the Plan's investment in an
entity for purposes of certain provisions of ERISA, including the fiduciary
responsibility provisions of Title I of ERISA, and Section 4975 of the Code.
Under the Plan Asset Regulation, if a Plan invests in an "equity interest" of
an entity that is neither a "publicly-offered security" nor a security issued
by an investment company registered under the 1940 Act, the Plan's assets
include both the equity interest and an undivided interest in each of the
entity's underlying assets, unless one of the exceptions to such treatment
described in the Plan Asset Regulation applies. Under the Plan Asset
Regulation, a security which is in debt form may be considered an "equity
interest" if it has "substantial equity features". If the issuer were deemed
under the Plan Asset Regulation to hold plan assets by reason of a Plan's
investment in any of the [US notes], such plan assets would include an
undivided interest in the assets held by the issuer and transactions by the
issuer would be subject to the fiduciary responsibility provisions of Title I
of ERISA and the prohibited transaction provisions of ERISA and Section 4975
of the Code. [Investors should note that concerns in respect of the foregoing
may be magnified here, particularly in the case of the series 1 class C notes
and the series 2 class C notes]. In addition, in analyzing these issues with
their own counsel, prospective purchasers of notes should consider, among
other things, that, although special tax counsel has concluded that the notes
are debt for federal income tax purposes, see "Material United States tax
consequences", it is not clear whether the debt would be treated for tax
purposes as issued by the issuer. If the underlying assets of the issuer are
deemed to be Plan assets, the obligations and other responsibilities of Plan
sponsors, Plan fiduciaries and Plan administrators, and of parties in interest
and disqualified persons, under parts 1 and 4 of subtitle B of title I of
ERISA and section 4975 of the Code, as applicable, may be expanded, and there
may be an increase in their liability under these and other provisions of
ERISA and the Code (except to the extent (if any) that a favorable statutory
or administrative exemption or exception applies). In addition, various
providers of fiduciary or other services to the issuer, and any other parties
with authority or control with respect to the issuer, could be deemed to be
Plan fiduciaries or otherwise parties in interest or disqualified persons by
virtue of their provision of such services.
Any insurance company proposing to purchase any of the US notes using
the assets of its general account should consider the extent to which such
investment would be subject to the requirements of ERISA in light of the US
Supreme Court's decision in John Hancock Mutual Life Insurance Co. v. Harris
Trust and Savings Bank and under any subsequent guidance that may become
available relating to that decision. In particular, such an insurance company
should consider the retroactive and prospective exemptive relief granted by
the Department of Labor for transactions involving insurance company general
accounts in PTCE 95-60, 60 Fed. Reg. 35925 (July 12, 1995), the enactment of
Section 401(c) of ERISA by the Small Business Job Protection Act of 1996
(including, without limitation, the expiration of any relief granted
thereunder) and the regulations thereunder.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold any of the US
notes should determine whether, under the documents and instruments governing
the Plan, an investment in the notes is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment mortgage portfolio. Any Plan proposing to invest in such
notes (including any governmental plan) should consult with its counsel to
confirm, among other things, that such investment will not result in a
non-exempt prohibited
244
transaction and will satisfy the other requirements of ERISA and the Code (or,
in the case of a governmental plan, any substantially similar state, local or
other federal law).
The sale of any notes to a Plan is in no respect a representation by
the seller, the issuer, the administrator, the mortgages trustee, Funding 2 or
any other party to the transactions that such an investment meets all relevant
legal requirements with respect to investments by Plans generally or any
particular Plan, or that such an investment is appropriate for Plans generally
or any particular Plan.
245
Enforcement of foreign judgments in England and Wales
The issuer is a UK public company incorporated with limited liability
in England and Wales.
Any final and conclusive judgment of any New York State or United
States Federal Court sitting in the Borough of Manhattan in the City of New
York having jurisdiction recognized by England or Wales in respect of an
obligation of the issuer in respect of the notes for a fixed sum of money and
which has not been stayed or satisfied in full, would be enforceable by action
against the issuer in the courts of England and Wales without a re-examination
of the merits of the issues determined by the proceedings in the New York
State or United States Federal Court.
This will be the case unless the following occurs:
o the proceedings in the New York State or the United States
Federal Court in which the judgment was obtained were contrary
to the principles of natural or substantive justice;
o enforcement of the judgment is contrary to the public policy of
England or Wales;
o the judgment was obtained by fraud or duress or was based on a
clear mistake of fact;
o the judgment is of a public nature (for example, a penal or
revenue judgment);
o there has been a prior judgment in another court concerning the
same issues between the same parties as are dealt with in the
judgment of the New York State or the United States Federal
Court;
o the enforcement would contravene section 5 of the Protection of
Trading Interests Act 1980; or
o the enforcement proceedings are not instituted within six years
after the date of the judgment.
The issuer expressly submits to the non-exclusive jurisdiction of the
courts of England for the purpose of any suit, action or proceedings arising
out of this offering. A judgment by a court may be given in some cases only in
sterling.
All of the directors and executive officers of the issuer reside
outside the United States. Substantially all of the assets of all or many of
such persons are located outside the United States. As a result, it may not be
possible for the noteholders to effect service of process within the United
States upon such persons with respect to matters arising under the federal
securities laws of the United States or to enforce against them judgments
obtained in United States courts predicated upon the civil liability
provisions of such laws.
The issuer has been advised by Sidley Austin Brown & Wood, its
English counsel, that there is doubt as to the enforceability in England and
Wales, in original actions or in actions for enforcement of judgments of
United States courts, of civil liabilities predicated upon the Federal
securities laws of the United States based on the restrictions referred to
above.
246
United States legal investment considerations
None of the notes is a "mortgage related security" under the United
States Secondary Mortgage Market Enhancement Act of 1984, as amended.
The appropriate characterization of the notes under various legal
investment restrictions and, consequently, the ability of investors subject to
these restrictions to purchase such notes, is subject to significant
interpretative uncertainties. These uncertainties may adversely affect the
liquidity of, and the creation of any secondary market for, the notes.
Accordingly, investors should consult their own legal advisors in determining
whether and the extent to which the notes constitute legal investments or are
subject to investment, capital or other restrictions.
247
Experts
The balance sheet of Granite Finance Funding 2 Limited as at [o]
included in this prospectus have been so included in reliance on the report of
[o], independent accountants, given on the authority of that firm as experts
in auditing and accounting.
The balance sheet of Granite Master Issuer plc as at [o], 2005
included in this prospectus has been so included in reliance on the report of
[o], independent accountants, given on the authority of that firm as experts
in auditing and accounting.
Legal matters
Certain matters of English law and United States law regarding the
notes, including matters relating to the validity of the issuance of the
notes, will be passed upon for the issuer by Sidley Austin Brown & Wood,
London. Certain matters of United States law regarding matters of United
States federal income tax law with respect to the US notes will be passed upon
for the issuer by Sidley Austin Brown & Wood LLP, New York. Certain matters of
English law and United States law will be passed upon for the underwriters by
Allen & Overy LLP, London.
Certain matters of Jersey (Channel Islands) law regarding the
mortgages trustee will be passed upon for the mortgages trustee, respectively,
by Mourant du Feu & Jeune, London.
248
Underwriting
United States
A prospectus supplement will be prepared for each series of US notes
which will describe the method of offering being used for that series and will
set forth the identity of any of its underwriters and either the price at
which each series and class is being offered, the nature and amount of any
underwriting discounts or additional compensation to the underwriters and the
proceeds of the offering to us, or the method by which the price at which the
underwriters will sell those US notes will be determined. Each prospectus
supplement for an underwritten offering will also contain information
regarding the nature of the underwriters obligations, any material
relationship between any underwriter and us and, where appropriate,
information regarding any discounts or concessions to be allowed or reallowed
to dealers or others and any arrangements to stabilize the market for the
certificates so offered. US notes may be acquired by the underwriters for
their own accounts 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 seller and we will agree to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act.
The underwriters or their affiliates may engage in over-allotment
transactions (also known as short sales), stabilizing transactions, syndicate
covering transactions and penalty bids for the US notes under Regulation M
under the Exchange Act.
o Over-allotment transactions involve sales by an underwriter in
excess of the total offering size, which creates what is known
as a naked short position. A naked short position is more likely
to be created if the underwriters are concerned that there may
be downward pressure on the price of the notes in the open
market after pricing that could adversely affect investors who
purchase in the offering.
o Stabilizing transactions permit bids to purchase the US notes so
long as the stabilizing bids do not exceed a specified maximum.
o Short covering transactions involve purchases of the US notes in
the open market after the distribution has been completed in
order to cover naked short positions.
o Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the notes originally
sold by that syndicate member are purchased in a syndicate
covering transaction.
Similar to other purchase transactions, these transactions may have
the effect of raising or maintaining the market price of the US notes or
preventing or retarding a decline in the market price of the US notes. As a
result, these transactions may cause the prices of the US notes to be higher
than they would otherwise be in the absence of those transactions. Neither we
nor any of the underwriters represent that any underwriter will engage in any
of these transactions or that these transactions, once begun, will not be
discontinued without notice at any time.
The US notes will be registered under the United States Securities
Act. The underwriters of the US notes will agree that they will offer and sell
the US notes within the United States through their US registered
broker-dealers.
The US notes will not be offered or sold via the internet, e-mail or
through similar electronic channels except that certain underwriters may
deliver copies of this prospectus and related prospectus supplement via e-mail
to persons who have given, and not withdrawn, their prior consent to receive
copies of this prospectus and related prospectus supplement in that format.
249
United Kingdom
Each underwriter will represent and agree that:
o it has not offered or sold, and will not offer or sell any notes
to persons in the United Kingdom prior to admission of the notes
to listing in accordance with Part VI of the FSMA, except to
persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or
agent) for purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995 (as amended) or
the FSMA;
o it has only communicated or caused to be communicated and will
only communicate or cause to be communicated any invitation or
inducement to engage in investment activity (within the meaning
of section 21 of the FSMA) received by it in connection with the
issue or sale of any notes in circumstances in which section
21(1) of the FSMA does not apply to the issuer; and
o it has complied and will comply with all applicable provisions
of the FSMA with respect to anything done by it in relation to
the notes in, from or otherwise involving the United Kingdom.
[Italy
Each underwriter will represent and agree that the offering of the
notes has not been cleared by CONSOB (the Italian Securities Exchange
Commission) pursuant to Italian securities legislation and, accordingly, no
notes may be offered, sold or delivered by it, nor may copies of this
prospectus or of any other document relating to the notes be distributed by it
in the Republic of Italy, except:
(i) to professional investors (operatori qualificati), as defined in
Article 31, second paragraph, of CONSOB Regulation No. 11522 of
July 1, 1998, as amended; or
(ii) in circumstances which are exempted from the rules on
solicitation of investments pursuant to Article 100 of
Legislative Decree No. 58 of February 24, 1998 (the "Financial
Services Act") and Article 33, first paragraph, of CONSOB
Regulation No. 11971 of May 14, 1999, as amended.
Any offer, sale or delivery of the notes or distribution of copies of
this prospectus or any other document relating to the notes made by it in the
Republic of Italy under (i) or (ii) above must be:
(a) made by an investment firm, bank or financial intermediary
permitted to conduct such activities in the Republic of Italy in
accordance with the Financial Services Act and Legislative
Decree No. 385 of September 1, 1993 (the "Banking Act");
(b) in compliance with Article 129 of the Banking Act and the
implementing guidelines of the Bank of Italy, as amended from
time to time, pursuant to which the issue or the offer of
securities in the Republic of Italy may need to be preceded and
followed by an appropriate notice to be filed with the Bank of
Italy depending, inter alia, on the aggregate value of the
securities issued or offered in the Republic of Italy and their
characteristics; and
(c) in accordance with any other applicable laws and regulations.
Spain
Each underwriter will acknowledge that the notes may not be offered
or sold in Spain by means of a public offer as defined and construed by
Spanish law unless such public offer is made in compliance with the
requirements of Law 24/1988 of July 28 (as amended by Law
250
37/1998, of November 16), on the Spanish Securities Market and the Royal
Decree 291/1992, of March 27 (as amended by Royal Decree 2590/1998, of
December 7 and Royal Decree 705/2002, of July 19), on issues and public offers
for the sale of securities.
Ireland
Each underwriter will represent and agree that it has not, directly
or indirectly, offered or sold and will not, directly or indirectly, offer or
sell in Ireland any notes other than to persons whose ordinary business it is
to buy or sell shares or debentures whether as principal or agent.
The Netherlands
This prospectus may not be distributed and the notes (including
rights representing an interest in a global note) may not be offered, sold,
transferred or delivered as part of their initial distribution or at any time
thereafter, directly or indirectly, to individuals or legal entities who or
which are established, domiciled or have their residence in The Netherlands
("Dutch Residents") other than to the following entities, provided that such
entities trade or invest in securities in the conduct of a business or
profession (the following such entitles hereinafter referred to as
"Professional Market Parties" or "PMPs") and provided further that they
acquire the notes for their own account or for the account of another such
PMP;
(i) banks, insurance companies, securities firms, collective
investment institutions or pension funds that are supervised or
licensed under Dutch law;
(ii) banks or securities firms licensed or supervised in a European
Economic Area member state (other than The Netherlands) and
registered with the Dutch Central Bank (De Nederlandsche Bank
N.V.: DNB) or the Dutch Authority for the Financial Markets
(Stichting Autoriteit Financiele Markten) acting through a
branch office in The Netherlands;
251
(iii) Netherlands collective investment institutions which offer
their shares or participations exclusively to professional
investors and are not required to be supervised or licensed
under Dutch law;
(iv) The Dutch government (de Staat der Nederlanden), DNB, Dutch
regional, local or other decentralised governmental
institutions, or any international treaty organisations and
supranational organisations located in The Netherlands;
(v) Netherlands enterprises or entities with total assets of at
least (Euro)500,000,000 (or the equivalent thereof in another
currency) according to their balance sheet at the end of the
financial year preceding the date they purchase or acquire the
notes;
(vi) Netherlands enterprises, entities or individuals with net
assets (eigen vermogen) of at least (Euro)10,000,000 (or the
equivalent thereof in another currency) according to their
balance sheet at the end of the financial year preceding the
date they purchased or acquire the notes and who or which have
been active in the financial markets on average twice a month
over a period of at least two consecutive years preceding such
date;
(vii) Netherlands subsidiaries of the entities referred to under (i)
above provided such subsidiaries are subject to prudential
supervision;
(viii) Netherlands enterprises or entities that have a credit rating
from an approved rating agency or whose securities have such a
rating; and
(ix) such other Netherlands entities designated by the competent
Netherlands authorities after the date hereof by any amendment
of the applicable regulations.
The notes (whether or not offered to Dutch Residents) shall bear the
following legend:
THIS NOTE (OR ANY INTEREST HEREIN) MAY NOT BE OFFERED, SOLD,
TRANSFERRED OR DELIVERED AS PART OF ITS INITIAL DISTRIBUTION OR AT ANY TIME
THEREAFTER, DIRECTLY OR INDIRECTLY, TO INDIVIDUALS OR LEGAL ENTITIES WHO ARE
ESTABLISHED, DOMICILED OR HAVE THEIR RESIDENCE IN THE NETHERLANDS (DUTCH
RESIDENTS) OTHER THAN TO PROFESSIONAL MARKET PARTIES WITHIN THE MEANING OF THE
EXEMPTION REGULATION PURSUANT TO THE DUTCH ACT ON THE SUPERVISION OF THE
CREDIT SYSTEM 1992 THAT TRADE OR INVEST IN SECURITIES IN THE CONDUCT OF A
BUSINESS OR PROFESSION ("PMPS") AND THAT ACQUIRE THIS NOTE (OR ANY INTEREST
HEREIN) FOR THEIR OWN ACCOUNT OR FOR THE ACCOUNT OF ANOTHER PMP.
EACH DUTCH RESIDENT BY PURCHASING THIS NOTE (OR ANY INTEREST HEREIN),
WILL BE DEEMED TO HAVE REPRESENTED AND AGREED FOR THE BENEFIT OF THE ISSUER
THAT IT IS SUCH A PMP AND IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF ANOTHER PMP.
EACH HOLDER OF THIS NOTE (OR ANY INTEREST HEREIN), BY PURCHASING THIS
NOTE (OR ANY INTEREST HEREIN), WILL BE DEEMED TO HAVE REPRESENTED AND AGREED
FOR THE BENEFIT OF THE ISSUER THAT (1) THIS NOTE (OR ANY INTEREST HEREIN) MAY
NOT BE OFFERED, SOLD, TRANSFERRED OR DELIVERED TO DUTCH RESIDENTS OTHER THAN
TO A PMP ACQUIRING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF ANOTHER PMP AND
THAT (2) THE HOLDER WILL PROVIDE NOTICE OF THE TRANSFER RESTRICTIONS DESCRIBED
HEREIN TO ANY SUBSEQUENT TRANSFEREE.]
