As filed with the Securities and Exchange Commission on April 13, 2006
Registration Nos. 333-[ ], 333-[ ], 333-[ ]
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------------
GRANITE MASTER ISSUER PLC
(Issuing entity in respect of the Notes)
(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
(Depositor)
(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
(Mortgages Trustee)
(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 NE3 4PL 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. [ ]
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CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
Title of securities Amount to be Proposed Proposed Amount of
to be registered registered maximum maximum registration
(1)(2) offering aggregate fee(5)
price per offering
unit(3) price(3)
- ------------------------------------------------------------------------------------------------------------
Mortgage Backed Notes $10,000,000,000 100% $10,000,000,000 $1,070,000
- ------------------------------------------------------------------------------------------------------------
Global intercompany loan((4)) - - - -
- ------------------------------------------------------------------------------------------------------------
Funding 2 interest in the mortgages - - - -
trust((4))
- ------------------------------------------------------------------------------------------------------------
Total $10,000,000,000 100% $10,000,000,000 $1,070,000
- ------------------------------------------------------------------------------------------------------------
1 With respect to any securities issued with original issue discount, the
amount to be registered is calculated based on the initial public offering
price thereof.
2 With respect to any securities denominated in any foreign currency, the
amount to be registered shall be the U.S. dollar equivalent thereof based
on the prevailing exchange rate at the time such security is first
offered.
3 Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act, as amended.
4 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.
5 In accordance with Rule 457(p) of the General Rules and Regulations under
the Securities Act of 1933, the amount of $204,862 of the filing fee
previously paid in connection with Registration Statement Nos.
333-119671-01, 333-119671-02, 333-119671-03 of Granite Master Issuer plc,
Granite Finance Funding 2 Limited and Granite Finance Trustees Limited
(initially filed with the Securities and Exchange Commission on October
12, 2004) is offset against the current due filing fee of $1,070,000.
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 mortgage-backed 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. 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 other or sale is not permitted.
[FORM OF PROSPECTUS SUPPLEMENT]
Subject to completion and amendment dated [_______]
PROSPECTUS SUPPLEMENT DATED [ ], 200[ ]
(to Prospectus dated [ ], 200[ ])
$[ ]
Granite Master Issuer plc
Issuing Entity
$[o] series 2006-[2] callable class [A] notes
$[o] series 2006-[2] callable class [B] notes
$[o] series 2006-[2] callable class [M] notes
$[o] series 2006-[2] callable class [C] notes
The offering in respect of this series 2006-[2] comprises the following
classes of notes:
Net
Proceeds
to
Price Issuing Underwriters'
to entity Management
Initial Public per and Underwriter Final
Principal per Class Underwriting Selling Maturity
Class Amount Interest Rate(1) Note of Notes Fee Commission Date
Class [A] $[o] [One-month USD LIBOR + [o]% p.a.] [o]% $[o] [o]% [o]% [o]
Class [B] $[o] [Three-month USD LIBOR + [o]% p.a.] [o]% $[o] [o]% [o]% [o]
Class [M] $[o] [Three-month USD LIBOR + [o]% p.a.] [o]% $[o] [o]% [o]% [o]
Class [C] $[o] [Three-month USD LIBOR + [o]% p.a.] [o]% $[o] [o]% [o]% [o]
Total: $[o] $[o] [o]% [o]%
- ---------
(1) [One-month USD LIBOR and three-month USD LIBOR] will be determined as
described under "Summary -- Interest" in this prospectus supplement and
"Description of the US Notes -- 4. Interest" in the accompanying
prospectus.
[Fixed interest, if applicable]
The series 2006-[2] callable class [A] notes, series 2006-[2] callable
class [B] notes, series 2006-[2] callable class [M] notes and series 2006-[2]
callable class [C] notes (the "offered notes") are part of the series 2006-[2]
issuance of notes by Granite Master Issuer plc.
Interest on, and principal of, [(i) the series 2006-[2] class [A] notes
will be paid [monthly] on the 20th day of each calendar month, beginning in
[o],] and (ii) all other classes of offered notes will be paid [quarterly] on
the 20th day of each [February, May, August and November] of each calendar
year, beginning in [ ]. [Delete (as appropriate) if no money market notes are
issued.]
You should review and consider the discussion under "Risk factors"
beginning on page [S-18] in this prospectus supplement and on page] [31] of
the accompanying prospectus before you purchase any notes.
Application will be 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 offered notes during the period of
twelve months from the date of this prospectus supplement to be admitted to
the official list maintained by the UK Listing Authority. Application will
also be made to the London Stock Exchange plc for such notes to be admitted to
trading on the London Stock Exchange's Gilt Edged and Fixed Interest Market.
The offered notes are not insured or guaranteed by any United States,
United Kingdom or any other governmental agency or instrumentality. The
offered notes are obligations of Granite Master Issuer plc only and are not
obligations of any other person or entity. The primary asset securing the
offered notes is a loan made by Granite Master Issuer plc to 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 Wales and Scotland.
Northern Rock plc is the sponsor in relation to Granite Master Issuer
plc's note issuance program.
Granite Finance Funding 2 Limited is the depositor in relation to
Granite Master Issuer plc's note issuance program.
The offered notes will have the benefit of certain internal credit
support, such as the availability of reserve funds and subordination of
certain note classes to other note classes as described in the summary of this
prospectus supplement and under "Credit structure" and "Risk factors" in the
prospectus.
The offered notes will also have the benefit of the following derivative
instruments: (i) the Funding 2 basis rate swaps entered into between Northern
Rock plc, as basis rate swap provider, and Funding 2, and (ii) the issuer
swaps to be entered into between the issuing entity and [ ], as the issuer
swap provider in respect of the series 2006-[2] class [o] notes.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the offered notes or determined that
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The underwriters or affiliates of certain underwriters will pay and
subscribe for the offered notes at the price per note stated in the table
above. The net proceeds to the issuing entity from the sale of the offered
notes is expected to be approximately $[o].
Underwriters
[ ] [ ] [ ]
[ ] [ ] [ ]
TABLE OF CONTENTS
Prospectus Supplement Page Prospectus Page
Summary..........................S-4 Summary of prospectus .............6
Risk factors....................S-16 Fees..............................31
US dollar presentation..........S-17 Risk factors .....................31
[Controlled redemption dates] Defined terms.....................55
[Scheduled redemption dates] The issuing entity ...............56
[Bullet redemption dates] Use of proceeds...................57
S-18.........................S-18 The Northern Rock Group...........58
Maturity and repayment Funding 2 ........................59
considerations...............S-19 The mortgages trustee ............60
The Funding 2 basis rate swap Holdings .........................61
provider.....................S-21 GPCH Limited .....................62
The issuer swap provider........S-22 Funding issuing entities..........63
Underwriting....................S-23 The note trustee and the issuer
Legal matters...................S-27 security trustee................78
ANNEX A-1......................A-1-1 Affiliations and certain
The cut-off date mortgage relationships and
portfolio...................A-1-1 related transactions of
ANNEX A-2......................A-2-1 transaction parties.............79
Characteristics of the Issuance of Notes ................63
United Kingdom residential The Mortgage Loans ...............68
mortgage market.............A-2-1 Certain characteristics of the
ANNEX B Loan tranches...........B-1 United Kingdom residential
ANNEX C..........................C-1 mortgage market ................91
Start-up loan tranche............C-1 The servicer and the
ANNEX D..........................D-1 administration agreement........97
Static pool data.................D-1 Assignment of the mortgage loans
and related security ............108
The mortgages trust .............119
The global intercompany loan
agreement......................138
Cashflows........................143
Credit structure.................168
The swap agreements..............178
Cash management for the
mortgages trustee and
Funding 2......................183
Cash Management for the
issuing entity.................187
Security for Funding 2's
obligations....................189
Security for the Issuing
entity's obligations...........194
Description of the trust deed....198
The notes .......................200
Description of the US notes .....205
Material legal aspects of the
mortgage loans and the related
security.......................231
Material United Kingdom tax
consequences ..................237
Material Jersey (Channel Islands)
tax considerations.............240
ERISA considerations.............246
Enforcement of foreign judgments in
England and Wales..............249
United States legal investment
considerations.................250
Legal matters ...................251
Underwriting ....................252
Reports to noteholders...........255
Listing and general information .256
Glossary ........................259
Index of principal terms.........337
S-2
Important notice about information presented in this prospectus supplement
and the accompanying prospectus
We provide information to you about the offered notes in two separate
documents that progressively provide more detail: this prospectus supplement
and the accompanying prospectus. This prospectus supplement provides the
specific terms of the offered 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 offered notes is expected to be paid. Most of the information
provided in the prospectus does not appear in this prospectus supplement.
This prospectus supplement contains information about the series and
classes of notes offered hereby that supplements the information contained in
the prospectus, and you should rely on that supplementary information in this
prospectus supplement for the particular terms of the offered notes.
Consequently, you should carefully read both the prospectus and the prospectus
supplement before you purchase any of the offered notes.
In deciding whether to purchase any offered notes you should rely solely
on the information in this prospectus supplement and the accompanying
prospectus, including any information incorporated by reference. We have not
authorized anyone to give you different information about the offered notes.
The information in this prospectus supplement and the accompanying prospectus
is only accurate as of the dates on their respective covers.
This prospectus supplement may be used to offer and sell the offered
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 material agreements and other
documents referred to in this prospectus supplement and the prospectus. You
may obtain copies of these documents for review. See "Incorporation by
Reference" and "Where You Can Find More Information" in the prospectus.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these documents 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.
To facilitate your review of this prospectus supplement we have included
definitions of certain defined terms used in this prospectus supplement and
the accompanying prospectus under the caption "Glossary" in the accompanying
prospectus. We have also included an index of principal terms on page [337] in
the accompanying prospectus. The index of principal terms lists the pages
where terms used in this prospectus supplement or the accompanying prospectus
are first defined.
References in this prospectus supplement to "we", "us" or the "issuing
entity" mean Granite Master Issuer plc and references to "you" mean potential
investors in the offered notes.
S-3
Summary
This summary highlights selected information from this prospectus
supplement and does not contain all of the information you may need to make an
informed investment decision. To understand all of the terms of an offering of
the offered notes, you should read this entire prospectus supplement and the
accompanying prospectus before you purchase any offered notes.
Issuing entity Granite Master Issuer plc
Securities offered The issuing entity will issue $[o] series
2006-[2] callable class [A] notes, $[o] series
2006-[2] callable class [B] notes, $[o] series
2006-[2] callable class [M] notes [o] and $[o]
series 2006-[2] callable class [C] notes
(collectively, the "offered notes").
The offered notes are part of our series
2006-[2] issuance of notes. The offered notes
are issued by us and are solely our
obligations. The series 2006-[2] notes also
includes other sub-classes of class [A]
notes, class [B] notes, class [M] notes and
class [C] notes which are not being offered
hereby. The sub-classes of the series
2006-[2] notes not offered hereby are
described under "-- Other issuing entity
notes". Only the offered notes are being
offered pursuant to the prospectus and this
prospectus supplement.
We expect to issue other series of notes in the
future of various classes. These notes,
including additional class A notes, class B
notes, class M notes and class C notes, may
have interest rates, note payment dates,
repayment terms and other characteristics that
differ from the offered notes. You will not
receive prior notice of any future issuance of
notes and will not be asked for your consent to
any such issuance. However, any future issuance
of notes, as well as material changes to in the
solicitation, credit-granting, underwriting,
origination or pool selection criteria used to
originate or select new mortgage loans to be
assigned to the mortgages trust, will be
reported in our periodic reports on Form 10-D.
You may access such reports as described under
"Where you can find more information".
Sponsor Northern Rock plc
Seller, originator, servicer, Northern Rock plc
issuer cash manager and
Funding 2 basis rate swap
provider
Depositor Granite Finance Funding 2 Limited
Note trustee and issuer The Bank of New York, acting through its London
security trustee Branch at 48th Floor, One Canada Square, London
E14 5AL
Note payment dates Interest on, and principal of, the offered
notes, will be paid [(i) in respect of the
series 2006-[2] class A notes, [monthly]
S-4
on the 20th day of each calendar month (a
"monthly payment date") in each year up to and
including the final maturity date,] and] (ii)
in respect of all other classes of offered
notes, [quarterly] on the 20th of each
[February, May, August and November] in each
year up to and including the final maturity
date or, following the earlier to occur of the
step-up date (if applicable) and a pass-through
trigger event (as defined below), [monthly] on
each monthly payment date up to and including
the final maturity date (or, in each case, if
such day is not a business day, the next
succeeding business day).
A "pass-through trigger event" means the
occurrence of any of the following: (a) a
trigger event, (b) the service of an issuer
enforcement notice by the note trustee on the
issuing entity or (c) the service of an Funding
2 intercompany loan enforcement notice by the
Funding 2 security trustee on the issuing
entity. See "Risk factors - The occurrence of
an asset trigger event or enforcement of the
issuer security or the Funding 2 security may
accelerate the repayment of certain notes
and/or delay the repayment of other notes" and
"Risk factors - The occurrence of a
pass-through trigger event may accelerate the
repayment of certain notes and/or delay the
repayment of other notes" in the prospectus.
First note payment date [Money market notes] For the series 2006-[2]
class [o] notes, the note payment date falling
in [o].
[For all classes of offered notes, the note
payment date falling in [o].]
Closing date [o].
Interest Interest on the offered notes will be paid on
each [monthly or quarterly] note payment date
(as applicable) up to and including the final
maturity date.
[All] offered notes will accrue interest at the
annual rate specified on the cover of this
prospectus supplement up to (but excluding) the
note payment date falling in [o] (the "step-up
date"). From (and including) the step-up date,
offered notes will accrue interest at an annual
rate as follows:
Class Interest Rate
Class [A] [One-month USD LIBOR + [o]% p.a.]
Class [B] [Three-month USD LIBOR + [o]%
p.a.]
Class [M] [Three-month USD LIBOR + [o]%
p.a.]
Class [C] [Three-month USD LIBOR + [o]%
p.a.]
[Adjust as appropriate for fixed interest notes
and zero
S-5
coupon notes.] [State maximum/minimum rate of
interest, if applicable, for floating rate
notes.]
Interest on the offered notes will accrue from
the closing date and will be calculated on the
basis of a day count fraction of
[actual/360][actual/365 or actual/actual
(ISDA)][actual/365 (fixed)][actual/365
(sterling)][actual/360][30/360 or 360/360 or
"bond basis"][30E/360 or "eurobond basis"].
[Specify day count fraction for fixed interest
notes, if applicable.]
On each interest determination date, the rate
of interest payable in respect of each class of
offered notes will be determined by the agent
bank on the following basis:
(a) in respect of the first interest period,
(i) for the series 2006-[2] class [o]
notes, the linear interpolation of the
arithmetic mean of the offered quotations
to leading banks for two-week dollar
deposits and the arithmetic mean of the
offered quotations to leading banks for
one-month dollar deposits in the London
inter-bank market, and (ii) for all other
classes of offered notes, the linear
interpolation of the arithmetic mean of the
offered quotations to leading banks for
two-month dollar deposits and the
arithmetic mean of the offered quotations
to leading banks for three-month dollar
deposits (in each case, rounded upwards, if
necessary, to five decimal places); and
(b) in respect of subsequent interest periods,
for each class of offered notes, the
offered quotations to leading banks for US
dollar deposits for a period equal to the
relevant interest period or, following the
earlier to occur of the step-up date (if
applicable) and a pass-through trigger
event, one-month USD LIBOR,
in each case by reference to the display as
quoted on the Dow Jones/Telerate Monitor at
Telerate Page 3750. If Telerate Page No. 3750
stops providing these quotations, a 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 us (with the approval
of the note trustee, in its sole discretion)
will be used. [This is called the "screen rate"
for the respective classes of offered notes.]
[ISDA rate, if applicable.] The "interest
determination date" for the offered notes means
the second London business day before the first
day of an interest period.
Principal We expect to repay the principal amount
outstanding of each class of the offered notes
on the [controlled redemption dates] [scheduled
redemption dates] [bullet
S-6
redemption dates] for each such class in an
amount [up to the [controlled amortization
amount] [scheduled amortization
installment]][as set forth under "Bullet
redemption dates"]. See ["Controlled redemption
dates"] ["Scheduled redemption dates"] in this
prospectus supplement. We are obliged to make
such payments if we have funds available for
that purpose. If the principal amount
outstanding of any class of the offered notes
is not repaid in full on the final [controlled
redemption date] [scheduled redemption
date][bullet redemption dates] for such class,
noteholders generally will not have any
remedies against us until the final maturity
date of the offered notes. [Adjust for
pass-through notes, if applicable.] In that
case, any such class of notes, subject to the
principal payment rules described under
"Cashflows -- Distribution of Funding 2
principal receipts prior to the enforcement of
the Funding 2 security" in the prospectus, will
receive payments of principal to the extent of
the shortfall on each note payment date
thereafter in the amounts, and to the extent
available, until repaid in full.
Principal of the offered notes may be repaid
earlier than expected if a trigger event 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 mortgages trustee principal receipts on or
after the occurrence of a trigger event" in the
prospectus.
Redemption/payment basis [All offered notes] [specify class of offered
notes] are [controlled amortization notes].
[All offered notes] [specify class of offered
notes] are [scheduled redemption notes].
[All offered notes] [specify class of offered
notes] are [bullet redemption notes].
[All offered notes] [specify class of offered
notes] are [pass-through notes].
[Controlled redemption dates] [In respect of [each] class of offered notes,
the note payment dates on which principal
[Scheduled redemption dates] repayments are scheduled to be made, as set out
in ["Controlled redemption dates"] ["Scheduled
[Bullet redemption dates] redemption dates"] ["Bullet redemption dates"]
in this prospectus supplement.]
[Pass-through notes] [In respect of [each] class of offered
notes, principal will be repaid on the note
payment dates occurring in [ ].]
Issuance of future series The offered notes (and any future series and
and class of notes class of notes) issued by us are (and will be)
subject to the satisfaction of the issuance
tests, which are set out under "Issuance of
notes - Issuance" in the prospectus. In
S-7
particular, a note will be issued only if there
is a sufficient credit enhancement in the form
of outstanding subordinated loan tranches and
reserves or other forms of credit enhancement,
equal to or greater than the required
subordination amount for each outstanding class
of notes. The required subordination percentage
for each class of notes, which is used to
calculate the required subordination amount for
such class of notes, is set forth below.
The issuing entity may at any time, subject to
certain conditions, change the required
subordinated percentage for any class of
notes, or the method of calculating the
amounts of subordination, without your consent
or the consent of any other noteholders if the
rating agencies confirm that such change will
not negatively affect the ratings of any
outstanding notes. See "Risk Factors -- The
required subordination for a class of notes
may be changed" in the prospectus.
Subordination and credit The class A required subordinated percentage
enhancement is [o]%, the class B required subordinated
percentage is [o]%, the class M required
subordinated percentage is [o]% and the class C
required subordinated percentage is [o]%.
Payments of principal of, and interest on, the
junior classes of the series 2006-[2] notes are
subordinated to payments of principal of, and
interest on, the more senior classes of the
series 2006-[2] notes, including amounts of
principal to be credited to the cash
accumulation sub-ledgers of those more senior
classes of notes. In addition, amounts of
principal otherwise available to pay principal
of the junior classes of the series 2006-[2]
notes may be used to pay interest on more
senior classes of notes. See "Summary of
prospectus - Payment priority and ranking of
the notes" and "Credit Structure -- Use of
Funding 2 principal receipts to pay Funding 2
income deficiency" in the prospectus.
Payments of principal of the offered notes
will be deferred on the note payment dates on
which such principal payment is scheduled to
be made if at such time such principal
payments are needed to provide the required
subordination for more senior classes of
notes. Any such deferral of principal
repayments will continue until the required
subordination for such senior classes is
restored through repayment of the senior
classes or the issuance of sufficient
additional subordinate notes. See "Risk
factors -- Payments of class B, class M, class
C and class D notes may be delayed or reduced
in certain circumstances" in the prospectus.
Target reserve required (GBP)[o]
amount
S-8
Program reserve required [o]%
percentage
Arrears or step-up trigger An "arrears or step-up trigger" event occurs
event 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) the issuing entity fails to
exercise its option to redeem any of its notes
on the relevant step-up date pursuant to the
terms and conditions of such notes.
If an arrears or step-up trigger event has
occurred under item (i) only of the arrears and
step-up trigger event definition, then the
Funding 2 reserve fund increased amount will be
(GBP)[o].
If an arrears or step-up trigger event has
occurred under item (ii) only of the arrears
and step-up trigger event definition, then the
Funding 2 reserve fund increased amount will be
(GBP)[o].
If an arrears or step-up trigger event has
occurred under items (i) and (ii) of the
arrears and step-up trigger event definition,
then the Funding 2 reserve fund increased
amount will be (GBP)[o].
Losses Losses on the mortgage loans may reduce the
amount of principal available to repay principal
of the series 2006-[2] notes. Losses on the
mortgage loans will be allocated to the classes
of notes in inverse order of seniority,
beginning with the class C notes. No losses will
be allocated to the series 2006-[2] class A
notes until the aggregate amount of losses
exceeds the principal amount outstanding of each
class of notes junior to the series 2006-[2]
class A notes. See "The mortgages trust --
Losses" and "Credit Structure -- Principal
deficiency ledger" in the prospectus.
Optional redemption by the We have the right to redeem the offered notes at
issuing entity their aggregate principal amount outstanding,
together with any accrued and unpaid interest in
respect thereof on the following dates:
o on any note payment date on which the
aggregate principal amount outstanding of
the offered notes and all other classes of
the series [o] notes is less than 10% of the
initial outstanding principal amount of the
offered notes and all other classes of the
series [o] notes; or
o on the note payment date falling in [o]
and on any note payment date thereafter.
o [note payment date for optional redemption
for Implementation of Capital Requirements
Directive, if
S-9
applicable.]
Further, we may redeem the offered notes for
tax and other reasons and in certain other
circumstances as more fully described under
"Description of the US notes -- 5. Redemption,
purchase and cancellation" in the prospectus.
Security for the notes The offered notes are secured primarily by our
rights under the global intercompany loan
agreement. In addition, we have granted
security for the benefit of noteholders over
our bank accounts. See "Security for the
issuing entity's obligations" in the
prospectus.
The series 2006-[2] loan We have entered into a global intercompany loan
tranches agreement with Funding 2. The proceeds of the
offered notes will fund the relevant series
2006-[2] loan tranches. The principal terms of
such series 2006-[2] loan tranches are set out
in Annex B to this prospectus supplement. A
description of the global intercompany loan is
set forth in the prospectus under "The global
intercompany loan agreement".
Events of default The offered notes are subject to certain events
of default described under "Description of the
US notes" in the prospectus.
Limited recourse The only sources of payment for principal of or
interest on the offered notes are:
o repayments of principal of the relevant
series 2006-[2] loan tranches of the global
intercompany loan;
o funds in the issuer transaction account
that are allocable to the offered notes; and
o amounts available to be drawn under the
issuer reserve fund, subject to the limits
and conditions on the purposes for which the
issuer reserve fund may be utilized.
The mortgages trust Each series 2006-[2] loan tranche is a tranche
of the global intercompany loan and made by us
to Funding 2. Funding 2 will secure 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 the seller 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 the seller's lending criteria for inclusion
in the mortgages trust. These criteria are
discussed in the prospectus under "Assignment of
the mortgage loans and related security" in the
prospectus. The seller has given representations
and warranties to the
S-10
mortgages trustee in the mortgage sale
agreement that, among other things, the
mortgage loans have been originated in
accordance with the seller's lending criteria
in effect at the time of origination. If a
mortgage loan (including any personal secured
loan) or 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,
the Funding beneficiaries or the Funding
security trustees, then 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 mortgage portfolio.
The seller may assign new mortgage loans and
their related security to the mortgages trustee
in order to increase or maintain the trust
property. The seller may also increase the size
of the trust property from time to time in
connection with an issue of new notes by us,
the proceeds of which are applied ultimately to
fund the acquisition (by assignment) of the new
mortgage loans and their related security by
the mortgages trustee, or to comply with the
seller's obligations under the mortgage sale
agreement as described under "Assignment of the
mortgage loans and related security -
Assignment of new mortgage loans and their
related security in the prospectus" in the
prospectus.
When new mortgage loans are assigned to the
mortgages trustee, the trust property will
increase accordingly. 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 share and
Funding 2 share of the trust property, see
"The mortgages trust" in the prospectus.
The aggregated outstanding current balance of
mortgage loans in the mortgages trust as at the
cut-off date was (GBP)[o]. See Annex A-1 to
this prospectus supplement for detailed
statistical and other information on the
mortgage loans.
Issuer accounts The issuer transaction account and the issuer
GIC account.
Other issuing entity notes The series 2006-[2] notes are the [fifth] series
of notes issued by us. Only the offered notes
are being offered by this prospectus supplement
and the accompanying prospectus. On or about
the closing date, the issuing entity
S-11
will also issue the series 2006-[2] callable
class [A] notes, the series 2006-[2] callable
class [B] notes, the series 2006-[2] callable
class [M] notes and the series 2006-[2]
callable class [C] notes which are not being
offered hereby. As of the closing date, the
aggregate principal amount outstanding of notes
issued by us (converted, where applicable, into
sterling at the applicable specified currency
exchange rate), including the offered notes,
will be: class A (GBP)[o]
class B (GBP)[o]
class M (GBP)[o]
class C (GBP)[o]
As used herein, "specified currency exchange
rate" means, 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.
As of the date of this prospectus supplement,
the aggregate principal amount outstanding of
notes issued by each Funding issuing entity
identified below (converted, where applicable,
into sterling at the applicable currency
exchange rate) is:
(1) Granite Mortgages 01-1 plc, (GBP)[o];
(2) Granite Mortgages 01-2 plc, (GBP)[o];
(3) Granite Mortgages 02-1 plc, (GBP)[o];
(4) Granite Mortgages 02-2 plc, (GBP)[o];
(5) Granite Mortgages 03-1 plc, (GBP)[o];
(6) Granite Mortgages 03-2 plc, (GBP)[o];
(7) Granite Mortgages 03-3 plc, (GBP)[o];
(8) Granite Mortgages 04-1 plc, (GBP)[o];
(9) Granite Mortgages 04-2 plc, (GBP)[o]; and
(10) Granite Mortgages 04-3 plc, (GBP)[o].
For a description of the Funding issuing
entities, see "Funding issuing entities" in the
prospectus.
Use of proceeds The gross proceeds from the issue of the series
2006-[2] notes will equal approximately $[o] and
(after exchanging, where applicable the proceeds
of the notes for sterling, calculated by
reference to the applicable specified currency
exchange rate) will be used by the issuing
entity to make available loan tranches to
Funding 2 pursuant to the terms of the global
intercompany loan agreement. Funding 2 will
S-12
use the gross proceeds of each loan tranche to
make a further contribution to the mortgages
trustee.
Stock exchange listing Application will be 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
offered notes issued during the period of twelve
months from the date of this prospectus
supplement to be admitted to the official list
maintained by the UK Listing Authority.
Application will also be made to the London
Stock Exchange plc for such notes to be admitted
to trading on the London Stock Exchange's Gilt
Edged and Fixed Interest Market.
Ratings It is a condition of the issuance of the offered
notes that they be assigned on the closing date
the following ratings by Standards & Poor's,
Moody's and Fitch, respectively:
Class Ratings
Class [A] [AAA/Aaa/AAA]
Class [B] [AA/Aa3/AA]
Class [M] [A/A2/A]
Class [C] [BBB/Baa2/BBB]
See "Summary -- Ratings on the notes" and "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" in the prospectus.
Funding 2 basis rate swaps The mortgage loans in the mortgage portfolio pay
interest at a variety of rates, for example at
rates linked either to the seller's standard
variable rate or linked to an interest rate
other than the seller's standard variable rate
as specified in the prospectus. The amount of
revenue receipts that Funding 2 receives on the
mortgage portfolio 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 us under the
loan tranches advanced pursuant to the global
intercompany loan agreement, from which amount
we will fund, among other things, our payment
obligations under the issuer swaps and the
notes, will generally be calculated by reference
to an interest rate based upon three-month
LIBOR, but will be payable in monthly
instalments.
To hedge its exposure against the possible
variance between the foregoing interest rates,
Funding 2 entered into the Funding 2 basis rate
swaps with the Funding 2 basis rate swap
provider on the Funding 2 program date. See
"The swap agreements - The Funding 2 basis rate
swaps" in the prospectus.
S-13
Issuer swaps In respect of each class of offered notes, we
will enter into a currency swap transaction with
an issuer swap provider in order to hedge
against any variance between the interest
received by us under the global intercompany
loan agreement, which will be related to
sterling LIBOR and paid in sterling, and the
interest which is payable on the offered notes,
and to hedge against fluctuations in the
exchange rate in respect of principal received
under the global intercompany loan agreement,
which will be paid in sterling, and principal
which we are obliged to repay in dollars on the
offered notes. See "The swap agreements -- The
issuer swaps" in the prospectus and "The issuer
swap providers" in this prospectus supplement.
Start-up loan tranche Pursuant to the NR start-up loan agreement,
Northern Rock has agreed to make available to us
start-up loan tranches. Each start-up loan
tranche will be used to fund (in whole or in
part) the issuer reserve fund and to meet cost
and expenses incurred by Funding 2 and us as
more fully described under "Credit structure --
Start-up loans" in the accompanying prospectus.
On the closing date, Northern Rock will make
available to us a start-up loan tranche, the
principal terms of which are set out in Annex C
to this prospectus supplement.
Denominations The offered notes will be issued in minimum
denominations of $100,000 and integral
multiples of $1,000 in excess thereof.
Material United States tax As more fully discussed in the accompanying
consequences prospectus, in the opinion of Sidley Austin llp,
US federal income tax counsel to Northern Rock,
the class A, class B and class M offered notes
will be treated as debt for US federal income
tax purposes and the class C offered notes
should be treated as debt for US federal income
tax purposes. Further, in the opinion of US
federal income tax counsel to Northern Rock,
assuming compliance with the transaction
documents, the mortgages trustee acting in its
capacity as trustee of the mortgages trust,
Funding 2 and the issuing entity will not be
subject to US federal income tax. See "Material
United States federal income tax consequences"
in the prospectus.
[Additional US tax disclosure to be provided in
the event (i) any offered notes are denominated
in a currency other than US dollars and (ii)
any money market notes are issued]
ERISA considerations for The offered notes will be eligible for purchase
investors 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
S-14
ERISA or Section 4975 of the Code, subject to
consideration of the issues described in the
prospectus under "ERISA considerations".
United States legal None of the offered notes is a "mortgage related
investment considerations security" under the United States Secondary
Mortgage Market Enhancement Act of 1984, as
amended. See "United States legal investment
considerations" in the prospectus.
Payment and Delivery No later than 10:00 a.m. (Eastern Standard Time)
on the Closing Date, we will (a) cause the
global note certificate for each of the offered
notes to be registered in the name of Cede & Co.
as nominee for DTC for credit on the closing
date to the account of the lead underwriters
with DTC or to such other account with DTC as
the lead underwriters may direct, and (b)
deliver the global note certificate for each of
the offered notes duly executed on our behalf
and authenticated in accordance with the issuer
paying agent and agent bank agreement to
Citibank N.A., as custodian for DTC.
Against delivery of the offered notes (i) the
underwriters will pay to the lead underwriters
the gross underwriting proceeds for the offered
notes and (ii) the lead underwriters will pay to
us or to a third party, as directed by us, the
gross underwriting proceeds for the offered
notes.
Clearing and settlement It is expected that on the closing date the
offered notes will be accepted for clearance
through DTC, Clearstream Luxembourg and
Euroclear under the following CUSIP numbers,
common codes and ISINs:
- -----------------------------------------------------------------------------
Class of Notes CUSIP ISIN Common Code
- -----------------------------------------------------------------------------
series 2006-[2] class [A] [o] [o] [o]
notes
- -----------------------------------------------------------------------------
series 2006-[2] class [B] [o] [o] [o]
notes
- -----------------------------------------------------------------------------
series 2006-[2] class [M] [o] [o] [o]
notes
- -----------------------------------------------------------------------------
series 2006-[2] class [C] [o] [o] [o]
notes
- -----------------------------------------------------------------------------
Reports to noteholders The servicer will prepare annual and monthly
reports that will contain information about the
offered notes as more fully described under
"Reports to noteholders" in the prospectus.
The issuing entity will file with the SEC
annual reports on Form 10-K, periodic reports
on Form 10-D and reports on Form 8-K about the
mortgages trust. See "Where You Can Find More
Information" in the prospectus.
S-15
Risk factors
The information in this section and under "Risk factors" in the
accompanying prospectus identifies the principal risks associated with an
investment in the offered notes. You should read these sections closely and
consider the risks carefully.
[Selected risk factors related to [bullet redemption notes] [controlled
amortization notes] [money market notes] [scheduled redemption notes]
[pass-through notes] to be added, if applicable, depending on the capital
structure of the transaction].
S-16
US dollar presentation
Translations of (GBP)s sterling into US dollars, unless otherwise stated
in this prospectus supplement, have been made at the rate of (GBP)[o], which
reflects the noon buying rate in the City of New York for cable transfers in
sterling per US$1.00 as certified for customs purposes by the Federal Reserve
Bank on [o]. Use of this rate does not mean that (GBP) sterling amounts
actually represent those US dollar amounts or could be converted into US
dollars at that rate at any particular time.
References throughout this prospectus supplement to "(GBP)", "(GBP)s"
or "sterling" are to the lawful currency for the time being of the United
Kingdom of Great Britain and Northern Ireland.
References in this prospectus supplement to "US$", "USD", "$", "US
dollars" or "dollars" are to the lawful currency of the United States of
America.
Sterling/US dollar exchange rate history*
Years ended December 31
-------------------------------------------------------------
2005 2004 2003 2002 2001
-------------------------------------------------------------
Last(1) 1.7230 1.9181 1.7858 1.6100 1.4546
Average(2) 1.8196 1.8334 1.6358 1.5038 1.4407
High 1.9291 1.9467 1.7858 1.6100 1.5038
Low 1.7142 1.7559 1.5541 1.4082 1.3727
- ---------
Notes
(1) Last is the closing exchange rate on the last operating business day of
each of the periods indicated, years commencing from January 1 or the next
operating business day.
(2) Average is the average daily exchange rate during the period.
December November October
[o] 2006 [o] 2006 2005 2005 2005
-------------------------------------------------------------
High [o] [o] 1.7761 1.7767 1.7845
Low [o] [o] 1.7167 1.7142 1.7464
- ---------
* Source: Bloomberg (New York composite rates)
S-17
[Controlled redemption dates] [Scheduled redemption dates]
[Bullet redemption dates]
The ["controlled amortization amount"] ["scheduled amortization
installment"] for each class of offered notes for any note payment date set
forth below (each such date, a ["controlled redemption date"] ["schedule
redemption date"] is an amount equal to the amount which we would be required
to repay in respect of such class of offered notes so that on that [controlled
redemption date][schedules redemption date] the aggregate principal amount
outstanding of such class of offered notes has been reduced to (but is not
less than) the stated amount or "target balance" set out in the following
table:
[Controlled
redemption Target Target Target Target Target Target
[scheduled balance for balance for balance for balance for balance for balance for
redemption] series series series series series series
date 2006-[2] 2006-[2] 2006-[2] 2006-[2] 2006-[2] 2006-[2]
occurring class [o] class A4 class [o] class [o] class [o] class [o]
in: notes notes notes notes notes notes
- ----------- ------------- ------------- -------------- -------------- --------------- --------------
(GBP) $ (GBP) $ (GBP) $ (GBP) $ (GBP) $ (GBP) $
------ ------ ------ ------ ------ ------- ------ ------- ------- ------- ------- ------
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o] [o]
- -------------
The target balances for the offered notes which are stated in US dollars in the above table have been
calculated based upon the specified currency exchange rate under the issuer swaps for the offered notes of
(GBP)1 = $[o].
[The bullet redemption dates and the amount which we would be required to repay on such bullet
redemption dates in respect of each class of offered notes so that on that bullet redemption date the
aggregate principal amount outstanding of such class of offered notes is reduced to zero are set out in the
following table:]
Bullet redemption Principal amount Principal amount
date occurring in: outstanding for series 2006-[2] class outstanding for series 2006-[2] class
[o] notes [o] notes
[o] [o] [o]
S-18
Maturity and repayment considerations
The average lives of each class of the offered 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 each class of the offered notes
can be made, however, based on certain assumptions. The assumptions used to
calculate the possible average lives of each class of the offered 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 issuing
entity at any time after giving effect to principal distributions;
(4) no asset trigger event or non-asset trigger event occurs;
(5) no event occurs (including, but not limited to, the failure to
comply with the repayment tests), that would cause payments on each
class of the offered notes to be deferred;
(6) the issuing entity exercises its option to redeem each class of the
offered notes on the step-up date, if applicable, relating to such
notes;
(7) the offered notes are issued on [o];
(8) each payment made by the issuing entity 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 issuing entity'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.
CPR and average lives of the offered notes
Based upon the foregoing assumptions, the approximate average lives of
the offered notes, at various constant payment rates for the mortgage loans,
would be as follows:
Possible Possible Possible Possible Possible Possible
average life average life average life average life average life average life
of the series of the series of the series of the series of the series of the series
Constant payment 2006-[2] class 2006-[2] class 2006-[2] 2006-[2] class 2006-[2] class 2006-[2]
rate (% per [o] notes [o] notes class [o] [o] notes [o] notes class [o]
annum) (years) (years) notes (years) (years) (years) notes (years)
- ---------------- -------------- -------------- ------------- -------------- -------------- -------------
5% [o] [o] [o] [o] [o] [o]
10% [o] [o] [o] [o] [o] [o]
15% [o] [o] [o] [o] [o] [o]
20% [o] [o] [o] [o] [o] [o]
25% [o] [o] [o] [o] [o] [o]
30% [o] [o] [o] [o] [o] [o]
S-19
The average lives of each class of the offered notes are subject to
factors largely outside the control of the issuing entity and consequently no
assurance can be given that these assumptions and estimates are realistic.
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.
CPR and yields to maturity of the offered notes
Based upon the foregoing assumptions, the approximate yield to maturity
of each class of the offered notes, at various constant payment rates for the
mortgage loans, would be as follows:
Constant payment series series series series series series
rate (% per 2006-[2] class 2006-[2] class 2006-[2] class 2006-[2] class 2006-[2] class 2006-[2] class
annum) [o] notes [o] notes [0] notes [o] notes [o] notes [o] notes
- ---------------- -------------- -------------- -------------- -------------- -------------- -------------
5% [o] [o] [o] [o] [o] [o]
10% [o] [o] [o] [o] [o] [o]
15% [o] [o] [o] [o] [o] [o]
20% [o] [o] [o] [o] [o] [o]
25% [o] [o] [o] [o] [o] [o]
30% [o] [o] [o] [o] [o] [o]
S-20
The Funding 2 basis rate swap provider
Information in respect of the Funding 2 basis rate swap provider and the
Funding 2 basis rate swaps is provided in the accompanying prospectus (see
"The swap agreements - The Funding 2 basis rate swaps").
The sponsor has determined that the significance percentage for the
Funding 2 basis rate swaps is [less than 10%] [10% but less than 20%] [20% or
more].
The significance percentage of the Funding 2 basis rate swaps is the
percentage equivalent of (i) the amount of a reasonable good-faith estimate of
maximum probable exposure (made in substantially the same manner as that used
in the sponsor's internal risk management process in respect of similar
derivative instruments) divided by (ii) the aggregate principal balance of the
mortgage loans in the mortgage portfolio.
[Appropriate financial disclosure as contemplated in Item 1115 of
Regulation AB to be provided if the significance percentage is 10% or more.]
S-21
The issuer swap provider
[Name of issuer swap provider]
[Disclosure in respect to the issuer swap provider - re: organizational
form, general characteristics of business and ratings.]
Except for the information provided in the preceding [o] paragraphs,
[name of issuer swap provider and any affiliated entity described in this
section] have not been involved in the preparation of, and do not accept
responsibility for, this prospectus supplement.
The sponsor has determined that the significance percentage for the
issuer swaps is [less than 10%] [10% but less than 20%] [20% or more].
The significance percentage of the issuer swaps in respect of the series
2006-[2] class [o] notes is the percentage equivalent of (i) the amount of a
reasonable good-faith estimate of maximum probable exposure (made in
substantially the same manner as that used in the sponsor's internal risk
management process in respect of similar derivative instruments) divided by
(ii) the aggregate principal amount of such classes of offered notes.
[Appropriate financial disclosure as contemplated in Item 1115 of
Regulation AB to be provided if the significance percentage is 10% or more.]
S-22
Underwriting
United States
We have agreed to sell, and [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 offered notes listed in that table.
The terms of these purchases are governed by an underwriting agreement among
us, the lead underwriters and the underwriters.
Principal amount
of the series
2006-[2] class
Underwriters of the series 2006-[2] class [A] notes [A] notes
- ------------------------------------------------------------------------------
[o]
[o]
[o]
[o]
[o]
[o]
[o]
Total: [o]
Principal amount
of the series
2006-[2] class
Underwriters of the series 2006-[2] class [B] notes [B] notes
- ------------------------------------------------------------------------------
[o]
[o]
[o]
[o]
[o]
[o]
[o]
Total: [o]
Principal amount
of the series
2006-[2] class
Underwriters of the series 2006-[2] class [M] notes [M] notes
- ------------------------------------------------------------------------------
[o]
[o]
[o]
[o]
[o]
[o]
[o]
Total: [o]
Principal amount
of the series
2006-[2] class
Underwriters of the series 2006-[2] class [C] notes [C] notes
- ------------------------------------------------------------------------------
[o]
[o]
[o]
Total: [o]
The price to the public as a percentage of the principal balance of the
offered notes will be [o]%.
S-23
We have agreed to pay to the underwriters in respect of each class of
offered notes a selling commission and a management and underwriting fee (in
each case based on the aggregate principal amount of such class of offered
notes) as set forth in the table below:
Class of Offered Notes Selling Commission Management and Underwriting Fee
Class [A] [o]% [o]%
Class [B] [o]% [o]%
Class [M] [o]% [o]%
Class [C] [o]% [o]%
Total: [o]% [o]%
The lead underwriters of the offered notes have advised us that the
underwriters propose initially to offer the offered notes to the public at the
offering price stated on the cover page of this prospectus supplement, and to
some dealers at that price, less a concession not in excess of [o]% per series
2006-[2] class [A] note, [o]% per series 2006-[2] class [B] note, [o]% per
series 2006-[2] class [M] note and [o]% per series 2006-[2] class [C] note.
The underwriters may allow, and those dealers may reallow, a concession not in
excess of [o]% per series 2006-[2] class [A] note, [o]% per series 2006-[2]
class [B] note, [o]% per series 2006-[2] class [M] note and [o]% per series
2006-[2] class [C] note to certain other brokers and dealers.
Additional out-of-pocket expenses (other than underwriting fees and
commissions stated above) solely in relation to the offered notes are
estimated to be approximately $[o].
[Japan
The offered notes have not been and will not be registered under the
Securities and Exchange Law of Japan (the "Securities and Exchange Law").
Each underwriter will agree that, except pursuant to an exemption from
the registration requirements of, and otherwise in compliance with, the
Securities and Exchange Law and any other applicable laws, regulations and
ministerial guidelines of Japan, it will not, directly or indirectly, offer or
sell any offered notes in Japan or to or for the benefit of any resident of
Japan (which term as used herein means any person resident in Japan, including
any corporation or other entity organized under the laws of Japan) or to any
person or entity for re-offering or resale, directly or indirectly, in Japan
or to or for the benefit of a resident of Japan.
Republic of Korea
Each underwriter will represent and agree that offered notes have not
been and will not be offered, delivered or sold directly or indirectly in
Korea or to any resident of Korea or to others for re-offering or resale
directly or indirectly in Korea or to any resident of Korea except as
otherwise permitted under applicable Korean laws and regulations. Each
underwriter will undertake to ensure that any securities dealer to which it
sells offered notes confirms that it is purchasing such offered notes as
principal and agrees with such underwriter that it will comply with the
restrictions described above.
Hong Kong
Each underwriter will represent and agree that:
(1) it has not offered or sold, and will not offer or sell, in Hong
Kong, by means of any document, any offered notes other than (i)
in circumstances which do not constitute an offer to the public
within the meaning of the Companies Ordinance
S-24
(Cap.32, Laws of Hong Kong), or (ii) to "professional investors"
within the meaning of the Securities and Futures Ordinance
(Cap.571, Laws of Hong Kong) and any rules made thereunder, or
(iii) in other circumstances which do not result in the document
being a "prospectus" within the meaning of the Companies Ordinance
(Cap.32, Laws of Hong Kong); and
(2) it has not issued, or had in its possession for the purpose of
issue and will not issue or have in its possession for the purpose
of issue (in each case whether in Hong Kong or elsewhere), any
advertisement, invitation, or document relating to the offered
notes which is directed at, or the contents of which are likely to
be accessed or read by, the public in Hong Kong (except if
permitted to do so under the laws of Hong Kong) other than with
respect to the offered notes which are or are intended to be
disposed of only to persons outside Hong Kong or only to
"professional investors" within the meaning of the Securities and
Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
Singapore
This prospectus supplement has not been registered with the Monetary
Authority of Singapore under the Securities and Futures Act, Chapter 289 of
Singapore (the "Securities and Futures Act"). Accordingly, each underwriter
will represent and agree that the offered notes may not be offered or sold or
made the subject of an invitation for subscription or purchase nor may this
prospectus supplement or any other document or material in connection with the
offer or sale or invitation for subscription or purchase of any offered notes
be circulated or distributed, whether directly or indirectly, to any person in
Singapore other than (a) to an institutional investor pursuant to Section 274
of the Securities and Futures Act, (b) to a relevant person, or any person
pursuant to Section 275(1A) of the Securities and Futures Act, and in
accordance with the conditions specified in Section 275 of the Securities and
Futures Act, or (c) pursuant to, and in accordance with the conditions of, any
other applicable provision of the Securities and Futures Act.
Each of the following relevant persons specified in Section 275 of the
Securities and Futures Act which has subscribed or purchased offered notes,
namely a person who is:
(a) a corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of whom
is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor) whose
sole purpose is to hold investments and each beneficiary is an
accredited investor,
should note that shares, debentures and units of shares and debentures of that
corporation or the beneficiaries' rights and interest in that trust shall not
be transferable for 6 months after that corporation or that trust has acquired
the offered notes under Section 275 of the Securities and Futures Act except:
(i) to an institutional investor under Section 274 of the Securities
and Futures Act or to a relevant person, or any person pursuant to
Section 275(1A) of the Securities and Futures Act, and in
accordance with the conditions, specified in Section 275 of the
Securities and Futures Act;
(ii) where no consideration is given for the transfer; or
(iii) by operation of law.
S-25
Taiwan
Each underwriter will represent and agree that the offered notes have
not been and will not be offered in Taiwan and may only be offered and sold to
Taiwan resident investors from outside Taiwan in such manner as complies with
Taiwan securities laws and regulations applicable to such cross border
activities.
People's Republic of China
Each underwriter will represent and agree that neither it nor any of its
affiliates has offered or sold or will offer or sell any of the offered notes
in the People's Republic of China (excluding Hong Kong, Macau and Taiwan) as
part of the initial distribution of the offered notes.
Malaysia
Each underwriter will represent and agree that the offered notes may not
be offered or sold, directly or indirectly, nor may any document or other
material in connection therewith be distributed in Malaysia other than to:
(i) a corporation with total net assets exceeding ten million Ringgit
or its equivalent in non-Ringgit currencies, based on the last
audited accounts of such corporation;
(ii) a person licensed as a dealer under the Securities Industry Act
1983;
(iii) a person licensed as a fund manager under the Securities Industry
Act 1983 or a person declared to be an exempt fund manager under
the Securities Industry Act 1983;
(iv) a licensed offshore bank as defined under the Offshore Banking Act
1990; or
(v) an offshore insurer as defined under the Offshore Insurance Act
1990.
Each underwriter will acknowledge that:
(a) residents of Malaysia are not permitted to purchase the offered
notes without first having had and obtained all the necessary
approvals from all relevant regulatory authorities, including but
not limited to all the necessary approvals from Bank Negara
Malaysia; and
(b) the onus of obtaining such approvals is on the residents concerned
and none of the note trustee, the issuer security trustee, the
underwriters, the Government of Malaysia or the Master Issuer
accepts any responsibility for the purchase of any Note by the
residents as aforesaid without the necessary approvals being in
place.]
[[ ], who is acting as the issuer swap provider, is an affiliate of [ ],
one of the underwriters for the offered notes.]
S-26
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 Northern Rock by Sidley Austin, London.
Certain matters of United States law regarding matters of United States
federal income tax law with respect to the offered notes will be passed upon
for Northern Rock by Sidley Austin llp, New York. Certain matters of English
law and United States law will be passed upon for the underwriters by Allen &
Overy LLP, London.
S-27
ANNEX A-1
The cut-off date mortgage portfolio
The information provided in this Annex A-1 constitutes an integral part
of this prospectus supplement and is incorporated by reference into this
prospectus supplement.
The statistical and other information contained herein has been compiled
by reference to the mortgage loans in the mortgage portfolio securing the
notes as of [o] (the "cut-off date"). The U.S. dollar figures set forth in the
tables below have been calculated based on the currency exchange rate of
(GBP)1 = [o] and have been rounded to the nearest cent following their
conversion from (GBP)s sterling. Columns stating percentage amounts may not
add to 100% due to rounding. A mortgage loan will have been removed from any
additional mortgage portfolio (which comprises a portion of the cut-off date
portfolio) if, in the period up to (and including) the assignment date related
to such additional mortgage portfolio, 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 applicable 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 to be
assigned on the applicable assignment date once the determination has 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. The mortgage loans in the mortgages trust are
selected on the basis of the seller's lending criteria set forth in the
mortgage sale agreement. The material aspects of such lending criteria are
described under "The mortgage loans - Origination of the mortgage loans" in
the accompanying prospectus. Standardized credit scoring is not used in the UK
mortgage market. For an indication of the credit quality of borrowers in
respect of the mortgage loans investors may refer to such lending criteria and
to the historical performance of the mortgage loans in the mortgages trust in
this Annex A-1 and in Annex D. One significant indicator of obligor credit
quality is arrears and losses. The information presented under "Arrears and
loss experience" on page A-1-9 in this Annex A-1 reflects the arrears and
losses experience of the cut-off date mortgage portfolio. Any material change
to the seller's lending criteria, which could lead to arrears and losses to
deviate from the historical experience presented in the table under "Arrears
and loss experience", will be reported by the seller on periodic reports filed
with the SEC on Form 10-D. 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 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 the cut-off date
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] (save for the
Scottish mortgage loans in the cut-off date mortgage portfolio, which were
originated by the seller between July 1, 2001 and [o]).
[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) were on leasehold or long lease (being the Scots law equivalent
of leasehold) properties.
A-1-1
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] mortgage loans (or [o]% of the
aggregate current balance of the mortgage loans as of the cut-off-date) of
which were Together mortgage loans.
As of the cut-off date, the seller's standard variable rate for existing
and new borrowers was [o]% per annum.
Types of property
Aggregate current Aggregate current Number of
balance balance % of total mortgage
Type of property (GBP) (US$) loans loans % of total
- ----------------------------- ----------------- ----------------- ------------- ------------ --------------
Detached Bungalow
Detached House
Flat
Maisonette
Not Known
New Property
Other
Semi Detached Bungalow
Purpose Built Flat
Semi Detached House
Terraced House ----------------- ----------------- ------------- ------------ --------------
Total
================= ================= ============= ============ ==============
Seasoning of mortgage loans
The following table shows length of time since the mortgage loans were
originated as of the cut-off date.
Aggregate current Aggregate current Number of
Age of mortgage loans balance balance % of total mortgage
(months) (GBP) (US$) loans loans % of total
- ----------------------------- ----------------- ----------------- ------------- ------------ --------------
0 to 6
6 to 12
12 to 18
18 to 24
24 to 30
30 to 36
36 to 42
42 to 48
48 to 54
54 to 60
60 to 66
A-1-2
66 to 72
72 to 78
78 to 84
84 to 90
90 to 96
96 to 102
102 to 108
108 to 114
114 to 120 ----------------- ----------------- ------------- ------------ --------------
Total
================= ================= ============= ============ ==============
The weighted average seasoning of mortgage loans as of the cut-off date
is expected to be [o] months. The maximum seasoning of mortgage loans as of
the cut-off date is expected to be [o] months and the minimum seasoning of the
mortgage loans as of the cut-off date is expected to be [o] months.
Aggregate current Aggregate current Number of
balance balance % of total mortgage
Years of maturity (GBP) (US$) loans loans % of total
- ----------------------------- ----------------- ----------------- ------------- ------------ --------------
Less than zero
0 to 5
5 to 10
10 to 15
15 to 20
20 to 25
25 to 30
30 to 35
35 to 40 ----------------- ----------------- ------------- ------------ --------------
Total
================= ================= ============= ============ ==============
The weighted average remaining term of the mortgage loans as of the
cut-off date is expected to be [o] years. The maximum remaining term as of the
cut-off date is expected to be [o] years and the minimum remaining term as of
the cut-off date is expected to be [o] month(s).
Geographical distribution of mortgaged properties
The following table shows the distribution of mortgaged properties
securing the mortgage loans throughout England, Wales and Scotland as of the
cut-off date. No mortgaged properties are situated outside England, Wales or
Scotland. The geographical location of a mortgaged property securing a
mortgage loan has no impact upon the seller's lending criteria and credit
scoring tests.
Aggregate current Aggregate current Number of
balance balance % of total mortgage
Region (GBP) (US$) loans loans % of total
- ----------------------------- ----------------- ----------------- ------------- ------------ --------------
East Anglia
East Midlands
Greater London
North
North West
Scotland
South East
(excluding London)
South West
Wales
A-1-3
West Midlands
Yorkshire
----------------- ----------------- ------------- ------------ --------------
Total
================= ================= ============= ============ ==============
Employment rates differ across regions. The South East and the South
West have the lowest levels of unemployment whilst the North has the highest.
Each region relies on different types on industry. The structure of industries
throughout England, Scotland and Wales is summarized in the table below:
Region(1) Industry
- ------------------------ --------------------------------------------------
East Midlands Automotives; footwear and clothing
West Midlands Mechanical and electrical engineering
East Anglia Agriculture and food processing; micro technology
North Traditional heavy industry; service industry
North West Heavy engineering; textiles
Yorkshire & Humberside Iron; steel; textiles; coal; fishing
London Financial and commercial center
Scotland North sea oil; agriculture
South East (excluding Technological; light engineering
London)
South West Agriculture and food processing; aerospace; tobacco
Wales Coal; iron; steel; agriculture
House prices and incomes vary throughout England, Scotland and Wales.
The table below summarizes the average house price and the average income for
each region in order to produce a house price to earnings ratio for each
region as of [the cut-off date]. This ratio is highest in London ([5.02]) and
lowest in Yorkshire and Humberside ([3.56]).
Average Earnings
Region(1) Average Price (GBP) (GBP) per annum) Price/Earnings Ratio
- -------------------------------- ------------------------- ---------------------- ------------------------
North
North West
Yorkshire & Humberside
East Midlands
West Midlands
East Anglia
Scotland
London
South East (excluding London)
South West
Wales
(1) The geographic regions shown above are U.K. economic planning regions. (Sources: Office for National
Statistics; www.bized.ac.uk)
Current loan-to-value ratios
The following table shows the range of current loan-to-value, or LTV,
ratios, which express the current 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
remortgaged its property or to which the seller has made a further advance, as
described in the prospectus under "The mortgage loans -- Characteristics of
the mortgage loans -- Maximum LTV ratio".
A-1-4
Aggregate current Aggregate current Number of
balance balance % of total mortgage
Current LTV (GBP) (US$) loans loans % of total
- ----------------------------- ----------------- ----------------- ------------- ------------ --------------
00% to 25%
25% to 50%
50% to 55%
55% to 60%
60% to 65%
65% to 70%
70% to 75%
75% to 80%
80% to 85%
85% to 90%
90% to 95%
95% to 100%
> 100%
----------------- ----------------- ------------- ------------ --------------
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 current 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 current Aggregate current Number of
balance balance % of total mortgage
Current Indexed LTV (GBP) (US$) loans loans % of total
- ----------------------------- ----------------- ----------------- ------------- ------------ --------------
No Valuation
0% to 25%
25% to 50%
50% to 55%
55% to 60%
60% to 65%
65% to 70%
70% to 75%
75% to 80%
80% to 85%
85% to 90%
90% to 95%
95% to 100%
> 100%
----------------- ----------------- ------------- ------------ --------------
Total
================= ================= ============= ============ ==============
The weighted average current indexed loan-to-value ratio of the mortgage
loans as of the cut-off date was [o]%.
Outstanding balances
The following table shows the outstanding balances of a mortgage loan
(including capitalized fees and/or charges, if applicable) as of the cut-off
date:
A-1-5
Aggregate current Aggregate current Number of
Range of outstanding balance balance % of total mortgage
principal balance (GBP) (US$) loans loans % of total
- ----------------------------- ----------------- ----------------- ------------- ------------ --------------
(GBP)0 to 25,000
(GBP)25,000 to 50,000
(GBP)50,000 to 75,000
(GBP)75,000 to 100,000
(GBP)100,000 to 125,000
(GBP)125,000 to 150,000
(GBP)150,000 to 175,000
(GBP)175,000 to 200,000
(GBP)200,000 to 225,000
(GBP)225,000 to 250,000
(GBP)250,000 to 275,000
(GBP)275,000 to 300,000
(GBP)300,000 to 325,000
(GBP)325,000 to 350,000
(GBP)350,000 to 375,000
(GBP)375,000 to 400,000
(GBP)400,000 to 425,000
(GBP)425,000 to 450,000
(GBP)450,000 to 475,000
(GBP)475,000 to 500,000
----------------- ----------------- ------------- ------------ --------------
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 $[o].
Mortgage loan products
Aggregate current Aggregate current Number of
Range of outstanding balance balance % of total mortgage
principal balance (GBP) (US$) loans loans % of total
- ----------------------------- ----------------- ----------------- ------------- ------------ --------------
Tracker
Variable
Capped
Discount
Fixed
Together Connections
Together
----------------- ----------------- ------------- ------------ --------------
Total
================= ================= ============= ============ ==============
Employment status
Aggregate current Aggregate current Number of
balance balance % of total mortgage
Employment status (GBP) (US$) loans loans % of total
- ----------------------------- ----------------- ----------------- ------------- ------------ --------------
Full Time
Part Time
Retired
Self Employed
Other(1)
----------------- ----------------- ------------- ------------ --------------
Total
================= ================= ============= ============ ==============
- ---------------------
(1) This category includes borrowers with a private income (e.g. family trust) and borrowers who are students with mortgage
loans guaranteed by a parent.
A-1-6
Approximately [o]% of the aggregate current balance of the mortgage
loans as of the cut-off date were made to borrowers under the seller's
non-verified income process described in the prospectus under "The mortgage
loans - Lending criteria".
Distribution of fixed rate mortgage loans
Fixed rate mortgage loans remain at the relevant fixed rate for a period
of time as specified in the offer of advance, after which they move to the
seller's standard variable rate or some other rate as specified in the offer
of advance.
Aggregate current Aggregate current Number of
balance balance % of total mortgage
Fixed rate % (GBP) (US$) loans loans % of total
- ----------------------------- ----------------- ----------------- ------------- ------------ --------------
0-2.99
3.00-3.99
4.00-4.99
5.00-5.99
6.00-6.99
7.00-7.99
----------------- ----------------- ------------- ------------ --------------
Total
================= ================= ============= ============ ==============
A-1-7
Aggregate current Aggregate current Number of
Month/year in which fixed balance balance % of total mortgage
rate period ends (GBP) (US$) loans loans % of total
- ----------------------------- ----------------- ----------------- ------------- ------------ --------------
----------------- ----------------- ------------- ------------ --------------
Total
================= ================= ============= ============ ==============
A-1-8
Aggregate current Aggregate current
balance as of the balance as of the Number of
cut-off date cut-off date mortgage
Type of Repayment plans (GBP) (US$) % of total loans % of total
- ----------------------- ------------------ ----------------- ------------ ------------ -------------
Endowment
Interest Only
Pension Policy
Personal Equity Plan
Repayment
----------------- ----------------- ------------- ------------ --------------
Total
================= ================= ============= ============ ==============
Arrears and loss experience
The following table shows the arrears and repossession experience in
respect of the cut-off date mortgage portfolio.