General
The underwriters have represented and agreed that they have complied
and will comply with all applicable laws and regulations in force in any
jurisdiction in which they purchase, offer, sell or deliver notes or possess
them or distribute the prospectus and will obtain any consent, approval or
permission required by them for the purchase, offer, sale or delivery by them
of notes under the laws and regulations in force in any jurisdiction to which
they are subject or in which they make such purchases, offers, sales or
deliveries and the issuer shall have no responsibility for them. Furthermore,
they will not directly or indirectly offer, sell or deliver any notes or
distribute or publish any prospectus, form of application, offering circular,
advertisement or other offering material except under circumstances that will,
to the best of its knowledge and belief, result in compliance with any
applicable laws and regulations, and all offers, sales and deliveries of US
notes by it will be made on the same terms.
Neither the issuer nor the underwriters represent that US notes may
at any time lawfully be sold in compliance with any application, registration
or other requirements in any jurisdiction, or pursuant to any exemption
available thereunder, or assume any responsibility for facilitating such sale.
The underwriters will, unless prohibited by applicable law, furnish
to each person to whom they offer or sell notes a copy of the prospectus and a
related prospectus supplement, in each case as then amended or supplemented
or, unless delivery of the prospectus is required by applicable law, inform
each such person that a copy will be made available upon request. The
underwriters are not authorized to give any information or to make any
representation not contained in the prospectus in connection with the offer
and sale of notes to which the prospectus relates.
252
Reports to noteholders
The administrator will prepare quarterly and annual reports that will
contain information about the notes. The financial information contained in
the reports will not be prepared in accordance with generally accepted
accounting principles of any jurisdiction. The reports will be sent to Cede &
Co. and Citivic, as applicable, as the holder of the notes, unless and until
individual note certificates are issued. Reports will not be sent to investors
by the administrator.
Where investors can find more information
We have filed a registration statement with the SEC for the US notes.
This prospectus is one portion of the registration statement, which also
includes additional information.
The administrator will file with the SEC all required periodic and
special SEC reports and other information about the US notes.
Investors may read and copy any reports, statements or other
information filed at the SEC's public reference room in Washington, D.C. and
may receive copies of these documents upon writing to the SEC and paying a
duplicating fee. Investors can call the SEC at 1 800 732 0330 for further
information on the operation of the public reference room. The SEC filings are
also available to the public on the SEC's Internet site at http://
www.sec.gov.
253
Listing and general information
Authorization
The issue of each series of notes from time to time has been
authorized by resolution of the board of directors of the issuer passed on
[o], 2005.
Listing of notes
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the FSMA for
the notes issued during the period of 12 months from the date of this
prospectus to be admitted to the official list. Application has also been made
to the London Stock Exchange for each class of the notes to be admitted to
trading by the London Stock Exchange. It is expected that such applications
will be granted on or about [o], 2005.
The admission of the notes to the official list will be expressed as
a percentage of their nominal amount (excluding accrued interest). It is
expected that each series and class of notes which is to be admitted to the
official list and to trading on the London Stock Exchange will be admitted
separately, as and when issued, subject only to the issue of a global note
certificate or individual note certificates representing the notes of each
series and class.
This prospectus has been prepared in compliance with the listing
rules made under Section 74 of the FSMA by the UK Listing Authority. Copies
have been delivered to the Registrar of Companies in England and Wales for
registration in accordance with Section 83 of that Act.
The issuer and the directors of the issuer, whose names appear on
page [o] of this prospectus, accept responsibility for the information
contained in this prospectus. To the best of the knowledge and belief of the
issuer and the directors of the issuer (who have taken all reasonable care to
ensure that such is the case), the information contained in this prospectus is
in accordance with the facts and does not omit anything likely to affect the
import of such information. The issuer and the directors of the issuer accept
responsibility accordingly.
Clearing and settlement
Transactions in respect of the US notes will normally be effected for
settlement in US dollars and for delivery on the third working day after the
date of the transaction. Prior to listing, however, dealings will be permitted
by the London Stock Exchange plc in accordance with its rules.
The US notes have been accepted for clearance through DTC,
Clearstream, Luxembourg and Euroclear. The appropriate CUSIP numbers, common
codes and ISINs for each series and class of notes will be specified in the
applicable prospectus supplement.
Litigation
None of the issuer or Funding 2, (the "Funding 2 Group"), Holdings,
the post-enforcement call option holder or the mortgages trustee is or has
been involved since its incorporation in any legal or arbitration proceedings
which may have, or have had since its incorporation, a significant effect upon
the financial position of the issuer, the Funding 2 Group, Holdings, the
post-enforcement call option holder or the mortgages trustee (as the case may
be) nor, so far as the issuer, the Funding 2 Group, Holdings, the
post-enforcement call option holder or the mortgages trustee (respectively) is
aware, are any such legal or arbitration proceedings pending or threatened.
254
Accounts
No statutory or non-statutory accounts within the meaning of Section
240(5) of the Companies Act 1985 in respect of any financial year of the
issuer have been prepared. So long as the notes are listed on the official
list of the UK Listing Authority and are trading by the London Stock Exchange
plc the most recently published audited annual accounts of the issuer from
time to time shall be available at the specified office of the UK principal
paying agent in London. The issuer does not publish interim accounts.
Since the date of its incorporation, the issuer has not entered into
any contracts or arrangements not being in the ordinary course of business.
Consents
[o], chartered accountants, whose address is [o], have given and have
not withdrawn their consent to the inclusion in this prospectus of their
reports on the issuer and Funding 2 and the references to their name in the
form and context in which they appear, and have authorized the contents of
that part of the listing particulars containing their report for the purposes
of Article 6(1)(e) of the UK Financial Services and Markets Act 2000 (Official
Listing of Securities) Regulations 2001.
Significant or material change
Other than as described in this prospectus, since the date of
incorporation of the issuer ([o], 2004) and Funding 2 ([o], 2004), the date of
incorporation of Holdings (December 14, 2000), the date of incorporation of
the mortgages trustee (February 14, 2001), and the date of incorporation of
the post-enforcement call option holder (December 15, 2000), there has been:
o no material adverse change in the financial position or
prospects of the issuer, Funding 2 Group, Holdings, the
post-enforcement call option holder or the mortgages trustee;
and
o no significant change in the financial or trading position of
the issuer, Funding 2 Group, Holdings, the post-enforcement call
option holder or the mortgages trustee.
Documents available
For so long as any series and class of notes issued by the issuer may
be admitted to the official list, copies of the following documents may, when
published, be inspected at the registered offices of the Issuer and from the
specified office of the principal paying agent during usual business hours, on
any weekday (public holidays excepted):
(A) the Memorandum and Articles of Association of each of the
issuer, Funding 2, Holdings, the mortgages trustee and the
post-enforcement call option holder;
(B) the balance sheet of the issuer and Funding 2 as at [o], 2004
and the independent accountants' report thereon;
(C) the most recently published financial statements of the
Issuer and Funding 2 ;
(D) a copy of the prospectus
(E) any future offering circulars, prospectuses, information
memoranda and supplement including prospective supplements
(save that a prospectus supplement relating to an unlisted
series and class of notes will be available for inspection
only by the underwriters or dealers, as applicable, specified
in the prospectus supplement or, upon proof satisfactory to
the principal paying agent or the registrar, as the case may
be, as to the identity of the holder of any note to
255
which the prospectus supplement relates) to the prospectus and
any other documents incorporated therein or therein by
reference.
(F) each of the following documents:
o the programme agreement;
o each subscription agreement
o each underwriting agreement;
o the global intercompany loan agreement;
o the mortgages trust deed;
o the mortgage sale agreement;
o the issuer deed of charge;
[o the deeds of accession to the issuer deed of charge]
[o the deeds of accession to the Funding 2 deed of
charge]
o the Funding 2 deed of charge;
o the second priority Funding 2 deed of charge;
o the Funding 2 basis rate swap agreement;
o each issuer swap agreement;
o the trust deed;
o the paying agent and agent bank agreement;
o the administration agreement;
o the cash management agreement;
o the issuer cash management agreement;
o the Funding 2 guaranteed investment contract;
o the mortgages trustee guaranteed investment contract;
o the post-enforcement call option agreement;
o the bank account agreement;
o the stand-by bank account agreement;
o the issuer bank account agreement;
o the collection bank agreement;
o the master definitions schedule;
o the start-up loan agreement;
o the corporate services agreement;
o any other deeds of accession or supplemental deeds
relating to any such documents; and
(E) independent accountant's consent letter.
256
Glossary
"$", "US$", "USD", "US dollars"
or "dollars" The lawful currency for the
time being of the United States
of America
"(Euro)" or "euro" The currency of the member
states of the European Union
that adopt the single currency
in accordance with the Treaty
of Rome of March 25, 1957,
establishing the European
Community, as amended from time
to time
"(GBP)", "sterling" or "pounds sterling" The lawful currency for the time
being of the United Kingdom of
Great Britain and Northern Ireland
"A loan tranches" The loan tranches made by the
issuer to Funding 2 under the
global intercompany loan
agreement from the proceeds of
issue of any series of class M
notes
"AA loan tranches" The loan tranches made by the
issuer to Funding 2 under the
global intercompany loan
agreement from the proceeds of
issue of any series of class B
notes
"AAA loan tranches" The loan tranches made by the
issuer to Funding 2 under the
global intercompany loan
agreement from the proceeds of
issue of any series of class A
notes
"A principal deficiency subledger" One of five subledgers on the
principal deficiency ledger which
records any principal deficiency in
respect of any A loan tranches
"AA principal deficiency subledger" One of five subledgers on the
principal deficiency ledger
which records any principal
deficiency in respect of any AA
loan tranches
"AAA principal deficiency subledger" One of five subledgers, on the
principal deficiency ledger
which specifically records any
principal deficiency in respect
of any AAA loan tranches
["accrual yield" In respect of any series and
class of notes, the yield
specified as such in the
applicable prospectus
supplement]
"additional mortgage loan" Any mortgage loan (being an
English mortgage loan or a
Scottish mortgage loan, as
applicable) which the seller
anticipated assigning to the
mortgages trustee on an
assignment date under the terms
of the mortgage sale agreement
and referenced by its mortgage
loan identifier number and
comprising the aggregate of all
principal sums, interest,
costs, charges, expenses and
other monies (including all
further advances) due or owing
with respect to that mortgage
loan under the
257
relevant mortgage conditions by a
borrower on the security of a
mortgage from time to time
outstanding or, as the context
may require, the borrower's
obligations in respect of the
same
"additional mortgage portfolio" The portfolio of additional
mortgage loans, their related
security, accrued interest and
other amounts derived from such
additional mortgage loans that
the seller, as of each cut-off
date, anticipated assigning to
the mortgages trustee from time
to time
["adjusted Funding 2 reserve
fund level" The sum of:
(a) the amount standing to the
credit of the Funding 2
reserve fund ledger; and
(b) the amount (if any) then to be
credited in accordance with
item [(B)] of the relevant
Funding 2 pre-enforcement
principal priority of
payments]
"administration fee" The fee payable by the
mortgages trustee to the
administrator on each
distribution date in payment
for the administering of the
mortgage loans by the
administrator. The
administration fee equals 0.08%
per annum (inclusive of VAT) on
the amount of the Funding 2
share of the trust property as
determined on that distribution
date in respect of the then
current trust calculation
period, but is payable on each
distribution date only to the
extent that the mortgages
trustee has sufficient funds
available to pay that amount in
accordance with the mortgages
trust allocation of revenue
receipts
"administration procedures" The administration, arrears and
enforcement policies and
procedures forming part of the
seller's policy from time to
time or, at any time when the
administrator is not also the
seller, the policies and
procedures from time to time
which would be adopted by a
reasonable, prudent mortgage
lender
"administrator" Northern Rock or such other
person as may from time to time
be appointed as administrator
of the mortgage portfolio under
the administration agreement
"administrator termination event" The meaning given to it on page
[o]
"agent bank" Citibank, N.A, acting through
its London branch at 5
Carmelite Street, London EC4Y
0PA, or such other person for
the time being acting as agent
bank under the paying agent and
agent bank agreement
"alternative clearing system" The meaning given to it on page
[o]
"alternative insurance
258
requirements" Requirements which vary the
insurance provisions of the
mortgage conditions
"anticipated cash accumulation
period" The meaning given to it on page
[o]
"arrears of interest" As at any date and for any
mortgage loan, interest (other
than capitalized interest or
accrued interest) on that
mortgage loan which is
currently due and payable on
that date
"arrears or step-up trigger event" An arrears or step-up trigger
event occurs when (i) the
outstanding principal balance
of the mortgage loans in
arrears for more than 90 days
divided by the outstanding
principal balance of all of the
mortgage loans in the mortgages
trust (expressed as a
percentage) exceeds 2% or (ii)
if the issuer fails to exercise
its option to redeem its notes
on the relevant step-up date
pursuant to the terms and
conditions of its notes
"asset trigger event" The meaning given to it on page
[o]
"assignment date" The date of assignment of any
new mortgage portfolio to the
mortgages trustee
["authorized holdings" In respect of the US notes,
$100,000 and integral multiples
of $1,000 in excess thereof or,
in relation to a series and
class of notes, as otherwise
specified in the applicable
prospectus supplement]
"authorized investments" (a) sterling gilt-edged securities;
and
(b) sterling demand or time
deposits, certificates of
deposit and short-term debt
obligations (including
commercial paper) (which may
include deposits into any
account which earns a rate of
interest related to LIBOR)
provided that in all cases
these investments have a
maturity date of 90 days or
less and mature on or before
the next following payment
date or, in relation to any
mortgages trustee bank
account, the next following
distribution date and the
short-term unsecured,
unguaranteed and
unsubordinated debt
obligations of the issuing or
guaranteeing entity or the
entity with which the demand
or time deposits are made
(being an authorized
institution under the FSMA)
are rated at least equal to
"A-1+" by Standard & Poor's,
"P-1" by Moody's and "F1+" by
Fitch or which are otherwise
acceptable to the rating
agencies (if they are notified
in advance) to maintain the
then current rating of the
notes
"authorized underpayment" The meaning given to it on page
[o]
259
"AXA" The AXA Group of Companies
"bank account agreement" The agreement dated March 26,
2001, as amended from time to
time, among the account bank,
the cash manager, the mortgages
trustee, Funding, Funding 2 and
the security trustee which
governs the operation of the
mortgages trustee bank accounts
and the Funding 2 bank accounts
"Banking Act" The meaning given to it on page
[o]
"Bank of England base rate" The Bank of England's official
dealing rate (the repo rate) as
set by the UK Monetary Policy
Committee, and in the event
that this rate ceases to exist
or becomes inappropriate as an
index for the base rate pledge,
such alternative rate or index,
which is not controlled by the
seller, that the seller
considers to be the most
appropriate in the circumstances
"Barclays" Barclays Bank plc, acting
through its office at City
Group Office, Percy Street,
Newcastle upon Tyne NE99 1JP
"Barclays collection account" The account of the
administrator held at Barclays
as may be utilized from time to
time for the purpose of
collecting amounts which are
paid to the seller on the
mortgage loans and/or the
related security
"base rate pledge" The meaning given to it on page
[o]
"Basel Committee" The meaning given to it on page
[o]
"basic terms modifications" The meaning given to it on page
[o]
"basis rate swaps" The Funding 2 basis rate swap
and the swap agreements entered
into by each of the Funding
issuers with Northern Rock plc
as swap provider to hedge
exposure to interest rates on
the mortgage loans and the
interest rates on the notes
issued by such Funding issuers
"BBB loan tranches" The loan tranches made by the
issuer to Funding 2 under the
global intercompany loan
agreement from the proceeds of
issue of any series of class C
notes
"BB loan tranche" The loan tranches made by the issuer
to Funding 2 under the global
intercompany loan from the proceeds
of the issue of any series of class
D notes
"beneficiaries" Funding, Funding 2 and the
seller, collectively as
beneficiaries of the mortgages
trust
"benefit plan investors" An investor in a pension,
profit-sharing or other
employee benefit plan, as well
as individual retirement
260
accounts and certain types of
Keogh Plans, as described
further in "ERISA
considerations"
"borrower" For each mortgage loan, the
person or persons who is or are
named and defined as such in
the relevant mortgage deed, or
the other person or persons
(other than a guarantor) who
shall become legally obligated
to comply with the borrower's
obligations under the related
mortgage
"broken amount" In respect of any series and
class of notes, an amount
specified as such (if any) in
the applicable prospectus
supplement
"bullet loan tranche" Any loan tranche which is scheduled
to be repaid in full on one payment
date. Bullet loan tranches will be
deemed to be pass-through loan
tranche if:
(a) a trigger event occurs;
(b) the issuer security is
enforced; or
(c) the Funding 2 security is
enforced
"bullet redemption date" [o]
"bullet redemption notes" Any series and class of notes
which is scheduled to be repaid
in full on one payment date.
Bullet redemption notes will be
deemed to be pass-through notes
if:
(a) a trigger event occurs; or
(b) the issuer security is enforced
"bullet repayment loan amount" The amount required to be repaid on
the schedule redemption date in
respect of a bullet loan tranche in
order to repay such loan tranche in
full;
"calculation period swap
provider amount" The meaning given to it on page
[o]
"calendar year" A year from the beginning of
January 1 to the end of
December 31
"capital balance" For any mortgage loan at any
date, the principal balance of
that mortgage loan to which the
seller applies the relevant
interest rate at which interest
on that mortgage loan accrues
"capital payment" The meaning given to it on page
[o]
"capitalized" In respect of a fee, an interest
amount or any other amount, means
that amount which is added to the
capital balance of a mortgage loan
"capitalized arrears" For any mortgage loan at any
date, interest or other amounts
which are overdue in respect of
that mortgage loan and which as
at that date have been added to
the
261
capital balance of that mortgage
loan either in accordance with the
mortgage conditions or otherwise by
arrangement with the relevant
borrower
"capitalized interest" For any mortgage loan at any
date, interest which is overdue
in respect of that mortgage
loan and which as at that date
has been added to the capital
balance of that mortgage loan
in accordance with the mortgage
conditions or otherwise by
arrangement with the relevant
borrower (excluding for the
avoidance of doubt any arrears
of interest which have not been
so capitalized on that date)
"capped rate mortgage loans" Mortgage loans that are subject
to a maximum rate of interest
and charge interest at the
lesser of the seller's standard
variable rate or the specified
capped rate
"cash accumulation amount" The meaning given to it on page
[o]
"cash accumulation ledger" A ledger maintained by the cash
manager to record the amount
accumulated by Funding 2 from time
to time to pay the relevant
accumulation amounts
"cash accumulation ledger
amount" The meaning given to it on page
[o]
"cash accumulation liability" The meaning given to it on page
[o]
"cash accumulation shortfall" means at any time that the cash
accumulation ledger amount is
less than the cash accumulation
liability;
"cash accumulation period" The meaning given to it on page
[o]
"cash accumulation requirement" The meaning given to it on page
[o]
"cashback mortgage loan" A type of mortgage loan, the
primary characteristics of
which are described on page [o]
"CAT standard mortgage loan" A type of flexible mortgage
loan, the primary
characteristics of which are
described on page [o]
"CCA" The Consumer Credit Act 1974
"Citibank, N.A." Citibank, N.A., acting through
its London branch at 5
Carmelite Street, London EC4Y
0PA
"class" In relation to the notes or the
noteholders, the class A notes, the
class B notes, the class M notes,
the class C notes or the class D
notes, as the context requires
"class" [Any of the class A notes, the
class B notes, the class M notes,
the class C notes and the class D
notes
262
"class A available subordinated
amount" The meaning given to it on page
[o]
"class A noteholders" The holders of the class A notes
"class A required subordinated
amount" The meaning given to it on page
[o]
"class B available subordinated
amount" The meaning given to it on page
[o]
"class B noteholders" The holders of the class B notes
"class B required subordinated
amount" The meaning given to it on page
[o]
"class C available subordinated
amount" The meaning given to it on page
[o]
"class C noteholders" The holders of the class C notes
"class C required subordinated
amount" The meaning given to it on page [o]
"class D available subordinated
amount" The meaning given to it on page [o]
"class D noteholders" The holders of the class D notes
"class D required subordinated
amount" The meaning given to it on page [o]
"class M available
subordinated amount" The meaning given to it on page [o]
"class M noteholders" The holders of the class M notes
"class M required subordinated The meaning given to it on page [o]
amount"
"clearing agency" An agency registered under the
provisions of section 17A of the
Exchange Act
"clearing corporation" A corporation within the meaning of
the New York Uniform Commercial
Code
263
"Clearstream, Luxembourg" Clearstream Banking, societe
anonyme
"closing date" The closing date for the issuance of
any series and class of notes as
specified in the prospectus
supplement for such notes.
"CML" The Council of Mortgage Lenders
of which the seller is a member
"CML Code" The meaning given to it on page [o]
"Code" United States Internal Revenue
Code of 1986, as amended
"collection account" The Barclays collection
account, the Lloyds TSB
collection account and each
other account in the name of
the administrator which is from
time to time used for the
purpose of collecting, directly
or indirectly, monies due in
respect of mortgage loans
and/or the related security
"collection banks" Barclays Bank plc acting
through its branch at Percy
Street, Newcastle upon Tyne
NE99 1JP and Lloyds TSB Bank
plc acting through its branch
at City Office, Bailey Drive,
Gillingham Business Park, Kent
ME8 0LS and each other bank as
may be appointed as such under
and in accordance with the
transaction documents
"collection bank agreement" The agreement dated March 26,
2001, as amended from time to
time, among the mortgages
trustee, Funding, Funding 2,
the seller, the administrator,
the security trustee and the
collection banks
"combination mortgage loan" A mortgage loan that combines
the features of a repayment
mortgage loan and an
interest-only loan in that only
part of the principal of the
mortgage loan will be repaid by
way of monthly payments
"combined credit balance" The meaning given to it on page
[o]
"combined debit balance" The meaning given to it on page
[o]
"Connections Benefit" The meaning given to it on page
[o]
"Connections combined credit
balance" The meaning given to it on page
[o]
"Connections debit balance" The meaning given to it on page
[o]
"Connections Interest" The meaning given to it on page
[o]
"Connections mortgage loan" A type of flexible mortgage
loan, the primary
characteristics of which are
described on page [o]
264
"contribution" The consideration in the form
of cash provided to the
mortgages trustee by any
beneficiary in respect of the
share of that beneficiary in
the trust property under the
mortgages trust deed, being any
of an initial contribution, a
further contribution or a
deferred contribution
"contribution date" Any date (including, in
connection with the issuance of
the notes, the initial closing
date) on which Funding 2 or
Funding makes a further
contribution to the mortgages
trustee in connection with the
purchase of an increased
beneficial interest in the
trust property, on which date
the mortgages trustee will also
pay to the seller an initial
consideration equal to the
amount of such further
contribution
"contributions ledger" The ledger on which
contributions to the mortgages
trust made by Funding 2 and the
seller to the mortgages trustee
and the application of such
contributions in accordance
with the terms of the mortgages
trust deed shall be recorded
"controlled amortization amount" On any payment date before the
occurrence of a trigger event
or the enforcement of the
issuer security for any note or
series and class of notes which
is a controlled amortization
note or series and class of
such notes, the maximum
aggregate principal amount
which may be repaid by the
issuer to the relevant
noteholder or noteholders of
such series and class on that
payment date in accordance with
the relevant note
"controlled amortization dates" The scheduled payment dates for
any series and class of notes
which are controlled
amortization notes, which will
be set out in the prospectus
supplement related to such
series and class of notes
"controlled amortization loan
amount" On any payment date before the
occurrence of a trigger event
or the enforcement of the [o]
security, for any controlled
amortization loan tranche, the
maximum aggregate principal
amount which may be repaid by
Funding 2 to the issuer on that
payment date (which will be
equal to the aggregate of the
controlled amortization amounts
due on that payment date under
the controlled amortization
notes issued by the issuer)
"controlled amortization loan
tranche" Any loan tranche which by its
term imposes a limit on the
amount of principal which may
be repaid on such loan tranche
on any payment date prior to
the occurrence of a trigger
event or the enforcement of the
Funding 2 security.
"controlled amortization note" Any series and class of notes
the conditions of which impose
a limit on the amount of
principal which may be
265
repaid on such note on each payment
date. Controlled amortization
notes will be deemed to be
pass-through notes if:
(a) a trigger event occurs; or
(b) the issuer security is
enforced
"controlled amortization
requirement" The meaning given to it on page
[o]
"core terms" The main subject matter of the
contract
"corporate services agreement" With respect to the issuer, the
corporate services agreement,
as amended from time to time,
entered into on or before the
Funding 2 program date among,
inter alios, the corporate
services provider, Holdings,
the post enforcement call
option holder and the issuer,
for the provision by the
corporate services provider of
certain corporate services, and
with respect to Funding 2 and
the mortgages trustee, the
corporate services agreement
entered into on March 26, 2001,
as amended from time to time,
among, inter alios, the
corporate services provider,
Funding, Funding 2 and the
mortgages trustee for the
provision by the corporate
services provider of certain
corporate services
"corporate services provider" With respect to the issuer, Law
Debenture Corporate Services
Limited, and with respect to
Funding 2, Mourant & Co.
Capital (SPV) Limited, and with
respect to the mortgages
trustee, Mourant & Co.
Limited, or any other person or
persons for the time being
acting as corporate services
provider under the corporate
services agreement
"CPR" or "constant payment rate" Unless otherwise defined in
this prospectus, represents a
constant rate of scheduled and
unscheduled repayments on the
mortgage loans in the mortgage
portfolio each month relative
to the aggregate principal
amount outstanding of those
mortgage loans
"crystallize" When a floating charge becomes
a fixed charge
"current balance" For any mortgage loan as at any
given date, the aggregate (but
avoiding double counting) of:
(1) the original principal amount
advanced to the relevant
borrower and any further
amount advanced on or before
the given date to the relevant
borrower secured or intended
to be secured by the related
mortgage; and
(2) the amount of any re-draw
under any flexible mortgage
loan or any further draw under
any personal secured loan
secured or intended to be
secured by the related
mortgage; and
266
(3) any interest, disbursement,
legal expense, fee, charge,
rent, service charge, premium
or payment which has been
properly capitalized in
accordance with the relevant
mortgage conditions or with
the relevant borrower's
consent and added to the
amounts secured or intended to
be secured by that mortgage
loan (including interest
capitalized on any re-draw
under a flexible mortgage
loan); and
(4) any other amount (other than
unpaid interest) which is due
or accrued (whether or not
due) and which has not been
paid by the relevant borrower
and has not been capitalized
in accordance with the
relevant mortgage conditions
or with the relevant
borrower's consent but which
is secured or intended to be
secured by that mortgage loan
as at the end of the London
business day immediately
preceding that given date less
any repayment or payment of
any of the foregoing made on
or before the end of the
London business day
immediately preceding that
given date and excluding any
retentions made but not
released and any further
advances committed to be made
but not made by the end of the
London business day
immediately preceding that
given date
"current Funding 2 share" The amount of trust property
beneficially owned by Funding 2
from time to time, as described
further in "The mortgages trust"
"current Funding 2 share
percentage" The percentage share of Funding 2's
interest in the trust property from
time to time, as described further
in "The mortgages trust"
"current seller share" The amount of trust property
beneficially owned by the seller
from time to time, as described
further in "The mortgages trust"
"current seller share percentage" The percentage share of the seller's
interest in the trust property from
time to time, as described further
in "The mortgages trust"
"cut-off date" The cut-off date in relation
to the issuance of any series and
class of notes, which will be
specified in the prospectus
supplement for such notes.
"cut-off date mortgage portfolio" As of any cut-off date, the
initial mortgage portfolio and
the further mortgage portfolios
(taking account of, among other
things, amortization of
mortgage loans in that
portfolio and the addition
and/or removal of any
267
mortgage loans to or from that
portfolio since March 26, 2001)
combined with the additional mortgage
portfolio
"dealers" Barclays Bank PLC, Citigroup Global
Markets Limited and Merrill Lynch
International and any other dealers
appointed from time to time in
accordance with the programme
agreement
"deferred contribution" The consideration in the form
of cash payable by Funding 2 to
the mortgages trustee from time
to time in respect of the
Funding 2 share of the trust
property pursuant to and in
accordance with the mortgages
trust deed and/or the Funding 2
deed of charge, which
contribution will fund the
payment by the mortgages
trustee to the seller of the
deferred purchase price payable
by the mortgages trustee to the
seller from time to time
pursuant to and in accordance
with the mortgage sale agreement
"deferred purchase price" That portion of the purchase
price for the initial mortgage
portfolio and of the purchase
price (if any) of any other
mortgage portfolio assigned to
the mortgages trustee which was
not paid to the seller on the
initial closing date or (in the
case of any other mortgage
portfolio) the relevant
assignment date and which is to
be paid by the mortgages
trustee from time to time to
the seller from deferred
contributions received by the
mortgages trustee from Funding
2 and otherwise in accordance
with the mortgage sale agreement
"determination date" In respect of any series and
class of notes, the date(s)
specified as such in the
applicable prospectus supplement
"determination period" Each period from (and
including) a determination date
to (but excluding) the next
determination date (including,
where either the interest
commencement date or the final
payment date is not a
determination date, the period
commencing on the first
determination date prior to,
and ending on the first
determination date falling
after, such date)
"direct debit" A payment made directly by a
borrower from its bank account
to a collection account
"discount rate mortgage loan" A type of mortgage loan, the
primary characteristics of
which are described on page [o]
"distribution date" The date on which the mortgages
trust terminates and the London
business day determined by the
cash manager falling no later
than 6 business days after each
trust determination date
"DTC" The Depository Trust Company
268
"DTI" The UK Department of Trade and
Industry
"dual currency interest notes" A note, the interest basis of which
is specified in the applicable
prospectus supplement as being dual
currency interest
"due and payable" A loan tranche shall become due
and payable on the earlier to
occur of:
(1) the date [set forth in the
prospectus supplement related
to the series and class of
notes supported by such loan
tranche];
(2) the date upon which a trigger
event occurs;
(3) the date upon which a note
acceleration notice in respect
of the related series and
class of notes is served on
the issuer under the issuer
deed of charge;
(4) the date upon which an issuer
enforcement notice is served
on the issuer under the issuer
deed of charge;
(5) the date upon which a global
intercompany loan enforcement
notice is served on Funding 2
under the Funding 2 deed of
charge; and
(6) the date upon which a step-up
date occurs in relation to the
relevant issuer loan tranche
In each case, when a loan
tranche becomes due and
payable it shall continue to
be due and payable until it is
fully repaid. If there are
insufficient funds available
to repay on a loan tranche on
the payment date upon which
that loan tranche is due and
payable, then the shortfall
will be repaid on subsequent
payment dates from Funding 2
available principal receipts
until that loan tranche is
fully repaid
"English mortgage loan" Each mortgage loan secured over
a property located in England
or Wales
"ERISA" The United States Employee
Retirement Income Security Act
of 1974, as amended. See
further "ERISA considerations"
"ESIS" The meaning given to it on page
[o]
["EURIBOR" EURIBOR will be determined by the
agent bank on the following basis:
(1) on the applicable interest
determination date the agent
bank will determine the
offered quotation to leading
banks for deposits in euro for
a period equal to the relevant
interest period.
269
This will be determined by
reference to the display as
quoted on the Dow
Jones/Telerate Screen No. 248.
If the Dow Jones/Telerate
Screen No. 248 stops providing
these quotations, the
replacement service for the
purposes of displaying this
information will be used.
If the replacement service
stops displaying the
information, another page as
determined by the issuer with
the approval of the note
trustee will be used.
In each of these cases, the
determination will be made as
at or about 11:00 a.m.,
Brussels time, on that date.
This is called the screen rate
for the euro notes;
(2) if, on any of these interest
determination dates, the
screen rate is unavailable,
the agent bank will:
request the principal London
office of each of the
reference banks to provide the
agent bank with its offered
quotation to prime banks for
euro deposits of the
equivalent amount, and for a
time equal to the relevant
interest period, in the
Eurozone inter-bank market as
at or about 11:00 a.m.