The mortgage loans used in the table below are administered in
accordance with Northern Rock's administration policies. The method by which
Northern Rock classifies mortgage loans as being in arrears is described in
the prospectus under "The servicer and the administration agreement - Arrears
and default procedures" and is important in helping to understand the arrears
and repossession information in respect of the cut-off date mortgage portfolio
set forth in the following table.
December 31, 2002 December 31, 2003 December 31, 2004 December 31,2005
------------------------- ------------------------- ------------------------ ----------------------------
US$ US$ US$ US$
(GBP)(mls) (mls) % GBP)(mls) (mls) % (GBP)(mls) (mls) % (GBP)(mls) (mls) %
--------- ------- ---- --------- ------- ---- --------- ------- ----- ----------- ------- ------
Current balance 28,955 [o] n/a 36,875 [o] n/a 48,030 25,432 n/a
Number of mortgage
loans outstanding 489,690 489,690 n/a 531,403 531,403 n/a 584,457 584,457 n/a
Current balance of
loans In arrears
1 to 2 months 271.07 [o] 0.94 349.77 [o] 0.95 492.89 260.98 1.03
2 to 3 months 104.94 [o] 0.36 123.18 [o] 0.33 161.86 85.70 0.34
3 to 4 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
4 to 5 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
5 to 6 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
6 to 7 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
7 to 8 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
8 to 9 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
9 to 10 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
10 to 11 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
11 to 12 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
.....................
Through the point at
which charged off [o] [o] [o] [o] [o] [o] [o] [o] [o]
Total current balance
of mortgage loans
In arrears 512.55 [o] 1.77 617.19 [o] 1.67 815.12 431.60 1.70
Number of mortgage
loans outstanding
in arrears
1 to 2 months 4,557 4,557 0.93 5,260 5,260 0.99 5,654 5,654 0.97
2 to 3 months 2,150 2,150 0.44 1,965 1,965 0.37 2,055 2,055 0.35
3 to 4 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
4 to 5 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
5 to 6 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
6 to 7 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
7 to 8 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
8 to 9 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
9 to 10 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
10 to 11 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
11 to 12 months [o] [o] [o] [o] [o] [o] [o] [o] [o]
.....................
A-1-9
Through the point at
which charged off [o] [o] [o] [o] [o] [o] [o] [o] [o]
Total number of
mortgage loans
outstanding In
arrears 9,444 9,444 1.93 9,639 9,639 1.81 9,844 9,844 1.68
Total mortgage loans
written off [o] [o] [o] [o] [o] [o] [o] [o] [o]
Repossessions during
year 573 573 0.06 509 509 0.09 628 628 0.11
Amount of recovery on
repossessions [o] [o] [o] [o] [o] [o] [o] [o] [o]
Amount of mortgage
loan losses 3.72 [o] n/a 1.00 [o] n/a 0.64 0.34 n/a
Net Mortgage loan
losses as % of
total current
balance 0.01% [o] n/a 0.00% [o] n/a 0.001% 0.001% n/a
- -------------
Provided by Northern Rock plc. Data is provided in monthly increments in
respect of the years ended December 31, 2004 and December 31, 2005. Data in
respect of years prior to 2004 is only provided in 1 to 2 month, 2 to 3 month,
3 to 6 month, 6 to 12 month, and over 12 month increments, as monthly data is
unavailable for such years.
Repossessions expresses the number of mortgaged properties in the
cut-off date mortgage portfolio that the servicer has taken into possession
during the period, as a percentage of the number of mortgage loans in the
cut-off date mortgage portfolio outstanding at the end of the period.
A-1-10
ANNEX A-2
Characteristics of the United Kingdom residential mortgage market
The information provided in this Annex A-2 constitutes an integral part
of this prospectus supplement and is incorporated by reference into this
prospectus supplement.
CPR rates
The following table shows the actual annualized constant payment rate
("CPR") experience of the mortgage loans that have been assigned to the
mortgages trustee between March 26, 2001 and [March 2006]. It should be noted
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. Since the seller may assign new mortgage loans and their
related security to the mortgages trustee after the Funding 2 program date, it
should be noted 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 prospectus.
Month Annualized CPR Month Annualized CPR
- ----------------- --------------- ---------------- ---------------
April 2001 25.94% September 2003 38.12%
May 2001 27.72% October 2003 44.14%
June 2001 28.23% November 2003 42.70%
July 2001 32.05% December 2003 45.04%
August 2001 31.87% January 2004 35.49%
September 2001 28.84% February 2004 37.16%
October 2001 29.28% March 2004 54.19%
November 2001 28.40% April 2004 46.85%
December 2001 27.76% May 2004 44.67%
January 2002 31.34% June 2004 49.41%
February 2002 33.33% July 2004 44.04%
March 2002 27.52% August 2004 46.16%
April 2002 41.78% September 2004 44.04%
May 2002 41.90% October 2004 42.82%
June 2002 33.57% November 2004 57.89%
July 2002 44.13% December 2004 50.35%
August 2002 44.89% January 2005 34.48%
September 2002 38.65% February 2005 48.38%
October 2002 42.50% March 2005 41.72%
November 2002 44.26% April 2005 45.31%
December 2002 43.42% May 2005 44.95%
January 2003 37.28% June 2005 55.33%
February 2003 48.30% July 2005 43.37%
March 2003 44.60% August 2005 44.57%
April 2003 44.77% September 2005 47.65%
May 2003 49.23% October 2005 54.40%
June 2003 48.24% November 2005 47.54%
July 2003 44.96% December 2005 [o]%
August 2003 42.03% January 2006 [o]%
February 2006 [o]%
March 2006 [o]%
__________
Source: Northern Rock Investor Report
A-2-1
The quarterly 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 mortgage lenders in
the UK. These quarterly scheduled and unscheduled repayment rates were then
annualized using standard methodology. The CPR data presented below and in the
prospectus is based on a percentage of the total UK residential mortgage
market, but because the seller's CPR data (which calculates the amount of
scheduled and unscheduled repayments on a monthly basis) for all mortgage
loans originated by the seller (and thus gives an indication of anticipated
CPR for the mortgage trust) includes the effect of product switches, which
results in a higher CPR, the data presented below is on a basis which
undercounts CPR relative to the seller's method of calculating CPR.
For the four quarter rolling average CPR between March 1999 and
September 2005, see "Certain characteristics of the United Kingdom residential
mortgage market" in the prospectus.
Over the past [6.75] years, quarterly CPR experienced in respect of
residential mortgage loans made by mortgage lenders has been between [17.0]%
and [25.5]% for approximately [66.7]% of that time. See "Certain
characteristics of the United Kingdom residential mortgage market" in the
prospectus.
Aggregate Aggregate Aggregate Aggregate Aggregate
quarters quarters quarters quarters quarters
over over over over over
[6.75] [6.75] [6.75] [6.75] [6.75]
CPR (%) years CPR (%) years CPR (%) years CPR (%) years CPR (%) years
- ------ ---------- ------ ---------- ------ --------- ------- --------- ------- ---------
12.5 0 16.0 0 19.5 1 23.0 0 26.5 2
13.0 0 16.5 0 20.0 0 23.5 2 27.0 0
13.5 1 17.0 2 20.5 1 24.0 0 27.5 2
14.0 0 17.5 3 21.0 1 24.5 1 28.0 1
14.5 0 18.0 1 21.5 0 25.0 0
15.0 1 18.5 0 22.0 3 25.5 3
15.5 0 19.0 1 22.5 1 26.0 0
Source of repayment and outstanding mortgage information: Bank of England
Over the past [6.75] years, the highest single quarter CPR experienced
in respect of residential mortgage loans made by mortgage lenders was recorded
in [December 2003] at a level of [27.75]%. The lowest level was 13.19% in
March of 1999. The highest four quarter rolling average CPR over the same
[6.75] year period was [25.83]%. The lowest was [16.43]%.
The prior CPR table presents the historical CPR experience only of
mortgage lenders in the UK. During the late 1990's, a number of former
building societies (including Northern Rock) converted to stock form UK banks.
For the CPR experience of building societies, see "Certain characteristics of
the United Kingdom residential mortgage market" in the prospectus.
Repossession rate
The repossession rate of residential mortgaged properties in the UK has
steadily declined since 1991.
Repossessions Repossessions Repossessions
Year (%) Year (%) Year (%)
- ------- ------------- ---- ------------- ---- -------------
1982 0.11 1990 0.47 1998 0.31
1983 0.12 1991 0.77 1999 0.27
1984 0.17 1992 0.69 2000 0.20
1985 0.25 1993 0.58 2001 0.16
1986 0.30 1994 0.47 2002 0.11
1987 0.32 1995 0.47 2003 0.07
1988 0.22 1996 0.40 2004 0.05
1989 0.17 1997 0.31 2005 [o]
A-2-2
Source: Council of Mortgage Lenders
In [January 2005], the Council of Mortgage Lenders published arrears
figures for the year ended [2004], which showed that repossessions in the
United Kingdom had fallen to a [25]-year low. In [2004], the repossession rate
in the United Kingdom was [0.05]%. 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.
Arrears 6-12 Arrears 12 Arrears 6-12 Arrears 12
months months + months months +
Year (%) (%) Year (9'0) (%)
- --------- ------------ ---------- --------- ------------ ----------
1985 0.74 0.17 1995 1.20 0.81
1986 0.64 0.16 1996 0.95 0.63
1987 0.67 0.18 1997 0.69 0.42
1988 0.12 1998 0.68 0.32
1989 0.73 0.15 1999 0.52 0.27
1990 1.31 0.38 2000 0.43 0.19
1991 1.87 0.93 2001 0.38 0.18
1992 2.07 1.48 2002 0.30 0.15
1993 1.62 1.50 2003 0.25 0.11
1994 1.28 1.12 2004 0.23 0.10
2005 [o] [o]
____________
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.
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.
House price to House price to
Year earnings ratio Year earnings ratio
- ----------- --------------- ------------ ---------------
1994 3.42 2000 4.44
1995 3.37 2001 4.51
1996 3.40 2002 5.09
1997 3.62 2003 5.64
1998 3.86 2004 6.00
1999 4.08 2005 [o]
____________
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.
A-2-3
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 quarterly Housing Indices experienced
in respect of residential mortgage loans by building socieites between fourth
quarter of 1973 and the fourth quarter of 2004 are presented in the section
"Certain characteristics of the United Kingdom residential mortgage market" in
the prospectus. The following table sets out the quarterly Housing Indices
experienced in respect of residential mortgage loans since the first quarter
of 2005.
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)
- -------------------- ---------- ---------- --------- ---------- --------- ----------
2005 Q1 190.5 3.2 307.4 9.9 527 9.7
2005 Q2 192.2 2.9 316.9 6.1 528.0 3.9
2005 Q3 193.1 2.7 317.2 2.7 537.5 3.0
2005 Q4 [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.
A-2-4
ANNEX B
Loan tranches
The information provided in this Annex B constitutes an integral part of
this prospectus supplement and is incorporated by reference into this
prospectus supplement.
Series 2006-[2] AAA (Class [o]) Loan Tranche
The series 2006-[2] callable class [o] notes will fund the series
2006-[2] AAA (class [o]) loan tranche, which shall have the following terms as
set out in the supplement to the global intercompany loan agreement:
Tier of loan tranche: AAA (Class [o]) Series number: Series 2006-[2] Initial
outstanding principal balance: (GBP)[o]
Closing date: [o]
Interest commencement date: [o]
Final repayment date: The loan payment date falling in [o]
Loan payment dates: Each monthly payment date
Series 2006-[2] AAA (Class [o]) Loan Tranche
The series 2006-[2] callable class [o] notes will fund the series
2006-[2] AAA (class [o]) loan tranche, which shall have the following terms as
set out in the supplement to the global intercompany loan agreement:
Tier of loan tranche: AAA (Class [o]) Series number: Series 2006-[2] Initial
outstanding principal balance: [o]
Closing date: [o]
Interest commencement date: [o]
Final repayment date: The loan payment date falling in [o]
Loan payment dates: Each monthly payment date
Series 2006-[2] AAA (Class [o]) Loan Tranche
The series 2006-[2] callable class [o] notes will fund the series
2006-[2] AAA (class [o]) loan tranche, which shall have the following terms as
set out in the supplement to the global intercompany loan agreement:
Tier of loan tranche: AAA (Class [o]) Series number: Series 2006-[2] Initial
outstanding principal balance: [o]
Closing date: [o]
Interest commencement date: [o]
Final repayment date: The loan payment date falling in [o]
Loan payment dates: Each monthly payment date
B-1
Series 2006-[2] AA (Class [o]) Loan Tranche
The series 2006-[2] callable class [o] notes will fund the series
2006-[2] AA (class [o]) loan tranche, which shall have the following terms as
set out in the supplement to the global intercompany loan agreement:
Tier of loan tranche: AA (Class [o]) Series number: Series 2006-[2] Initial
outstanding principal balance: (GBP)[o]
Closing date: [o]
Interest commencement date: [o]
Final repayment date: The loan payment date falling in [o]
Loan payment dates: Each monthly payment date
Series [o] A (Class [o]) Loan Tranche
The series 2006-[2] callable class [o] notes will fund the series
2006-[2] A (class [o]) loan tranche, which shall have the following terms as
set out in the supplement to the global intercompany loan agreement:
Tier of loan tranche: A (Class [o]) Series number: Series 2006-[2] Initial
outstanding principal balance: [o]
Closing date: [o]
Interest commencement date: [o]
Final repayment date: The loan payment date falling in [o]
Loan payment dates: Each monthly payment date
Series 2006-[2] BBB (Class [o]) Loan Tranche
The series 2006-[2] callable class [o] notes will fund the series
2006-[2] BBB (class [o]) loan tranche, which shall have the following terms as
set out in the supplement to the global intercompany loan agreement:
Tier of loan tranche: BBB (Class [o]) Series number: Series 2006-[2] Initial
outstanding principal balance: [o]
Closing date: [o]
Final repayment date: The loan payment date falling in [o]
Loan payment dates: Each monthly payment date
B-2
ANNEX C
Start-up loan tranche
The information provided in this Annex C constitutes an integral part of
this prospectus supplement and is incorporated by reference into this
prospectus supplement.
The start-up loan tranche to be made available to the issuing entity on
the closing date will have the following terms:
1. Start-up loan provider Northern Rock plc 2.
Initial outstanding principal balance (GBP)[o]
3. Interest rate Three-month sterling LIBOR +
[o]% per annum
C-1
ANNEX D
Static pool data
The information provided in this Annex D constitutes an integral part of
this prospectus supplement and is incorporated by reference into this
prospectus supplement.
[[Static pool information regarding the performance of the mortgage
loans in the mortgages trust is contained in a current report on Form 8-K
filed with the SEC on [o]. Such Form 8-K report is incorporated by reference
into this prospectus supplement. See "Where you can find more information" in
the accompanying prospectus.] [Static pool information regarding the
performance of the mortgage loans in the mortgages trust is contained in this
Annex D to this prospectus supplement.]] Static pool information contained in
[such report filed on Form 8-K] [this Annex D to this prospectus supplement]
that relates to the performance of the mortgage loans for periods commencing
prior to January 1, 2006 does not form a part of this prospectus supplement,
the accompanying prospectus or the registration statement relating to the
notes. Static pool information about the mortgage loans in the mortgages trust
for periods prior to December 31, 2003 (i.e. the years ended December 31, 2002
and December 31, 2001) is not provided, as such information is not available
for such years and cannot be obtained without unreasonable effort and expense.
The following vintage tables present static pool information about the
mortgage loans in the mortgages trust in respect of arrears and cumulative
losses as at the dates specified in respect of mortgage loans originated in
specific years. "V2000", for example, indicates all mortgage loans originated
in the calendar year 2000. All of the mortgage loans originated by the seller
are prime quality mortgage loans, secured by a mortgage with first ranking
priority on residential property in the United Kingdom. All such mortgage
loans are originated in accordance with the seller's strict lending criteria
at the time of offer of the mortgage loan. Notwithstanding any change to the
lending criteria or other terms applicable to new mortgage loans, new mortgage
loans 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 mortgages trustee mortgage loans that are in
breach of these representations and warranties. See "The mortgage loans -
Origination of the mortgage loans" and "Assignment of the mortgage loans and
related security" in the accompanying prospectus. Further, for comparative
arrears performance, see "The Characteristics of the United Kingdom
residential mortgage market" in Annex A-2, which presents data regarding (a)
the actual annualized CPR experience of the mortgage loans that have been
assigned to the mortgages trustee between March 26, 2001 and [March 2006] and
(b) the Council of Mortgage Lenders' arrears information in respect of
mortgage loans in the UK market since 1985.
Static pool information on prepayments, including repurchases of
mortgage loans by the seller, is not being provided because prepayment and
repayment rates have had no effect on note maturities. In addition, the master
trust structure of the Granite program reduces the likelihood of any such
effect. As a general matter, if prepayments on the mortgage loans occur less
frequently than anticipated, then the amortization of the notes may take much
longer than anticipated and the actual yields on your notes may be lower than
you anticipate. Historically, variations in the rates of prepayments and
scheduled repayments of mortgage loans in the mortgages trust have not delayed
repayment of the issuing entity's notes and have had no impact on the yield to
maturity of the notes to date. On the other hand, higher rates of
D-1
prepayments and scheduled repayments of mortgage loans in the mortgages trust
have not, since the mortgages trust was established in 2001, reduced the
average lives of the notes. It is unlikely that the maturities of the notes
would be accelerated unless CPRs rose to levels much higher than the
historical CPR levels in respect of the mortgages trust (or the United Kingdom
mortgage market in general) as described in the prospectus supplement and, in
addition, the sponsor ceased to maintain the minimum seller share in the
mortgages trust. See "Risk factors - The yield to maturity of the notes may be
affected by prepayments or redemptions on the mortgage loans or repurchases of
mortgage loans by the seller" in the accompanying prospectus.
The effect of rates of prepayment and scheduled repayments of the
mortgage loans on the issuing entity's notes is reduced because of the master
trust structure. The single pool of mortgage loans in the mortgages trust
supports an ongoing issuance of notes by the issuing entity. As mortgage loans
repay or prepay, reducing the size of the pool, the seller is required to add
mortgage loans to maintain the mortgages trust at a minimum size in relation
to the aggregate balance of outstanding notes. Any new mortgage loans may only
be assigned to the mortgages trust if those new mortgage loans comply with the
seller's lending criteria, the material aspects of which are described under
"The mortgage loans - Origination of the mortgage loans" in the accompanying
prospectus. In addition, most series and classes of notes pay in specified
amounts according to specified amortization schedules. The large mortgages
trust, the size of which is intended to be maintained at specified minimum
levels, combined with controlled repayment on most series and classes of
notes, make it unlikely that fluctuations in prepayment and repayment rates or
amount of prepayments or repayments in respect of the mortgage loans would
accelerate or extend the maturities of the notes. Therefore differences, if
any, among prepayment and repayment rates of different vintage years are
unlikely to correlate to material risk of early or late repayment of the notes
and a consequential effect on the yield to maturity of the notes.
D-2
ARREARS
V2000 mortgage loans
- ----------------------------------------------------------------------------------------------------------------------------------
As at
- --------------------- ------------------------------------------------------------------------------------------------------------
December 31, 2003 December 31, 2004 December 31, 2005
- --------------------- --------------------------------------------- ---------------------------- -----------------------------
<1 month Four columns: Similarly Similarly
delinquent A. Number of delinquent V2000 loans
B. Balance of delinquent V2000 loans
C. Column A / aggregate number of V2000
loans
D. Column B / aggregate balance of V2000
loans
- ---------------------
1 - 2 months
delinquent
- ---------------------
2 - 3 months
delinquent
- ---------------------
...
- ---------------------
Through the point
at which charged
off
- ----------------------------------------------------------------------------------------------------------------------------------
D-3
V2001 mortgage loans
- ----------------------------------------------------------------------------------------------------------------------------------
As at
- --------------------- ------------------------------------------------------------------------------------------------------------
December 31, 2003 December 31, 2004 December 31, 2005
- --------------------- --------------------------------------------- ---------------------------- -----------------------------
<1 month Four columns: Similarly Similarly
delinquent A. Number of delinquent V2001 loans
B. Balance of delinquent V2001 loans
C. Column A / aggregate number of V2001
loans
D. Column B / aggregate balance of V2001
loans
- ---------------------
1 - 2 months
delinquent
- ---------------------
2 - 3 months
delinquent
- ---------------------
...
- ---------------------
Through the point
at which charged
off
- ----------------------------------------------------------------------------------------------------------------------------------
Vintage 2002 mortgage loans
- ----------------------------------------------------------------------------------------------------------------------------------
As at
- --------------------- ------------------------------------------------------------------------------------------------------------
December 31, 2003 December 31, 2004 December 31, 2005
- --------------------- --------------------------------------------- ---------------------------- -----------------------------
<1 month Four columns: Similarly Similarly
delinquent A. Number of delinquent V2002 loans
B. Balance of delinquent V2002 loans
C. Column A / aggregate number of V2002
loans
D. Column B / aggregate balance of V2002
loans
- ---------------------
1 - 2 months
delinquent
- ---------------------
2 - 3 months
delinquent
- ---------------------
...
- ---------------------
Through the point
at which charged
off
- ----------------------------------------------------------------------------------------------------------------------------------
D-4
Vintage 2003 mortgage loans
- -----------------------------------------------------------------------------------------
As at
- --------------------- -------------------------------------------------------------------
December 31, 2004 December 31, 2005
- --------------------- ------------------------------------ ----------------------------
<1 month Four columns: Similarly
delinquent A. Number of delinquent V2003
loans
B. Balance of delinquent V2003
loans
C. Column A / aggregate
number of V2003 loans
D. Column B / aggregate
balance of V2003 loans
- ---------------------
1 - 2 months
delinquent
- ---------------------
2 - 3 months
delinquent
- ---------------------
...
- ---------------------
Through the point
at which charged
off
- ----------------------------------------------------------------------------------------
Vintage 2004 mortgage loans
- ----------------------------------------------------------
As at
- --------------------- ------------------------------------
December 31, 2005
- --------------------- ------------------------------------
<1 month Four columns:
delinquent A. Number of delinquent V2004
loans
B. Balance of delinquent V2004
loans
C. Column A / aggregate
number of V2004 loans
D. Column B / aggregate
balance of V2004 loans
- ---------------------
1 - 2 months
delinquent
- ---------------------
2 - 3 months
delinquent
- ---------------------
...
- ---------------------
Through the point
at which charged
off
- ----------------------------------------------------------
D-5
CUMULATIVE LOSS
V2000 mortgage loans
- -----------------------------------------------------------------------------------------------------------------------------------
For the year ending
- -------------------- --------------------------------------------------------------------------------------------------------------
December 31, 2003 December 31, 2004 December 31, 2005
- -------------------- ---------------------------------------- --------------------------------- -------------------------------
Charge-offs Four columns: Similarly Similarly
(= Net loss) A. Number of V2000 loans that
were charged off during 2003
B. Balance of V2000 loans that
were charged off during 2003
C. Column A / weighted average
of (month-end) aggregate number
of V2000 loans
D. Column B / weighted average of
(month-end) aggregate balance
of V2000 loans
- -------------------- ---------------------------------------- -------------------------------- -------------------------------
Loans experiencing Four columns: Similarly Similarly
a loss A. Number of V2000 loans
(= gross losses) experiencing a loss during 2003
B. Balance of V2000 loans
experiencing a loss during 2003
C. Column A / weighted average
of (month-end) aggregate number
of V2000 loans
D. Column B / weighted average of
(month-end) aggregate balance
of V2000 loans
- -------------------- ---------------------------------------- --------------------------------- --------------------------------
Cumulative loss Four columns: Similarly Similarly
(= aggregate of A. Cumulative loss on V2000
net losses) loans during 2003
B. Column A / weighted average
of (month-end) aggregate balance
of V2000 loans
- -------------------- ---------------------------------------- --------------------------------- ---------------------------------
D-6
V2001 mortgage loans
- -----------------------------------------------------------------------------------------------------------------------------------
For the year ending
- -------------------- --------------------------------------------------------------------------------------------------------------
December 31, 2003 December 31, 2004 December 31, 2005
- -------------------- ---------------------------------------- --------------------------------- -------------------------------
Charge-offs Four columns row: Similarly Similarly
(= Net loss) A. Number of V2001 loans that
were charged off during 2003
B. Balance of V2001 loans that
were charged off during 2003
C. Column A / weighted average
of (month-end) aggregate number
of V2001 loans
D. Column B / weighted average of
(month-end) aggregate balance
of V2001 loans
- -------------------- ---------------------------------------- -------------------------------- -------------------------------
Loans experiencing Four columns row: Similarly Similarly
a loss A. Number of V2001 loans
(= gross losses) experiencing a loss during 2003
B. Balance of V2001 loans
experiencing a loss during 2003
C. Column A / weighted average
of (month-end) aggregate number
of V2001 loans
D. Column B / weighted average of
(month-end) aggregate balance
of V2001 loans
- -------------------- ---------------------------------------- --------------------------------- --------------------------------
Cumulative loss Four columns row: Similarly Similarly
(= aggregate of A. Cumulative loss on V2001
net losses) loans during 2003
B. Column A / weighted average
of (month-end) aggregate balance
of V2001 loans
- -------------------- ---------------------------------------- --------------------------------- ---------------------------------
D-7
V2002 mortgage loans
- -----------------------------------------------------------------------------------------------------------------------------------
For the year ending
- -------------------- --------------------------------------------------------------------------------------------------------------
December 31, 2003 December 31, 2004 December 31, 2005
- -------------------- ---------------------------------------- --------------------------------- -------------------------------
Charge-offs Four columns row: Similarly Similarly
(= Net loss) A. Number of V2002 loans that
were charged off during 2003
B. Balance of V2002 loans that
were charged off during 2003
C. Column A / weighted average
of (month-end) aggregate number
of V2002 loans
D. Column B / weighted average of
(month-end) aggregate balance
of V2002 loans
- -------------------- ---------------------------------------- -------------------------------- -------------------------------
Loans experiencing Four columns row: Similarly Similarly
a loss A. Number of V2002 loans
(= gross losses) experiencing a loss during 2003
B. Balance of V2002 loans
experiencing a loss during 2003
C. Column A / weighted average
of (month-end) aggregate number
of V2002 loans
D. Column B / weighted average of
(month-end) aggregate balance
of V2002 loans
- -------------------- ---------------------------------------- --------------------------------- --------------------------------
Cumulative loss Four columns row: Similarly Similarly
(= aggregate of A. Cumulative loss on V2002
net losses) loans during 2003
B. Column A / weighted average
of (month-end) aggregate balance
of V2002 loans
- -------------------- ---------------------------------------- --------------------------------- ---------------------------------
D-8
V2003 mortgage loans
- ---------------------------------------------------------------------------------------------------
For the year ending
- -------------------- ------------------------------------------------------------------------------
December 31, 2004 December 31, 2005
- -------------------- ---------------------------------------- ---------------------------------
Charge-offs Four columns: Similarly
(= Net loss) A. Number of V2003 loans that
were charged off during 2004
B. Balance of V2003 loans that
were charged off during 2004
C. Column A / weighted average
of (month-end) aggregate number
of V2003 loans
D. Column B / weighted average of
(month-end) aggregate balance
of V2003 loans
- -------------------- ---------------------------------------- --------------------------------
Loans experiencing Four columns: Similarly
a loss A. Number of V2003 loans
(= gross losses) experiencing a loss during 2004
B. Balance of V2003 loans
experiencing a loss during 2004
C. Column A / weighted average
of (month-end) aggregate number
of V2003 loans
D. Column B / weighted average of
(month-end) aggregate balance
of V2003 loans
- -------------------- ---------------------------------------- ---------------------------------
Cumulative loss Four columns row: Similarly
(= aggregate of A. Cumulative loss on V2003
net losses) loans during 2004
B. Column A / weighted average
of (month-end) aggregate balance
of V2003 loans
- -------------------- ---------------------------------------- --------------------------------- -
D-9
V2004 mortgage loans
- ----------------------------------------------------------------
For the year ending
- -------------------- -------------------------------------------
December 31, 2004
- -------------------- ----------------------------------------
Charge-offs Four columns row:
(= Net loss) A. Number of V2004 loans that
were charged off during 2005
B. Balance of V2004 loans that
were charged off during 2005
C. Column A / weighted average
of (month-end) aggregate number
of V2004 loans
D. Column B / weighted average of
(month-end) aggregate balance
of V2004 loans
- -------------------- ----------------------------------------
Loans experiencing Four columns:
a loss A. Number of V2004 loans
(= gross losses) experiencing a loss during 2004
B. Balance of V2004 loans
experiencing a loss during 2004
C. Column A / weighted average
of (month-end) aggregate number
of V2004 loans
D. Column B / weighted average of
(month-end) aggregate balance
of V2004 loans
- -------------------- ----------------------------------------
Cumulative loss Four columns row:
(= aggregate of A. Cumulative loss on V2004
net losses) loans during 2005
B. Column A / weighted average
of (month-end) aggregate balance
of V2004 loans
- -------------------- ----------------------------------------
D-10
Through and including [ ], all dealers effecting transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus. This is in addition to the
dealers' obligation to deliver a prospectus supplement and prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
Granite Master Issuer plc
$[o] series 2006-[2] callable class [A] notes
$[o] series 2006-[2] callable class [B] notes
$[o] series 2006-[2] callable class [M] notes
$[o] series 2006-[2] callable class [C] notes
--------------------------------------------
PROSPECTUS
SUPPLEMENT
--------------------------------------------
Lead Underwriters
[ ] [ ] [ ]
Underwriters
[ ] [ ] [ ]
[ ], 200[ ]
The information in this prospectus is not complete and may be amended. This
prospectus and the accompanying prospectus supplement 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
Subject to completion and amendment, dated [ ]
Granite Master Issuer plc
Issuing entity
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 classes 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. Granite Finance
Funding 2 Limited is the depositor in relation to our note issuance
program.
o The principal asset from which Granite Finance Funding 2 Limited will
make payments of interest on, and principal of, 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 the related prospectus supplement.
o Northern Rock plc is the sponsor in relation to our note issuance
program. Northern Rock plc is also the Funding 2 basis rate swap
provider under the Funding 2 basis rate swaps entered into between the
Funding 2 basis rate swap provider and Funding 2.
o The notes will have the benefit of certain internal credit support, such
as the availability of reserve funds and subordination of certain note
classes to other note classes as described under "Credit Structure" and
"Risk Factors". In addition, the notes may have the benefit of certain
derivative instruments if specified in the related prospectus
supplement.