(Brussels time); and
calculate the arithmetic mean,
rounded upwards to five
decimal places, of those
quotations;
(3) if on any of these interest
determination dates the screen
rate is unavailable and only
two or three of the reference
banks provide offered
quotations, the relevant rate
for that interest period will
be the arithmetic mean of the
quotations as calculated in
(2);
and
(4) if fewer than two reference
banks provide quotations, the
agent bank will consult with
the note trustee and the
issuer for the purpose of
agreeing a total of two banks
to provide these quotations
and the relevant rate for that
interest period will be the
arithmetic mean of the
quotations as calculated in
(2). If none of these banks
agree, then the relevant rate
for that interest period will
be the rate in effect for the
last preceding interest period
for which (1) or (2) was
applicable]
"Euroclear" The Euroclear system
"Euroclear operator" Euroclear Bank S.A./N.V., as
operator of the Euroclear system
270
"eurozone" The region comprised of the
member states of the European
Union that adopt the single
currency in accordance with the
Treaty of Rome of March 25,
1957, establishing the European
Community, as amended from time
to time
"event of default" as the context requires, any of
the following:
(a) for any notes, an event of
default under the terms and
condition of those notes; or
(b) for the global intercompany
loan, the occurrence of an
event of default under the
terms and conditions of the
global intercompany loan
agreement
"Exchange Act" The United States Securities
Exchange Act of 1934, as amended
"existing borrowers' re-fix rate" At any date, the fixed rate
then being offered to those of
the seller's existing borrowers
who at that date are seeking to
fix the rate of interest
payable under their existing
fixed rate mortgage loans
"filed plan" With respect to the
identification of a property, a
plan retained at H.M. Land
Registry indicating the
location of the related land
"final deferred contribution" An amount equal to the
aggregate amount standing to
the credit of the Funding 2
bank accounts after making any
payments ranking in priority,
subject to and in accordance
with the relevant Funding 2
priority of payments
"final maturity date" In respect of any series and
class of notes, the date
specified in the related
prospectus supplement
"final repayment date" In relation to any loan tranche
under the global intercompany
loan, such final repayment date
identified as such for that
loan tranche in the related
loan tranche supplement
"Financial Services Act" The Legislative Decree No.58 of
February 24, 1998 of the
Republic of Italy
"Fitch" Fitch Ratings Ltd., including
any successor to its ratings
business
"fixed coupon amount" In respect of any series and
class of notes, the amount
specified as such (if any) in
the applicable prospectus
supplement
"fixed rate mortgage loan" A mortgage loan which is
subject to a fixed rate of
interest set by reference to a
predetermined rate or series of
rates for a fixed period or
periods or is subject to a
maximum rate of interest (and
charge interest at
271
the lesser of a variable rate and
such maximum rate) for a fixed
period or periods (and shall,
for the avoidance of doubt,
exclude variable rate mortgage
loans and flexible mortgage
loans save for flexible
mortgage loans which are, at
the relevant time, subject to
such fixed rates of interest or
such maximum rates of interest
arrangements and shall also
exclude any fixed rate mortgage
loans which have become
re-fixed mortgage loans since
the immediately preceding
payment date)
"fixed rate note" A note, the interest basis of
which is specified in the
applicable prospectus
supplement as being fixed rate
"fixed rate period" For any fixed rate mortgage
loan or other mortgage loan
offered with a fixed rate, the
period agreed between the
borrower and the seller as set
out under the mortgage
conditions, during which the
interest rate applicable to
that mortgage loan will remain
fixed and after which the
borrower may be entitled to
apply for a new fixed rate of
interest
"fixed security" A form of security which
means that the chargor is not
allowed to deal with the assets
subject to the charge without the
consent of the chargee
"flexible capped rate mortgage
loans" Flexible mortgage loans with
the same basic features as a
Together mortgage loan (other
than allowing the borrower to
obtain an unsecured loan) which
are subject to a maximum rate
of interest for a specified
period of time, and at the
expiration of that period are
generally subject to the
seller's standard variable rate
"flexible cash re-draw capacity" The meaning given to it on page
[o]
"flexible fixed rate mortgage loan" Flexible mortgage loans with
the same basic features as a
Together mortgage loan (other
than allowing the borrower to
obtain an unsecured loan) which
are subject to a fixed rate of
interest for a specified period
of time, and at the expiration
of that period are generally
subject to the seller's
standard variable rate
"flexible mortgage loan" A type of mortgage loan product
that typically incorporates
features that give the borrower
options (which may be subject
to certain conditions) to,
among other things, make
further drawings on the
mortgage loan account, and/or
to overpay or underpay interest
and principal in a given month
and/or to take a payment
holiday (and shall, for the
avoidance of doubt, exclude:
(i) flexible mortgage loans
which are, at the relevant
time, subject to fixed rates of
interest set by reference to a
pre-determined interest rate or
series of interest rates for a
fixed period or are subject to
a maximum rate of interest (and
charge interest at the lesser
of a
272
variable rate and such maximum rate)
for a fixed period or periods (which
shall, for such fixed period,
constitute fixed mortgage
loans); and (ii) variable rate
mortgage loans). The types of
flexible mortgage loan products
currently offered by the seller
are described under "The
mortgage loans -
Characteristics of the mortgage
loans - Flexible mortgage loans"
"flexible tracker rate mortgage
loans" A type of flexible mortgage
loan, the primary
characteristics of which are
described on page [o]
"floating rate note" A note, the interest basis of
which is specified in the
applicable prospectus
supplement as being floating
rate
"floating security" A form of security which is not
attached to specific assets but
which "floats" over a class of
them and which allows the
chargor to deal with those
assets in the every day course
of its business, up until the
point that the floating
security is enforced if other
specified events occur (most
often a default), at which
point it crystallizes into a
fixed security
"FSA" The UK Financial Services
Authority
"FSMA" The UK Financial Services and
Markets Act 2000
"Funding" Granite Finance Funding Limited
"Funding beneficiary deed" The beneficiary deed entered
into on the Funding 2 program
date, as amended from time to
time, among Funding, Funding 2,
the security trustee, the
Funding 2 security trustee and
[others]
"Funding bridge loan agreement" An arrangement to be entered
into between, amongst others,
Funding, Funding 2, the
security trustee and the
Funding 2 security trustee to
provide for the making of loans
from Funding to Funding 2 with
the proceeds of a residuals
bridge loan tranche.
"Funding intercompany loans" The intercompany loans between
Funding and each of the Funding
issuers
"Funding issuers" The several note issuers each
of which is a subsidiary of
Funding and has lent the
proceeds of notes issued by it
to Funding pursuant to a
separate intercompany loan, the
repayment of which is secured
by Funding's beneficial
interest in the mortgages trust.
"Funding security" [o]
"Funding share" The current Funding share of the
property calculated in the manner
set out in "The Mortgage Trust -
Funding share of the trust
property"
273
"Funding share/Funding 2
share/seller share ledger" The ledger maintained by the
cash manager, on behalf of the
mortgages trustee and the
beneficiaries, to record the
current Funding 2 share, the
current Funding 2 share
percentage, the current seller
share and the current seller
share percentage of the trust
property
"Funding share percentage" The current Funding share
percentage of the trust
property calculated in the
manner set out in "The
mortgages trust - Funding share
of the trust property"
"Funding 2" Granite Finance Funding 2
Limited
"Funding 2 available principal
receipts" The meaning given to it on page
[o]
"Funding 2 available revenue
receipts" The meaning given to it on page
[o]
"Funding 2 bank accounts" The Funding 2 GIC account, and
the Funding 2 transaction
account, each as further
described under "Funding 2's
bank accounts" and each other
bank account (if any) opened in
the name of Funding 2
"Funding 2 basis rate swap" The swap documented under the
Funding 2 basis rate swap
agreement, as described further
under "The swap agreements -
Funding 2 basis rate swap"
"Funding 2 basis rate swap
agreement" The ISDA master agreement, the
schedule thereto and the
confirmation thereunder to be
entered into on or before the
Funding 2 program date, and any
credit support annex entered
into at any time, as amended
from time to time, among
[Funding 2], the Funding 2
basis rate swap provider and
the note trustee, which
includes any additional and/or
replacement swap agreement
entered into by [Funding 2]
from time to time in connection
with the global intercompany
loan
"Funding 2 basis rate swap
provider" Northern Rock and/or, as
applicable, any other basis rate
swap provider appointed from time
to time in accordance with the
transaction documents
"Funding 2 basis rate swap
excluded termination amount" means, in relation to the Funding 2
basis rate swap agreement, an
amount equal to:
(a) the amount of any termination
payment due and payable to the
Funding 2 basis rate swap provider
as a result of a Funding 2 basis
rate swap provider default; less
(b) the amount (if any) received by
Funding 2 from a replacement swap
provider upon entry by Funding 2
into an agreement with such
replacement swap
274
provider to replace the Funding 2
basis rate swap agreement which has
terminated as a result of such
Funding 2 basis rate swap provider
default
"Funding 2 charged property" The property, assets and
undertaking of Funding 2 which
from time to time are or are
expressed to be mortgaged,
charged, assigned, pledged or
otherwise encumbered to, or in
favor of the security trustee
for itself and for the Funding
2 secured creditors under the
Funding 2 deed of charge
"Funding 2 deed of charge" The deed of charge entered into
on the Funding 2 program date,
as amended and restated from
time to time, among Funding 2,
the Funding 2 security trustee,
and the Funding 2 secured
creditors as at the Funding 2
program date including any
deeds of accession or
supplements thereto (including,
where the context admits and
for the avoidance of doubt, the
second priority Funding 2 deed
of charge)
"Funding 2 expense subledger" The ledger on which receipts
and payments of Funding 2
revenue receipts allocable to
the payment of expenses will be
recorded by the cash manager
"Funding 2 guaranteed investment
contract" The guaranteed investment
contract entered into on
January [ ], 2005, as amended,
restated, supplemented or
otherwise modified from time to
time, among Funding 2, the
Funding 2 GIC provider and
others, in each case under
which or the Funding 2 GIC
provider, agrees to pay Funding
2 a guaranteed rate of interest
on the balance from time to
time of the Funding 2 GIC
account
"Funding 2 liquidity facility" means a liquidity facility
entered into at any time after
the Funding 2 program date
"Funding 2 liquidity facility
provider" means the provider of the
Funding 2 liquidity facility
"Funding 2 liquidity facility
subordinated amounts" The amounts specified as such
in the Funding 2 liquidity
facility agreement (if any)
"Funding 2 liquidity facility
principal payment" The payments specified as such
in the Funding 2 liquidity
facility agreement (if any)
"Funding 2 liquidity reserve
rating event" The meaning given to it on page
[o]
"Funding 2 liquidity reserve fund" The liquidity reserve fund in
Funding 2's name which Funding
2 will be required to establish
if the long-term, unsecured,
unsubordinated and unguaranteed
debt
275
obligations of the seller
cease to be rated at least A3
by Moody's or A- by Fitch
(unless Moody's or Fitch, as
applicable, confirms that the
then current ratings of the
notes will not be adversely
affected) and, if the context
so requires, any liquidity
reserve fund required to be
established by Funding 2 with
respect to any other issuer.
The issuer liquidity reserve
fund, if any, will be funded up
to the issuer liquidity reserve
required amount
"Funding 2 liquidity reserve
ledger" A ledger maintained by the cash
manager to record the balance
from time to time of the issuer
liquidity reserve fund, if any
and, if the context so
requires, any ledger maintained
by Funding 2 with respect to
the issuer liquidity reserve
fund of any other issuer
"Funding 2 liquidity reserve
principal amount" The meaning given to it on page
[o]
"Funding 2 liquidity reserve
principal payment" The meaning given to it on page
[o]
"Funding 2 liquidity reserve
rating event" The meaning given to it on page
[o]
"Funding 2 liquidity reserve
required amount" The meaning given to it on page
[o]
"Funding 2 post-enforcement
priority of payments" The provisions and the order of
priority set out in a schedule
to the Funding 2 deed of charge
in which Funding 2 available
revenue receipts, Funding 2
available principal receipts
and all other monies, income,
receipts and recoveries of
Funding 2 or the security
trustee or any receiver of
Funding 2 and the proceeds of
enforcement of the Funding 2
security are to be applied
following service of a global
intercompany loan enforcement
notice or otherwise following
an enforcement of the Funding 2
security, as described under
"Cashflows - Distribution of
Funding 2 available principal
receipts and Funding 2
available revenue receipts
following enforcement of the
Funding 2 security"
"Funding 2 pre-enforcement
principal priority of payments" The provisions and the order of
priority of payments set out in
a schedule to the Funding 2
deed of charge in which Funding
2 available principal receipts
will be applied until
enforcement of the Funding 2
security, which is as described
under "Cashflows - Distribution
of Funding 2 available
principal receipts prior to
enforcement of the Funding 2
security"
"Funding 2 pre-enforcement
revenue priority of payments" The provisions and the order of
priority of payments set out in
a schedule to the Funding 2
deed of charge in
276
which Funding 2 available revenue
receipts will be applied until
enforcement of the Funding 2
security, which is as described
under "Cashflows - Distribution
of Funding 2 available revenue
receipts"
"Funding 2 principal deficiency
ledger" The ledger maintained by the
Funding 2 cash manager in the
name of the issuer which will
be established on the Funding 2
program date and will be
sub-divided into subledgers
corresponding to the classes of
notes issued by the issuer in
order to record losses
allocated to the global
intercompany loan of the issuer
which are to be applied to the
notes or the application of
issuer available principal
receipts of the issuer in
paying interest on the notes
and certain amounts ranking in
priority thereto in accordance
with the issuer pre-enforcement
revenue priority of payments
"Funding 2 principal ledger" The ledger on which receipts
and payments of Funding 2
principal receipts will be
recorded by the cash manager
"Funding 2 principal receipts" The mortgage trustee principal
receipts paid by the mortgages
trustee to Funding 2 on each
distribution date
"Funding 2 priority of payments" As the context requires, any of
the Funding 2 pre-enforcement
revenue priority of payments,
the Funding 2 pre-enforcement
principal priority of payments
and/or the Funding 2
post-enforcement priority of
payments
"Funding 2 reserve adjustment
date" A payment date in respect of
which (i) a Funding 2 reserve
decrease has occurred on the
immediately preceding payment
date and (ii) such immediately
preceding payment date was not
also a Funding 2 reserve
adjustment date;
"Funding 2 reserve decrease" A reduction in the amount
standing to the credit of the
Funding 2 reserve ledger
resulting from the application
of such amount to the payment
of items in accordance with the
Funding 2 pre-enforcement
revenue priority of payments
(except items [(A)- (D))] or
the Funding 2 post-enforcement
priority of payments (except
items [(A)-(C))]
"Funding 2 reserve fund" The reserve fund established in
the name of Funding 2 on
January [ ], 2005 up to an
amount not exceeding the
Funding 2 reserve required
amount as further described
under "Credit structure -
Funding 2 reserve fund"
"Funding 2 reserve fund
threshold" On any date, the lesser of:
(a) the Funding 2 reserve fund
required amount; or
277
(b) the highest amount which the
adjusted Funding 2 reserve
fund level has been since the
first payment date upon which
interest is due and payable in
respect of loan tranches
advanced or the closing date
relating to the then most
recent issue of notes
"Funding 2 reserve ledger" The ledger maintained by the
cash manager in the name of
Funding 2 to record the amount
credited to the Funding 2
reserve fund on the Funding 2
program date, and subsequent
withdrawals from and deposits
into the Funding 2 reserve fund
"Funding 2 reserve principal
payment" The meaning given to it on page
[o]
"Funding 2 reserve required
amount" As of any date of determination
an amount calculated in
accordance with the formula set
out on page [o]
"Funding 2 revenue ledger" The ledger on which the cash
manager records all monies
received and paid out by
Funding 2 during an interest
period other than the Funding 2
principal receipts
"Funding 2 secured creditors" The security trustee (and any
receiver of Funding 2 appointed
under the Funding 2 deed of
charge), the issuer, the
corporate services provider in
respect of Funding 2, the
account bank, the Funding 2 GIC
provider, the mortgages
trustee, any start-up loan
provider, the cash manager and
any new Funding 2 secured
creditor who accedes to the
Funding 2 deed of charge from
time to time under a deed of
accession or supplemental deed
"Funding 2 security" The mortgages, charges,
assignments, pledges and/or any
other security created by
Funding 2 under or pursuant to
the Funding 2 deed of charge in
favor of the security trustee
for the benefit of the Funding
2 secured creditors
"Funding 2 security trustee" The Bank of New York, acting
through its office at 48th
floor, One Canada Square,
London E14 5AL or such other
person for the time being
acting as Funding 2 security
trustee under the Funding 2
deed of charge
"Funding 2 share" The current Funding 2 share of
the trust property calculated
in accordance with the formula
set out on pages [o], [o] and
[o]
"Funding 2 share percentage" The current Funding 2 share
percentage of the trust
property calculated in
accordance with the formula set
out on pages [o] and [o]
278
"Funding 2 step-up trigger event" A Funding 2 step-up trigger
event occurs if the issuer
fails to exercise its option to
redeem any series and class of
notes on the relevant step-up
date pursuant to the terms and
conditions of its notes
"Funding 2 transaction account" The account in the name of
Funding 2 held with the account
bank and maintained subject to
the terms of the bank account
agreement and the Funding 2
deed of charge, or any
additional or replacement
account as may, for the time
being, be in place with the
prior consent of the security
trustee
"Funding 2 transaction
documents" Each of the following documents:
(a) the mortgages trust deed;
(b) the mortgage sale agreement;
(c) the administration agreement;
(d) the Funding 2 deed of charge;
(e) the second priority Funding 2
deed of charge;
(f) the corporate services
agreement;
(g) the bank account agreement;
(h) the Funding 2 guaranteed
investment contract;
(i) the cash management agreement;
(j) the start-up loan agreements;
(k) the collection bank agreement;
(l) the global intercompany loan
agreement;
(m) the beneficiary trust deed;
(n) each other deed, document,
agreement, instrument or
certificate entered into or to
be entered into by Funding 2
under or in connection with
any of the documents set out
in paragraphs (a) through (p)
above or the transactions
contemplated in them
"further advance" For any mortgage loan, any
advance of further money to the
relevant borrower following the
making of the initial advance
of monies under the mortgage
and which is secured by the
same mortgage, excluding the
amount of any retention in
respect of the initial advance
and excluding any re-draw in
respect of any flexible
mortgage loan or further draw
in respect of any personal
secured loan
"further contribution" The consideration in the form
of cash payable by any
beneficiary to the mortgages
trustee to increase the Funding
2 share or, as the case may be,
the seller share of the trust
property pursuant to and in
accordance with the terms of
the mortgages trust deed,
279
but excluding any initial
contribution or deferred
contribution paid by Funding 2
"further draw" The meaning given to it on page
[o]
"further draw capacity" The meaning given to it on page
[o]