The notes offered by this prospectus will be solely our obligation. The
notes will not be obligations of the sponsor, Funding 2, any of their
respective affiliates or any other person or entity named in this prospectus
other than us.
You should consider the discussion under the "Risk Factors" beginning on
page 33 of this prospectus before you purchase any notes.
Application will be 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 will also be made to the
London Stock Exchange plc for such notes to be admitted to trading on the
London Stock Exchange's Gilt Edged and Fixed Interest Market.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Prospectus dated [ ]
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 issuing entities which have issued notes and used the proceeds
thereof to make intercompany loans to Granite Finance Funding Limited. Granite
Finance Funding Limited may also establish from time to time new issuing
entities which will issue notes and make new intercompany loans to Granite
Finance Funding Limited. Subject to certain conditions, Granite Finance
Funding 2 Limited may establish, from time to time, new issuing entities which
will issue notes and make new intercompany loans to Granite Finance Funding 2
Limited. The notes issued by these existing issuing entities ultimately are,
and any new notes issued by such new issuing entities ultimately will be,
secured by the same trust property as the notes issued by us under this
prospectus and the related prospectus supplement. References in this document
to "Funding" mean Granite Finance Funding Limited and references to "Funding
2" mean 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.
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 servicer 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.
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;
2
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. The information in this prospectus or the accompanying prospectus
supplement is only accurate as of the dates on their respective covers.
We include cross-references in this prospectus and in the accompanying
prospectus supplement to captions in these documents where you can find
further related discussions. The Table of Contents in this prospectus and in
the accompanying prospectus supplement provides the pages on which these
captions are located.
Incorporation by reference
The United States Securities and Exchange Commission (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 modify and supersede this
information. Only the modified form of such information will constitute a part
of this prospectus.
You may request a copy of our filings at no cost by writing or
telephoning at the following address:
Northern Rock plc
Northern Rock House
Gosforth
Newcastle upon Tyne
NE3 4PL
Tel: +44 (0)191 285 7191
Where you can find more information
We have filed a registration statement with the SEC for the US notes.
This prospectus, which forms a part of the registration statement, and the
prospectus supplement relating to each series and class of US notes contain
summaries of the material terms of the documents referred to in this
prospectus and in the prospectus supplement, but do not contain all of the
information in the registration statement pursuant to the rules and
regulations of the SEC. For further information, reference is made to the
registration statement and its exhibits.
Granite Master Issuer plc, Granite Finance Funding 2 Limited and Granite
Finance Trustees Limited (the "registrants") will file annual reports on Form
10-K, periodic reports on
3
Form 10-D and other information with the SEC about the mortgages trust, the
property of which ultimately secures your notes. The reports will be filed
under SEC file numbers 333-119671, 333-119671-02 and 333-119671-03,
respectively. You may also read and copy any document we file at the public
reference facilities maintained by the SEC at its Public Reference Room, 100 F
Street, NE, Washington, DC 20549. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an internet website that contains reports, information statements
and other information regarding the registrants that file electronically with
the SEC, including Funding 2, the mortgages trustee and us. The address of
that internet website is http://www.sec.gov.
4
Table of Contents
Summary of prospectus.............................................................................................6
Fees.............................................................................................................31
Risk factors.....................................................................................................33
Defined terms....................................................................................................66
The issuing entity...............................................................................................67
Use of proceeds..................................................................................................70
Northern Rock plc................................................................................................71
Funding 2........................................................................................................74
The mortgages trustee............................................................................................75
Holdings.........................................................................................................76
GPCH Limited.....................................................................................................77
Funding issuing entities.........................................................................................79
The note trustee and the issuer security trustee.................................................................80
Affiliations and certain relationships and related transactions of transaction parties...........................81
Issuance of notes................................................................................................82
The mortgage loans...............................................................................................88
Certain characteristics of the United Kingdom residential mortgage market.......................................114
The servicer and the administration agreement...................................................................121
Assignment of the mortgage loans and related security...........................................................134
The mortgages trust.............................................................................................146
The global intercompany loan agreement..........................................................................168
Cashflows.......................................................................................................174
Credit structure................................................................................................203
The swap agreements.............................................................................................215
Cash management for the mortgages trustee and Funding 2.........................................................220
Cash management for the issuing entity..........................................................................224
Security for Funding 2's obligations............................................................................227
Security for the issuing entity's obligations...................................................................233
Description of the trust deed...................................................................................238
The notes.......................................................................................................240
Description of the US notes.....................................................................................246
Material legal aspects of the mortgage loans and the related security...........................................275
Material United Kingdom tax consequences........................................................................282
Material United States tax consequences.........................................................................285
Material Jersey (Channel Islands) tax considerations............................................................290
ERISA Considerations............................................................................................291
Enforcement of foreign judgments in England and Wales...........................................................294
United States legal investment considerations...................................................................295
Legal matters...................................................................................................296
Underwriting....................................................................................................297
Reports to noteholders..........................................................................................300
Listing and general information.................................................................................301
Glossary........................................................................................................305
Index of principal terms........................................................................................334
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 "initial closing date"), the seller
assigned the initial mortgage portfolio and the other initial
trust property to the mortgages trustee pursuant to the mortgage
sale agreement. Since the initial closing date 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. For a
further description of the assignment of the initial mortgage
portfolio and the further mortgage portfolios, see "-- 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 dated the initial closing date, as amended
from time to time, among the mortgages trustee, the seller,
Funding, Funding 2 and the corporate services provider (the
"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 "-- 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 AAA loan tranches, the AA
loan tranches, the A loan tranches, the BBB loan tranches and the
BB loan tranches (collectively, 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:
6
o in payment of a contribution to the mortgages trustee to
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:
(a) to the seller, as an initial purchase price 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 (which will
have the effect of reducing the seller share); or
(c) to Funding as a special distribution (which will have
the effect of reducing the Funding share)
o to fund or replenish 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 refinance 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 and security
therefor. 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 note payment date if we have received principal
repayments in respect of the loan tranche that was funded by the
issue of such notes. We will only receive a principal repayment in
respect of a loan tranche if, amongst other things, following such
repayment (and repayment of the applicable notes), there would be
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. Following the
occurrence of a trigger event, Funding 2 will apply principal
receipts received by it from the mortgages trustee to repay all
classes of outstanding notes of any series. The trigger events are
described under "-- Trigger events" in this "Summary of
prospectus" and later in this prospectus and the related
prospectus supplement.
7
As used in this prospectus, the term "enforcement of the issuer
security" denotes realization on assets that secure the issuing
entity's obligations by exercise of the power of sale and other
powers conferred by Section 101 of the Law of Property Act 1925,
as varied or amended by the issuer deed of charge.
(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 classes of notes and may 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 on existing loan
tranches.
(8) The accounts, reserve funds and swaps transactions, 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.
Funds produced from the mortgage loans will be applied, as described
above, to service payments under the notes. The assets backing the issue
(as set out above) will have characteristics that demonstrate capacity
to produce funds to service any payments due and payable on the notes.
8
Structural diagram of the securitization transaction
[GRAPHIC OMITTED]
9
Diagram of ownership structure of principal parties to the
securitization transaction
[GRAPHIC OMITTED]
This diagram illustrates the ownership structure of the principal
parties to the securitization transaction:
o Each of the mortgages trustee, Funding and Funding 2 is a
wholly-owned subsidiary of Granite Finance Holdings Limited
("Holdings").
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 income
received by Holdings from investments of the trust fund held by
it, after payment of the costs and expenses of Holdings in
connection with administrative services provided by Northern Rock
and corporate services provided by The Law Debenture Intermediary
Corporation p.l.c., 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 the professional trust
company (see "Holdings"). The payments on your notes will not be
affected by this arrangement.
o The post enforcement call option holder was a wholly owned
subsidiary of Holdings (who holds two shares in the post
enforcement call option holder) until 6 July 2005 when 15,000
further ordinary shares of (GBP)1.00 were allotted and issued to
The Law Debenture Trust Corporation plc. who holds those shares
under the terms of a discretionary trust for the benefit of
certain charities. The payments under your notes will not be
affected by this arrangement.
10
o Funding 2 may establish an additional issuing entity or issuing
entities 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 this diagram. As a result, the financial condition of
the seller should not directly affect the mortgages trustee,
Funding, Funding 2, the Funding issuing entities, us or,
ultimately, investors in the notes, although the seller still has
a connection with the transaction for other reasons (such as
acting as servicer 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 issuing entities 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 proceeds of the
trust property, including receipts of principal and interest on
the mortgage loans, will be made pari passu and pro rata as
between Funding and Funding 2.
11
Diagram of note priority of payments and subordination(1)
Interest Principal
--------------------------- --------------------------
Issuing Entity Issuing Entity
Granite Master Issuer plc Granite Master Issuer plc
--------------------------- --------------------------
| |
| |
- ------------------------------------------------- |
Senior expenses of note trustee, issuer security |
trustee, agent bank, paying agents, transfer |
agent and registrar, issuer cash manager, |
corporate service provider, issuer account bank |
and liquidity provider (if any) |
- ------------------------------------------------- --------------------------
| Replenish issuer
| reserve fund
------------------------------------
Class A issuer swap provider(s)
------------------------------------ --------------------------
| |
--------------------------- |
Interest on Class A notes |
--------------------------- |
| |
--------------------------------------- ----------------------------
Class B issuer swap provider(s)
-------------------------------------- Class A notes
|
--------------------------- ---------------------------
Interest on Class B notes |
--------------------------- |
| |
-------------------------------------- ---------------------------
Class M issuer swap provider(s) |
-------------------------------------- |
| |
---------------------------- ---------------------------
Interest on Class M notes
---------------------------- Class B notes
|
-------------------------------------- ---------------------------
Class C issuer swap provider(s) |
-------------------------------------- |
| |
---------------------------- ---------------------------
Interest on Class C notes
---------------------------- Class C notes
|
-------------------------------------- ---------------------------
Class D issuer swap provider(s) |
-------------------------------------- |
| |
---------------------------- ---------------------------
Interest on Class D notes
---------------------------- Class D notes
|
-------------------------------------------- ---------------------------
Start-up loan providers - interest payments
--------------------------------------------
|
--------------------------------------------
Replenishment of issuer reserve fund
--------------------------------------------
|
--------------------------------------------
Issuer swap providers - only issuer swap
excluded termination payments
--------------------------------------------
|
--------------------------------------------
Start-up loan providers - principal amounts
--------------------------------------------
|
--------------------------------------------
Remainder to issuing entity - up to 0.01%
p.a. of interest on global intercompany loan
--------------------------------------------
|
--------------------------------------------
Issuer GIC provider
--------------------------------------------
- ---------------
1 The chart above is intended to show a summary of the priority of payments of
interest and principal by the issuing entity. It also illustrates the
subordination among the classes of notes. This chart is not a complete
representation of the cashflows of the issuing entity. You should refer to
"Cashflows" in this prospectus for a detailed discussion of payment priorities
of the notes and to "Credit Structure" for a discussion of subordination among
the classes of notes.
12
The issuing entity
Granite Master Issuer plc (the "issuing entity") 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 issuing entity 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.
The depositor
Granite Finance Funding 2 Limited ("Funding 2") 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 (the "mortgagees trustee") 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.
The sponsor, the originator, the seller, the servicer, the cash manager, the
issuer cash manager, the Funding 2 basis rate swap provider 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 UK Financial Services Authority
("FSA"). Its registered office is at Northern Rock House, Gosforth, Newcastle
upon Tyne NE3 4PL.
Northern Rock is the sponsor in relation to the Granite Program (the
"sponsor").
Northern Rock, in its capacity as seller (the "seller"), originated each
of the mortgage loans which it assigned to the mortgages trustee according to
its lending criteria applicable at the time such mortgage loan was offered
(the "lending criteria"), which lending criteria were the same as or
substantially similar to the criteria described later in this prospectus.
Northern Rock, as seller, has a continuing interest in the mortgage loans as
one of the beneficiaries of the mortgages trust.
13
Northern Rock acts as servicer of the mortgage portfolio under the terms
of the administration agreement (the "servicer"), 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 Funding, Funding 2 and
the seller (collectively, the "beneficiaries" of the mortgages trust),
including collecting payments under the mortgage loans and taking steps to
recover arrears. Northern Rock may not resign as servicer unless a successor
servicer has been appointed. In addition, the servicer may be replaced by a
new servicer if it defaults in its obligations under the administration
agreement.
Northern Rock has also been appointed as the cash manager for the
mortgages trustee, Funding and Funding 2 (the "cash manager") to manage their
bank accounts, determine the amounts of and arrange payments to be made by
them and keep certain records on their behalf.
Northern Rock has also been appointed as an account bank (an "account
bank") to provide banking services to Funding 2. It has also been appointed as
account bank in respect of the issuer GIC account and the mortgages trustee
GIC account.
Northern Rock has also been 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 (the "issuer cash manager").
Northern Rock also acts as the Funding 2 basis rate swap provider.
Citibank, N.A., acting through its London branch at 5 Carmelite Street,
London EC4Y 0PA (the "issuer account bank") has been appointed as account bank
to provide banking services to us.
Lloyds TSB Bank plc, Jersey International Branch, a branch of Lloyds TSB
Bank plc, has been appointed as Jersey account bank (an "account bank") to
provide banking services to the mortgages trustee. The activities of Lloyds
TSB Bank plc, Jersey International Branch 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 Funding 2 security trustee
The Bank of New York, acting through its London office at 48th Floor,
One Canada Square, London E14 5AL is the "Funding 2 security trustee". The
Funding 2 security trustee will act as trustee for the Funding 2 secured
creditors (including us) under the Funding 2 deed of charge.
The note trustee
The Bank of New York, acting through its London Branch at 48th Floor,
One Canada Square, London E14 5AL, is the "note trustee". The note trustee
will act as trustee for you under the trust deed.
The issuer security trustee
The Bank of New York, acting through its London Branch at 48th Floor,
One Canada Square, London E14 5AL, is the "issuer security trustee". The
issuer security trustee will act as trustee for the issuer secured creditors
(including you) under the issuer deed of charge.
14
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, 388 Greenwich Street, New York, New York 10013. The
principal paying agent and the US paying agent are together referred to as the
"paying agents". The paying agents will make payments on the notes to you.
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
floating rate 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.
The swap providers
Northern Rock plc is the "Funding 2 basis rate swap provider" 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
Funding 2 basis rate swap agreement with Funding 2 (see "The swap agreements -
The Funding 2 basis rate swaps").
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 or have a combination of these characteristics (as specified in the
relevant prospectus supplement). To hedge certain interest rate and/or
currency 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 specified in the prospectus supplement for such notes (the applicable
"closing date") 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 cashflows. The notes of a particular class in different series (and the
notes of differing sub-classes of the same class and series) will not
necessarily have all the same terms. Differences may include principal amount,
interest rates, interest rate calculations, currency, permitted redemption
dates, final maturity dates, and/or ratings. Each series and class of notes
will be secured over the same property as the notes offered by this
prospectus. Noteholders holding certain notes may have the benefit of
remarketing and conditional purchase arrangements or similar arrangements. 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 "--Payment priority and
ranking of the notes".
15
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, 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 United States Securities Act of 1933, as amended (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 the class A, class B, class M or class C notes which are
registered in the United States under the Securities Act and offered under
this prospectus and a related prospectus supplement are referred to as the "US
notes". Class D notes will not be registered in the United States under the
Securities Act and will not be offered under this prospectus.
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
It is a condition of the issuance of each series and class of US Notes
and Reg S notes that they be assigned the following ratings by at least one of
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), Moody's Investors Services Limited ("Moody's") or
Fitch Ratings Limited ("Fitch").
Class A Class B Class M Class C Class D
------- ------- ------- ------- -------
Standard & Poor's AAA AA A BBB BB
Moody's Aaa Aa3 A2 Baa2 Ba2
Fitch AAA AA A BBB BB
It is a condition of the issuance of any series and class of notes which
are designated as money market notes that they be assigned a rating of A-1+,
P-1 or F1+ by at least one of Standard & Poor's, Moody's or Fitch,
respectively.
The ratings assigned to each series and class of US Notes and Reg S
notes will be specified in the applicable prospectus supplement.
Listing
Application will be 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
16
the official list maintained by the UK Listing Authority (the "official
list"). Application will also be made to the London Stock Exchange plc (the
"London Stock Exchange") for each series and class of the notes to be admitted
to trading on the London Stock Exchange's Gilt Edged and Fixed Interest Market
(the "Market") for listed securities.
Denominations
Notes (other than US notes) will be issued in minimum denominations of
euro 50,000 (or its equivalent in any other currency as at the date of issue
of such notes) but subject thereto in such denominations as may be agreed
between 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 issuing entity
or the relevant specified currency. The US notes will be issued in minimum
denominations specified in the applicable prospectus supplement.
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 the relevant underwriters
and/or dealers (as applicable) and us and specified 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 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 agreement". 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, dates for payment of principal and the type of amortization or
redemption) will reflect the terms of the related 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.
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Payment priority and ranking of the notes
Payments of interest and principal on the class A notes of any series
due and payable on a note payment date will rank ahead of payments of interest
and principal on the 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
(in each case, due and payable on such note payment date). Payments of
interest and principal on the class B notes of any series due and payable on a
note payment date 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 (in each case, due and payable on such note payment date).
Payments of interest and principal on the class M notes of any series due and
payable on a note payment date 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 (in each case, due and payable on such note payment date). Payments of
interest and principal on the class C notes of any series due and payable on a
note payment date will rank ahead of payments of interest and principal on the
class D notes of any series due and payable on such note payment date. 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 note payment dates of the class A notes of
each series). Payments of interest and principal on the class B notes of each
series rank equally (but subject to the note payment dates of the class B
notes of each series). Payments of interest and principal on the class M notes
of each series rank equally (but subject to the note payment dates of the
class M notes of each series). Payments of interest and principal on the class
C notes of each series rank equally (but subject to the note payment dates of
the class C notes of each series). Payments of interest and principal on the
class D notes of each series rank equally (but subject to the note payment
dates of the class D notes of each series). The note payment dates for a
series and class of notes will be specified in the applicable prospectus
supplement.
Investors should note that:
o notes of different series and classes are intended to receive
payment of interest and principal at different times, therefore
lower ranking classes of notes of one series may be paid interest
and principal before higher ranking classes of notes of a
different series;
o no loan tranche of any tier (other than the AAA loan tranches)
and, consequently, no notes of any class (other than the class A
notes) may be repaid principal if, following such repayment, 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 loan tranche (or
any part thereof) and, consequently, any series and class of notes
may be repaid principal are set out in "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 failure to repay principal in
respect of such loan tranche and the related notes on the
applicable redemption dates for such reason will not constitute an
event of default in respect of such loan tranche or in respect of
the related notes;
o if any class A note and/or AAA loan tranche remains outstanding
and either the issuer arrears test or the issuer reserve
requirement is not satisfied on any permitted redemption date, no
amount of principal will be repayable in respect of any
18
subordinate loan tranche and (consequently) the related series and
class of notes. The failure to repay principal in respect of such
subordinate loan tranche and the related notes on the applicable
redemption dates for such reason will not constitute an event of
default in respect of such loan tranche or in respect of the
related notes;
o 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 (save in certain circumstances, where
amounts standing to the credit of the issuer reserve fund may be
so applied);
o to the extent required, but subject to certain limits and
conditions, the issuing entity may apply amounts standing to the
credit of the issuer reserve fund in payment of interest and
principal on the notes;
o if not redeemed earlier, each series and class of notes will be
redeemed by us on the final maturity date specified in the
applicable prospectus supplement. The failure to redeem a series
and class of notes on its final maturity date will constitute an
event of default in respect of such notes; and
o following the enforcement of the issuer security, the priority of
payments will change and we will make payments of interest and
principal in accordance with and subject to the relevant priority
of payments as described under "Cashflows".
Investors should also note that Funding 2 may establish from time to
time other Funding 2 issuing entities which will issue notes and from the
proceeds thereof make intercompany loans to Funding 2. The notes issued by
such other Funding 2 issuing entities ultimately will be secured by the same
trust property (primarily consisting of the mortgage portfolio) as the notes
issued by us under this prospectus and the related prospectus supplements (see
"Risk factors - If Funding 2 enters into other Funding 2 intercompany loans,
such other Funding 2 intercompany loans and accompanying notes may be repaid
prior to the global intercompany loan and the notes" and "Risk factors - Other
Funding 2 issuing entities may share in the same security granted by Funding 2
to us, and this may ultimately cause a reduction in the payments you receive
on the notes").
Interest
Interest will accrue on each series and class of notes from its date of
issuance at the applicable interest rate specified for that series and class
of notes, which may be a fixed or floating rate or have a combination of these
characteristics and will be specified in the applicable prospectus supplement.
See "Description of the US note - 4. Interest". Interest on each series and
class of notes will be due and payable on each note payment date as specified
in the applicable prospectus supplement. Following the earlier to occur of a
pass-through trigger event and the step-up date (if any) in relation to a
series and class of notes, interest in respect of such notes will become due
and payable on monthly payment dates and interest will accrue on a monthly
basis.
Any revenue shortfall in payments of interest due on any series of the
class B notes, the class M notes, the class C notes or the class D notes on
any note payment date in respect of such notes will be deferred until the
immediately succeeding note payment date in respect of such notes. On that
immediately succeeding note 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 note payment date there is still a revenue shortfall,
that revenue shortfall will be deferred again. This deferral process will
continue until the final maturity 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
19
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 on interest due on any note payment
date in respect of the most senior class of notes then outstanding. The
failure to pay interest on such notes will be a note event of default.
Fixed rate notes
For a series and class of fixed rate notes, interest will be payable at
a fixed rate on such note payment dates and on redemption as specified in the
applicable prospectus supplement and will be calculated on the basis of such
day count fraction as specified in the applicable prospectus supplement.
Floating rate notes
A series and class of floating rate notes will bear interest at a rate
determined:
(i) on the same basis as the floating rate under an interest rate swap
transaction in the relevant specified currency governed by an
agreement incorporating the ISDA definitions and based upon
certain elections made pursuant to the ISDA definitions; or
(ii) on the basis of a reference rate appearing on the agreed screen
page of a commercial quotation service (as specified in the
applicable prospectus supplement),
in each case as specified in the applicable prospectus supplement.
See "Description of the US notes -- 4. Interest -- (B) Interest on
floating rate notes".
The margin (if any) relating to such series and class of notes will be
specified in the applicable prospectus supplement.
Other provisions in relation to floating rate notes
A series and class of floating rate notes may also have a maximum
interest rate, a minimum interest rate or both (as specified in the applicable
prospectus supplement). Interest on floating rate notes in respect of each
interest period, will be payable on such note payment dates, and will be
calculated on the basis of such day count fraction, as specified in the
applicable prospectus supplement.
Zero coupon notes
A series and class of zero coupon notes may be offered and sold at a
discount to their nominal amount as specified in the applicable prospectus
supplement ("zero coupon notes").
Pass-through notes
A series and class of pass-through notes will be redeemable in full
on the final maturity date specified for such series and class of notes in the
applicable prospectus supplement. On each applicable loan 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
20
may, on the applicable note payment date, repay all or part of the
pass-through notes prior to their respective final maturity dates. Following
the earlier to occur of a pass-through trigger event and the step-up date (if
any) in relation to a series and class of notes, we will repay such notes, to
the extent that funds are available and subject to the conditions for
repayment, on monthly payment dates.
Controlled amortization notes
A series and class of controlled amortization notes will be redeemable,
on controlled redemption dates in controlled amortization installments, the
amounts of which will be determined as specified in the applicable prospectus
supplement. On each controlled repayment date for a controlled repayment loan
tranche, Funding 2 will seek to make payments equal to the controlled
repayment requirement to us so that we may repay each controlled amortization
installment on its controlled redemption date. If there are insufficient funds
on a controlled redemption date to repay the relevant controlled amortization
installment(s) in respect of a series and class of controlled amortization
notes, then we shall be required to pay the shortfall, to the extent we
receive funds therefor, on subsequent note payment dates in respect of such
notes.
Following the earlier to occur of a pass-through trigger event and the
step-up date (if any) in relation to a series and class of controlled
amortization notes, such notes will be deemed to be pass-through notes and we
will repay such notes, to the extent that funds are available and subject to
the conditions regarding repayment, on monthly payment dates.
Scheduled redemption notes
A series and class of scheduled redemption notes will be redeemable on
scheduled redemption dates, in two or more scheduled amortization
installments, the amounts of which will be determined as specified in the
applicable prospectus supplement. On each scheduled repayment 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 scheduled redemption
date to repay the relevant scheduled amortization installment(s) in respect of
a series and class of scheduled redemption notes, then we shall be required to
pay the shortfall, to the extent we receive funds therefor, on subsequent note
payment dates in respect of such notes.
Following the earlier to occur of a pass-through trigger event and the
step-up date (if any) in relation to a series and class of scheduled
redemption notes, such notes will be deemed to be pass-through notes and we
will repay such notes, to the extent that funds are available and subject to
the conditions regarding repayment, on monthly payment dates.
Bullet redemption notes
A series and class of bullet redemption notes will be redeemable in full
on the bullet redemption date specified in the applicable prospectus
supplement. 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 bullet redemption notes in full on the relevant 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 principal receipts 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 date. The cash
accumulation period will be determined according to a formula described under
"Cashflows - Distribution of Funding 2 available principal receipts
21
prior to the enforcement of the Funding 2 security". To the extent that there
are insufficient funds to redeem a series and class 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 note payment
dates in respect of such notes. 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 we are able to repay principal of the related series of bullet
redemption notes on their bullet redemption date. If this happens, holders of
affected notes will not receive repayment of principal when expected. Failure
of a noteholder to receive full repayment of principal when expected could
have a negative effect on the yield to that holder on such notes. 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".
Following the earlier to occur of a pass-through trigger event and the
step-up date (if any) in relation to a series and class of bullet redemption
notes, such notes will be deemed to be pass-through notes and we will repay
such notes to the extent that funds are available and subject to the
conditions regarding repayment, on monthly payment dates.
Money market notes
From time to time, we may issue a series and class of notes designated
as money market notes in the applicable prospectus supplement. "Money market
notes" will be bullet redemption notes or scheduled redemption notes, the
final maturity date of which will be less than 397 days from the closing date
on which such notes were issued.
We may repay certain series and classes of money market notes on their
final maturity dates using amounts received from a third party that has agreed
to purchase those notes pursuant to the terms of a money market note purchase
agreement. In addition, we may provide for remarketing arrangements whereby
money market notes may be remarketed to other investors prior to the end of
each of a specified number of periods of less than 397 day following issuance.
If such arrangements apply to any money market notes, the applicable
prospectus supplement will, in addition to providing information regarding a
series and class of money market notes, identify any money market note
purchaser or remarketing agent in respect of such money market notes and the
terms of the applicable money market note purchase agreement or remarketing
agreement.
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 purchaser may not be sufficient to repay money market
notes".
Redemption and Repayment
If not redeemed earlier, each series and class of notes will be redeemed
by us on the final maturity date specified for such series and class of notes
in the applicable prospectus supplement.
For more information on the redemption of the notes, see "The mortgages
trust - Cash management of trust property - principal receipts" and
"Cashflows". See also "- Payment priority and ranking of the notes".
22
Trigger Events
Following the occurrence of a trigger event, the payments in respect of
the notes may be altered as described under "Cashflows". 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 principal deficiency sub-ledger in relation to the class A
notes of any Funding issuing entity or to the AAA principal deficiency
sub-ledger of Funding 2.
A "non-asset trigger event" means (a) the occurrence of an insolvency
event in relation to the seller; or (b) the seller's role as servicer is
terminated and a new servicer is not appointed within 60 days; or (c) 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 as set forth under "The mortgages trust - Cash management of the trust
property - principal receipts".
For more information on trigger events, see the "The mortgages trust -
Cash management of the trust property - principal receipts", "Cashflows" and
"- Payment priority and ranking of the notes".
Enforcement
All notes will become immediately due and payable on the service on us
by the note trustee of an issuer enforcement notice. The note trustee becomes
entitled to serve an issuer enforcement notice at any time after the
occurrence of a note event of default in respect of a series and class of
notes (and it may do so using its own discretion or on the instructions of the
noteholders of the applicable class of notes across all series (holding, in
aggregate at least one quarter in principal amount outstanding of such class
of notes)) provided that, at such time, all notes ranking in priority to such
class of notes have been repaid in full.
For more information on 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 and class of notes at their principal amount
outstanding, together with any accrued and unpaid interest in respect thereof,
in the event of particular tax changes affecting such series and class 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 and class of notes on the relevant note payment date.
In addition, we may redeem in principally the same manner as stated in
the previous paragraph, 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
monthly payment date thereafter; or
23
o if the consultation paper published by the European Commission on
the EU's implementation of the New Basel Capital Accord (known as
the "Capital Requirements Directive") has been implemented in the
United Kingdom, whether by rule of law, recommendation or best
practice or by any other regulation, on the first note payment
date in respect of such notes falling after such implementation
and any applicable note payment date thereafter provided that an
issuer enforcement notice has not been served; or
o on any note payment date in respect of such notes on which the
aggregate principal amount outstanding of such series and class of
notes and all other classes of notes of the same series is less
than 10% of the aggregate principal amount outstanding of such
series of notes as at the applicable closing date; or
o on any note payment date in respect of such notes after it has
become unlawful for us to make, fund or allow to remain
outstanding the related loan tranche and we have required Funding
2 to prepay such loan tranche.
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 under 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 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
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 19, 2005 (the "Funding 2 program date") the issuing
entity and other principal transaction parties entered into the main operative
transaction documents in relation to the Granite Master Issuer plc
securitization program (the "Granite Program").
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 issuer
security trustee, 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.
24
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 mortgaged property situated in Scotland are
governed by Scots law.
The global intercompany loan
We have entered into the global intercompany loan agreement with Funding
2.
As described under "-- Relationship between the notes and the global
intercompany loan", the global intercompany loan will consist of separate loan
tranches, each corresponding to a particular series and class of notes. The
loan tranches will 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 a series and class of notes
will be specified for such series and class of notes in the applicable
prospectus supplement. 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 or replenish the Funding 2 reserve fund and/or to make a
deposit into the Funding 2 GIC account; and/or
o make a payment back to us to refinance an existing loan tranche.
Subject to the provisions of the relevant Funding 2 priority of payments
(see "Cashflows"), Funding 2 will repay the global intercompany loan from
payments received from the mortgages trustee, as described under "- The
mortgages trust". To the extent required, but subject to certain limits and
conditions, Funding 2 may also apply amounts standing to the credit of the
Funding 2 reserve fund and the Funding 2 liquidity reserve fund (if any) in
payments of interest and principal due under the global intercompany loan. 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.
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 scheduled to be paid, 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 subordinate
classes of notes (and other forms of credit enhancement) and reserves (as
applicable) is at least equal to the required credit enhancement for each of
the class A notes, the class B notes, the class M notes and the class C notes
then outstanding. In certain circumstances, payment on the controlled
repayment loan tranches, scheduled repayment loan tranches and pass-through
loan tranches will be deferred (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").
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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. Prior to the occurrence of a pass-through trigger
event, 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.
For a detailed description of Funding 2's payments of interest and
principal under the global intercompany loan agreement, see "The global
intercompany loan agreement - Payment of interest" and "The global
intercompany loan agreement - Repayment of the global intercompany loan".
Repayment of loan tranches
Whenever Funding 2 is to repay a loan tranche (in whole or in part), it
will do so only to the extent that its share of the proceeds of principal
receipts it has received from the mortgages trustee and allocated to that loan
tranche are sufficient to repay that loan tranche in accordance with its
terms, and only to the extent that certain tests relating to repayment of loan
tranches are satisfied, including that following such repayment and the
consequential redemption of the related series and class of notes, the amount
of subordination available from all subordinate outstanding classes of notes
(and other forms of credit enhancement) and reserves (as applicable) is
greater than or equal to the required credit enhancement for each of the class
A notes, the class B notes, the class M notes and the class C 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, prior to the latest occurring final repayment date of
any loan tranche advanced under the global intercompany loan agreement it will
not be an event of default under the global intercompany loan agreement if
Funding 2 does not pay some or all amounts due under the global intercompany
loan agreement 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. However, the
occurrence of an event of default under any other Funding 2 intercompany loan
agreement (if any) may trigger an acceleration of the loan tranches
outstanding under the global intercompany loan agreement. For more information
on events of default under the global intercompany loan agreement 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 advance a new loan tranche to Funding 2.
Neither Funding 2 nor we are required to provide prior notice to you, 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.
If we issue notes constituting part of a series and class of notes on a
date after the first date on which such series and class of notes were issued,
the proceeds of the issuance of such new notes will, without notice to, or the
consent of, any noteholders, increase the outstanding principal amount of the
applicable loan tranche.
26
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 regulated personal secured loan) is secured by a first legal charge over a
residential property located in England or Wales or a first ranking standard
security over a residential property located in Scotland. Each mortgage over a
residential property located in England or Wales will be governed by English
law. Each mortgage over a residential property located in Scotland will be
governed by Scots law. The associated mortgage loans will be governed by
English or Scots law. Each regulated personal secured loan is secured by a
legal charge over freehold or leasehold property located in England or Wales
or by a standard security over heritable or long leasehold property located in
Scotland which ranks in priority below the first legal charge or first ranking
standard security securing the related borrower's existing mortgage loan. 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 see 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 at the time of offer of the mortgage loan. The seller may,
from time to time, change its lending criteria and any other terms applicable
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
mortgages trustee mortgage loans that are in breach of these representations
and warranties. See "Assignment of the mortgage loans and related security".
Assignment of the mortgage loans
The seller assigned the initial mortgage portfolio to the mortgages
trustee on the initial closing date, and since the initial closing date 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 trust property. The seller may also increase the size of the
trust property from time to time in connection with an issue of new notes by
us, the proceeds of which are applied ultimately to fund the acquisition (by
assignment) of the new mortgage loans and their related security to the
mortgages trustee, or to maintain adequate over collateralization in the
mortgages trust, in each case 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 were and will be
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 were and will be transferred by the seller to the
mortgages trustee by way of a declaration of trust in favor 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
27
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 trust
property will increase accordingly. 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 the initial closing date among
the mortgages trustee, the seller, Funding and Law Debenture Corporate
Services Limited (the "mortgages trust"). 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, the proceeds of
interest and principal payments arising from the mortgage loans in the trust
property 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, cash re-draws and non-cash
re-draws ("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 future further draws that are made under personal secured loans, in each
case that are assigned to the mortgages trustee, will also form part of the
trust property. A cash re-draw is an option available to a borrower under a
flexible mortgage loan that allows the borrower to request that the seller
refund some or all of overpayments that the borrower has made subject to
certain conditions as described under "The mortgage loans - Characteristics of
the mortgage loans - Flexible mortgage loans". A non-cash re-draw is 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 as
described under "The mortgage loans - Characteristics of the mortgage loans -
Mortgage loan products offered by the seller". 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 GIC account (together, the
"mortgages trustee bank accounts"). The "mortgages trustee GIC account" is the
bank account in the name of the mortgages trustee held at Northern Rock in
which the mortgages trustee holds any cash that is part of the trust property
until it is distributed to the beneficiaries pursuant to the terms of the
mortgages trustee guaranteed investment contract and the bank account
agreement.
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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 subsequently 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 trustee 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 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 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.
The realized losses experienced on the mortgage loans ("losses")
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 distribution date
immediately preceding the determination of such losses (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. Set-off rights (including analogous rights in Scotland) may
arise if the seller fails to advance a cash re-draw or a further draw to a
borrower under the relevant mortgage loan. In such situation, the borrower may
argue that he is entitled to set-off any damages claim (or to exercise the
analogous rights in Scotland) arising from the seller's breach of contract
against the seller's claim for payment of principal and/or interest under the
relevant mortgage loan as and when it becomes due. 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 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 loan tranches, see "The
mortgages trust - Losses" and "Credit structure - Principal deficiency
ledger".
Under the terms of the controlling beneficiary deed, Funding, Funding 2,
the security trustee, the Funding 2 security trustee and the seller 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.
29
United Kingdom tax
A discussion of the material UK tax consequences of the purchase,
ownership and disposition of the notes is set out in "Material United Kingdom
tax consequences".
United States federal income tax
A discussion of the material US federal income tax consequences of the
purchase, ownership and disposition of US notes is set out in "Material United
States tax consequences". As set forth in the applicable prospectus
supplement, it is anticipated that Sidley Austin LLP, US federal income tax
counsel to Northern Rock, will deliver their opinion that the class A, class B
and class M US notes will be treated as debt for US federal income tax
purposes and the class C US notes offered in the United States should be
treated as debt for US federal income tax purposes. See "Material United
States tax consequences - Alternative characterization of the US notes".
Further, it is anticipated that US federal income tax counsel to
Northern Rock will also provide their opinion that, assuming compliance with
the transaction documents, neither we nor the mortgages trustee acting in its
capacity as trustee of the mortgages trust nor Funding 2 will be subject to US
federal income tax. See "Material United States tax consequences".
Jersey (Channel Islands) tax
A discussion of certain aspects of Jersey taxation of the mortgages
trustee is set out in "Material Jersey (Channel Islands) tax considerations".
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.
30
Fees
The table below sets out the on-going fees to be paid by the issuing
entity, Funding 2 and the mortgages trustee to transaction parties. Each of
the fees set out below is payable out of revenue receipts in accordance with
the revenue priority of payments set out in the mortgages trust deed and the
trust deed, as applicable.
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 the amounts payable to Funding
trust property 2 by mortgages trustee
Funding 2 cash management fee (GBP)100,000 each year Ahead of all revenue Each monthly payment
amounts payable by Funding date
2 and allocable to the
issuing entity
Issuer cash management fee (GBP)100,000 each year Ahead of all interest Each monthly payment
payments on the notes date
Corporate expenses of mortgages Estimated (GBP)13,000 Ahead of all revenue Each distribution date
trustee each year amounts payable to Funding
2 by mortgages trustee
Corporate expenses of Funding 2 Estimated (GBP)10,500 Ahead of all revenue Each monthly payment
each year amounts payable by Funding date
2 and allocable to the
issuing entity
Corporate expenses of the issuing Estimated (GBP)12,000 Ahead of all interest Each monthly payment
entity each year payments on the notes date
Fee payable by Funding 2 to Estimated (GBP)13,000 In respect of Funding 2 Each monthly payment
Funding 2 security trustee, by each year security trustee, ahead of date
the issuing entity to note all revenue amounts
trustee and issuer security payable by Funding 2 and
trustee and by the issuing entity allocable to the issuing
to principal paying agent, paying entity, and in respect of
agent, transfer agent, registrar note trustee, issuer
and agent bank security trustee and
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.
31
Each of the above fees is subject to change at any time without
notice to, or approval by, noteholders. Further, any of the above fees may be
changed in the event a successor transaction party is appointed pursuant to
the applicable transaction document.
32
Risk factors
This section describes the principal risks 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
prospectus and in the related prospectus supplement, including the risk
factors set out in this section, prior to making any investment decision. 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 Funding 2 security trustee,
the note trustee, the issuer security 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 agreement. 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 other than (in the case of interest due and payable on
the notes and scheduled principal due in respect of original bullet redemption
notes) the amount of funds credited to the issuer reserve fund (as described
under "Credit structure - Issuer reserve fund"). 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 its share of the proceeds of revenue
receipts and principal receipts on the mortgage loans included in
the mortgages trust on or before each loan 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
agreement and principal due in respect of original bullet loan
tranches) the amount of funds credited to the Funding 2 reserve
fund (as described under "Credit structure - Funding 2
33
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").
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 loan payment date in respect of a loan tranche, however, Funding
2 will only be obliged to pay amounts due to us in respect of such 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) and taking into account payments ranking
equally with such loan tranche (such as other loan tranches of the same tier).
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 agreement until the latest occurring final repayment date of
any loan tranche advanced under the global intercompany loan agreement.
Following enforcement of the Funding 2 security and disbursement of the
proceeds thereof, any remaining shortfall will be extinguished.
If there is a shortfall between the amounts paid 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 you may
not receive the full amount of interest and/or principal which would otherwise
be due and payable on those notes.
Enforcement of the issuer security is the only remedy for a default in our
obligations
The only remedy for recovering amounts due on the notes is through the
enforcement of the issuer security by the issuer security trustee in
accordance with the issuer deed of charge. 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 agreement 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. Noteholders may not directly enforce our
obligation to repay notes or our right to repayment of the global intercompany
loan by Funding 2. The note trustee may, and if directed by the required
number of noteholders, will direct the issuer security trustee to enforce our
rights against Funding 2.
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 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. 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
34
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.
Conflicts of interest between the Funding beneficiaries and the Funding
security trustees
Where Funding and Funding 2 in their capacities as beneficiaries of the
mortgages trust (together, the "Funding beneficiaries"), acting together, or
the Funding security trustees, acting together, are permitted to provide or
exercise directions, rights, powers, benefits and/or discretions (or their
equivalent), the Funding beneficiaries or the Funding security trustees (as
applicable) will provide or exercise such directions, rights, powers, benefits
and/or discretions in accordance with the controlling directions (as to which
see "The mortgages trust - The controlling beneficiary deed"). Therefore, in
circumstances where there is a conflict of interest, the directions of Funding
or the security trustee (acting on behalf of the secured creditors of Funding)
may prevail over the directions of Funding 2 or the Funding 2 security trustee
(acting on behalf of the Funding 2 secured creditors), which may adversely
affect your interests. For example, following an event of default, affecting
the notes of one or more Funding issuing entities, and in a situation in which
there was a larger outstanding balance of AAA-rated notes issued by the
Funding issuing entities than was issued by us, then Funding and the Funding
security trustees could direct enforcement proceedings to liquidate assets of
the mortgages trust without regard to the wishes of holders of notes issued by
us. It is possible that Funding or the Funding security trustees might decide
to enforce its security at a time when you would not want assets of the
mortgages trust sold, e.g., if all notes issued by us were performing
normally.
If Funding 2 enters into other Funding 2 intercompany loans, such other
Funding 2 intercompany loans and accompanying notes may be repaid prior to the
global intercompany loan and the notes
Subject to satisfaction of certain conditions, Funding 2 may, in the
future, establish additional wholly-owned subsidiary companies that will issue
notes to investors. The proceeds of each such issue of notes may be advanced
by way of a Funding 2 intercompany loan to Funding 2. Funding 2 may use the
proceeds of such Funding 2 intercompany loan to, amongst other things, pay to
the mortgages trustee an initial contribution or a further contribution or to
refinance all or part of an existing Funding 2 intercompany loan outstanding
at that time. If the global intercompany loan (or any part thereof) is
refinanced, you could be repaid early.
We expect that the payment of the amounts owing by Funding 2 under any
such Funding 2 intercompany loan will be funded from amounts received by
Funding 2 from the trust property. You should note that the obligation to make
such payments may rank equally in
35
priority with payments made by Funding 2 to us under the global intercompany
loan agreement. The terms of the notes issued by such other Funding 2 issuing
entity and the related Funding 2 intercompany loan may result in such notes
and such Funding 2 intercompany loan being repaid prior to the repayment of
the notes issued by us under this prospectus and the related prospectus
supplements and the repayment of the global intercompany loan.
You will not have any right of prior review or consent before Funding 2
enters into any additional Funding 2 intercompany loans or the corresponding
issuance of notes by the related Funding 2 issuing entity. Similarly, the
terms of the Funding 2 transaction documents (including, but not limited to,
the mortgage sale agreement, the mortgages trust deed, the Funding 2 deed of
charge, the global intercompany loan agreement), the definitions of the
trigger events and the seller share event and the criteria for the assignment
of new loans to the mortgages trustee may be amended to reflect the new issue.
Your consent to these changes will not be required. There can be no assurance
that these changes will not affect the cashflow available to pay amounts due
on your notes.
Before issuing any notes, however, such other Funding 2 issuing entity
will be required to satisfy a number of conditions, including that the then
current ratings of your notes will not be reduced, withdrawn or qualified at
the time of the issuance of such notes by such other Funding 2 issuing entity.
The criteria for the assignment of new mortgage loans to the mortgages trustee
may change over time without your consent
The criteria for new mortgage loans to be assigned to the mortgages
trustees may be amended in the future without your consent. As a result, the
mortgages trust may include types of mortgage loans in the future with
different characteristics than those currently in the mortgages trust. This
may occur, for example, due to the development of new mortgage loan products
in response to changing market conditions. Any such amendments, as provided in
the mortgage sale agreement would require the consent of the parties to the
mortgage sale agreement, including the Funding 2 security trustee.
If the global intercompany loan (or any part thereof) is refinanced your notes
could be repaid early
Funding 2 may refinance some or all of the Funding 2 intercompany loans
through proceeds received from us or a new issuing entity under new Funding 2
intercompany loans. We or a new issuing entity would fund such loans through
the issuance of a new series and classes of notes. For example, an existing
Funding 2 intercompany loan might be re-financed in order to provide us with
funds to redeem a class of notes after their step-up date following a change
in tax law as permitted under the transaction documents. If the proceeds of a
refinanced Funding 2 intercompany loan were used by us to exercise an optional
redemption of notes prior to their expected maturity, your notes could be
repaid early. This, in turn, could have an adverse effect on the yield on your
notes. See "Description of US Notes - 5. Redemption, purchase and
cancellation".
Other Funding 2 issuing entities may share in the same security granted by
Funding 2 to us, and this may ultimately cause a reduction in the payments you
receive on the notes
Any other Funding 2 issuing entity may become party to the Funding 2
deed of charge and, if so, will be entitled to share in the security granted
by Funding 2 for our benefit (and the benefit of the other Funding 2 secured
creditors) under the Funding 2 deed of charge. If the Funding 2 security is
enforced and there are insufficient funds to make the payments that are due to
all Funding 2 issuing entities, we expect that each Funding 2 issuing entity
will only be
36
entitled to its proportionate share of those limited funds. This could
ultimately cause a reduction in the payments you receive on your notes.
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 from
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 to 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 mortgage loans and 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 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 trustee.
However, if the relevant original mortgage loan made to that borrower happens
to have been sold to the mortgages trustee 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 trustee.
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 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. As a general matter in relation to the mortgage
portfolio, a new mortgage product and/or further advance will only be approved
by the servicer upon receipt of the seller's confirmation that it will
repurchase the relevant loan and related security in accordance with the terms
of the mortgage sale agreement.
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
37
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 - 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.
Repurchases of mortgage loans by the seller may have the same effect as
prepayments on the mortgage loans
In the event of the seller purchasing, from the mortgages trustee,
mortgage loans subject to product switches or further advances or the
repurchase by the seller of mortgage loans for breaches of representations and
warranties, 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. See "- 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".
If a borrower takes a personal secured loan after the borrower's
existing mortgage loan(s) has been assigned to the mortgages trustee, as of
the date of this prospectus, the seller 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.
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.
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.
38
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 within the United Kingdom
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 nor where such regional economic declines may occur nor to what
extent or for how long such conditions may continue. See "The cut-off date
mortgage portfolio" in Annex A-1 to the related prospectus supplement.
Each geographic region within the United Kingdom relies on different
types of industries. Any downturn in a particular industry may adversely
affect the regional employment levels and consequently the repayment ability
of the borrowers in the region that relies most heavily on that industry. Any
natural disasters in a particular region may reduce the value of affected
mortgaged properties. This may result in a loss being incurred upon sale of
the mortgaged property. In addition, employment rates differ across regions.
The South East and South West have the lowest unemployment levels while the
North has the highest. See the prospectus supplement for each issuance of
notes which will contain information tables together with other information
regarding the geographic distribution of the mortgage loans.
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
(either voluntarily by borrowers or as a result of enforcement action taken),
as well as the receipt of proceeds from buildings insurance and life assurance
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 portfolio 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. See "- 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".
39
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
payment required to be made on a monthly payment date ("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.
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. See "Characteristics
of the United Kingdom residential mortgage market" in Annex A-2 to the related
prospectus supplement for historical data in respect of the CPR in relation to
mortgage loans held in the mortgages trust as well as historical CPRs in
relation to the United Kingdom residential mortgage market.
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
40
granted by us under the issuer deed of charge has been enforced. As a general
matter, 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. Rates of prepayment and scheduled repayments on the mortgage
loans in the mortgages trust have had no impact on the yield to maturity of
the notes to date. However, if the aggregate rates of prepayments and
scheduled repayments fell to levels much lower than the historical CPR levels
in respect of the mortgages trust (or the United Kingdom mortgage market in
general) as described in the prospectus supplement, note maturities would
likely be extended. Alternatively, it is unlikely that the average lives of
the notes would be reduced unless CPRs rose to levels much higher than the
historical CPR levels in respect of the mortgages trust (or the United Kingdom
mortgage market in general) as described in the prospectus supplement and the
sponsor ceased to maintain the required amount of mortgage loans in the
mortgages trust.
No assurance can be given that Funding 2 will receive sufficient funds
during the cash accumulation period prior to the bullet repayment date for a
bullet loan tranche, prior to the scheduled repayment date for a scheduled
repayment loan tranche or prior to the controlled repayment date for a
controlled repayment loan tranche, in each case 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, scheduled redemption
dates or controlled 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 or a
controlled 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, scheduled repayment loan
tranche or controlled repayment loan tranche and therefore we cannot redeem
the corresponding series and classes of notes on their bullet redemption date,
scheduled redemption dates or controlled redemption dates, 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 loan payment dates or, as applicable, note 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 amount to be repaid on
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 an asset trigger event or enforcement of the issuer security
or the Funding 2 security may accelerate the repayment of certain notes and/or
delay the repayment of other notes
If an asset trigger event has occurred or the issuer security and/or the
Funding 2 security has been enforced, the mortgages trustee will distribute
principal receipts on the mortgage loans to Funding, Funding 2 and the seller
proportionally based on their percentage shares of the trust property. Funding
2 will, on each monthly payment date following the occurrence of an
41
asset trigger event or the enforcement of the Funding 2 security or the issuer
security apply those principal receipts received by it from the mortgages
trustee, after making the requisite payments to the Funding 2 liquidity
facility provider (if any), the Funding 2 reserve fund and the Funding 2
liquidity reserve fund (if any), to repay:
o first, the AAA loan tranches in respect of each Funding 2
intercompany loan until each of those AAA loan tranches is fully
repaid;
o then, the AA loan tranches in respect of each Funding 2
intercompany loan until each of those AA loan tranches is fully
repaid;
o then, the A loan tranches in respect of each Funding 2
intercompany loan until each of those A loan tranches is fully
repaid;
o then, the BBB loan tranches in respect of each Funding 2
intercompany loan until each of those BBB loan tranches is fully
repaid;
o then, the BB loan tranches in respect of each Funding 2
intercompany loan until each of those BB loan tranches is fully
repaid.
The above priority of payments may cause certain series and classes of
notes to be repaid more rapidly than expected and other series and classes of
notes to be repaid more slowly than expected and there is a risk that such
notes may not be repaid by their final maturity date.
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 and until the occurrence of an
asset-trigger event, 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 and will
thereafter apply all principal receipts to the seller. Funding 2 will, on each
monthly payment date following the occurrence of a non-asset trigger event,
apply these principal receipts received by it from the mortgages trustee,
after making the requisite payments to the Funding 2 liquidity facility
provider (if any), the Funding 2 reserve fund and the Funding 2 liquidity
reserve fund (if any), to repay:
o firstly, the AAA loan tranches in order of final repayment date,
beginning with the earliest final repayment date;
o then, the AA loan tranches in respect of each Funding 2
intercompany loan until each of those AA loan tranches is fully
repaid;
o then, the A loan tranches in respect of each Funding 2
intercompany loan until each of those A loan tranches is fully
repaid;
o then, the BBB loan tranches in respect of each Funding 2
intercompany loan until each of those BBB loan tranches is fully
repaid;
o then, the BB loan tranches in respect of each Funding 2
intercompany loan until each of those BB loan tranches is fully
repaid.
42
The above priority of payments may cause certain series and classes of
notes to be repaid more rapidly than expected and other series and classes of
notes to be repaid more slowly than expected and there is a risk that such
notes may not be repaid by their final maturity date.
The occurrence of a pass-through trigger event may accelerate the repayment of
certain notes and/or delay the repayment of other notes
A "pass-through trigger event" is any of the following events: (a) a
trigger event; (b) the service of an issuer enforcement notice by the note
trustee on the issuing entity; or (c) the service of an Funding 2 intercompany
loan enforcement notice by the Funding 2 security trustee on the issuing
entity.
Following the occurrence of a pass-through trigger event:
o each series and class of notes will be deemed pass-through notes
and each loan tranche will be deemed a pass-through loan tranche;
o interest on each loan tranche will be calculated on a monthly
basis and will be due and payable by Funding 2 to us on each
monthly payment date and interest on each series and class of
notes will also be calculated on a monthly basis and will be due
and payable by us on each monthly payment date; and
o principal repayments in respect of each loan tranche (as to which
see "- The occurrence of an asset trigger event or enforcement of
the issuer security or the Funding 2 security may accelerate the
repayment of certain notes and/or delay the repayment of other
notes" and "- The occurrence of a non-asset trigger event may
accelerate the repayment of certain notes and/ or delay the
repayment of other notes" will be made by Funding 2 on each
monthly payment date and we will, also on each monthly payment
date, apply the proceeds of such principal repayments, which are
available for payment, in repayment of the notes in accordance
with the applicable issuer priority of payments but without regard
to the scheduled amounts due in respect of the bullet redemption
notes, the scheduled redemption notes and the controlled
amortization notes and the dates on which such amounts would
otherwise have been due.
This may cause certain series and classes of notes to be repaid more
rapidly than expected and other series and classes of notes to be repaid more
slowly than expected and there is a risk that such notes may not be repaid by
their final maturity date.
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
43
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 monthly 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 to Funding 2 at the relevant time.
If the mortgages trustee GIC provider, the Funding 2 GIC provider or the
issuer GIC provider ceases to satisfy certain criteria, then the mortgages
trustee GIC account, the Funding 2 GIC account and the issuer GIC account may
have to be transferred to another GIC provider under terms that may not be as
favorable as those offered by the current GIC provider
The mortgages trustee GIC provider, the Funding 2 GIC provider and the
issuer 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, the Funding 2 GIC account and the issuer GIC account, respectively.
If either the mortgages trustee GIC provider, the Funding 2 GIC provider or
the issuer GIC provider ceases to satisfy these criteria, then the relevant
account may need to be transferred to another entity which does satisfy these
criteria. In these circumstances, the stand-by GIC provider (in relation to
the mortgages trustee GIC account) or other bank, as applicable, may not offer
a GIC on terms as favorable as those provided by the mortgages trustee GIC
provider, the Funding 2 GIC provider or the issuer GIC provider.
The criteria referred to above as of the date of this prospectus include
a requirement that the short-term, unguaranteed and unsecured debt ratings
ascribed to the mortgages trustee GIC provider, the Funding 2 GIC provider or
the issuer GIC provider (as applicable) 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 aggregate principal amount outstanding of the notes issued by the
issuing entity and the Funding issuing entities, then the short-term,
unguaranteed and unsecured rating required to be ascribed by Standard & Poor's
to the mortgages trustee GIC provider, the Funding 2 GIC provider or the
issuer GIC provider (as applicable) shall be at least "A-1". These criteria
are subject to change by the rating agencies.
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 note
payment date under those classes of notes. The ratings also address the
likelihood of ultimate repayment of principal on the final 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,
withdraw or qualify its rating if, in the sole judgment of the rating agency,
the credit quality of the notes has declined or is in question. If
44
any rating assigned to the notes is lowered, withdrawn or qualified, 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 of any series.
You should be aware, however, that not all classes of notes are
scheduled to receive payments of principal on the same note payment dates. The
note payment dates for the payment of interest and principal in respect of
each series and class of notes will be specified in the applicable prospectus
supplement. Each series and class of notes may have note payment dates in
respect of interest and/or principal that are different from other notes of
the same class (but of different series) or of the same series (but of a
different class or sub-class). Despite the principal priority of payments
described above, subject to no pass-through trigger event having occurred and
satisfaction of the repayment tests, lower ranking classes of notes may
nevertheless be repaid principal before higher ranking classes of notes and a
series and class of notes may be repaid principal before other series of notes
of the same class. 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".
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 borne by the class D notes,
the class C notes, the class M notes and the class B notes 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 borne by the class A notes at which
point there will be an asset trigger event. If the losses borne by the class D
notes, the class C notes and the class M notes are in an aggregate amount
equal to the aggregate outstanding principal balances of the class D notes,
the class C notes and the class M notes, then losses on the mortgage loans
will thereafter be borne by the class B notes. Similarly, if the losses
allocated to the class D notes and the class C notes are in an aggregate
amount equal to the aggregate outstanding principal balance of the class D
notes and the class C notes, then losses on the mortgage loans will thereafter
be borne by the class M notes. Finally, if the losses borne by the class D
notes are in an amount equal to the aggregate outstanding principal balance of
the class D notes, then loss on the mortgage loans will thereafter be borne by
the class C notes.
45
Payments of class B, class M, class C and class D notes may be delayed or
reduced in certain circumstances
If on any note payment date on which a repayment of principal is due on
any series of class B, class M, class C or class D notes at a time when, if
the repayment was made, the principal amount outstanding of the remaining
subordinate classes of notes is not sufficient to provide the level of credit
enhancement required to support the ratings on the more senior classes of
notes then outstanding 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 more senior classes of
notes outstanding have their required level of subordination. See "Cashflows -
Distribution of Funding 2 available principal receipts prior to enforcement of
the Funding 2 security - Rules for application of Funding 2 available
principal receipts".
On any note payment date on which a payment of principal is due on any
series of class B notes, the class M notes, the class C notes and the class D
notes, our obligation to make such principal payments will be subject to the
satisfaction of the issuer arrears test and the issuer reserve requirement to
the extent that any class A notes of any series are outstanding on that date.
See "Cashflows - Distribution of Funding 2 available principal receipts prior
to enforcement of the Funding 2 security - Rules for application of Funding 2
available principal receipts".
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 such change will not
cause a reduction, qualification or withdrawal of its then-current rating of
any outstanding notes that will be affected by such change.
In certain circumstances some of the conditions for issuance of notes may be
waived
If we obtain confirmation from each rating agency 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 other conditions to issuance of notes (e.g.
the absence of a note event of default in respect of a series and/or class of
notes) may be waived. For a description of the conditions to issuance and the
waiver of such conditions see "Issuance of notes".
Payments from a money market note purchaser may not be sufficient to repay
money market notes
Where we have entered into a money market note purchase agreement or
remarketing agreement in respect of a series and class of money market notes,
our ability to redeem such notes on their final maturity date may be dependent
upon timely receipt of purchaser proceeds from the relevant money market note
purchaser (which will be used by us to redeem such notes) as it is unlikely
that the principal receipts available to us on such final maturity date will
be sufficient to redeem such notes in full on such date.
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
46
notes. For a description of the conditions that must be meet before the
issuing entity can issue new notes, see "Issuance of 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 to exist.
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
on any loan tranche under the global intercompany loan agreement will be
calculated pursuant to a margin over LIBOR for three-month sterling deposits
or, for some loan tranches, such other sterling LIBOR rate as may be specified
in the applicable loan tranche supplement (but will be payable in monthly
installments) or, following the earlier to occur of the step-up date in
relation to such loan tranche or a pass-through trigger event, LIBOR for
one-month sterling deposits but interest due and payable on a series and class
of notes may be calculated on a fixed or floating 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
swap transactions for such notes with an issuer swap provider as specified in
the related prospectus supplement (see "The swap agreements - The issuer
swaps").
Each issuer swap provider is obliged only to make payments under an
issuer swap as long as we make our timely 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 scheduled to
be paid to us on the dates for payment specified under the relevant issuer
swap or such issuer swap is otherwise terminated, we will be exposed to
changes in the exchange rates between sterling and the currency in which such
notes are denominated and in the relevant interest rates. Unless a replacement
swap transaction is entered into, we may have insufficient funds to make
payments due on the applicable series and class of notes.
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 rates of interest payable by Funding 2 to us on any loan tranche under the
global intercompany loan agreement (which will be calculated pursuant to a
margin over three-month sterling LIBOR or, for some loan tranches, such other
sterling LIBOR rate as may be specified in the applicable loan tranche
supplement
47
(or, following the earlier to occur of the step-up date in relation to such
loan tranche or a pass-through trigger event, a margin over one-month sterling
LIBOR) and will be payable in monthly installments).