"further draw ledger" The ledger on which further
draws under personal secured
loans will be recorded by the
cash manager
"further mortgage loan" Any mortgage loan which was
assigned by the seller to the
mortgages trustee after March
26, 2001 and before the
assignment date on [o], 2004
under the terms of the mortgage
sale agreement and referenced
by its mortgage loan identifier
number and comprising the
aggregate of all principal
sums, interest, costs, charges,
expenses and other monies
(including all further
advances) due or owing with
respect to that mortgage loan
under the relevant mortgage
conditions by a borrower on the
security of a mortgage from
time to time outstanding or, as
the context may require, the
borrower's obligations in
respect of the same
"further mortgage portfolios" The portfolios of further
mortgage loans, their related
security, accrued interest and
other amounts derived from such
further mortgage loans that the
seller assigned to the
mortgages trustee after March
26, 2001 and before [o], 2004
"global note certificates" The note certificates
representing the notes in
global form
"heritable creditor" The meaning given to it on page
[o]
"holder" In respect of the issuer, each
person in whose name a note is
for the time being registered
in the register
"Holdings" Granite Finance Holdings Limited
"Housing Indices" The UK Nationwide House Price
Index and Halifax Price Index
"in arrears" For a mortgage account, occurs
when one or more monthly
payments on that mortgage
account have become due and
unpaid by a borrower
"index linked interest note" A note, the interest basis of which
is specified in the applicable
prospectus supplement as being
index linked interest
"individual note certificates" The note certificates
representing the notes in
definitive form
"initial closing date" March 26, 2001
280
"initial consideration" A payment made by the mortgages
trustee to the seller from
principal receipts held by the
mortgages trustee for the
purpose of increasing Funding
2's beneficial interest in the
trust property as of the
closing date in respect of any
further contribution paid by
Funding 2 to the mortgages
trustee, which payment may be
made on any date, including any
payment date, as further
described under "The mortgages
trust - Increasing the Funding
2 share of the trust property"
"initial contribution" The consideration in the form
of cash paid by Funding 2 to
the mortgages trustee in
respect of the Funding 2 share
of the trust property pursuant
to and in accordance with the
mortgages trust deed, which
contribution is to fund the
payment to the seller by the
mortgages trustee of (and is
equal to) the initial purchase
price in respect of the initial
mortgage portfolio or, as the
case may be, the further
mortgage portfolio or (if any
is payable) any new mortgage
portfolio assigned to the
mortgages trustee and is to be
funded from the proceeds of the
global intercompany loan, as
the case may be
"initial mortgage portfolio" The portfolio of mortgage
loans, their related security,
accrued interest and other
amounts, proceeds, powers,
rights, benefits and interests
derived from such mortgage
loans that the seller assigned
to the mortgages trustee on
March 26, 2001
"initial purchase price" That portion of the purchase
price paid by the mortgages
trustee to the seller on the
initial closing date in
consideration for the
assignment to the mortgages
trustee of the initial mortgage
portfolio or that portion of
the purchase price (if any)
payable by the mortgages
trustee to the seller on the
relevant assignment date in
consideration for the
assignment to the mortgages
trustee of the further mortgage
portfolios or any new mortgage
portfolio, in each case in
accordance with the provisions
of the mortgage sale agreement
"initial trust property" The sum of (GBP)100 that the
corporate services provider
settled on trust and held on
trust absolutely as to both
capital and income by the
mortgages trustee for the
benefit of the beneficiaries
"insolvency event" For the seller, the
administrator, the cash manager
or the issuer cash manager
(each, for the purposes of this
definition, a "relevant
entity"):
(a) an order is made or an
effective resolution
passed for the winding
up of the relevant
entity or the
appointment of an
administrator over the
relevant entity (except,
in any such case, a
winding-up or
dissolution for the
purpose of a
281
reconstruction or
amalgamation the terms
of which have been
previously approved by
the security trustee);
(b) the relevant entity
ceases or threatens to
cease to carry on its
business or a
substantial part of its
business or stops
payment or threatens to
stop payment of its
debts or is deemed
unable to pay its debts
within the meaning of
section 123(a), (b), (c)
or (d) of the Insolvency
Act 1986 (as amended,
modified or re-enacted)
or becomes unable to pay
its debts as they fall
due or the value of its
assets falls to less
than the amounts of its
liabilities (taking into
account, for both these
purposes, contingent and
prospective liabilities)
or otherwise becomes
insolvent;
(c) (i) proceedings are initiated
against the relevant
entity under any
applicable liquidation,
insolvency, composition,
reorganization (other than
a reorganization where
the relevant entity
is solvent) or other
similar laws (including,
but not limited to,
application or pending
application for an
administration order
or presentation of a
petition for a
winding up order),
except where these
proceedings are
being contested in
good faith; or
(ii) an administration order
being granted or, an
administrative or other
receiver, administrator,
liquidator or other
similar official is
appointed in relation to
the whole or any
substantial part of the
undertaking or assets of
the relevant entity; or
(iii) a distress, execution or
diligence or other
process is enforced upon
the whole or any
substantial part of the
undertaking or assets of
the relevant entity and
in any of the foregoing
cases it is not
discharged within 30
London business days; or
(iv) if the relevant entity
initiates or consents to
judicial proceedings
relating to itself under
any applicable
liquidation,
administration,
insolvency,
reorganization or other
similar laws or makes a
conveyance or assignment
for the benefit of its
creditors generally; and
in respect of Funding 2 or the
issuer (each, for the purposes of
this definition, a "relevant
entity") means:
282
(a) except for the purposes of an
amalgamation or restructuring
as described under the point
immediately following, the
relevant entity ceases or
threatens to cease to carry on
all or a substantial part of
its business or the relevant
entity is deemed unable to pay
its debts within the meaning
of section 123(1)(a), (b), (c)
or (d) of the Insolvency Act
1986 (as that section may be
amended, modified or
re-enacted) or becomes unable
to pay its debts within the
meaning of section 123(2) of
the Insolvency Act 1986 (as
that section may be amended,
modified or re-enacted); or
(b) an order is made or an effective
resolution is passed for the
winding up of the relevant
entity or the appointment of
an administrator over the
relevant entity (except for
the purposes of or pursuant to
an amalgamation, restructuring
or merger previously approved
by the note trustee or the
security trustee, as the case
may be, or as approved in
writing by an extraordinary
resolution (as defined in the
trust deed) of the class A
noteholders); or
(c) (i) proceedings are otherwise
initiated against the
relevant entity under any
applicable liquidation,
insolvency, composition,
reorganization or other
similar laws (including,
but not limited to,
application or pending
application for an
administration order or
presentation of a petition
for a winding up order)
and (except in the case of
presentation of
application or pending
application a petition for
an administration order)
such proceedings are not,
in the opinion of the note
trustee or the security
trustee (as the case may
be), being disputed in
good faith with a
reasonable prospect of
success; or
(ii) an administration order
being granted or an
administrative receiver or
other receiver,
administrator, liquidator
or other similar official
being appointed in
relation to the relevant
entity or in relation to
the whole or any
substantial part of the
undertaking or assets of
the relevant entity; or
(iii) an encumbrancer taking
possession of the whole or
any substantial part of
the undertaking or assets
of the relevant entity, or
a distress, execution,
diligence or other process
being levied or enforced
upon or sued out against
the
283
whole or any substantial
part of the undertaking or
assets of the relevant
entity and such possession
or process (as the case
may be) not being
discharged or not
otherwise ceasing to apply
within 30 days; or
(iv) the relevant entity
initiating or consenting
to judicial proceedings
relating to itself under
applicable liquidation,
administration,
insolvency, composition,
reorganization or other
similar laws or making a
conveyance or assignment
for the benefit of its
creditors generally
"interest commencement date" In respect of any series and
class of notes, the closing
date of such notes or such
other date as may be specified
as such in the applicable
prospectus supplement
"interest determination date" [o]
"interest period" In relation to each note, (i)
with respect to the first
payment date, the period from
and including the closing date
to but excluding such first
payment date, and (ii)
thereafter, with respect to
each payment date, the period
from and including the
preceding payment date to but
excluding such current payment
date
"interim calculation period" The meaning given to it on page
[o]
"investment plan" For an interest-only loan, a
repayment mechanism selected by
the borrower and intended to
provide sufficient funds to
redeem the full principal of a
mortgage loan at maturity
"IRS" The US Internal Revenue Service
"ISA" An individual savings account
within the Individual Savings
Account Regulations 1998 (as
amended) and which shelters
investments in the account from
income Tax or capital gains tax
"ISDA definitions" The 2000 ISDA Definitions, as
published by the International
Swaps and Derivatives
Association, Inc. and as
amended and updated as at the
[closing] date of the first
series of notes
"issuer" Granite Master Issuer plc
"issuer account bank" Citibank, N.A., acting through
its London branch at 5
Carmelite Street, London EC4Y
0PA or any other authorized
entity as the issuer may choose
with the prior written approval
of the note trustee
["issuer arrears test" The meaning given to it on page
[o]]
284
"issuer available principal
receipts" The meaning given to it on page
[o]
"issuer bank account agreement" The bank account agreement
entered into on or about the
Funding 2 program date, as
amended from time to time,
among the issuer, the issuer
cash manager, the issuer
account bank and the note
trustee
"issuer cash management
agreement" The issuer cash management
agreement entered into on or
about the Funding 2 program
date, as amended from time to
time, among the issuer cash
manager, the issuer and the
note trustee, as described
further in "Cash management for
the issuer"
"issuer cash manager" Northern Rock or such other
person or persons for the time
being acting, under the issuer
cash management agreement, as
agent for the issuer and
(following enforcement of the
issuer security) the note
trustee for the purposes of,
inter alia, managing all cash
transactions and maintaining
certain ledgers on behalf of
the issuer and (following
enforcement of the issuer
security) the note trustee
"issuer deed of charge" The deed of charge entered into
on the Funding 2 program date,
as amended from time to time,
between, the issuer, the note
trustee and the issuer secured
creditors as at the Funding 2
program date including any
deeds of accession or
supplements thereto, under
which the issuer charges the
issuer security in favor of the
issuer secured creditors, as
described further under
"Security for the issuer's
obligations"
"issuer enforcement notice" An enforcement notice served by
the note trustee for the
enforcement of the issuer
security
"issuer post-enforcement priority
of payments" The provisions and the order of
priority set out in a schedule
to the issuer deed of charge in
which all issuer available
revenue receipts, issuer
available principal receipts
and all other monies, income,
receipts and recoveries of the
issuer or the note trustee or
any receiver of the issuer
security are to be applied
following service of an issuer
enforcement notice or otherwise
following an enforcement of the
issuer security which on the
Funding 2 program date will be
as described under "Cashflows -
Distribution of issuer
available principal receipts
and issuer available revenue
receipts following enforcement
of the issuer security"
"issuer pre-enforcement
principal priority of payments"
The provisions and the order of
priority of payments set out in a
schedule to the issuer cash
management agreement in which the
issuer available principal
285
receipts will be applied until
enforcement of the issuer
security, which on the Funding 2
program date will be as described
under "Cashflows - Distribution of
issuer available principal
receipts prior to enforcement of
the issuer security and/or
occurrence of a trigger event"
"issuer pre-enforcement revenue
priority of payments" The provisions and the order of
priority of payments set out in
a schedule to the issuer cash
management agreement in which
the issuer available revenue
receipts will be applied until
enforcement of the issuer
security, which on the Funding
2 program date will be as
described under "Cashflows -
Distribution of issuer
available revenue receipts
prior to enforcement of the
issuer security"
"issuer priority of payments" An issuer pre-enforcement
revenue priority of payments,
the issuer pre-enforcement
principal priority of payments
and the issuer post-enforcement
priority of payments
"issuer secured creditors" The note trustee (and any
receiver appointed under the
issuer deed of charge), the
swap providers, the corporate
services provider in respect of
the issuer, the issuer account
bank, the issuer cash manager,
the paying agents, the agent
bank, the transfer agent, the
registrar and the noteholders
"issuer security" The mortgages, charges,
assignments, pledges and/or any
other security created by the
issuer under the issuer deed of
charge in favor of the note
trustee for the benefit of the
issuer secured creditors
"issuer swap agreements" The ISDA master agreements,
schedules thereto and
confirmations thereunder
relating to the issuer swaps to
be entered into on or about
each closing date, and any
credit support annexes or other
credit support documents
entered into at any time, as
amended from time to time,
among the issuer, the
applicable issuer swap provider
and the note trustee and/or any
credit support provider and
includes any additional and/or
replacement issuer swap
agreement entered into by the
issuer from time to time in
connection with the notes
"issuer swap default" The occurrence of an event of
default (as defined in the
relevant swap agreement) where
the issuer is the defaulting
party (as defined in the
relevant swap agreement)
"issuer swap excluded
termination amount" In relation to an issuer swap
agreement an amount equal to:
286
(a) the amount of any termination
payment due and payable to the
relevant swap provider as a
result of a swap provider
default
less
(b) the amount, if any, received
by the issuer from a
replacement swap provider upon
entry by the issuer into an
agreement with such
replacement swap provider to
replace such swap agreement
which has terminated as a
result of such swap provider
default
"issuer swap providers" The institutions identified in
respect of each issuer swap in the
prospectus supplement related to the
relevant series and class of notes
"issuer swaps" The sterling-specified issuer
swaps which enable the issuer
to receive and pay amounts
under the global intercompany
loan in sterling and to receive
and pay amounts under the notes
not denominated in sterling in
the applicable specified
currency, as described further
under "The swap agreements -
The issuer swaps"
"issuer transaction account" The day to day bank account of
the issuer, held with the
issuer account bank as at the
Funding 2 program date or that
may be opened, with the prior
approval of the note trustee,
after the Funding 2 program date
"lead underwriters" The institutions specified in
the prospectus supplement
relating to any series and
class of notes
"lending criteria" The lending criteria of the
seller, or that other criteria
as would be acceptable to a
reasonable, prudent mortgage
lender
"LIBOR" The London Interbank Offered Rate
for deposits in the relevant
currency, as determined by the
agent bank on the following basis:
(1) on the applicable interest
determination date the agent
bank will determine the
offered quotation to leading
banks for deposits in the
relevant currency for a period
equal to the relevant period.
This will be determined by
reference to the display as
quoted on the Dow
Jones/Telerate Page No. 3750.
If the Dow Jones/Telerate Page
No. 3750 stops providing these
quotations, the replacement
page for the purposes of
displaying this information
will be used. If the
replacement page stops
displaying the information,
another service as determined
by the issuer with the
approval of the note trustee
will be used.
287
In each of these cases, the
determination will be made as
at or about 11:00 a.m., London
time, on that date. This is
called the screen rate.
(2) if on any of these interest
determination dates the screen
rate is unavailable, the agent
bank will:
request the principal London
office of each of the
reference banks to provide the
agent bank with its offered
quotation to leading banks for
deposits in the relevant
currency of the equivalent
amount, and for a time equal
to the relevant period, in the
London interbank market as at
or about 11:00 a.m. (London
time); and
calculate the arithmetic mean,
rounded upwards to five
decimal places, of those
quotations;
(3) if on any of these interest
determination dates the screen
rate is unavailable and only
two or three of the reference
banks provide offered
quotations, the relevant rate
for that period will be the
arithmetic mean of the
quotations as calculated in
(2); and
(4) if fewer than two reference
banks provide quotations, the
agent bank will consult with
the note trustee and the
issuer for the purpose of
agreeing a total of two banks
to provide these quotations
and the relevant rate for that
period will be the arithmetic
mean of the quotations as
calculated in (2). If none of
these banks agree, then the
relevant rate for that period
will be the rate in effect for
the last preceding interest
period for which (1) or (2)
was applicable
"Lloyds TSB" Lloyds TSB Bank plc acting
through its office at City
Office, Bailey Drive,
Gillingham Business Park, Kent
ME8 0LS, England
"Lloyds TSB collection account" The account of the
administrator held at Lloyds
TSB as may be utilized from
time to time for the purpose of
collecting amounts which are
paid to the seller on the
mortgage loans and/or the
related security
"loan tranche rating" The designated rating assigned
to a loan advance which
corresponds to the rating of
the series and class of notes
when first issued to provide
funds for that loan tranche so
that, for example, any AAA loan
tranche has a loan tranche
rating of "AAA" to reflect the
ratings of AAA/Aaa/AAA then
assigned to the corresponding
series and class of notes
"loan tranches" The AAA loan tranches, the AA
loan tranches, the A loan
tranches, the BBB loan tranches
and the BB loan tranches, being
the advances made by the issuer
to Funding 2, pursuant to the
global intercompany loan
288
agreement, each being funded
from proceeds received by the
issuer from the issue of a
series and class of notes
"London business day" A day (other than a Saturday, Sunday
or public holiday) on which banks
are generally open for business in
London
"London Stock Exchange" London Stock Exchange plc
"losses" The realized losses experienced
on the mortgage loans in the
mortgage portfolio
"losses ledger" The ledger created and
maintained by the cash manager
under the cash management
agreement to record the losses
on the mortgage portfolio
"LTV ratio" or "loan to value ratio" In respect of any mortgage loan
assigned to the mortgages
trust, the ratio of the
outstanding balance of such
mortgage loan to the value of
the mortgaged property securing
such mortgage loan; and in
respect of the seller's
decision as to whether to make
a mortgage loan to a
prospective borrower and for
purposes of determining whether
a MIG policy is necessary in
connection with a mortgage
loan, the ratio of the
outstanding balance of such
mortgage loan to the lower of
the purchase price or valuation
of the mortgaged property
securing such mortgage loan as
determined by the relevant
valuation by the seller
"LTV tests" Two tests which assign a credit
enhancement value (I) to each
mortgage loan in the mortgage
portfolio based on its current
LTV ratio and the amount of
mortgage indemnity cover on
that mortgage loan, and (ii)
calculated to include any
related unsecured portion of a
mortgage loan in respect of the
Together product based on its
current LTV ratio and the
amount of mortgage indemnity
cover on that mortgage loan.