To hedge its exposure against the possible variance between the
foregoing interest rates, Funding 2 entered into the Funding 2 basis rate
swaps with the Funding 2 basis rate swap provider on the Funding 2 program
date (see "The swap agreements - The Funding 2 basis rate swaps").
If the Funding 2 basis rate swap provider fails to make payments under
the Funding 2 basis rate swaps or such Funding 2 basis rate swaps otherwise
terminate, Funding 2 will be exposed to the variance between the rates of
interest payable on the mortgage loans and the rate(s) 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.
Swap termination payments 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 swap
termination payment to the relevant issuer swap provider. If any of the
Funding 2 basis rate swaps terminate, Funding 2 may be obliged to make a swap
termination payment to the Funding 2 basis rate swap provider. The amount of
the applicable swap termination payment will be based on the cost of entering
into a replacement swap.
Under the global intercompany loan agreement, Funding 2 will be required
to pay to us an amount equal to that required by us to pay any swap
termination payment due to be paid by us to the relevant issuer swap provider.
Funding 2 will also be obliged to pay us any extra amounts (beyond that which
is paid to us by the relevant issuer swap provider) 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 any swap termination payment under any of the Funding 2
basis rate swaps or to make any payment to us 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 Funding 2 or we, as
applicable, will be able to enter into a replacement swap, or if one is
entered into, that the credit rating of the replacement swap provider
(notwithstanding the terms of the transaction documents) will be sufficiently
high to prevent a reduction, qualification or withdrawal of the then current
ratings of the notes by the rating agencies.
Except where termination of an issuer swap occurs as a result of a swap
provider default with respect to the relevant issuer swap provider, our
obligation to make any swap termination payment due by us will rank equally
with payments due on the applicable series and class of notes. Any additional
amounts required to be paid by us following termination of the relevant issuer
swap (including any extra costs incurred (for example, from entering into
other hedging transactions) if we cannot immediately enter into a replacement
swap), will also rank equally with payments due on the notes.
Except where termination of a Funding 2 basis rate swap occurs as a
result of a swap provider default with respect to the Funding 2 basis rate
swap provider, any swap termination payment due by Funding 2 will rank in
priority to payments due on the loan tranches. Any additional amounts required
to be paid by Funding 2 following termination of any of the Funding
48
2 basis rate swaps (including any extra costs incurred (for example, from
entering into other hedging transactions) if Funding 2 cannot immediately
enter into a replacement swap), will also rank in priority to payments due on
the loan tranches.
If Funding 2 is obliged to make a swap termination payment to the
Funding 2 basis rate swap provider or to pay any other additional amount as a
result of the termination of any of the Funding 2 basis rate swaps, 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. In addition, if we
are obliged to make a swap 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 for interest 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 reduction in income on the mortgage loans
and that, as a result, either or both of Funding 2 and we would suffer a
revenue shortfall. In establishing the margin above the Bank of England base
rate for purposes of calculating clause (b) above, the seller has to regard
factors relating to setting variable mortgage rates of the type described
under - "The Mortgage loans - Characteristics of the mortgage loans - Interest
payments and setting of interest rates".
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% per annum (although the seller may in the future allow for a discount of
between 0.25% and 0.75% per annum) 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 reduction in 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 perform under their respective swap
transactions, the corporate services provider has agreed to
49
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 available to Funding 2 may not be sufficient to
replenish principal that has been used to pay interest due on loan tranches,
which may result in your notes not being repaid in full
If, on any loan payment date, revenue receipts available to Funding 2
are insufficient to enable it to pay interest on the loan tranches to us and
its other expenses ranking in priority to interest due on loan tranches, then
it may use principal receipts received from the mortgages trustee 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 Funding 2
available revenue receipts. However, if subsequent excess Funding 2 available
revenue receipts are insufficient to recoup those principal deficiencies, this
will affect the funds which we have available to make payments on the notes of
any class or series and as a consequence, 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 "The mortgages trust - 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
percentage 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 Funding 2 intercompany loan enforcement notice is given (as
described under "Security for Funding 2's obligations"), the Funding 2
security trustee may sell Funding 2's rights as a beneficiary under the
mortgages trust. 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.
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.
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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 (if capable of remedy) 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 or if the breach
is not capable of remedy, 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 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 current
balance 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 in relation to a
breach of warranty under the mortgage sale agreement.
There can be no assurance that a borrower will repay principal at the end of
the term on an interest-only mortgage loan (with or without a capital
repayment vehicle) or a combination mortgage 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 maturity date for that mortgage loan (a
"repayment mortgage loan"); 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 of
such mortgage loan will be repaid by way of monthly payments (a
"combination mortgage loan").
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 that 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, and
also depends on the financial condition of the borrower, tax laws and general
economic conditions at the relevant time. However, there can be no assurance
that there will be sufficient
51
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 that the borrower
takes out term life assurance 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 after enforcing the related security, then this
may affect payments on the notes if that loss cannot be cured by the
application of excess issuer available revenue receipts.
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
Each assignment by the seller to the mortgages trustee of the benefit of
English mortgage loans and their related security has taken effect in equity
only (and any assignment of the benefit of English mortgage loans and their
related security in the future will take effect in equity only). Each sale and
assignment by the seller to the mortgages trustee of Scottish mortgage loans
and their related security was 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 declarations of trust). In each case this means that
legal title to the mortgage loans and their related security assigned to the
mortgages trustee 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
related security - Transfer of legal title to the mortgages trustee" and until
then the mortgages trustee will not apply to the Land Registry or the Land
Charges Registry to seek to protect 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 and the related security - Scottish mortgage loans". 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 the related security or has not notified the
borrowers of its interest in the mortgage loans and the related security,
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 that
person might obtain good title to the mortgage loan, free from
52
the interests of the mortgages trustee and the beneficiaries. If
this occurred then the title of the mortgages trustee to the
affected mortgage loan and its related security would be
subordinated to the title of that person and the mortgages trustee
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 rights of set-off (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 repay their mortgage loans
directly to the seller. If these rights were to be exercised, the
mortgages trustee may receive less money than anticipated from the
mortgage loans, which may affect our ability to repay the notes;
and
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 firstly 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 arise 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 he is entitled to set-off any damages claim (or to exercise the
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
53
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 to exercise the
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 setoff 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 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 servicer 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 judgment
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 firstly 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 Consumer Credit
Act 1974 (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;
o a borrower may seek to argue that a loan is unenforceable under
the UK Financial Services and Markets Act 2000 ("FSMA") or that
there has been a breach of an FSA rule, and claim damages in
respect thereof (see "--Regulation of Mortgage Lending in the
United Kingdom under the FSMA" below); or
o certain re-draws or further draws may rank behind security 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.
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If the servicer is removed, there is no guarantee that a substitute servicer
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 servicer to service the mortgage loans. If the servicer
breaches the terms of the administration agreement, then the mortgages trustee
and/or the Funding beneficiaries and the Funding security trustees will be
entitled to terminate the appointment of the servicer and the Funding security
trustees will be entitled to appoint a substitute servicer.
There can be no assurance that a substitute servicer would be found who
would be willing and able to service the mortgage loans on the terms of the
administration agreement. In particular, there can be no assurance that a
substitute servicer would be willing to accept an appointment in consideration
of the current servicing fee, which is calculated as a fixed percentage of the
Funding 2 share of the trust property. If a substitute servicer were required
at a time when the pool balance was relatively low, the amount of the
servicing fee might be insufficient to obtain a substitute servicer. The
administration agreement provides that the mortgages trustee and a potential
substitute servicer (other than the seller) may agree a different servicing
fee. In addition, as described under the third risk factor immediately
succeeding this risk factor, any substitute servicer 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 servicer
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 servicer may
affect payments on the mortgage loans and hence our ability to make payments
when due on the notes.
You should note that the servicer 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
successful claim will be sufficient to reinstate the affected property. This
could reduce the share of 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 to contract for such
protection at all, subject to prior agreement with the rating agencies and
their confirmation that this will not cause a reduction, qualification or
withdrawal of the then current ratings of the notes.
55
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 trustee. See "The
mortgage loans - Buildings insurance policies - MIG Policies".
Failure to comply with the regulatory mortgage regime in the United Kingdom
under the FSMA and other regulatory changes may render regulated mortgage
contracts or other secured credit agreements unenforceable against the
borrower and may ultimately adversely affect our ability to make payments on
your notes when due
Mortgage lending in the United Kingdom became a regulated activity under
the FSMA on October 31, 2004 ("N(m)").
Certain provisions of the FSMA apply to a "regulated mortgage contract".
A mortgage loan contract will be a regulated mortgage contract under the FSMA
if it is originated on or after N(m) or originated prior to N(m) but varied on
or 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 (or the Scottish equivalent) 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 does not
apply to a mortgage contract that is secured by a second or subsequent legal
charge (or the Scottish equivalent) or is provided to a corporate body. The
CCA may apply to mortgage loans post N(m) where the mortgage loan does not
satisfy the definition of a regulated mortgage contract but does fall within
the criteria for regulation under the CCA as described below in this risk
factor.
On and 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 FSA under the FSMA. The specified activities currently are
(a) entering into a regulated mortgage contract as lender, (b) administering a
regulated mortgage contract (administering 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 also a regulated activity. If requirements as to, inter alia,
authorization of lenders and brokers are not complied with, a regulated
mortgage contract will be unenforceable against the borrower except with the
approval of a court and the unauthorized person may commit a criminal offense.
The regime under the FSMA regulating financial promotions covers the content
and manner of promotion of agreements relating to qualifying credit, and by
whom such promotions can be issued or approved. In this respect, the FSMA
regime not only covers financial promotions of regulated mortgage contracts
but also promotions of certain other types of secured credit agreements under
which the lender is a person who carries on the regulated activity of entering
into a regulated mortgage contract. Failure to comply with this regime is a
criminal offense and will render the regulated mortgage contract or other
secured credit agreement in question unenforceable against the borrower except
with the approval of a court.
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. The
mortgages trustee does not need to be an authorized person under the FSMA in
order to acquire legal or beneficial title to a regulated mortgage contract.
The mortgages trustee 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
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administration agreement terminates, however, the mortgages trustee will have
a period of not more than one month in which to arrange for mortgage
administration to be carried out by a replacement servicer having the required
FSA authorization and permission. In addition, on and from N(m) no variations
may be made to the mortgage loans and no re-draws, further draws or further
advances may be made under the mortgage loans, where this would result in the
mortgages trustee arranging, advising on, administering or entering into a
regulated mortgage contract or agreeing to carry on any of these activities,
if the mortgages trustee would be required to be authorized under the FSMA to
do so.
Prior to N(m), there was only self-regulation of mortgage business in
the UK under the Mortgage Code (the "CML Code") issued by the Council of
Mortgage Lenders (the "CML"). The seller subscribed to the CML Code.
Membership of the CML and compliance with the CML Code were voluntary. The CML
Code set 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 were not permitted to accept mortgage business introduced by
intermediaries who were not registered with (before November 1, 2000 until 31
October 2004) the Mortgage Code Register of Intermediaries or (on and after
November 1, 2000) the Mortgage Code Compliance Board. The CML Code ceased to
have effect on N(m), although, transitional provisions exist whereby certain
complaints relating to breaches of the CML Code occurring before N(M) may be
dealt with by the Financial Ombudsman Service established under the FSMA (see
below).
Since N(m), as an authorized person the seller 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 the start of a regulated mortgage contract and responsible
lending. A failure to comply with MCoB by a regulated mortgage lender, would
not render the regulated mortgage contract unenforceable or void as against
the borrower or constitute an offense by the regulated mortgage lender. A
borrower who 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.
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 proposed directive required specified
requirements to be met and restrictions observed in respect of credit
agreements, including certain mortgage loan products such as further drawings
under certain flexible mortgages and for further advances. However, there has
been significant opposition from the European Parliament to the original form
of the proposed directive, and therefore, in October 2004 and 2005 the
European Commission published revised proposals. In its current form, the
proposed directive will apply to consumer credit agreements not exceeding
(EURO)50,000 but excludes all mortgage credit agreements from its scope. The
European Commission's current intention is to address mortgage lending
separately following the European Commission's consultation on its Green Paper
entitled "Mortgage Credit in the EU" published in July 2005.
However, the scope of the proposed directive may be substantially
further amended before it is ultimately brought into effect. If a finalised
text is agreed, member states will have two years in which to bring into force
national implementing legislation, regulations and administrative provisions.
Cancellation of certain credit agreements by borrowers under the distance
marketing regulations may have an adverse impact on the seller, the mortgages
trustee and/or the
57
servicer and may ultimately adversely affect our ability to make payments on
the notes when due
With effect from 31 October 2004, the Distance Marketing of Financial
Services Directive has been implemented in the United Kingdom by way of the
Financial Services (Distance Marketing) Regulations 2004 (the "DM
Regulations") and amendments to MCoB. The DM Regulations apply to, inter alia,
credit agreements entered into on or after 31st October, 2004 by means of
distance communication (i.e. without any substantive simultaneous physical
presence of the originator and the borrower).
The DM Regulations and MCoB require suppliers of financial services by
way of distance communication to provide certain information to consumers.
This information generally has to be provided before the consumer is bound by
a distance contract for supply of the financial services in question and
includes, but is not limited to, general information in respect of the
supplier and the financial service, contractual terms and conditions and
whether or not there is a right of cancellation.
A regulated mortgage contract under the FSMA, if originated by a UK
lender from an establishment in the UK, will not be cancellable under the DM
Regulations. Certain other credit agreements, such as agreements relating to
personal secured loans will be cancellable under the DM Regulations if the
borrower does not receive the prescribed information at the prescribed time.
Where the credit agreement is cancellable under the DM Regulations, the
borrower may send notice of cancellation at any time before the end of the
fourteenth day after the day on which the cancellable agreement is made, where
all the prescribed information has been received, or, if later, the borrower
receives the last of the prescribed information.
If the borrower cancels the credit agreement under the DM Regulations,
then:
(a) the borrower is liable to repay the principal and any other sums
paid by the originator to the borrower under or in relation to the
cancelled agreement, within 30 days beginning with the day of the
borrower sending notice of cancellation or, if later, the
originator receiving notice of cancellation;
(b) the borrower is liable to pay interest, or any early repayment
charge or other charge for credit under the cancelled agreement,
only if the borrower received certain prescribed information at
the prescribed time and if other conditions are met; and
(c) any security provided in relation to the contract is to be treated
as never having had effect.
Regulation of consumer credit lending in the United Kingdom may have an impact
on the seller, the mortgages trustee and/or the servicer and may adversely
affect our ability to make payments in full 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 (except to the extent of the regulation of the market by the FSA under
FSMA - see above). The licensing regime under the CCA is different from, and
additional to, the regime for authorization under the FSMA.
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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 or a regulated mortgage contract under the FSMA (see
above)). Some of the personal secured loans in the mortgage portfolio might be
wholly or partly regulated or treated as such by the CCA. The loan agreement
that evidences any such personal secured loan has to comply with requirements
under the CCA as to content, layout and execution. If the contract does not
comply, then to the extent that it is regulated or to be treated as such:
(a) the contract relating to the personal secured loan is
unenforceable if the form of agreement 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 contract relating to 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 lender.
If a court order is necessary to enforce some or part of a personal
secured loan agreement in the mortgage portfolio to the extent that it is
regulated or to be treated as such, then in dealing with such an application,
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 agreement (apart from a personal secured loan documented as a
regulated agreement subject to the CCA) 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 under a regulated mortgage contract under the FSMA or an exempt agreement
under the CCA, will be regulated by the CCA. Such agreement relating to the
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, the
agreement will be unenforceable against the borrower. A white paper on
consumer credit was published by the DTI in December 2003. The white paper was
accompanied by a consultation on draft regulations.
Following the consultation process, a number of finalized regulations
have been laid before Parliament since June 2004. Those include amongst
others, regulations governing consumer credit advertising; the form and
content of regulated consumer credit agreements; requirements for pre-contract
disclosure; and the rebate of interest charges to which a borrower will be
entitled on early settlement of regulated consumer credit agreements. The new
regulations relating to advertising came into effect on October 31, 2004. The
regulations relating to form and content of regulated consumer credit
agreements came into effect on May 31, 2005. For agreements that had been
presented, sent or made available to the borrower but had not been executed
before May 31, 2005 the new regulations applied from August 31, 2005.
59
Regulations on pre-contract disclosure took effect on 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 of a loan made under a regulated consumer credit agreement, which
are anticipated to be more favorable to the borrower than the existing
formulae. The new formulae came into force on May 31, 2005 for all regulated
consumer credit agreements entered into on or after that date. For all
regulated consumer credit 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 Consumer Credit Bill was introduced into Parliament on 16 December
2004. The bill, if enacted, would amend the CCA and the main provisions
covered by the bill include: (a) removing the financial limit for consumer
lending, whilst retaining the limit of (GBP)25,000 for lending for business
purposes to individuals, unincorporated bodies and partnerships of up to 3
partners; (b) strengthening the licensing regime; (c) reforming the law on
extortionate credit as it applies to both new and existing regulated consumer
credit agreements; and (d) introducing alternative dispute resolution
procedures outside the courts for consumer credit agreements. The Consumer
Credit Bill lapsed with the dissolution of Parliament on April 11, 2005 but
was re-introduced in Parliament on May 18, 2005. At present there is no
indication as to when the Consumer Credit Bill is likely to be enacted, or if
it will be enacted in its current form.
So as to avoid dual regulation on and from N(m), it is intended that all
mortgage loans regulated by the FSA are not covered by the CCA. This carve-out
only affects mortgage loans entered into on or after N(m) (or entered into
before N(m) but varied on or after that date such that a new contract is
formed). In respect of mortgage loans entered into prior to N(m) (which have
not been so varied) the CCA will continue to be the relevant legislation. A
mortgage contract that would (except for the carve-out) be regulated under the
CCA or treated as such will, however, only be enforceable on an order of the
court pursuant to section 126 of the CCA, notwithstanding regulation under the
FSMA.
No assurance can be given that additional regulations 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, the
mortgages trustee 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.
Regulations in the United Kingdom could lead to some terms of the agreements
relating to the mortgage loans and personal secured loans being unenforceable,
which may adversely affect payments on your 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 replaced 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.
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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 interest at 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
considered to be fair and unfair terms for interest variation in mortgage loan
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 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.
The FSA has agreed with the OFT to take responsibility for the
enforcement of the UTCCR insofar as they apply to regulated mortgage
contracts. In May 2005, the FSA issued a statement of good practice on
fairness of terms in consumer contracts, with specific reference to the
fairness of variation clauses. The statement is addressed to firms authorized
and regulated by the FSA in relation to products and services within the FSA's
regulatory scope. Although that statement is not, of itself, enforceable
against the firm, the FSA will have regard to it in exercising its powers
under the UTCCR. The statement provides, amongst other things, the FSA's views
on the factors to be considered when assessing the fairness of variation
clauses, particularly where such variation clauses are applied to contracts
with locked-in borrowers. These factors include whether there is some
connection between interest rates which apply to locked-in borrowers and those
which apply to non-locked in borrowers and whether the borrower must be given
advance notice of the change. Additionally, the FSA states that firms may
consider drafting contracts so as to permit variations to be made only when
any lock-in clause has not been exercised.
On May 11, 2005 the European Council and European Parliament adopted a
directive on unfair commercial practices. This directive affects all consumer
contracts and thus may have an impact on the residential mortgage market.
Under this directive, a commercial practice is to be regarded as unfair if it
is (a) contrary to the requirements of professional diligence; and (b)
materially distorts or is likely to materially distort the economic behaviour
of affected consumers. In addition, there are provisions aimed at aggressive
and misleading practices and a list of practices which will in all cases be
considered unfair. Member States are required to adopt national implementing
measures by June 12, 2007 and apply these provisions by December 2007. Until
the details of United Kingdom implementing legislation are published, it is
not certain what effect the adoption and implementation of the directive would
have on the seller, the mortgages trustee and/or the servicer.
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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 draft Bill) was published February 24, 2005. No assurances
can be given that changes to the UTCCR, if implemented, will not have an
adverse effect on the seller, the mortgages trustee and/or the servicer.
Decisions of the Ombudsman could lead to some terms of the loans being varied,
which may adversely affect payments on your notes
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 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 or the mortgages 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. The
mortgages trustee 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 Funding 2 security trustee is never obliged to enter into
possession of the mortgaged property.
Withholding tax payable by Funding 2 or us may adversely affect our ability to
make payments on the notes
In the event any withholding or deduction for or on account of taxes is
imposed on or is otherwise applicable to payments of interest on or repayments
of principal of the notes or the loan tranches, Funding 2 is not obliged to
gross-up or otherwise compensate us for the lesser amount we will receive and
we are not obliged to gross-up or otherwise compensate you for the lesser
amounts you will receive, in each case, as a result of such withholding or
deduction.
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 will become payable in euro; (b) applicable provisions
of law may allow or require us to re-denominate such notes into euro and take
62
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 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
The structure of the issue of the notes and the ratings which are to be
assigned to them are based on English law, Scottish law, Jersey law, US
federal tax and New York law and administrative practice in effect as at the
date of this prospectus. No assurance can be given as to the impact of any
possible change to English law, Scottish law, Jersey law, US federal tax or
New York law or administrative practice after the date of this prospectus, nor
can any assurance be given as to whether any such change could adversely
affect our ability to make payments in respect of the notes.
The implementation of changes to the Basel Capital Accord and the EU
regulatory capital framework may result in changes to the risk-weighting of
your notes
On June 26, 2004, the Basel Committee on Banking Supervision (the "Basel
Committee") published the text of a new capital accord under the title Basel
II: International Convergence of Capital Measurement and Capital Standards: a
Revised Framework ("Basel II"). Basel II replaces the 1988 Basel Accord and
places enhanced emphasis on risk-sensitivity and market discipline. The Basel
Committee has stated that it is currently intended that the various approaches
under Basel II will be implemented in stages, some from year-end 2006; the
most advanced at year-end 2007. If implemented in accordance with its current
form, Basel II could affect the risk weighting of the Notes in respect of
investors which are subject to Basel II (or any national legislative
implementation thereof including, in respect of EU financial institution
investors, via the proposed Capital Requirements Directive). Consequently,
investors should consult their own advisers as to the consequences to and
effect on them of the proposed implementation of Basel II. No predictions can
be made by the Issuer as to the precise effects of potential changes which
might result if Basel II is adopted in its current form.
You will not receive physical notes, which may cause delays in distributions
and hamper your ability to pledge or resell the notes
Unless the note certificates representing the notes in global form (the
"global note certificates") are exchanged for note certificates representing
notes in definitive form ("individual note certificates" and, together with
the global note certificates, the "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 The Depository Trust Company
("DTC"), the Euroclear system ("Euroclear") or Clearstream Banking, societe
anonyme ("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
63
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.
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.
Risks relating to the introduction of International Financial Reporting
Standards
Our UK corporation tax position depends to a significant extent on the
accounting treatment applicable to us. From January 1, 2005, our accounts are
required to comply with International Financial Reporting Standards ("IFRS")
or with new UK Financial Reporting Standards reflecting IFRS ("new UK GAAP").
Funding 2 may also choose to comply with IFRS. There is a concern that
companies such as ourselves, might, under either IFRS or new UK GAAP, suffer
timing differences that could result in profits or losses for accounting
purposes, and accordingly for tax purposes, which bear little or no
relationship to the company's cash position. However, the Finance Act 2005
requires a "securitisation company" to prepare tax computations for its
periods of account beginning on or after January, 1 2005 and ending before
January 1, 2007 on the basis of UK GAAP as applicable up to December 31, 2004,
notwithstanding the requirement to prepare statutory accounts under IFRS or
new UK GAAP. We and Funding 2 have each been advised that we will be a
"securitisation company" for these purposes. (We note that the UK Government
announced in the Pre-Budget Report ("PBR") on December 5, 2005 that it had
decided to extend the interim regime described above for a further year to
December 31, 2007).
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The stated policy of HM Revenue & Customs is that the tax neutrality of
securitisation companies in general should not be disrupted as a result of the
transition to IFRS or new UK GAAP, and it is working with participants in the
securitisation industry to establish a permanent regime that would prevent any
such disruption. The Finance Act 2005 enables regulations to be made to
establish such a regime. However, if (for whatever reason) measures are not
introduced to deal with the corporation tax position of such companies in
respect of their periods of account ending on or after January 1, 2007 (or,
following the implementation of the extension announced in the PBR, January 1,
2008), we and Funding 2 (like other UK securitisation companies) may then be
required to recognise profits or losses as a result of the application of IFRS
or new UK GAAP which could have tax effects not contemplated in the cashflows
for the transaction, and as such adversely affect us, Funding 2 and
consequently noteholders.
Risks related to alternative characterization of the US notes as an equity
interest in the issuing entity for US federal income tax purposes
The issuing entity is incorporated as a public limited company under the
laws of England and Wales. It is a special purpose company and will be mostly
passive. See "The issuing entity". Under current US federal income tax law,
the issuing entity is treated as an association that is taxable as a
corporation for US federal income tax purposes. The characterization of the US
notes as debt or equity for US federal income tax purposes depends on many
factors, including the form of such notes, the terms of the US notes and the
debt-to-equity ratio of the issuing entity. Because the issuing entity may not
have substantial equity, there is a risk that the United States Internal
Revenue Service ("IRS") could assert that the lowest subordinated class of
notes or any other class of notes should be treated as an equity interest in
the issuing entity rather as debt for US federal income tax purposes. See
"Material United States tax consequences - Characterization of the US notes".
As more fully discussed in "Material United States tax consequences -
Alternative characterization of the US notes", the issuing entity intends to
treat the US notes as debt of the issuing entity for all purposes, including
for US federal income tax purposes.
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Defined terms
We have provided a glossary of certain defined terms which are not
otherwise defined in the text 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 are used in this prospectus. We have also provided
an index of principal terms on page 337. The index of principal terms lists
the pages where defined terms used in the prospectus or prospectus supplement
are defined. 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 "issuing entity", "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 supplement.
References to a "series" of notes refer to all classes of notes
issued on a given day and any class of notes issued on any other day which:
(a) is expressed to be consolidated; and
(b) is identical in all respects (including as to listing) except for
closing date, interest commencement date and issue price,
with any of the classes of notes issued on such given day.
References to a "series and class" of notes refer to a particular class
of notes of a given series.
References to a "class" of notes refer to any of the class A notes, the
class B notes, the class M notes, the class C notes and the class D notes.
A class of notes of a given series may comprise one or more sub-classes.
If a class of note of a given series does comprise more than one sub-class,
references to "series and class" will refer to a particular sub-class within
such class.
References to "$", "US$", "USD", "US dollars" or "dollars" are to the
lawful currency for the time being of the United States of America.
References to "(EURO)" or "euro" are to 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.
References to "(GBP)", "sterling" or "pounds sterling" are to the lawful
currency for the time being of the United Kingdom of Great Britain and
Northern Ireland.
66
The issuing entity
Introduction
The issuing entity 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 issuing entity is at
Fifth Floor, 100 Wood Street, London EC2V 7EX. The issuing entity is wholly
owned by Funding 2 (see "Funding 2").
The issuing entity is organized as a special purpose company and will be
mostly passive. The issuing entity has no subsidiaries. The seller does not
own directly or indirectly any of the share capital of Funding 2 or the
issuing entity.
The principal activities of the issuing entity are set out in its
memorandum of association and permit the issuing entity, 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 issuing entity 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 issuing
entity.
The issuing entity may by special resolution of the shareholders alter
its memorandum of association with respect to the statement of the issuing
entity's principal activities. Subject to the provisions of the Companies Act
1985 and the provisions contained in its memorandum of association, the
issuing entity may also by special resolution of the shareholders alter its
articles of association.
Since its incorporation, the issuing entity 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 issuing entity has no employees.
Each financial period of the issuing entity will end on December 31 of
each year. The first financial period of the issuing entity will end on
December 31, 2005.
The directors of the issuing entity and their respective business
addresses and principal activities or business occupations are:
Principal Activities/
Business Occupation
Name Business Address Age
Keith McCallum Currie Northern Rock House Treasury Director of Northern 49
Gosforth Rock plc
Newcastle upon Tyne
NE3 4PL
L.D.C. Securitisation Fifth Floor Acting as corporate directors -
Director No. 1 Limited 100 Wood Street of special purpose companies
London
EC2V 7EX
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L.D.C. Securitisation Fifth Floor Acting as corporate directors -
Director No. 2 Limited 100 Wood Street of special purpose companies
London London
EC2V 7EX
Keith McCallum Currie is an employee of the seller and does not receive
any compensation for acting as a director of the issuing entity.
The directors of L.D.C. Securitisation Director No. 1 Limited and L.D.C.
Securitisation Director No. 2 Limited and their principal activities or
business occupations are:
Principal Activities/
Name Business Address Business Occupation
Law Debenture Fifth Floor Provision of directors for
Securitisation Services 100 Wood Street special purpose vehicles
Limited London
EC2V 7EX
The affairs of L.D.C. Securitisation Director No. 1 Limited, L.D.C.
Securitisation Director No. 2 Limited and Law Debenture Securitisation
Services Limited are represented by, among others, its directors Denyse
Monique Anderson, Julian Robert Mason-Jebb and Richard David Rance each of
whose business address is at Fifth Floor, 100 Wood Street, London EC2V 7EX and
each of whose principal activities are as director of The Law Debenture Trust
Corporation p.l.c. The principal activity of Robert James Williams is director
of The Law Debenture Corporation p.l.c.
The company secretary of the issuing entity is:
Name Business Address
Law Debenture Corporate Services Fifth Floor
Limited 100 Wood Street
London
EC2V 7EX
In accordance with the corporate services agreement, the corporate
services provider will provide directors for the issuing entity, a registered
and administrative office for the issuing entity, the service of a secretary
to the issuing entity, the arrangement of meetings of directors and
shareholders of the issuing entity and book-keeping services and preparation
of accounts for the issuing entity. In consideration for the foregoing
corporate services, the issuing entity will pay to the corporate services
provider an annual fee in the amount of (GBP)[o]. No other remuneration is
paid to any director or officer (including directors or officers provided by
the seller) in connection with such director's or officer's activities on
behalf of the issuing entity.