The weighted average credit
enhancement value for the
mortgage portfolio is then
determined
"managers"
"mandate holders" The meaning given to it on page
[o]
"margin" In respect of any series and
class of notes, the amount
specified as such in the
applicable prospectus
supplement
"master definitions schedule" Together, the master
definitions schedule dated
January [ ], 2005, as amended
from time to time, and the
issuer master definitions
schedule to be dated the
Funding 2 program date, as
amended from time to time,
which are schedules of
definitions used in the
transaction documents
289
"maximum rate of interest" In respect of any series and
class of notes, the rate of
interest specified as such in
the applicable prospectus
supplement
"MCoB" has the meaning given to it on
page [o]
"MIG policies" The mortgage indemnity
guarantee policies on certain
of the mortgage loans which are
intended to cover losses which
may be incurred following
repossession and sale of a
mortgaged property from a
borrower, and which were issued
by NORMIC
"minimum rate of interest" In respect of any series and
class of notes, the rate of
interest specified as such in
the applicable prospectus
supplement
"minimum seller share" An amount included in the
seller share which is
calculated in accordance with
the mortgages trust deed as
further described under "The
mortgages trust"
"money market notes" Any series and/or class of
notes issued by the issuer that
are designated as "money market
notes"
"monthly CPR" The meaning given to it on page
[o]
"monthly payment" For any mortgage loan, the
amount a borrower is required
to pay on a monthly payment date
"monthly payment date" For any mortgage loan, the date
in each month on which the
relevant borrower is required
to make a payment of interest
and, if applicable, principal,
for that mortgage loan, as
required by the applicable
mortgage conditions
"Moody's" Moody's Investors Services
Limited, including any
successor to its rating
business
"mortgage" For any mortgage loan in the
mortgage portfolio (other than
personal secured loans), the
first priority charge by way of
legal mortgage (in relation to
English mortgage loans) or
first priority standard
security (in relation to
Scottish mortgage loans), in
each case which secures the
repayment of that mortgage loan
including the mortgage
conditions applicable to it
"mortgage account" As the context requires, either
(1) all mortgage loans secured
on the same mortgaged property
and thereby forming a single
mortgage account or (2) an
account maintained by the
administrator in respect of a
particular mortgage loan to
record all amounts due in
respect of that mortgage loan
(whether by way of principal,
interest or otherwise) and all
amounts received in respect
thereof
290
"mortgage conditions" (1) For any mortgage loan, the
terms and conditions
applicable to that
mortgage loan and its
related security as set
out in the seller's
relevant "mortgage
conditions" booklet and
the seller's relevant
general conditions, and in
relation to each as from
time to time varied by the
relevant mortgage loan
agreement and the relevant
mortgage deed; and
(2) For any personal secured loan
in the mortgage portfolio, the
second or lower ranking charge
by way of legal mortgage (in
relation to English mortgage
loans) or standard security
(in relation to Scottish
mortgage loans) over the same
property that secures the
relevant borrower's existing
mortgage loan, in each case in
which secures the repayment of
that personal secured loan
including the mortgage
conditions applicable to it
"mortgage deed" In respect of any mortgage, the
deed creating that mortgage
including, unless the context
otherwise requires, the
mortgage conditions applicable
to that mortgage
"mortgage loan" Any mortgage loan (including,
for the avoidance of doubt, any
personal secured loan) and any
permitted replacement mortgage
loan which is assigned by the
seller to the mortgages trustee
from time to time under the
terms of the mortgage sale
agreement and referenced by its
mortgage loan identifier number
and comprising the aggregate of
all principal sums, interest,
costs, charges, expenses and
other monies (including all
further advances) due or owing
with respect to that mortgage
loan (or permitted replacement
mortgage loan, as applicable)
under the relevant mortgage
conditions by a borrower on the
security of a mortgage from
time to time outstanding or, as
the context may require, the
borrower's obligations in
respect of the same
"mortgage loan files" For each mortgage loan, the
file or files (including files
kept in microfiche format or
similar electronic data
retrieval system) containing
correspondence between the
borrower and the seller and
including the mortgage
documentation applicable to
that mortgage loan, each letter
of offer for that mortgage loan
and other relevant documents
"mortgage portfolio" The initial mortgage portfolio
and, the further mortgage
portfolios as of any date of
determination taking account
of, among other things,
amortization of mortgage loans
in that portfolio and the
addition and/or removal of any
mortgage loans to or from that
portfolio as of such date of
the most recent assignment
291
"mortgage related security" As defined in the United States
Secondary Mortgage Markets
Enhancement Act 1984, as amended
"mortgage sale agreement" The mortgage sale agreement
entered into on March 26, 2001,
as amended from time to time,
among the seller, the mortgages
trustee, Funding, Funding 2 and
the security trustee regarding
the assignment of the mortgage
portfolio to the mortgages
trustee including any documents
ancillary thereto, and as
further described under
"Assignment of the mortgage
loans and their related
security"
"mortgaged property" For any mortgage loan, the
freehold or leasehold property
in England and Wales or (as
applicable) the heritable or
long leasehold property in
Scotland and (in each case) all
rights and security attached or
appurtenant or related thereto
and all buildings and fixtures
on the property which are
subject to the mortgage
securing repayment of that
mortgage loan
"mortgagee" For any mortgage loan, the
person for the time being who
is entitled to exercise the
rights of the mortgagee or (in
Scotland) heritable creditor
under the relevant mortgage
securing repayment of that
mortgage loan
"mortgages" The mortgages contained in the
mortgage portfolio
"mortgages trust" The bare trust of the trust
property as to both capital and
income, held by the mortgages
trustee on trust absolutely for
Funding 2 (as to the Funding 2
share) and the seller (as to
the seller share) under the
mortgages trust deed so that
each beneficiary has an
undivided beneficial interest
in it
"mortgages trust allocation of
revenue receipts" The order of priority for
applying mortgages trustee
available revenue receipts as
set forth on page [o]
"mortgages trust deed" The mortgages trust deed
entered into on March 26, 2001,
as amended from time to time,
among the mortgages trustee,
Funding, Funding 2, the seller
and the corporate services
provider
"mortgages trustee" Granite Finance Trustees Limited
"mortgages trustee available
revenue receipts" The meaning given to it on page
[o]
"mortgages trustee bank
accounts" The mortgages trustee GIC
account and the mortgages
trustee transaction account
"mortgages trustee GIC account" The account in the name of the
mortgages trustee held at
Northern Rock and maintained
subject to the terms
292
of the mortgages trustee guaranteed
investment contract and the
bank account agreement or any
additional or replacement
account as may for the time
being be in place with the
prior consent of the Funding 2,
the seller and the security
trustee
"mortgages trustee GIC provider" Northern Rock or any other
person or persons as are for
the time being the mortgages
trustee GIC provider under the
applicable mortgages trustee
guaranteed investment contract
"mortgages trustee guaranteed
investment contract" The guaranteed investment
contract entered into on May
26, 2004, as amended, restated,
supplemented or otherwise
modified from time to time,
among Funding, Funding 2, the
Funding 2 GIC provider and
others, in each case under
which the previous mortgages
trustee GIC provider or the
mortgages trustee GIC provider,
as applicable, has agreed to
pay the mortgages trustee a
guaranteed rate of interest on
the balance of the mortgages
trustee GIC account
"mortgages trustee principal
priority of payments" The order in which the cash
manager applies principal
receipts on the mortgage loans
on each distribution date to
each of Funding 2 and the
seller, as set out in
"The mortgages trust"
"mortgages trustee principal
receipts" On any distribution date, any
mortgages trustee retained
principal receipt plus the
principal receipts received by
the mortgages trustee in the
immediately preceding trust
calculation period which may be
distributed by the mortgages
trustee
"mortgages trustee retained
principal receipts" The meaning given to it on page
[o]
"mortgages trustee revenue
priority of payments" The order in which the cash
manager applies the mortgages
trustee available revenue
receipts on each distribution
date, as set out in "The
mortgages trust" "mortgages
trustee transaction account"
The account in the name of the
mortgages trustee held at the
account bank and maintained
subject to the terms of the
bank account agreement or any
additional or replacement bank
account of the mortgages
trustee as may for the time
being be in place with the
prior consent of the security
trustee
"N(m)" The meaning given to it on page
[o]
"New Basel Capital Accord" The meaning given to it on page
[o]
293
"new mortgage loans" Mortgage loans, other than the
mortgage loans assigned on or
before the Funding 2 program
date, which the seller may
assign, from time to time, to
the mortgages trustee under the
terms of the mortgage sale
agreement
"new mortgage portfolio" Any portfolio of new mortgage
loans, the mortgages and new
related security, any accrued
interest and any other amounts,
proceeds, powers, rights,
benefits and interests derived
from the new mortgage loans
and/or the new related
security, in each case which
are to be assigned by the
seller to the mortgages trustee
after the Funding 2 program
date under the mortgage sale
agreement but excluding any
mortgage loan and its related
security which has been
redeemed in full on or before
the relevant assignment date
"new related security" The security for the new
mortgage loans (including the
mortgages) which the seller may
assign to the mortgages trustee
under the mortgage sale
agreement
"new trust property" As at any assignment date after
the Funding 2 program date, any
and all new mortgage portfolios
assigned by the seller to the
mortgages trustee on an
assignment date, or as at any
distribution date, any and all
new mortgage portfolios
assigned by the seller to the
mortgages trustee during the
immediately preceding trust
calculation period
"New York business day" A day (other than a Saturday, Sunday
or public holiday) on which banks are
generally open for business in the
city of New York
"non-asset trigger event" The meaning given to it on page
[o]
"non-cash re-draw" An authorized underpayment or a
payment holiday under a
flexible mortgage loan included
in the mortgages trust, which
will result in the seller being
required to pay to the
mortgages trustee an amount
equal to the unpaid interest
associated with that authorized
underpayment or payment holiday
"non-performing mortgage loan" A mortgage loan that is in
arrears and for which the
related borrower has not made
any payment within any of the
three consecutive calendar
months prior to the date of
determination
"NORMIC" Northern Rock Mortgage
Indemnity Company Limited
"Northern Rock" Northern Rock plc
"note certificates" The global note certificates
and the individual note
certificates
"note event of default" An event of default under the
provisions of the notes
294
"note principal payment" The amount of each principal
payment payable on each note
"note trustee" The Bank of New York, acting
through its office at 48th
Floor, One Canada Square,
London E14 5AL, or such other
person for the time being
acting as note trustee under
the trust deed
"noteholders" The holders of the class A notes,
the class B notes, the class M
notes, the class C notes and the
class D notes of any series
"notes" Includes all of the class A notes,
the class B notes, the class M
notes, the class C notes and the
class D notes of the issuer
"notice" In case of notice being given
to the noteholders, a notice
duly given in accordance with
the relevant conditions set
forth in the notes
"notional amount of the
Funding 2 basis rate swap" The meaning given to it on page
[o]
"NRG" Northern Rock (Guernsey) Limited
"[NR start-up loan agreement]" The agreement entered into on
or about the Funding 2 program
date, as amended from time to
time, between Funding 2,
Northern Rock plc and the
Funding 2 security trustee
relating to the provision of
the start-up loan tranches to
Funding 2
"OID" Original issue discount
"OID regulations" The US Treasury regulations
relating to original issue
discount
"offer conditions" The terms and conditions
applicable to a specific
mortgage loan as set out in the
relevant offer letter to the
borrower
"official list" The official list maintained by
the UK Listing Authority
"OFT" Office of Fair Trading
"Ombudsman" The UK Financial Ombudsman
Service
"pass-through loan tranche" Means a loan tranche which has
no schedule repayment date
other than the final repayment
date. If a trigger event
occurs or the Funding 2
security or issuer security is
enforced, then the bullet
repayment [(other than the AAA
loan tranche)] and the
scheduled repayment loan
tranches will be deemed to be
pass-through loan tranche
"pass-through requirement" The meaning given on page [o]
295
"paying agent and agent bank
agreement" The paying agent and agent bank
agreement entered into on or
about the Funding 2 program
date, as amended from time to
time, among the issuer, the
principal paying agent, the
paying agents, the transfer
agent, the registrar and the
agent bank
"paying agents" The principal paying agent and
the US paying agent
"payment business day" A day which is:
(i) a day on which a day on
which commercial banks
and foreign exchange
markets settle payments
and are open for general
business (including
dealing in foreign
exchange and foreign
currency deposits) in:
(a) the relevant place of
presentation;
(b) London
(c) any additional financial
centre specified in the
applicable Note
Supplement; and
(ii) either (1) in relation to
any sum payable in a
specified currency other
than euro, a day on which
commercial banks and
foreign exchange markets
settle payments and are
open for general business
(including dealing in
foreign exchange and
foreign currency
deposits) in the
principal financial
centre of the country of
the relevant specified
currency (if other than
London and any additional
business centre) and
which if the specified
currency is Australian
dollars or New Zealand
dollars shall be Sydney
and Auckland,
respectively or (2) in
relation to any Notes
denominated or payable in
euro, a day on which the
Trans-European Automated
RealTime Gross Settlement
Express Transfer (TARGET)
System is open; and
(iii) in the case of any payment in
respect of a global note
denominated in a specified
currency other than US
dollars and registered in the
name of DTC or its nominee
and in respect of which an
accountholder of DTC (with an
interest in such global note)
has elected to receive any
part of such payment in US
dollars, a day on which
commercial banks are not
authorised or required by law
or regulation to be closed in
New York
"payment date" In respect of each series and
class of notes the dates
specified in the related
prospectus supplement
296
"payment holiday" The meaning given to it on page
[o]
"permitted product switch" The exchange by a borrower of
its then current mortgage loan
product for a different
mortgage loan product offered
by the seller, which may be
made only if the new mortgage
loan for which the prior
mortgage loan is to be
exchanged is a permitted
replacement mortgage loan
"permitted redemption date" As applicable, a bullet
redemption date, a scheduled
redemption date, a controlled
amortization date or the date
on which a pass-through note
will become due and payable
"permitted replacement mortgage
loan" The meaning given to it on page
[o]
"pension plan" A financial plan arranged by a
borrower to provide for that
borrower's expenses during
retirement
"personal secured loans" A mortgage loan for
unrestricted purposes offered
to borrowers with existing
mortgage loans (other than a
personal secured loan) from the
seller which is secured on the
same property which secures the
borrowers' existing mortgage
loan. Some personal secured
loans permit the borrower to
make further draws up to the
fixed amount of credit extended
under the mortgage conditions
at the inception of the
personal secured loan.
"PFIC" A passive foreign investment
company as more fully described
under "Material United States
tax consequences"
"Plans" The meaning given to it on page
[o]
"post-enforcement call option
agreement" The agreement entered into on
or about the Funding 2 program
date, as amended from time to
time, under which the note
trustee agrees on behalf of the
noteholders, that in specified
circumstances, GPCH Limited may
call for the notes to be
transferred to it
"post-enforcement call option
holder" GPCH Limited
"previous mortgages trustee GIC
Provider" Lloyds TSB Bank plc acting
through its office at Financial
Markets Division, 25 Monument
Street, London EC3R 8BQ as the
mortgages trustee GIC provider
under the applicable mortgages
trustee guaranteed investment
contract
"principal amount outstanding" For each series and class of
notes and as of any date of
determination, the initial
principal amount of such series
and class of notes less (in
each case) the
297
aggregate amount of all principal
payments in respect of such series
and notes that have been paid since
the closing date for such
series and class notes and on
or prior to that determination
date
"principal ledger" The ledger maintained by the
cash manager on behalf of the
mortgages trustee under the
cash management agreement to
record any mortgages trustee
retained principal receipts
plus principal receipts on the
mortgage loans and payments of
principal from the mortgages
trustee GIC account to Funding,
Funding 2 and the seller on
each distribution date.
Together the principal ledger
and the revenue ledger reflect
the aggregate of all amounts of
cash standing to the credit of
the mortgages trustee in the
mortgages trustee bank accounts
"principal paying agent" Citibank, N.A., acting through
its London branch at 5
Carmelite Street, London EC4Y
0PA, or such other person for
the time being acting as
principal paying agent under
the paying agent and agent bank
agreement
"principal receipts" Any payment in respect of
principal received in respect
of any mortgage loan, whether
as all or part of a monthly
payment, on redemption
(including partial redemption),
on enforcement or on the
disposal of that mortgage loan
or otherwise (including
payments pursuant to any
insurance policy) and which may
include the amount of any
overpayment in respect of any
non-flexible mortgage loan, but
only to the extent permitted by
the mortgages trust deed, and
which may also include the
amount of any further
contribution made by Funding,
Funding 2 from time to time
"product switch" Any variation in the mortgage
conditions (other than a
permitted product switch)
applicable to any mortgage loan
which may be offered by the
seller or (in limited
circumstances) the
administrator from time to time
"program" Means the asset-backed note
program established by or
otherwise contemplated in the
[Program Agreement] and the
Issuer Trust Deed
"properties in possession policy" The insurance policy issued by
AXA General Insurance Limited
which provides the seller with
rebuilding insurance when the
seller takes possession of a
property from a default borrower
"programme agreement" The agreement entered into on
or around the Funding 2 program
date, as amended from time to
time, between the issuer,
[Funding 2] and the dealers
named therein (or deemed named
therein)
298
"prospectus" This prospectus dated January [o],
2005 relating to the issue of US
notes as supplemented by the
prospectus supplement relating to
each series and class of notes
"prospectus supplement" Each prospectus supplement
relating to one or more series
of classes of notes issued on a
single closing date
"rate of interest" and "rates of
interest" In respect of any series and
class of notes, the rate or
rates (expressed as a
percentage per annum) on
interest payable in respect of
such notes specified in the
applicable prospectus
supplement or calculated and
determined in accordance with
the applicable prospectus
supplement
"rating" Any rating assigned by the
rating agencies to the notes or
new notes
"rating agencies" Moody's, Standard & Poor's and
Fitch
"real property" Freehold or leasehold property
in England and Wales and
heritable or long leasehold
property in Scotland, and any
estate or interest therein, and
any reference to "real
property" includes a reference
to all rights and security from
time to time attached,
appurtenant or related thereto
and all buildings and fixtures
from time to time thereon
"reasonable, prudent mortgage
lender" A reasonably prudent prime
residential mortgage lender
lending to borrowers in
England, Wales and Scotland who
generally satisfy the lending
criteria of traditional sources
of residential mortgage capital
"receiver" A receiver appointed by the note
trustee under the issuer deed of
charge and/or the security trustee
under the Funding 2 deed of charge
"recognised stock exchange" The meaning given to it on page
[o]
"record date" The fifteenth day before the
due date for any payment on the
notes
"re-draw" Either a cash re-draw or a
non-cash re-draw
"re-draws ledger" The ledger maintained by the
cash manager in the name of the
mortgages trustee under the
cash management agreement to
record re-draws on flexible
mortgage loans from time to
time and will be sub-divided
into two subledgers to record
cash redraws and non-cash
re-draws
"reference banks" On the closing date, the London
office of each of the following
banks: ABN Amro Bank NV,
Barclays Bank plc, Citibank,
N.A. and The Royal Bank of
Scotland plc
299
["reference price" In respect of any Series and
Class of Notes, the price
specified as such in the
applicable prospectus
supplement]
"reference rate" In respect of any series of
notes, the rate specified as
such in the applicable
prospectus supplement
"re-fixed mortgage loan" As at any given date, a
mortgage loan which on or
before that date had been a
fixed rate mortgage loan but
the fixed period had come to an
end, but as at or before that
given date, the interest
charged under that mortgage
loan was again fixed for
another fixed period by the
seller or the administrator, as
the case may be (following an
election by the borrower) in
accordance with the original
terms of the fixed rate
mortgage loan
"Reg S notes" The notes admitted to the official
list maintained by the UK Listing
Authority and admitted to trading
on the London Stock Exchange's
market for listed securities (but
not including the US notes)
"register" The register of noteholders kept by
the registrar and which records the
identity of each noteholder and the
number of notes which each
noteholder owns
"registered land" Land in England and Wales,
title to which is registered at
H.M. Land Registry
"registrar" Citibank, N.A., acting through
its London branch at 5
Carmelite Street, London EC4Y
0PA
"regulated mortgage contract" The meaning given to it on page
[o]
"reinstatement" For a mortgaged property that has
been damaged, repairing or
rebuilding that mortgaged property
to the condition that it was in
before the occurrence of the damage
"related security" The security for the repayment
of a mortgage loan including
the relevant mortgage and all
other matters applicable to the
mortgage loan, acquired as part
of the mortgage portfolio
assigned to the mortgages
trustee
[?"relevant deposit amount" The sum of the following:
(a) either:
(i) prior to the step-up
date in respect of
any notes (pursuant
to the terms and
conditions thereof)
or if the step-up
date has occurred in
respect of any notes
(pursuant to the
terms and conditions
thereof) and the
option to redeem any
notes has been
exercised by the
issuer, an amount
equal to:
300
[the Funding 2 share of
the trust property (as
most recently
calculated)/the Funding
2 share of the trust
property on the relevant
closing date] x [the
outstanding balance in
the Funding 2 reserve
fund (as most recently
calculated)]; or
(ii) if the issuer does not
exercise its option to
redeem its notes on the
relevant step-up date
pursuant to the terms
and conditions thereof,
an amount equal to:
[the Funding 2 share of
the trust property (as
most recently
calculated)/the Funding
2 share of the trust
property on the relevant
closing date] x [the
outstanding balance in
the Funding 2 reserve
fund (as most recently
calculated)] x 2;
(b) any amounts standing to
the credit of the Funding
2 GIC account which will
be applied on the next
following payment date to
pay amounts due under the
global intercompany loan
which in turn will result
in any notes having
ratings of "AAA", "AA" or
"A-1+" from Standard &
Poor's to be redeemed in
whole or in part;
(c) any amounts standing to
the credit of the
mortgages trustee GIC
account which will be
distributed to Funding 2
on the next following
distribution date and
which will be applied by
Funding 2 on the next
following payment date to
pay amounts due under the
global intercompany loan
which in turn will result
in any notes having
ratings of "AAA", "AA" or
"A-1+" from Standard &
Poor's to be redeemed in
whole or in part; and
(d) any other amounts standing
to the credit of accounts
maintained by the
mortgages trustee, Funding
2 or the issuer with a
bank and which would
otherwise be required by
Standard & Poor's to be
rated "A-1+";
less any amounts invested in
authorized investments or
maintained in accounts at a bank
rated at least "A-1+" by
Standard & Poor's]
"relevant distribution date" Each distribution date or the
date on which the mortgage
trust terminates
"relevant screen page" In respect of any series and
class of notes, the screen page
specified as such in the
applicable prospectus supplement
"repayment requirement" The meaning given to it on page
[o].
301
"repayment tests" The meaning given to it on page
[o].
"required subordinated
percentage" In respect of any series and
class, the percentage specified
in the related prospectus
supplement
"repayment mortgage loan" A mortgage loan for which the
borrower is under an obligation
to the mortgagee to make
monthly payments of principal
so that the whole principal (in
addition to interest) is repaid
by the stated maturity date for
that mortgage loan
"[?reserve fund threshold" The lesser of:
(a) the general Funding 2 reserve
required amount, and
(b) the highest amount which
the adjusted Funding 2
reserve fund level has
been since the first
Funding 2 reserve fund
level has been since the
first payment date upon
which interest is due and
payable in respect to loan
tranches made upon the
closing date relating to
the then most recent issue
of notes]
"revenue ledger" The ledger created and
maintained by the cash manager
on behalf of the mortgages
trustee under the cash
management agreement to record
revenue receipts on the
mortgage loans and interest
from the mortgages trustee bank
accounts and payments of
revenue receipts from the
mortgages trustee GIC account
to Funding, Funding 2 and the
seller on each distribution
date. Together the revenue
ledger and the principal ledger
reflect the aggregate of all
amounts of cash standing to the
credit of the mortgages trustee
bank accounts
"revenue receipts" Any payment received in respect
of any mortgage loan, whether
as all or part of a monthly
payment, on redemption
(including partial redemption),
on enforcement or on the
disposal of that mortgage loan
or otherwise (including
payments pursuant to any
insurance policy) which in any
such case is not a principal
receipt
"revenue shortfall" The deficiency of Funding 2
available revenue receipts on a
payment date over the amounts
due by Funding 2 under the
Funding 2 pre-enforcement
revenue priority of payments,
and the deficiency of issuer
available revenue receipts on a
payment date over the amounts
due by the issuer under the
issuer pre-enforcement revenue
priority of payments, as the
context requires
"scheduled redemption dates" The scheduled redemption dates
for any series and class of
scheduled redemption notes will
be set out in
302
the prospectus supplement related
to such series and class of notes.
"scheduled redemption notes" Any series and class of notes
scheduled to be repaid in full
in [two or more] installments
on scheduled redemption dates.
Scheduled redemption notes will
be deemed to be pass-through
notes if:
(a) a trigger event occurs; or
(b) the issuer security is enforced
"scheduled amortization
installment" [o]
"scheduled repayment dates" The scheduled repayment dates
for any scheduled repayment
loan tranche will be set out in
the loan tranche supplement for
the scheduled repayment loan
tranche
"scheduled repayment loan
installment" That part of a scheduled
repayment loan tranche which is
payable on each of the
scheduled repayment dates of
that loan tranche
"scheduled repayment loan
tranche" The scheduled repayment loan
tranches related to a series
and class of scheduled
redemption notes will be
identified in the prospectus
supplement related to such
series and class of notes.
Scheduled repayment loan
tranches will be deemed to be
pass-through loan tranches if:
(a) a trigger event occurs;
(b) the Funding 2 security is
enforced; or
(c) the issuer security is enforced
"scheduled repayment
requirement The meaning given to it on page
[o]
"Scottish mortgage" For any mortgage loan in the
mortgage portfolio, a standard
security over a residential
property in Scotland
"Scottish mortgage loan" Each mortgage loan secured over
a property located in Scotland
"S&P" and "Standard & Poor's" Standard & Poor's Ratings
Services, a division of The
McGraw-Hill Companies, Inc.,
including any successor to its
ratings business
"SEC" The United States Securities
and Exchange Commission
303
"Securities Act" The United States Securities
Act of 1933, as amended
"security trustee" The Bank of New York, acting
through its office at 48th
floor, One Canada Square,
London E14 5AL or such other
person for the time being
acting as security trustee
under the Funding security
"seller share" The current seller share of the
trust property calculated in
accordance with the formula set
out on page [o]
"seller share event" The meaning given to it on page
[o]
"seller share event distribution
date" A distribution date on which a
seller share event occurs
"seller share percentage" The current seller share
percentage of the trust
property calculated in
accordance with the formula set
out on page [o]
"seller's policy" The originating, lending and
underwriting, administration,
arrears and enforcement
policies and procedures which
are applied from time to time
by the seller to mortgage loans
and the security for their
repayment which are
beneficially owned solely by
the seller and which may be
amended by the seller from time
to time
"seller's standard variable rate" The rate of interest set by the
seller for variable rate
mortgage loans as more fully
described on page [o]
"senior expenses" Amounts ranking in priority to
interest due on the loan
tranches
"significant" When we discuss ERISA
considerations, a benefit plan
investors' equity participation
in the issuer would not be
significant if, immediately
after the most recent
acquisition of any equity
interest in the issuer, less
than 25% of the value of each
class of equity interests in
the issuer - excluding
interests held by Funding 2 -
is held by benefit plan
investors
"specified currency" Has the meaning given in the
relevant prospectus supplement
"specified currency
exchange rate" In relation to a series and
class of notes, the exchange
rate specified in the issuer
swap agreement relating to such
series and class of notes or,
if the issuer swap agreement
has been terminated, the
applicable spot rate;
"special distributions" [o]
304
"specified denomination" In respect of any series and
class of notes, the
denomination specified as such
in the applicable prospectus
supplement
"standard variable rate" The Northern Rock standard
variable rate and/or the
standard variable rate
applicable to mortgage loans
within the mortgages trust, as
applicable
"stand-by account bank" In respect of the Funding 2 GIC
account, and the mortgages
trustee GIC account, Lloyds TSB
Bank plc acting through the
office at Financial Markets
Division, 25 Monument Street,
London EC3R 8BQ
"stand-by bank account
agreement" The agreement dated May 26,
2004, as amended from time to
time, among the stand-by
account bank, the cash manager,
the mortgages trustee, Funding,
Funding 2 and the security
trustee which governs the
operation of the stand-by bank
accounts
"stand-by GIC provider" In respect of the Funding 2 GIC
account and the mortgages
trustee GIC account, Lloyds TSB
Bank plc acting through its
office at Financial Markets
Division, 25 Monument Street,
London EC2R 8BQ
"standard variable rate
mortgage loan" A mortgage loan which is
subject to the standard
variable rate
"start up loan agreement" The NR start-up loan agreement
or any agreement entered into
after the Funding 2 program
date, as amended from time to
time, between Funding 2,
start-up loan provider and the
Funding 2 security trustee
relating to the provision of
start-up loan tranches to
Funding 2
"start-up loan tranche" or
"start-up loan tranches" Each loan made by a
start-up loan provider to Funding 2
under a start-up loan agreement,
and collectively, the "start-up
loans"
"start-up loan provider" Northern Rock, in its capacity
as provider of the start-up
loans, or such other person who
provides a start-up loan
tranche to Funding 2 pursuant
to a start-up loan agreement
"step-up date" In respect of any loan tranche
and the related series and
class of notes, the payment
date in respect of a series and
class of notes on which the
interest rate on those notes
increases by a predetermined
amount following the payment
made by the issuer on such
payment date, which date for
any loan tranche or series and
class of notes will be
specified in the prospectus
supplement for the relevant
notes
305
"sterling equivalent" In relation to a note which is
denominated in (a) currency
other than sterling, the
sterling equivalent of such
amount ascertained using the
specified currency swap rates
and (b) sterling, the
applicable amount in sterling
"sub-class" Any sub-class of a series and
class of notes.