Capitalization and borrowings
The following table shows the unaudited capitalization and borrowings of
the issuing entity as at December 31, 2005:
As at December 31,
Share Capital 2005 ((GBP))
Total authorized share capital (ordinary 50,000
shares of (GBP)1 each)
Total issued and paid up share capital
50,000 ordinary shares of (GBP)1 each,
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two fully paid up and 49,998 partly paid up to 25%) 12,501.50
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Use of proceeds
An indication of the application of the proceeds from each issue of
notes will be contained in the applicable prospectus supplement.
70
Northern Rock plc
Northern Rock and the Granite Program
Northern Rock is the sponsor of the Granite Program. In this capacity,
Northern Rock participates in structuring the Granite Program and the terms of
each issuance of notes by the issuing entity. In addition, Northern Rock has
several other roles in the Granite Program. Northern Rock originates, directly
or through intermediaries, mortgage loans to the mortgages trustee. Northern
Rock is the only seller of mortgage loans to the mortgages trustee and is the
servicer of all the mortgage loans. Northern Rock also provides the services
of cash manager, issuer cash manager, account bank and Funding 2 basis rate
swap provider. See "The mortgage loans", "The servicer and the administration
agreement", "Assignment of the mortgage loans and related security", "Cash
management for the mortgages trustee and Funding 2", "Cash management for the
issuing entity" and "The swap agreements - The Funding 2 basis rate swaps".
Northern Rock plc was incorporated as a public limited liability company
in England and Wales on October 30, 1996 with registered number 03273685.
Northern Rock is regulated by the FSA. Northern Rock was originally a building
society and was converted on October 1, 1997 from a mutual form UK building
society to a UK public limited company whose shares are listed on the London
Stock Exchange plc and which is authorized under the FSMA.
The registered office of Northern Rock is at Northern Rock House,
Gosforth, Newcastle upon Tyne NE3 4PL.
At June 30, 2005, Northern Rock 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, 2005, Northern Rock and its principal subsidiaries had total
assets of approximately (GBP)72.5 billion and employed approximately 5,065
employees. At the date of this prospectus, Northern Rock has a long-term
rating of "A" (positive outlook) by Standard & Poor's, "A1" by Moody's and
"A+" by Fitch.
Mortgage business
Northern Rock is one of the major residential mortgage lenders in the UK
in terms of residential mortgage loans outstanding. In the UK mortgage market,
Northern Rock's net residential mortgage lending during 2004 and for the six
months ended June 30, 2005 (i.e., new mortgage lending during the year/period
net of capital repayments and acquisitions) was (GBP)11.4 billion and (GBP)5.6
billion, respectively, and gross residential mortgage lending during 2004 and
for the six months ended June 30, 2005 (i.e., solely on the basis of new
mortgage lending during the year/period) was (GBP)20.0 billion and (GBP)10.2
billion, respectively.
Securitization
Northern Rock began securitizing its residential mortgage loan portfolio
in October 1999. As of December 31, 2005, Northern Rock has completed
seventeen securitization transactions in which $42.5 billion of notes were
issued, including fourteen securitization transactions backed by residential
mortgage loans held in the mortgages trust. The balance of mortgage loans
assigned to the mortgages trustee as trust assets supporting notes issued by
the Funding issuing entities and the issuing entity was at December 31, 2002,
December 31, 2003, December 31, 2004 and June 30, 2005, (GBP)7.3 billion,
(GBP)13.0 billion, (GBP)20.8 billion and (GBP)28.2 billion,
71
respectively. All the mortgage loans originated by Northern Rock are prime
quality loans, secured by a mortgage with first ranking priority on
residential property in the United Kingdom.
Although Northern Rock's primary business is originating residential
mortgage loans in the UK, it began originating commercial mortgage loans in
the UK in 1990 and has since completed one commercial mortgage-backed
securitization transaction, the securities of which were not offered or sold
in the United States. In 2003, Northern Rock also securitized a portion of its
portfolio of unsecured consumer loans, the securities of which were not
offered or sold in the United States. None of the prior securitization
transactions organized by Northern Rock has defaulted or experienced any early
amortization.
Northern Rock also began issuing covered bonds under its covered bond
program in 2003. The covered bonds have the benefit of a guarantee that is
ultimately secured by certain mortgage loans in Northern Rock's mortgage
portfolio. The mortgage loans that ultimately secure Northern Rock's covered
bonds are wholly separate from the mortgage loans assigned to the mortgages
trustee under the Granite Program. Northern Rock's covered bonds are not
offered or sold in the United States.
Northern Rock originates mortgage loans with a variety of
characteristics, which are discussed under "The mortgage
loans--Characteristics of the mortgage loans". Such mortgage loans are
originated in accordance with the seller's lending criteria described later in
this prospectus. Northern Rock, in its capacity as servicer, performs the
day-to-day servicing of the mortgage loans in accordance with the terms of the
administration agreement. See "The servicer and the administration agreement".
The arrangers and underwriters for the notes are directly involved in
structuring the Granite Program. Northern Rock collaborates with the arrangers
and the underwriters (which are selected by it) in structuring the Granite
Program. In particular, Northern Rock initiates the securitization
transactions, participates in marketing of the notes, arranges currency and
interest rate swap providers, engages third party service providers and
advisors, participates in the pricing of the notes and in the overall
management of its securitization transactions. The arrangers and underwriters
are responsible for cashflow modelling of the securitization transactions,
overseeing pricing of the notes and liaising with the rating agencies in order
to satisfy applicable rating agency structuring and credit criteria in
connection with the securitization transactions.
Subsidiaries of Northern Rock
Northern Rock currently has the following two principal subsidiaries:
o Northern Rock Mortgage Indemnity Company Limited
Northern Rock Mortgage Indemnity Company Limited ("NORMIC") is a private
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 Northern
Rock.
o Northern Rock (Guernsey) Limited
Northern Rock (Guernsey) Limited ("NRG"), is a private limited liability
company incorporated in Guernsey on November 17, 1995 with registered number
30224. NRG is a wholly owned subsidiary of Northern Rock and engages in retail
deposit taking.
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The issuing entity believes that information in respect of Northern
Rock's audited financial accounts is not material to an investor's decision to
purchase the notes.
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Funding 2
Funding 2 is the depositor in the Granite Program. Funding 2 was
incorporated in England and Wales as a private limited company on 4 October,
2004 with registered number 5249387. 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. Its primary purpose is to acquire and hold beneficial interests in
the mortgages trust using funds advanced to Funding 2 by the issuing entity,
from time to time, under the terms of the global intercompany loan. Funding 2
has no subsidiaries other than the issuing entity although, subject to certain
conditions, Funding 2 may establish new issuing entities from time to time.
Since its incorporation, Funding 2 has not engaged in any material
activities other than those incidental to establishing the issuing entity,
authorizing the transaction documents referred to in this prospectus, and
other matters which are incidental or ancillary to those activities. Funding 2
has no employees.
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The mortgages trustee
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 issuing entities and us, the authorization of the transaction
documents referred to in this prospectus to which it is or will be a party or
relating to the issue of notes by the Funding issuing entities, and other
matters which are incidental or ancillary to those activities.
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Holdings
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 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. Holdings
is the sole owner of the mortgages trustee and Funding and Funding 2. Holdings
is a partial owner of the post-enforcement call option holder. Holdings does
not take an active role in the management of any of the participants in the
Granite Program.
Holdings holds 137,518 ordinary shares of (GBP)1.00 each (each of which
is fully paid up). Holding has the power under the terms of a declaration of
trust to invest any monies, shares, debentures and other interests in any
company, including the mortgages trustee, Funding and Funding 2. Any income
derived by Holdings will be paid for the benefit of the Down's Syndrome North
east Association (UK) or other charitable purposes selected by Holdings. The
costs and expenses of Holdings are in respect of administrative support
services provided by Northern Rock, audit fees, taxation and corporate
services provided by The Law Debenture Intermediary Corporation p.l.c. The
payments on your notes will not be affected by this arrangement.
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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.
The post-enforcement call option holder was wholly owned by Holdings
until July 6, 2005.
On July 6, 2005 15,000 ordinary shares were allotted and issued to The
Law Debenture Trust Corporation plc who holds such shares under the terms of a
trust for charitable purposes. As a result of the allotment, the
post-enforcement call option holder is no longer part of the same group as the
issuing entity, Funding, the Funding issuing entities or Funding 2.
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 issuing entities 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.
Post-enforcement call option
The post-enforcement call option agreement was entered into on or about
the Funding 2 program date between us, the note trustee (as agent for the
noteholders) and the post-enforcement call option holder (the
"post-enforcement call option agreement"). The terms of the option require,
upon exercise of the option granted to the post-enforcement call option holder
by the note trustee, the transfer to the post-enforcement call option holder
of all (but not some only) of the notes outstanding at the time of the
exercise of the option. The option may be exercised upon the earlier of (1)
within 20 days following the final maturity date of the latest maturing notes,
the issuer security trustee certifying that there is no further amount
outstanding under the global intercompany loan, and (2) following the
enforcement by the issuer security trustee of the security granted by us under
the issuer deed of charge, the issuer security 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 issuer security 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 the
post-enforcement call option holder in these circumstances. The noteholders
will not be paid more than a nominal sum for that transfer.
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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 the post-enforcement
call option holder 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.
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Funding issuing entities
In addition to Granite Master Issuer plc, ten other issuing entities,
called the Funding issuing entities, have issued notes which are ultimately
supported by receipts on the assets of the mortgages trust. Each Funding
issuing entity is a wholly-owned subsidiary of Funding. Funding is a special
purpose company established to facilitate the issuance of notes by the Funding
issuing entities and stands in substantially the same relationship to the
mortgages trust and the Funding issuing entities as Funding 2 does in respect
of the mortgages trust and us.
See "Structural diagram of the securitisation transaction" and "Diagram
of ownership structure" under "Summary of prospectus" in this prospectus. As
indicated in these diagrams, each of Funding and Funding 2 has a beneficial
interest in the mortgages trust which is proportional in size to the aggregate
outstanding balance from time to time of the notes issued by, on the one hand,
the Funding issuing entities and, on the other, us. Funding's obligation to
pay receipts under its beneficial interest in the mortgages trust to the
Funding issuing entities arises under the intercompany loan entered into
between Funding and each of the Funding issuing entities. Similarly, Funding 2
is obliged to pay us under the terms of the global intercompany loan.
Each of the Funding issuing entities has issued series and classes of
notes, beginning in March 2001. Each prospectus supplement will set forth the
aggregate amount of notes outstanding of each Funding issuing entity as of the
date of such prospectus supplement.
Each Funding issuing entity, and consequently the notes of each such
Funding issuing entity, have an indirect pro rata interest in the assets of
the mortgages trust in relation to each other Funding issuing entity and in
relation to the notes issued by us. In addition, the notes of each Funding
issuing entity, in aggregate, rank pari passu with the notes, in aggregate, of
each other Funding issuing entity and with the notes issued by us. This
relationship of the notes of the several Funding issuing entities and of the
Funding issuing entities with the notes issued by us results from the basic
architecture of the sponsor's Granite Program. Each of Funding and Funding 2
have a pro rata beneficial interest in the trust property of the mortgages
trust. See "The mortgages trust" in this prospectus. Receipts of principal of
and interest on the mortgage loans are allocated each month between Funding
and Funding 2 on a pro rata basis as described under "The mortgages trust".
Any losses experienced on mortgage loans, as well as expenses of the mortgages
trust, are also allocated pro rata between Funding and Funding 2.
Consequently, the amount of collections of principal and interest available to
be paid by Funding to the Funding issuing entities each month under their
intercompany loans, taking account of losses on the mortgage loans and
expenses of the mortgages trust, is in pro rata proportion to the amount of
collections available to Funding 2 to pay to us during the same period.
The sponsor does not currently intend that new Funding issuing entities
will be created in the future or that new series of notes will be issued by
any existing or new Funding issuing entity. We may issue new series of notes
from time to time. The conditions for our issuance of new series and classes
of notes are described in this prospectus under "Issuance of notes". The
consent of the noteholders of our existing series of notes is not required,
and will not be obtained, prior to our issuance of new series and classes of
notes. Similarly, the consent of the noteholders of notes issued by the
Funding issuing entities is not required and will not be obtained prior to our
issuance of new series and classes of notes.
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The note trustee and the issuer security trustee
The Bank of New York, a New York banking corporation, acting through its
London Branch at 48th Floor, One Canada Square, London E14 5AL, is acting
under the Granite program in its separate capacities as Funding 2 security
trustee, note trustee and issuer security trustee.
The Bank of New York has and currently is serving as note trustee and
security trustee for numerous securitization transactions and programs
involving pools of residential mortgage loans, including the securitization
transactions of the Funding issuing entities.
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. Pursuant to the trust deed, the note trustee is also
required to take certain actions as described under "Description of the trust
deed" and "Description of the US notes".
The issuer deed of charge sets out the terms under which the issuer
security trustee is appointed, the indemnification of the issuer security
trustee and the payment it receives. Pursuant to the issuer deed of charge,
the issuer security trustee is required to take certain actions as described
under "Security for the issuing entity's obligations" and "Description of the
US notes".
The Funding 2 deed of charge sets out the terms under which the Funding
2 security trustee is appointed, the indemnification of the Funding 2 security
trustee and the payment it receives. Pursuant to the Funding 2 deed of charge,
the Funding 2 security trustee is required to take certain actions as
described under "Security for Funding 2's obligations".
The limitations on liability of the note trustee are described under
"Description of the trust deed" and "Description of the US notes". The
limitations on the liability of the issuer security trustee are described
under "Security for the issuing entity's obligations" and "Description of the
US notes". The limitations on the liability of the Funding 2 security trustee
are described under "Security for Funding 2's obligations".
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Affiliations and certain relationships and related transactions
of transaction parties
Northern Rock is the sponsor of the Granite Program. In addition,
Northern Rock has several other roles in the Granite Program. Northern Rock is
the originator of the mortgage loans. Northern Rock is the only seller of
mortgage loans to the mortgages trustee and is the servicer of all of the
mortgage loans. Northern Rock also provides the services of cash manager,
issuer cash manager, account bank and Funding 2 basis rate swap provider.
Except as described in the preceding paragraph, there are no other
affiliations or relationships or related transactions involving the
transaction parties under the Granite Program.
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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 in different series (and the
notes of differing sub-classes of the same class and series) will not
necessarily have all the same terms. Differences may include principal amount,
interest rates, interest rate calculations, currency, dates, final maturity
dates and ratings. Noteholders holding certain notes may have the benefit of
remarketing and conditional purchase arrangements or similar arrangements.
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 subordinate classes of notes and/or the issuer
reserve fund and the Funding 2 reserve fund. The required subordinated
percentage, which is used to calculate the required subordination for each
class of notes other than the class D notes, will be set forth in the
applicable prospectus supplement for each series of that class of notes.
Similarly, the target reserve required amount and the programme reserve
required percentage 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 may be 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 issuer enforcement notice has been served on us by the note
trustee;
o no Funding 2 intercompany loan enforcement notice has been served
on Funding 2 by the Funding 2 security trustee;
o the issuer reserve fund and the Funding 2 reserve fund are (in
aggregate) fully funded up to the programme reserve required
amount (or if the issuer reserve fund or the Funding 2 reserve
fund are not so fully funded, no payments have been made from the
issuer reserve fund or the Funding 2 reserve fund, as applicable);
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o each of the applicable transaction documents has been executed by
the relevant parties to those documents;
o we shall have delivered a solvency certificate to the note trustee
in form and substance satisfactory to the note trustee; and
o the rating agencies have provided written confirmation that their
ratings of the outstanding notes will not be reduced, qualified or
withdrawn as a consequence of such issuance,
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.
o The "class A required subordinated amount" is calculated, on any
date, as the product of:
A x B
where:
A = the class A required subordinated percentage as specified in the
most recent prospectus supplement for class A notes of any series;
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) less the amounts standing to the credit of
the Funding 2 cash accumulation ledger and the Funding 2 principal
ledger available on such date for the repayment of principal on
the loan tranches (after giving effect to any repayments of
principal to be made on the loan tranches on such date).
o The "class A available subordinated amount" is calculated, on any
date, as:
(a) the sum of (i) 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 repayments of principal to be
made on the notes on such date); and (ii) the aggregate amount of
the Funding 2 reserve fund and the issuer reserve fund on such
date and (iii) excess spread;
less
(b) the amounts standing to the credit of the Funding 2 principal
ledger available on such date for the payment of principal on AA
loan tranches, A loan tranches, BBB loan tranches and BB loan
tranches (after giving effect to any payments of principal to be
made on the loan tranches on such date).
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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.
o The "class B required subordinated amount" is calculated, on any
date, as the product of:
A x B
where:
A = the class B required subordinated percentage as specified in the
most recent prospectus supplement for class B notes of any series;
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) less the amounts standing to the credit of
the Funding 2 cash accumulation ledger and the Funding 2 principal
ledger available on such date for the repayment of principal on
the loan tranches (after giving effect to any repayments of
principal to be made on the loan tranches on such date).
o The "class B available subordinated amount" is calculated, on any
date, as:
(a) the sum of (i) 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
repayments of principal to be made on the notes on such date); and
(ii) the aggregate amount of the Funding 2 reserve fund and the
issuer reserve fund on such date and (iii) excess spread;
less
(b) the amounts standing to the credit of the Funding 2 principal
ledger available on such date for the payment of principal on A
loan tranches, BBB loan tranches and BB loan tranches (after
giving effect to any payments of principal to be made on the loan
tranches on such date).
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.
o The "class M required subordinated amount" is calculated, on any
date, as the product of:
A x B
where:
A = the class M required subordinated percentage as specified in the
most recent prospectus supplement for class M notes of any series;
and
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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) less the amounts standing to the credit of
the Funding 2 cash accumulation ledger and the Funding 2 principal
ledger available on such date for the repayment of principal on
the loan tranches (after giving effect to any repayments of
principal to be made on the loan tranches on such date).
o The "class M available subordinated amount" is calculated, on any
date, as:
(a) the sum of (i) 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 repayments of principal to be made
on the notes on such date); and (ii) the aggregate amount of the
Funding 2 reserve fund and the issuer reserve fund on such date
and (iii) excess spread;
less
(b) the amounts standing to the credit of the Funding 2 principal
ledger available on such date for the payment of principal on BBB
loan tranches and BB loan tranches (after giving effect to any
payments of principal to be made on the loan tranches on such
date).
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.
o The "class C required subordinated amount" is calculated as the
product of:
A x B
where:
A = the class C required subordinated percentage as specified in the
most recent prospectus supplement for class C notes of any series;
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) less the amounts standing to the credit of
the Funding 2 cash accumulation ledger and the Funding 2 principal
ledger available on such date for the payment of principal on the
loan tranches (after giving effect to any payments of principal to
be made on the loan tranches on such date).
o The "class C available subordinated amount" is calculated, on any
date, as:
(a) the sum of (i) the aggregate of the principal amounts outstanding
of the class D notes of all series (after giving effect to
payments of principal to be made on the notes on such date); and
(ii) the aggregate amount of the Funding 2 reserve fund and the
issuer reserve fund on such date and (iii) excess spread;
less
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(b) the amounts standing to the credit of the Funding 2 principal
ledger available on such date for the payment of principal on BB
loan tranches (after giving effect to any payments of principal to
be made on the loan tranches on such date).
In relation to the above, the amounts available on any date for the
payment of principal on any loan tranche shall be calculated in accordance
with the Funding 2 pre-enforcement principal priority of payments (as set out
in "Cashflows - Distribution of Funding 2 available principal receipts prior
to the enforcement of the Funding 2 security - Definition of Funding 2
available principal receipts") and shall be calculated without reference to
the rules for the application of Funding 2 available principal receipts (as
set out in "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").
"Excess spread" is calculated, on any date, as:
(a) the product of:
X + Y
-----
2
and the aggregate outstanding principal balance of the loan
tranches advanced under the global intercompany loan agreement
less the amount debited to the Funding 2 principal deficiency
ledger at such date; less
(b) the product of the weighted average interest rate of the
outstanding notes at such date, including any notes issued on such
date (subject to adjustment where the step-up date occurs for any
series and class of notes and taking into account the margins on
the issuer swaps as at such date and the expenses of the issuing
entity ranking in priority to payments on such notes) and the
aggregate principal amount of outstanding of such notes at such
date.
where:
X = 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 (taking into
account the margins on the basis rate swaps as at such date)
Y = LIBOR for 3 month sterling deposits plus 0.50%
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 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 and (ii) such
change will not cause or constitute an event in which gain or loss
would be recognized by any holder of such notes.
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In addition, 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 other
conditions to issuance described above may be waived by the note trustee. For
example, the note trustee may, in accordance with and subject to the
provisions of the trust deed, without the consent of the noteholders, but only
if and so far as in its opinion the interests of the noteholders of any series
and class of notes shall not be materially prejudiced thereby, determine that
any note event of default in respect of a series and class of notes (the
absence of which constitutes a condition to issuance of notes) shall not be
treated as such.
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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 summarizing information in
relation to the applicable cut-off date mortgage portfolio. The tables will
contain information in relation to various criteria as at 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 the initial closing date;
o "further mortgage portfolio" means the portfolio 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 the initial closing
date;
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 from time to time;
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 the initial closing
date) 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.
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The seller selects new mortgage loans to be included in each cut-off
date mortgage portfolio, and any mortgage loans to be subsequently assigned to
the mortgage portfolio, using an internally developed system containing
defined data on each of the mortgage loans in the seller's overall portfolio
of mortgage loans available for selection. This system allows the setting of
exclusion criteria corresponding to relevant representations and warranties
that the seller makes in the mortgage sale agreement in relation to the
mortgage loans. Once the exclusion criteria have been determined, the system
identifies all mortgage loans owned by the seller that are consistent with the
exclusion criteria. Thereafter, mortgage loans are selected at random until
the target balance for new mortgage loans has been reached, or the mortgage
loan selection has been exhausted. After a pool of new mortgage loans is
selected in this way, the identified mortgage loans are monitored so that they
continue to comply with the relevant criteria as of the assignment date.
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 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 trustee any mortgage loan that was
more than one month in arrears at any time during the 12 months prior to the
assignment date, and will not assign to the mortgages trustee 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 regulated
personal secured loan) is secured by a first-ranking legal charge over a
residential property located in England or Wales (an "English mortgage") or a
first ranking standard security over a residential property located in
Scotland (a "Scottish mortgage"). Each regulated personal secured loan will be
secured by a legal charge over freehold or leasehold property located in
England and Wales or by a standard security over heritable or long leasehold
property located in Scotland ranking 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
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the borrower to obtain a mortgage loan, an unsecured loan and, in
some cases (historically, although no longer), 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. No
accounts under a credit card associated with a Together mortgage
loan have been or will be assigned to the mortgages trustee.
o "Together Connections mortgage loans": flexible mortgage loans,
which were 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 "combined credit balance").
Despite the foregoing, the borrower is nevertheless obligated to
make his 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 certain types
of mortgage loans may affect the rate of repayment and prepayment
of the mortgage loans". 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.
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The seller has for the time being, ceased to offer Together
Connections mortgage loans to borrowers. However, the seller may
continue to assign Together Connections mortgage loans which it
has previously originated to the mortgages trustee.
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
"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, the terms
of 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 interest which is charged 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), the terms of 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
with the same basic features as a Together mortgage loan (other
than allowing the borrower to obtain a credit card and unsecured
loan), the terms of 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.
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o "low-start flexible fixed rate mortgage loans": flexible mortgage
loans with the same features as flexible fixed rate mortgage loans
with the exception that the interest rate increases incrementally
in fixed amounts on each of the first, second, third and sixth
years of the term of each mortgage loan, at the expiration of
which each mortgage loan becomes generally subject to the seller's
standard variable rate.
o "discount rate mortgage loans": mortgage loans, the terms of 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 are subject to
either the seller's standard variable rate or a fixed rate of
interest or discount to the seller's standard variable rate for a
specified period of time and, the terms of which provide for a
specified lump sum payment to be made to the borrower at the time
that the mortgage loan is advanced to the borrower.
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
governed by separate terms and conditions documented either as a
regulated agreement subject to the CCA (a "regulated personal
secured loan") or as an agreement not regulated by the CCA (an
"unregulated personal secured loan"), depending upon purposes for
which it is used. A personal secured loan is, if the loan is an
unregulated personal secured loan, secured pursuant to the
borrower's existing mortgage. If the loan is a regulated personal
secured loan, it is secured pursuant to a separate subordinate
ranking mortgage. 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
All payments due under the mortgage loans which are included in the
mortgage portfolio are to be made by electronic direct debit authorized by the
relevant borrower and made monthly from such borrower's bank account to a
collection account ("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 servicer as more fully described under "The servicer and the
administration agreement--Appointment--Collection of payments".
Borrowers typically make payments of interest on, and repay principal
of, their mortgage loans using one of the following methods:
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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 an organization separate from the
seller, 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 to make 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 financial plan arranged by such borrower to provide
for that borrower's expenses during retirement; 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 the
trustees of 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 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
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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 amount 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 "- 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.
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
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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, low-start 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 of the applicable mortgage
loan, 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
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make an overpayment or they repay the entire current balance under the
relevant mortgage loan.
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 loan agreements, the borrower may exercise a onetime 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" constitutes a product switch and is 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
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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 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 1.99% below the
seller's standard variable rate it is possible that either or both of Funding
and we would suffer a revenue shortfall. See "Risk factors - 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".
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% per annum (although the seller may
in the future allow for a discount of between 0.25% and 0.75% per annum) 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 servicer and the
administration agreement - The administration agreement - Undertakings by the
servicer", the servicer on behalf of the mortgages trustee, each Funding
beneficiary and each Funding 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
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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. In
maintaining, determining or setting the variable mortgage rate for mortgage
loans within the mortgages trust, the servicer 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.
The seller has given the mortgages trustee, Funding, Funding 2, the
servicer, the security trustee and the Funding 2 security trustee 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.
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 low-start 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 expects 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 from 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, low-start 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
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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
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
his 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 a payment holiday of up to
six months 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 his 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
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the mortgage loan to the date of the cash redraw 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.
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 such term
is used in the Land Registration Act 2002 (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, historically, a
credit card which are made available to a borrower. The seller is no longer
offering a credit card facility in relation to this product. 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 and in 2004 in relation to the low-start
flexible 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, until
May 2005 only, (GBP)10,000 for flexible capped rate, flexible tracker rate and
flexible fixed rate mortgage loans and low-start flexible fixed rate mortgage
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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
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
101
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 as described above under "- Mortgage loan products offered by
the seller" but do not allow the borrower to have an unsecured facility.
Generally, a prospective borrower applying for a flexible mortgage loan
(offered by the seller as at the date of this prospectus) 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 term
over which a borrower may repay its flexible mortgage loan (other than a
Together Connections mortgage loan or a Connections mortgage loan) is, as at
the date of this prospectus, up to 35 years, and the term over which a
borrower may repay its Together Connections mortgage loan or Connections
mortgage loan is, as at the date of this prospectus, 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 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 regulated personal secured loan will rank below
the first priority legal charge or standard security securing the related
borrower's existing mortgage loan. An unregulated personal secured loan will
be secured pursuant to 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 any
amount up to a maximum of (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 loans
secured on the same property that secures the personal secured loan(s) is
greater than 95%.
102
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 85% of the indexed value of
the mortgaged property, the seller will reassess the property's value, either
by instructing a valuer, who may physically inspect the property, or by using
a desktop valuation assessment determined by a staff valuer. 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 (other than cash and non-cash
re-draws under a flexible loan or further draws under a flexi-plan loan).
However, the seller may choose to make further advances on some mortgage loans
in an additional mortgage portfolio prior to their assignment to the mortgages
trustee. Under the administration agreement, the servicer may, on behalf of
the seller, accept an application from or issue an offer for a further advance
to any borrower in respect of a mortgage loan which has been assigned to the
mortgages trustee where the seller has confirmed that it would elect to
purchase that mortgage loan in accordance with the terms of the mortgage sale
agreement. 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, then this may have an effect on whether a further advance
may be offered or made on such mortgage loans. See "Risk factors - The yield
to maturity of the notes may be adversely affected by prepayment or
redemptions on the mortgage loans 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 moving 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
servicer is required under the administration agreement not to accept an
application from or 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
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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 to be 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 loans 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 servicer 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 adopted the
CML Code which was a voluntary code observed by most banks, building societies
and other residential mortgage lenders in the UK. The CML Code ceased to have
effect on N(m). The seller is authorized to conduct mortgage lending business
under the FSMA and is 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, as with the CML Code prior to N(m), also requires
that the lender, among other things, acts fairly and reasonably with its
borrowers and assists borrowers in choosing a mortgage that fits the needs of
the relevant borrower. See "Risk factors - Regulatory changes by the Office of
Fair Trading, the FSA and any other regulatory authorities may have an impact
on the seller, the mortgages trustee, Funding 2, the issuing entity, the
mortgage loans and/ or personal secured 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
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mortgage loan applications. The levels are differentiated by, among other
things, degree of risk, value of the property, amount of the mortgage loan 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 applicant
at their current address and, if necessary, former addresses, which gives
details of public information including any county court judgments 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 accountant's certificate certifying the borrower's
income.
105
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 to July 2003, 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.
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 with low credit scores, borrowers employed less than
six months and borrowers of Together mortgage loans are ineligible for 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. In addition, 1% of applications
from prospective borrowers otherwise eligible for a non-verified mortgage loan
are randomly selected by the seller and verification of such borrower's income
is required to be obtained prior to granting the relevant mortgage loan.
106
(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, heritable and leasehold
houses, heritable and 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 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.
(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.
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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 judgment (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 a
mortgage account going into arrears. The seller also uses behavioral 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 application has been unfairly declined. It is
the seller's policy to allow only authorized individuals to exercise
discretion in granting variances from the scorecard.
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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 from 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)300,000 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 permitted
for prospective borrowers applying for interest-only mortgage loans (without a
repayment vehicle) and combination repayment and interest-only mortgage loans
(without a repayment vehicle) since May 2005 is 75% 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
servicer, 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 he 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.
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The servicer will make claims in accordance with the contingency
insurance policy and 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 paid by the seller and the amount of
the premium is added to the balance of the relevant mortgage loan.
It is possible that the seller may not be insured under any insurance
policy which is not arranged by the seller and, therefore, 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 which could adversely affect
payments on the notes".