"subscription agreement" An agreement supplemental to
the programme agreement (by
whatever name called) in or
substantially in the form set
out in the programme agreement
or in such other form as may be
agreed between the issuer and
the dealers
"subsidiary" A subsidiary within the meaning
of Section 736 of the United
Kingdom Companies Act 1985, and
unless the context otherwise
requires, a subsidiary
undertaking within the meaning
of section 258 of the United
Kingdom Companies Act 1985
"swap agreements" The Funding 2 basis rate swap
agreement and each [issuer swap
agreement]
"swap collateral" At any time, any asset
(including, without limitation,
cash and/or securities) which
is paid or transferred by a
swap provider to the issuer or
to Funding 2, as applicable, as
collateral to secure the
performance by such swap
provider of its obligations
under the relevant swap
agreement together with any
income or distributions
received in respect of such
asset and any equivalent of or
replacement of such asset into
which such asset is transformed
"swap collateral account" An account opened in the name
of the issuer and/or Funding 2,
as applicable for the purpose
of holding swap collateral and
maintained in accordance with
the issuer cash management
agreement or the cash
management agreement, as
applicable
306
"swap collateral ancillary
document" In relation to the issuer, any
document (including, without
limitation, any custodial
agreement or bank account
agreement but excluding the
swap agreements, the issuer
cash management agreement and
the issuer deed of charge) as
may be entered into by the
issuer from time to time in
connection with the swap
collateral. In relation to
Funding 2, any document
(including, without limitation,
any custodial agreement or bank
account agreement but excluding
the swap agreements, the cash
management agreement and the
Funding 2 deed of charge) as
may be entered into by Funding
2 from time to time in
connection with the swap
collateral
"swap collateral available
principal amount" At any time, the amount of swap
collateral which under the
terms of the relevant swap
agreement may be applied at
that time in satisfaction of
the relevant swap provider's
obligations to:
(i) the issuer to the extent that
such obligations relate to payments
to be made in connection with the
issuer pre-enforcement principal
priority of payments or the issuer
post-enforcement priority of
payments, as the case may be; or
(ii) Funding 2 to the extent that
such obligations relate to payments
to be made in connection with the
Funding 2 pre-enforcement principal
priority of payments or the Funding
2 post-enforcement priority of
payments, as the case may be
"swap collateral available
revenue amount" At any time, the amount of swap
collateral which under the
terms of the relevant swap
agreement may be applied at
that time in satisfaction of
the relevant swap provider's
obligations to:
(i) the issuer to the extent that
such obligations relate to payments
to be made in connection with the
issuer pre-enforcement revenue
priority of payments or the issuer
post-enforcement priority of
payments, as the case may be; or
(ii) Funding 2 to the extent that
such obligations relate to payments
to be made in connection with the
Funding 2 pre-enforcement revenue
priority of payments or the Funding
2 post-enforcement priority of
payments, as the case may be
"swap collateral excluded
amount" At any time, the amount of swap
collateral which may not be
applied at that time in
satisfaction of the relevant
swap provider's obligations to
the issuer or Funding 2,
307
as applicable under the terms of
the relevant swap agreement
"swap early termination event" A circumstance in which a swap
agreement can be terminated
before its scheduled
termination date
"swap provider default" The occurrence of an event of
default or swap provider
termination event (each as
defined in the relevant swap
agreement) where the relevant
swap provider is the defaulting
party or the affected party
(each as defined in the
relevant swap agreement)
"swap providers" Each of the Funding 2 basis
rate swap provider and the
[issuer swap providers], or any
one of them as the context
requires
"swap replacement payment" An amount received by the
issuer from a replacement swap
provider upon entry by the
issuer into an agreement with
such replacement swap provider
replacing a swap agreement
which has terminated following
the occurrence of a downgrade
termination event
"TARGET business day" A day on which the Trans-European
Automated Real-time Gross settlement
Express Transfer (TARGET) System is
open
"Telerate Page No. 3750" The display designated as Page 3750
on the Dow Jones/Telerate Service
(or any other page that may replace
the relevant Telerate Screen number
on that service, or any other
service that may be nominated by
the British Bankers' Association
(including the Reuters Screen) as
the information vendor for the
purposes of displaying British
Bankers' Association Interest
Settlement Rates for deposits in
the currency concerned)
"third party amounts" The meaning given to it on page [o]
"tier" All the loan tranches having the same
designated credit rating
"title deeds" For each mortgage loan and its
related security and the
mortgaged property relating to
it, all conveyancing deeds and
documents which make up the
title to the mortgaged property
and the security for the
mortgage loan and all searches
and inquiries undertaken in
connection with the grant by
the borrower of the related
mortgage
"Together Connections Benefit" The meaning given to it on page
[o]
"Together Connections Interest" The meaning given to it on page
[o]
"Together Connections mortgage
308
loan" A type of flexible mortgage
loan, the primary
characteristics of which are
described on page [o]
"Together discount tracker
mortgage loan" A type of Together mortgage
loan as more fully described on
page [o]
"Together mortgage loan" A type of flexible mortgage
loan which allows the borrower
to obtain an additional
unsecured loan and, in some
cases, a credit card, neither
of which is secured by the
mortgage relating to the
mortgage loan
"Together stepped tracker
mortgage loan" A type of Together mortgage
loan as more fully described on
page [o]
"Together variable mortgage loan" A type of Together mortgage
loan as more fully described on
page [o]
"tracker rate mortgage loan" A loan where interest is linked
to a variable interest rate
other than the standard
variable rate; for example, the
rate on a tracker rate mortgage
loan may be set at a margin above
sterling LIBOR or above rates set
by the Bank of England
"transaction documents" The documents listed in
"Listing and general
information" and any swap
collateral ancillary document
"transfer agent" Citibank, N.A., acting through
its London branch at 5
Carmelite Street, London EC4Y
0PA and/or any other person for
the time being acting as
transfer agent under the paying
agent and agent bank agreement
"transfer of equity" A transfer of the equitable or
beneficial and legal title by
co-owners to one of the
proprietors of a mortgaged
property where the transferee
remains a party to the original
mortgage or enters into a new
mortgage over the relevant
mortgaged property in favor of
the seller
"trigger event" An asset trigger event and/or a
non-asset trigger event
"trust calculation period" The period from (and including) the
first day of each calendar month to
(and including) the last day of the
same calendar month
"trust deed" The trust deed entered into on
or about the Funding 2 program
date, as amended from time to
time, between the issuer and
the note trustee constituting
the notes, as further described
under "Description of the trust
deed"
"trust determination date" The first day (or, if not a London
business day, the next succeeding
London business day) of each
calendar month
309
"trust property" The meaning given to it on page
[o]
"UK Listing Authority" The Financial Services Authority
in its capacity as competent
authority under Part VI of the
Financial Services and Markets Act
2000
"UK tax counsel" Sidley Austin Brown & Wood
"unauthorized underpayment" In relation to any flexible
mortgage loan has the meaning
given to it on page [o]
"underpayment" A situation where a borrower makes
a monthly payment on its mortgage
loan which is less than the
required monthly payment for that
month
"underwriters" The institutions specified in
the prospectus supplement
relating to any series and
class of notes
"underwriting agreement" The underwriting agreement relating
to the sale of a series or class
of US notes among the issuer and
the other underwriters designated
therein
"United Kingdom" The United Kingdom of Great
Britain and Northern Ireland
"United States person" The meaning given to it on page
[o]
"unpaid interest" For any non-cash re-draw of any
flexible mortgage loan, the
interest which would, but for
that non-cash re-draw, have
been payable in respect of that
mortgage loan on the relevant
monthly payment date for that
mortgage loan
"unregistered land" Land in England or Wales, title
to which is not registered at
H.M. Land Registry
"US holder" A beneficial owner of [US
notes] who is a "United States
person" or that otherwise is
subject to US federal income
taxation on a net income basis
in respect of note [denominated
in a currency other than US
dollars]
"US global note certificates" The global note certificates
relating to a series and class
of US notes
"US notes" Any series of the class A, class B,
class M and class C notes which
are registered in the United
States under the Securities Act
"US paying agent" Citibank, N.A., acting through its
office at 14th Floor Zone 3, 111
Wall Street, New York, New York
10043 "US tax counsel" Sidley
Austin Brown & Wood LLP
"UTCCR" The Unfair Terms in Consumer
Contracts Regulations 1999
310
"variable mortgage rate" The rate of interest which determines
the amount of interest payable
each month on a variable rate
mortgage loan
"variable rate mortgage loan" A mortgage loan where the
interest rate payable by the
borrower varies in accordance
with a specified variable rate
which at any time may be varied
in accordance with the relevant
mortgage conditions (and shall,
for the avoidance of doubt,
exclude fixed rate mortgage
loans and flexible mortgage
loans)
"VAT" Value added tax
"W-8BEN" An IRS Form W-8BEN
"WAFF" On any date, the weighted
average foreclosure frequency
for the mortgage portfolio as
calculated by the administrator
on that date in accordance with
the calculations for the
initial mortgage portfolio or
as agreed by the administrator
and the rating agencies from
time to time
"WALS" On any date, the weighted
average loss severity for the
mortgage portfolio as
calculated by the administrator
on that date in accordance with
the calculations for the
initial mortgage portfolio or
as agreed by the administrator
and the rating agencies from
time to time
"we" and "us" The issuer
"weighted average Funding 2
share percentage" The meanings given to it under
"The mortgages trust - Weighted
average Funding 2 share
percentage"
"weighted average seller
share percentage" The meanings given to it under
"The mortgages trust - Weighted
average seller share percentage"
"withholding tax" A tax levied under English or
Scots law, as further described
under "Material United Kingdom
tax consequences"
"zero coupon note" A note, the interest basis of
which is specified in the
applicable prospectus
supplement as being zero coupon
311
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
Following are the estimated expenses* (expressed in US dollars based on
an exchange rate of US$1.00=GB(pound)[.56]), other than underwriting discounts
and commissions, to be incurred in connection with the issuance and
distribution of the securities being registered under this registration
statement:
Securities and Exchange Commission registration fee....... $1,520,400
Printing and engraving expenses........................... $[580,000]
Legal fees and expenses................................... $[5,400,000]
Accounting fees and expenses.............................. $[460,000]
Trustee's fees and expenses............................... $[30,000]
Rating agency fees........................................ $[2,060,000]
Miscellaneous............................................. $[400,000]
Total..................................................... $[10,450,400]
* All amounts are estimates except for the SEC registration fee
Item 15. Indemnification of Directors and Officers
Granite Master Issuer plc (the "issuer")
Subject to the provisions of the Companies Act 1985, the laws which
govern the organization of the issuer provide for every director or other
officer or auditor of the issuer to be indemnified out of the assets of the
issuer against any liability incurred by him in defending any proceedings,
whether civil or criminal, in which judgment is given in his favor or in which
he is acquitted or in connection with any application in which relief is
granted to him by the court from liability for negligence, default, breach of
duty or breach of trust in relation to the affairs of the issuer.
Granite Finance Funding 2 Limited ("Funding 2")
Subject to the provisions of the Companies Act 1985, the laws which
govern the organization of Funding 2 provide for every director or other
officer or auditor of Funding 2 to be indemnified out of the assets of Funding
2 against any liability incurred by him in defending any proceedings, whether
civil or criminal, in which judgment is given in his favor or in which he is
acquitted or in connection with any application in which relief is granted to
him by the court from liability for negligence, default, breach of duty or
breach of trust in relation to the affairs of Funding 2.
Granite Finance Trustees Limited (the "mortgages trustee")
Subject to the provisions of the Companies (Jersey) Law 1991, the laws
which govern the organization of the mortgages trustee permit every director
or other officer or auditor of the mortgages trustee to be indemnified out of
the assets of the mortgages trust against any liability incurred by him in
defending any proceedings, whether civil or criminal, in which judgment is
given in his favor or in which he is acquitted or in connection with any
application in which relief is granted to him by the court from liability for
negligence, default, breach of trust in relation to the affairs of the
mortgages trustee.
Item 16. Exhibits
Exhibit No. Description of Exhibit Sequential
Page Number
1.1 Form of Underwriting Agreement*
3.1.1 Memorandum and Articles of Association of Granite
Master
II-1
Issuer plc*
3.1.2 Memorandum and Articles of Association of Granite
Finance Funding 2 Limited*
3.1.3 Memorandum and Articles of Association of Granite
Finance Trustees Limited*
4.1.1 Form of Global Intercompany Loan Terms and
Conditions*
4.1.2 Form of Issuer Global Intercompany Loan
Confirmation*
4.2 Form of Mortgages Trust Deed*
4.3 Form of Mortgage Sale Agreement*
4.4 Form of Issuer Deed of Charge*
4.5.1 Form of Funding 2 Deed of Charge*
4.5.2 Form of Deed of Accession to Funding 2 Deed of
Charge*
4.5.3 Form of Second Priority Funding 2 Deed of Charge*
4.6.1 Form of Issuer Trust Deed*
4.6.2 Form of Terms and Conditions of the Notes*
4.7 Form of Issuer Paying Agent and Agent Bank
Agreement*
4.8 Form of Cash Management Agreement*
4.9 Form of Issuer Cash Management Agreement*
4.10 Form of Administration Agreement*
4.11 Form of Issuer Post-Enforcement Call Option
Agreement*
5.1 Opinion of Sidley Austin Brown & Wood as to
legality*
8.1 Opinion of Sidley Austin Brown & Wood as to U.S.
tax matters*
8.2 Opinion of Sidley Austin Brown & Wood as to U.K.
tax matters*
8.3 Opinion of Mourant du Feu & Jeune as to Jersey
tax matters*
10.1 Form of Issuer Basis Rate Swap Agreement*
10.2 Form of Issuer Dollar Currency Swap Agreement*
10.3 Form of Issuer Euro Currency Swap Agreement*
10.4 Form of Issuer Start-up Loan Agreement*
10.5.1 Form of Master Definitions Schedule*
10.5.2 Form of Issuer Master Definitions Schedule*
10.6.1 Form of Issuer Corporate Services Agreement*
10.6.2 Form of Corporate Services Agreement (Mortgages
Trustee)*
10.6.3 Form of Corporate Services Agreement (Funding 2)*
23.1 Consent of Sidley Austin Brown & Wood (included
in Exhibits 5.1, 8.1 and 8.2)*
23.2 Consent of Mourant du Feu & Jeune (included in
Exhibit 8.3)*
23.3 Consent of auditors*
25.1 Statement of Eligibility of Trustee (Form T-1)*
* To be filed by amendment
Item 17. Undertakings
(a) As to Rule 415: Each of the undersigned registrants hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the
most recent post-effective amendment hereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this registration statement; and
II-2
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement;
provided, however, that the undertakings set forth in clauses (i)
and (ii) above do not apply if the information required to be
included in a post-effective amendment by those clauses is
contained in periodic reports filed by the registrants pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of
1934, as amended, that are incorporated by reference in this
amendment to the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To file a post-effective amendment to the registration statement to
include any financial statements required by Item 8.A. of Form 20-F at
the start of any delayed offering or continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Securities Act of 1933, as amended need not be furnished, provided, that
each of the registrants includes in the prospectus, by means of a
post-effective amendment, financial statements required pursuant to this
paragraph (4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of
those financial statements.
(b) As to indemnification: Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of each of the registrants pursuant to
the foregoing provisions, or otherwise, each registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
any of the registrants of expenses incurred or paid by a director,
officer or controlling person of such registrant in the successful
defense of any action, suit or proceeding) is asserted against any of
the registrants by such director, officer or controlling person in
connection with the securities being registered, the relevant registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy
as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(c) As to documents subsequently filed that are incorporated by reference:
Each of the undersigned registrants hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each
filing, if any, of each registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this registration statement shall be deemed
to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(d) As to information omitted in reliance on Rule 430A: Each of the
undersigned registrants hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in
II-3
reliance upon Rule 430A and contained in a form of prospectus filed by
the registrants pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized on October 12,2004.
GRANITE MASTER ISSUER PLC
By: L.D.C. Securitisation Director No.1
Limited
By: /s/ Sharon Tyson
Sharon Tyson
Director
GRANITE FINANCE FUNDING 2 LIMITED
By: L.D.C. Securitisation Director No. 1
Limited
By: /s/ Sharon Tyson
Sharon Tyson
Director
GRANITE FINANCE TRUSTEES LIMITED
By: /s/ Daniel Le Blancq
------------------------------------------
Daniel Le Blancq
Director
II-5
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment thereto has been signed by the following
persons in the capacities and on the dates indicated.
Granite Master Issuer plc
Signature Title Date
L.D.C. SECURITISATION DIRECTOR NO. 1 LIMITED Director October 12, 2004
By: /s/ Sharon Tyson
Name: Sharon Tyson
L.D.C. SECURITISATION DIRECTOR NO. 2 LIMITED Director October 12, 2004
By: /s/ Clive Rakestrow
Name: Clive Rakestrow
[Additional Signature Pages Follow]
II-6
Granite Finance Funding 2 Limited
Signature Title Date
L.D.C. SECURITISATION DIRECTOR NO. 1 LIMITED Director October 12, 2004
By: /s/ Sharon Tyson
Name: Sharon Tyson
L.D.C. SECURITISATION DIRECTOR NO. 2 LIMITED Director October 12, 2004
By: /s/ Clive Rakestrow
Name: Clive Rakestrow
[Additional Signature Pages Follow]
II-7
Granite Finance Trustees Limited
Signature Title Date
By: /s/ Daniel Le Blancq Director October 12, 2004
Name: Daniel Le Blancq
By: /s/ Julia Chapman Director October 12, 2004
Name: Julia Chapman
By: /s/ Richard Gough Director October 12, 2004
Name: Richard Gough
II-8
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE MASTER ISSUER plc
Pursuant to the requirements of the Securities Act of 1933, the
undersigned, the duly authorized representative in the United States of
Granite Master Issuer plc, has signed this registration statement or amendment
thereto in New York, New York on October 12, 2004.
By: /s/ Donald J. Puglisi
Name: Donald J. Puglisi
Office: Managing Director
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE FINANCE FUNDING 2 LIMITED
Pursuant to the requirements of the Securities Act of 1933, the
undersigned, the duly authorized representative in the United States of
Granite Finance Funding 2 Limited, has signed this registration statement or
amendment thereto in New York, New York on October 12, 2004.
By: /s/ Donald J. Puglisi
Name: Donald J. Puglisi
Office: Managing Director
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE FINANCE TRUSTEES LIMITED
Pursuant to the requirements of the Securities Act of 1933, the
undersigned, the duly authorized representative in the United States of
Granite Finance Trustees Limited, has signed the registration statement or
amendment thereto in New York, New York on October 12, 2004.
By: /s/ Donald J. Puglisi
Name: Donald J. Puglisi
Office: Managing Director
II-9
EXHIBIT INDEX
Exhibit No. Description of Exhibit Sequential
Page Number
1.1 Form of Underwriting Agreement*
3.1.1 Memorandum and Articles of Association of
Granite Master Issuer plc*
3.1.2 Memorandum and Articles of Association of
Granite Finance Funding 2 Limited*
3.1.3 Memorandum and Articles of Association of
Granite Finance Trustees Limited*
4.1.1 Form of Global Intercompany Loan Terms and
Conditions*
4.1.2 Form of Issuer Global Intercompany Loan
Confirmation*
4.2 Form of Mortgages Trust Deed*
4.3 Form of Mortgage Sale Agreement*
4.4 Form of Issuer Deed of Charge*
4.5.1 Form of Funding 2 Deed of Charge*
4.5.2 Form of Deed of Accession to Funding 2 Deed of
Charge*
4.5.3 Form of Second Priority Funding 2 Deed of
Charge*
4.6.1 Form of Issuer Trust Deed*
4.6.2 Form of Terms and Conditions of the Notes*
4.7 Form of Issuer Paying Agent and Agent Bank
Agreement*
4.8 Form of Cash Management Agreement*
4.9 Form of Issuer Cash Management Agreement*
4.10 Form of Administration Agreement*
4.11 Form of Issuer Post-Enforcement Call Option
Agreement*
5.1 Opinion of Sidley Austin Brown & Wood as to
legality*
8.1 Opinion of Sidley Austin Brown & Wood as to
U.S. tax matters*
8.2 Opinion of Sidley Austin Brown & Wood as to
U.K. tax matters*
8.3 Opinion of Mourant du Feu & Jeune as to Jersey
tax matters*
10.1 Form of Issuer Basis Rate Swap Agreement*
10.2 Form of Issuer Dollar Currency Swap Agreement*
10.3 Form of Issuer Euro Currency Swap Agreement*
10.4 Form of Issuer Start-up Loan Agreement*
10.5.1 Form of Master Definitions Schedule*
10.5.2 Form of Issuer Master Definitions Schedule*
10.6.1 Form of Issuer Corporate Services Agreement*
10.6.2 Form of Corporate Services Agreement (Mortgages
Trustee)*
10.6.3 Form of Corporate Services Agreement (Funding
2)*
23.1 Consent of Sidley Austin Brown & Wood (included
in Exhibits 5.1, 8.1 and 8.2)*
23.2 Consent of Mourant du Feu & Jeune (included in
Exhibit 8.3)*
23.3 Consent of auditors*
25.1 Statement of Eligibility of Trustee (Form T-1)*
* To be filed by amendment
II-10