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,
which 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 the 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 policy ("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 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
111
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 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 or
any level of coverage under the mortgage indemnity insurance policies for
mortgage loans that it may originate in the future and assign to the mortgages
trustee. 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 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 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 servicer. 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 the proceeds of 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
or claims paying ability or financial strength 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 is, 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 in the mortgage sale agreement 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 located 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
112
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
information on Scottish mortgages, see "Material legal aspects of the mortgage
loans and the related security - Scottish mortgage loans".
113
Certain characteristics of the United Kingdom
residential mortgage market
The housing market in the UK is primarily one of owner-occupier housing.
The remaining occupants are in some form of public/private landlord or social
ownership.
Set out in the following tables are certain characteristics of the
United Kingdom mortgage market. The prospectus supplement for each issuance of
notes will contain information updating such tables together with other
information regarding the characteristics of the United Kingdom 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. You should note that the CPR data presented below is based upon a
percentage of the total UK residential mortgage market, but because the
seller's CPR data (which calculates the amount of scheduled and unscheduled
repayments on a monthly basis for all mortgage loans originated by the seller
(and thus gives an indication of anticipated CPR for the mortgages trust))
includes the effect of further advances and product switches, which results in
a higher CPR, the data presented below is on a basis which undercounts CPR
relative to the seller's includes the.
The following table sets out the quarterly CPR rates experienced in
respect of residential mortgage loans by UK mortgage lenders from March 1999
to (and including) September 2005.
four four
CPR for quarter CPR for quarter
the rolling the rolling
quarter average quarter average
Date (%) (%) Date (%) (%)
- ----------------- ------- ------- -------------- ------- -------
March 1999 13.19 NA June 1999 17.40 NA
September 1999 19.35 NA December 1999 17.95 16.97
March 2000 14.68 17.35 June 2000 16.69 17.17
September 2000 17.33 16.66 December 2000 17.01 16.43
March 2001 16.69 16.93 June 2001 20.02 17.76
September 2001 22.34 19.02 December 2001 21.89 20.24
March 2002 20.52 21.19 June 2002 24.07 22.20
September 2002 27.01 23.37 December 2002 26.01 24.40
March 2003 23.35 25.11 June 2003 25.12 25.37
September 2003 27.10 25.39 December 2003 27.75 25.83
March 2004 23.21 25.79 June 2004 25.19 25.81
September 2004 26.26 25.60 December 2004 21.96 24.15
March 2005 18.58 23.00 June 2005 21.67 22.12
September 2005 25.40 21.90
_______________
Source of repayment and outstanding mortgage information: Bank of England
114
The following table sets out the quarterly CPR rates experienced in
respect of residential mortgage loans by building societies from March 1964 to
(and including) March 2005.
Four four
CPR for quarter CPR for quarter
the rolling the rolling
quarter average quarter average
Date (%) (%) Date (%) (%)
- ----------------- ------- ------- -------------- ------- -------
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 9.74 June 1981 11.78 10.52
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
115
Four four
CPR for quarter CPR for quarter
the rolling the rolling
quarter average quarter average
Date (%) (%) Date (%) (%)
- ----------------- ------- ------- -------------- ------- -------
September 1986 17.52 14.45 December 1986 15.60 14.92
March 1987 10.57 14.80 June 1987 14.89 14.64
September 1987 16.79 14.46 December 1987 16.18 14.61
March 1988 13.55 15.35 June 1988 16.03 15.64
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 10.96 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 10.29
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 11.00 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 13.43 12.36
March 1999 11.14 12.60 June 1999 14.27 13.16
September 1999 15.60 13.61 December 1999 14.94 13.99
March 2000 13.82 14.66 June 2000 13.87 14.56
September 2000 14.89 14.38 December 2000 15.55 14.53
March 2001 15.49 14.95 June 2001 17.39 15.83
September 2001 19.17 16.90 December 2001 19.03 17.77
March 2002 18.70 18.57 June 2002 19.91 19.21
September 2002 22.41 20.01 December 2002 22.16 20.80
March 2003 19.52 21.00 June 2003 20.18 21.07
September 2003 21.66 20.88 December 2003 21.33 20.67
March 2004 20.00 20.80 June 2004 21.50 21.13
September 2004 21.49 21.08 December 2004 18.78 20.44
March 2005 17.80 19.89
- ------------------
Source of repayment and outstanding mortgage information: Bank of England
The prior CPR table presents the historical CPR experience only of
building societies in the UK. During the late 1990's, a number of former
building societies (including Nborthern 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.
116
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 Indices experienced
in respect of residential mortgage loans by building societies between the
fourth quarter of 1973 and the fourth quarter of 2004. The prospectus
supplement for each issuance of notes will contain information updating the
historical quarterly Housing Indices with data available from the first
quarter of 2005 to 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
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
117
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)
- ----------------- ----- --------- ----- ---------- ----- ---------
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
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
118
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)
- ----------------- ----- --------- ----- ---------- ----- ---------
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
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 22.9 403.8 21.0
2003 Q2 181.3 2.9 250.1 19.2 419.0 19.8
2003 Q3 182.5 2.7 258.9 15.8 434.5 17.1
2003 Q4 183.5 2.8 267.1 14.4 455.3 14.9
2004 Q1 184.6 2.6 279.7 16.9 480.3 18.9
2004 Q2 186.8 3.0 298.7 19.4 508.4 21.3
2004 Q3 188.1 3.1 308.8 19.3 522.0 20.1
2004 Q4 189.9 3.5 306.8 14.8 524.4 15.2
- ------------------
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.
119
Source: Office for National Statistics, Nationwide, Halifax.
120
The servicer and the administration agreement
The servicer
The mortgages trustee, the seller, Funding and Funding 2 have appointed
Northern Rock under the terms of the administration agreement as the initial
servicer of the mortgage loans. The servicer performs the day-to-day servicing
of the mortgage loans through its retail branches, mortgage service centers
and telephone banking and operations centers. The servicer will continue to
administer other mortgage loans in addition to those mortgage loans included
in the mortgage portfolio. The servicer is a public limited liability company
incorporated under the laws of England and Wales and its registered office is
Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL, United Kingdom.
The servicer has been servicing UK residential mortgage loans since 1850
and UK commercial mortgage loans since 1990. The servicer administers and
services the mortgage loans and their related security in accordance with its
administration, arrears and enforcement policies and procedures (collectively
referred to in this prospectus as the "administration procedures" or, at any
time when the servicer is not also the seller, the term administration
procedures shall mean the policies and procedures from time to time which
would be adopted by a reasonable, prudent lender). The servicer's
administration procedures in respect of the mortgage loans have not been
amended in any material respect during the past three years.
This section describes the servicer's procedures in relation to mortgage
loans generally. A description of the servicer's obligations under the
administration agreement follows in the next section. The servicer 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 servicer 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 servicer 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 servicer will continue to determine the standard
variable rate applicable to such mortgage loans on behalf of the mortgages
trustee, the Funding beneficiaries and/or the Funding security trustees. The
servicer 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).
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 servicer will
follow the usual arrears procedures described under "- Arrears and default
procedures" below.
121
Arrears and default procedures The servicer 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
servicer 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 servicer calculates as of the date of determination the
difference between:
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 servicer 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 servicer
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 servicer 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 servicer would not classify that borrower as being in arrears.
However, if that borrower makes another payment (for the purposes of our
example, on the monthly 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 servicer 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 servicer 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 servicer will classify that mortgage loan as being in arrears.
In addition, there may be a significant period
122
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 servicer 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 servicer will continue to contact the borrower asking for payment
of the arrears. The servicer classifies a mortgage loan that is in arrears as
a "non-performing mortgage loan" if the related borrower has not made any
payment within any of the three consecutive calendar months prior to the date
of determination.
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 servicer 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/or
o a deferment for a period of time of all payments, including
interest and principal or parts of any of them.
The servicer 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 servicer may send further letters to the borrower encouraging
the borrower to enter into discussions to pay the arrears. The servicer may
still enter into an arrangement with a borrower at any time prior to a court
hearing, or it may request an adjournment of a court hearing. If the servicer
(on behalf of the mortgagee) 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 servicer 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 servicer
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
servicer may take any action it considers appropriate, including entering into
an arrangement with the borrower. In all cases, the servicer has a duty of
care to the borrower to act reasonably.
The servicer has discretion to deviate from these arrears procedures.
In particular, the servicer 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.
123
After the mortgagee has been granted possession, the servicer (on behalf
of the mortgagee) may take any action it considers appropriate, subject to any
fiduciary duties which the mortgagee 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/or
o letting the property for any period of time.
Subject as provided above, the servicer (on behalf of the mortgagee) has
discretion as to the timing of any of these actions, including whether to
postpone the action for any period of time. The servicer (on behalf of the
mortgagee) may also carry out works on the property as it considers
appropriate, including the demolition of the whole or any part of it.
The period between the servicer (on behalf of the mortgagee) obtaining
possession and sale of a mortgaged property is generally between three and
nine months.
However, you should note that the servicer'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 servicer'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 servicer's decision (on behalf of the mortgagee) to
exercise the power of sale and final completion of the sale.
The servicer 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 servicer 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 servicer 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
servicer may pursue the borrower to the extent of any deficiency resulting
from the sale if the servicer deems it appropriate to do so.
These arrears and security enforcement procedures may change over time
as a result of a change in the servicer's business practises, legislative or
regulatory changes or business codes of practise.
Arrears experience
Each prospectus supplement relating to the issuance of a series 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
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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 included in the mortgage portfolio will
correspond to the experience of the servicer's overall mortgage portfolio.
Moreover, if the property market experiences an overall decline in property
values so that the value of the mortgaged properties relating to the mortgage
loans included in the trust property falls below the current balances of such
mortgage loans, the actual rates of arrears and repossessions could be
significantly higher than those previously experienced by the seller. 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 included in the mortgage
portfolio. 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.
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, the historical upward trend of house price
inflation has moderated. In the period from 1988 to 1990, 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
(being the mechanism by which members of the European Community formerly
operated their currency exchange rates) 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 loans.
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 behavioural 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 servicer'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.
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Appointment
On the initial closing date, 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 servicer will continue to administer mortgage loans which
have not been assigned to the mortgages trustee. The servicer 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 servicer 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.
Except as otherwise specified in the transaction documents, the servicer
has agreed to comply with any reasonable directions, orders and instructions
which the mortgages trustee may, from time to time, give to it in accordance
with the provisions of the administration agreement.
The servicer 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 servicer's administration procedures. The servicer's
administration procedures are the administration, arrears and
enforcement policies and procedures, as amended from time to time
pursuant to which the servicer 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 servicer
Under the administration agreement, the servicer 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, the security trustee and/or the
Funding 2 security trustee will be entitled to do so. The servicer
may not at any time, without the prior consent of the mortgages
trustee, the Funding beneficiaries and the Funding security
trustees 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
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rates for mortgage loans which are beneficially owned by the
seller outside the mortgages trust;
(B) to determine on each monthly 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 included in
the mortgage portfolio and the variable mortgage rates in
respect of such mortgage loans which the servicer 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 the
Funding 2 liquidity facility (if any);
whether:
(i) Funding would receive an amount of income during that
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 counterparty by a Funding issuing entity or otherwise)
the amount of interest payable in respect of the class A
notes of the Funding issuing entities and all amounts
ranking higher in priority to such amounts on the scheduled
payment date falling at the end of that 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 issuing entities; and
(ii) Funding 2 would receive an amount of income during that
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 respect of the AAA loan tranches and
all amounts ranking higher in priority to such amounts on
the monthly payment date falling at the end of that interest
period, and (b) all other amounts payable by Funding 2 which
rank equally with or in priority to interest due in respect
of the AAA loan tranches.
If the servicer determines that there will be a revenue shortfall
in the foregoing amounts, it will give written notice to the
mortgages trustee, each Funding beneficiary and each Funding
security trustee, within one London business day of such
determination, of the amount of the revenue shortfall for each
Funding beneficiary and recommend the standard variable rate and
the other discretionary rates or margins which would, in the
servicer's opinion, need to be set in relation to the mortgage
loans included in the mortgage portfolio in order for no revenue
shortfall (in respect of each Funding beneficiary) to arise,
having regard to the obligations of Funding 2 and/or Funding, as
applicable. If the mortgages trustee, Funding, and/or the security
trustee notify the servicer that, having regard to the obligations
of Funding, the standard variable rate and the other discretionary
rates or margins for mortgage loans included in the mortgage
portfolio should be increased, and/or if the mortgages trustee,
Funding 2 and/or the Funding 2 security trustee make the same
notification to the servicer with respect to the obligations of
Funding 2, the servicer will take all steps which are
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necessary, including publishing any notice required under the
mortgage conditions, to effect such increase in those rates or
margins. The mortgages trustee and/or the Funding beneficiaries
and the Funding security trustees may terminate the authority of
the servicer to set the standard variable rate and the other
discretionary rates or margins applicable to mortgage loans
included in the mortgage portfolio in certain limited
circumstances set out in the administration agreement including
upon the occurrence of any servicer 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 the exercise of a re-fix option
by a borrower under a fixed mortgage loan, not to accept an
application from, or issue to any borrower an offer for a further
advance or a product switch without having received confirmation
that the seller will elect 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 servicer will take all steps to set
the existing borrowers' re-fix rate at the higher of the rate
recommended by the servicer (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, a Funding beneficiary or a Funding security
trustee) or as a consequence of the mortgage conditions. The
servicer will also notify the mortgages trustee, each Funding
beneficiary and each Funding 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 (if any) in safe custody and to the order of the mortgages
trustee, the Funding beneficiaries and the Funding security
trustees and in such a manner that they are readily identifiable
and accessible;
(H) to provide the mortgages trustee, each Funding beneficiary and
each Funding security trustee and their agents with access to the
title deeds and mortgage loan files at all reasonable times;
(I) to deliver to the mortgages trustee on or before March 31 of each
year, commencing in 2007, a report assessing compliance with the
servicing criteria applicable to it as set forth in Item 1122(d)
of Regulation AB. The assessment
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report will include an assessment of the servicer's compliance
with the servicing criteria and disclose any material
noncompliance. If any of the servicing criteria specified in Item
1122(d) of Regulation AB are inapplicable to the servicer, the
servicer will identify such criteria and the basis for their
omission. The assessment report will be filed as an exhibit to the
issuing entity's annual report on Form 10-K and will cover
compliance with the servicing criteria during the related fiscal
period of the Form 10-K;
(J) 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 outstanding. The
servicer will regularly give to the mortgages trustee and the
beneficiaries written details of mortgage loans that are in
arrears;
(K) 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
(L) not knowingly to fail to comply with any legal requirements in the
performance of its obligations under the administration agreement.
Collection of payments
The servicer has undertaken to ensure that all payments due under the
mortgage loans which are included in the mortgage portfolio 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 servicer held with Barclays Bank PLC ("Barclays"), acting
through its City Group Office, Percy Street, Newcastle-upon-Tyne NE99 1JP and
Lloyds TSB Bank plc ("Lloyds TSB"), acting through its City Office, Bailey
Drive, Gillingham Business Park, Kent ME8 0LS (each a "collection bank") and
other accounts (each a "collection account") which the servicer may utilize
from time to time in accordance with the collection bank agreement and the
administration agreement. All amounts standing to the credit of such accounts
will be held on trust by the seller.
The servicer 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 servicer 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
seller 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 have been assigned to the mortgages trustee and included
in the mortgage portfolio.
The collection accounts are operated by the servicer in accordance with
the collection bank agreement dated the initial closing date, as amended from
time to time, among the mortgages trustee, Funding, Funding 2, the seller, the
servicer, the security trustee and the collection banks (the "collection bank
agreement"). Under the collection bank agreement, until the collection banks
receive notice that, amongst other things, a Funding 2 intercompany loan
enforcement notice has been served or that the appointment of the servicer has
been terminated, each collection bank has agreed to operate the collection
accounts in accordance with the instructions of the servicer. If the short
term, unsecured, unguaranteed and unsubordinated debt obligations of Barclays
or Lloyds TSB are not rated at least "A-1+" by Standard & Poor's, "P-1" by
Moody's and "F1+" by Fitch, the servicer 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 and Lloyds TSB are currently rated
"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 trustee are
transferred by the servicer 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.
The servicer has agreed in the administration agreement to cause a
registered public accounting firm to furnish to the servicer and the mortgages
trustee on or before March 31 of each year, commencing in 2007, an attestation
report for each servicing criteria assessment, which report will be filed as
an exhibit to the issuing entity's annual report on Form 10-K. The attestation
examination will be made in accordance with the attestation engagement
standards issued or adopted by the Public Company Accounting Oversight Board.
The attestation report will contain the accounting firm's opinion as to
whether the related servicing criteria assessment was fairly stated in all
material respects, or a statement that the firm cannot express such an
opinion.
In the case of monthly payments which are made by direct debit, the
servicer initially credits the applicable collection account with the full
amount of the direct debit. If an unpaid
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direct debit is returned in circumstances where the servicer has credited to
the mortgages trustee transaction account the amount of the monthly payment,
the servicer 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 servicer is responsible for
handling the procedures connected with the redemption of mortgage and is
authorized to release the relevant title deeds (if any) to the person or
persons entitled thereto upon redemption.
Fees
The servicer is entitled to receive a fee for servicing the mortgage
loans. On each distribution date the mortgages trustee pays to the servicer an
"administration fee" of 0.08% per annum (inclusive of VAT) on the aggregate
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) the latest occurring final repayment date of
the intercompany loans between Funding and each of the Funding issuing
entities (the "Funding intercompany loans"), or on their earlier repayment in
full by Funding, or (ii) the latest occurring final repayment date of any loan
tranche advanced under the global intercompany loan agreement, or on the
earlier repayment of all loan tranches in full by Funding 2. The
administration agreement also provides for the servicer to be reimbursed for
all reasonable out-of-pocket expenses and charges properly incurred by the
servicer in the performance of its services under the administration
agreement.
If a substitute or successor servicer shall be appointed under the
administration agreement with respect to any of the mortgage loans, the
mortgages trustee has agreed to set the administration fee rate with such
substitute or successor servicer at the time such substitute or successor
servicer enters into the administration agreement. Any administration fee due
to a substitute or successor servicer will be paid on each distribution date
out of revenue receipts in accordance with the revenue priority of payments
set out in the mortgages trust deed.
Removal or resignation of the servicer
The appointment of the servicer may be terminated by the mortgages
trustee, and/or the Funding beneficiaries and the Funding security trustees
immediately upon written notice to the servicer, on the occurrence of certain
events (each a "servicer termination event") including:
o the servicer 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 servicer becomes aware of the default;
o subject as provided further in the transaction documents, the
servicer fails to comply with any of its other material
obligations under the administration agreement which in the
opinion of the Funding 2 security trustee is materially
prejudicial to the interests of the holders of the notes issued by
the issuing entity, and such failure is not remedied for a period
of 20 days after the servicer becomes aware of the default;
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o if at any time required under any UK mortgage regulatory regime
the servicer fails to obtain or maintain the necessary license or
permission or regulatory approval enabling it to continue
administering mortgage loans; or
o the occurrence of an insolvency event in relation to the servicer.
Upon termination of the servicer, the Funding security trustees have
agreed to use their reasonable endeavors to appoint a substitute servicer.
In addition, subject to the fulfilment of certain conditions including,
without limitation, that a substitute servicer has been appointed by the
mortgages trustee, the Funding beneficiaries and the Funding security trustees
(and in the event of failure to agree, by the Funding security trustees) the
servicer may voluntarily resign by giving not less than 12 months' notice of
termination to the mortgages trustee, each Funding beneficiary and the seller.
Any such substitute servicer (whether appointed upon a termination of
the appointment of, or the resignation of, the servicer) is required to:
o if possible, to have experience in administering mortgage loans
secured on residential 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 be reduced, withdrawn or qualified as
a result of the appointment of the substitute servicer, unless otherwise
agreed by an extraordinary resolution of the holders of the relevant class of
notes.
Forthwith upon termination of the appointment of the servicer, the
servicer must deliver the title deeds (if any), the mortgage loan files and
all books of account and other records maintained by the servicer 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 servicer
The servicer may, in some circumstances including with the prior written
consent of the mortgages trustee, and the Funding beneficiaries and after
consultation with the Funding security trustees, delegate or sub-contract the
performance of any of its obligations or duties under the administration
agreement. Upon the appointment of any such delegate or sub-contractor the
servicer 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 issuing entity
will not result in the ratings on the notes being reduced, qualified or
withdrawn.
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In the event of any such appointment, the Funding 2 security trustee 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 the initial closing date 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 and 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 by the seller 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 mortgage
portfolio, 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 and their related security 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 favor 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 issuing entity has 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
the 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 or, in the
case of a regulated personal secured loan, subject in priority
only to such charges securing mortgage loans other than regulated
personal secured loans;
o subject to completion of any registration which may be pending at
the Land Registry (in England and Wales) or the Registers of
Scotland (in Scotland), each mortgage (other than a mortgage in
respect of a regulated personal secured loan) either constitutes,
or will constitute, following registration at the 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
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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;
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 transfer of legal title 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
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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.; and
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 if and 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) or 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, the
Funding beneficiaries and the Funding security trustees then, at the direction
of the Funding beneficiaries (with the consent of the Funding security
trustees) or the Funding security trustees, 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
mortgage portfolio.
For so long as the seller is the servicer, it must notify the mortgages
trustee, each Funding beneficiary and each Funding security trustee of any
material breach of a warranty as soon as it 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 servicer may not accept an application from
or issue to a borrower an offer for a further advance or a product switch
without having received confirmation from the seller that it will elect 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 servicer on behalf of the seller 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
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trustee may not itself offer or make any product switch (other than in
relation to a re-fixed mortgage loan) or further advance.
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 any Funding intercompany loan is outstanding, it is
extended beyond 2039 and/ or while any loan tranche under the
global intercompany loan agreement is outstanding, it is extended
beyond January 2052;
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 aggregate current
balance of the mortgage loans in the mortgage portfolio in any
interest period.
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 or, following the
redemption in full of all notes issued by the Funding issuing
entities, January 2052.
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 trustee.
The purchase obligations of the seller set forth under "- Repurchase by the
seller" will 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
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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 otherwise provided below with respect to re-fixed mortgage
loans, if the servicer 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 intention to
elect 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 relevant 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 such fixed rate mortgage loan if that fixed
rate mortgage loan becomes "re-fixed" during the three month period
immediately following the end of the relevant 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 servicer is required to determine the applicable fixed rate in
relation to a borrower's request to re-fix any such mortgage loan if required
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 servicer as being required
by the mortgages trustee, Funding or Funding 2.
In addition, 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; and
(2) Funding 2 will be obliged to enter into a new hedging arrangement
in respect of such mortgage loans with either an existing swap
provider, in which case such hedging will be fixed at such fixed
rate as such swap provider, on the basis of fixed rates being
offered in the swap market, determines to be the fixed rate
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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 swap provider whose rating will not cause the then
current ratings of the notes to be reduced, withdrawn or
qualified.
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 mortgage portfolio. 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 mortgage portfolio. 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 such variation or waiver will not cause
the ratings of the outstanding notes of any Funding issuing entity or the
issuer to be reduced, withdrawn or qualified) 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 mortgage portfolio, 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 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 mortgage portfolio 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 mortgage portfolio on
such date, unless the rating agencies have confirmed that the then
current ratings of the notes will not be reduced, withdrawn or
qualified;
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(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 Funding 2 security trustee and the issuing
entity 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 issuing entity
and any Funding issuing entity (provided that at a time when the
issuing entity issues new notes the rating agencies will have
provided written confirmation that the then current ratings of the
existing notes have not been reduced, withdrawn or qualified);
(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 mortgage portfolio as
at the beginning of that interest period;
(h) the issuer reserve fund and the Funding 2 reserve fund are (in
aggregate) fully funded on the relevant assignment date up to the
programme reserve required amount (or, if the issuer reserve fund
and/or the Funding 2 reserve fund is not so fully funded on such
relevant assignment date, no payments have been made from the
issuer reserve fund or the Funding 2 reserve fund, as applicable);
(i) no Funding 2 intercompany loan enforcement notice has been served
under the global intercompany loan agreement;
(j) the assignment of new mortgage loans does not result in the
product of the weighted average foreclosure frequency ("WAFF") and
the weighted average loss severity ("WALS") for the mortgage loans
in the mortgage portfolio after such purchase, calculated on such
assignment date in the same way as for the initial mortgage
portfolio (or as agreed by the servicer, Fitch and Standard &
Poor's from time to time), exceeding the product of the WAFF and
WALS for the mortgage loans in the mortgage portfolio calculated
on the most recent preceding closing date, plus 0.25%;
(k) the assignment of new mortgage loans does not result in the
Moody's portfolio variation test value of the mortgage loans in
the mortgages portfolio after such assignment, (calculated by
applying the Moody's portfolio variation test to such mortgage
loans on such assignment date), exceeding the most recently
determined Moody's portfolio variation test threshold value as
calculated in relation to the mortgage loans in the mortgage
portfolio as at the most recent date on which Moody's performed a
full pool analysis on the mortgages portfolio (not to be less
frequent than annually) plus 0.30%;
(l) new mortgage loans may only be assigned to the mortgages trustee
if (to the extent necessary), the Funding issuing entities, the
issuing entity and Funding 2 have entered into appropriate hedging
arrangements in respect of such mortgage loans;
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(m) no event of default under the transaction documents shall have
occurred which is continuing at the relevant assignment date;
(n) the weighted average yield on the mortgage loans in the mortgage
portfolio together with the new mortgage loans to be assigned to
the mortgages trustee on the relevant 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;
(o) 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%;
(p) each new mortgage loan has a maturity date prior to January 2039
or, following the redemption in full of all notes issued by the
Funding issuing entities, January 2052;
(q) the related borrower under each new mortgage loan has made at
least one monthly payment; and
(r) the rating agencies have provided written confirmation that the
then current ratings on the notes would not be reduced, withdrawn
or qualified 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,
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), (l), (m), (n),
(p), (q) and (r) 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 issuing
entity, 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 a step-up date in respect of any series and class of notes of the
issuing entity, if the option to redeem any such notes on that
step-up date pursuant to the terms and conditions of such notes is
not exercised and the aggregate principal amount outstanding of
such notes (together with any other notes of the issuing entity in
respect of which the step-up date has passed) as at such step-up
date exceeds (GBP)1,000,000,000; or
o the date falling 12 months after the occurrence of a step-up date
in respect of any series and class of notes of the issuing entity,
if the option to redeem such notes by such date pursuant to the
terms and conditions of such notes is not exercised.
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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, 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, made by the issuing entity to Funding 2 (or, in the
case of Funding, the proceeds of an intercompany loan from a new
Funding issuing entity);
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 monthly 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 Funding 2 intercompany loan or borrows a new loan tranche
under the global intercompany loan agreement or Funding enters into a new
Funding intercompany loan, then the period during which the seller covenants
to use
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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 the Funding issuing entities and
the issuing entity on such distribution date provided that (i) where the notes
outstanding are controlled amortization notes or scheduled redemption notes,
the principal amount outstanding of such notes will be calculated on a
straight-line basis by applying the appropriate constant payment rate (being
the constant payment rate most recently calculated) applicable to each series
of notes on a monthly, rather than quarterly, basis and (ii) where the notes
are bullet redemption notes, the amount standing to the credit of the Funding
2 cash accumulation ledger shall be deducted from the aggregate principal
amount outstanding of the bullet redemption notes.
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 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 declarations 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 the 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, the Funding
beneficiaries, and/or the Funding security trustees upon the occurrence of any
of, amongst other things:
o the valid service of a Funding 2 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;
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o unless otherwise agreed by the rating agencies, the termination of
the seller's role as servicer under the administration agreement
and failure of any substitute servicer to assume the duties of the
servicer;
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 and
each Funding beneficiary (with a copy to each Funding 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 reduced, withdrawn or qualified) the seller will be obliged to give notice
only of the transfer of the equitable and beneficial interest in 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 or the related security
in favor of the mortgages trustee.
Title deeds
To the extent not held at the Land Registry electronically, 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 servicer 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 servicer 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 the initial closing date as a trust
under English law with the mortgages trustee as trustee for the benefit of the
seller and Funding as beneficiaries (the "mortgages trust"). On the Funding 2
program date, with the consent of all applicable parties, the seller assigned
a portion of its beneficial interest in the mortgages trust to Funding 2 for a
purchase price of (GBP)100. 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, the seller and, as a result of and following its
acquisition of a beneficial interest in the trust property (as described
above), Funding 2. 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
mortgage portfolio;
o any further advances made by the seller to existing borrowers
which are assigned to the mortgages trustee in accordance with the
mortgage sale agreement;
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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 deed 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
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 any interest in 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 forming part of 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, 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;
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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 whose
mortgage loan is included in the mortgage portfolio. 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 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.
As of the Funding 2 program date, and following its acquisition (by way
of assignment) from the seller of a portion of the beneficial interest of the
seller in the mortgages trust, the size of the share of Funding 2 in the trust
property will be (GBP)100. Funding 2 will use the proceeds of loan tranches
advanced to it by the issuing entity (less any amount utilized 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;
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o on any date on which Funding and/or Funding 2 makes an initial
contribution or a further contribution 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
and/or on which date the mortgages trustee will also pay to the
seller an initial purchase price equal to the amount of such
initial contribution or pay to the seller and/or Funding a special
distribution (where such special distribution is not made on a
distribution date) 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
mortgages trustee.
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 mortgage portfolio 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.
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
H
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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 on or 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 paragraph (1) in "- Adjustments to trust property"
below, in each case allocated to Funding 2 in the trust
calculation period ending on the relevant distribution date;
D = the amount of any capitalized arrears which have been allocated
to Funding 2 in the immediately preceding trust calculation
period; 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 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 (or, if the seller share is
zero, the adjustments referred to in paragraph (1) only),
(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
(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.
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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 mortgage
portfolio 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 mortgage portfolio will be reduced by an amount equal to the
amount of such set-off; and/or
(2) a mortgage loan or its related security (i) is in breach of the
loan warranties contained in the mortgage sale agreement or (ii)
is the subject of a product switch, further advance or the subject
of an offer by the seller to the borrower of a
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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 mortgage portfolio 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 mortgage portfolio 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
mortgage portfolio 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 servicer)
the administration agreement, which will also be grounds for
terminating the appointment of the servicer. In this event, the
aggregate current balance of the mortgage loans in the mortgage
portfolio will be deemed to be reduced by an amount equal to the
resulting loss incurred by Funding, Funding 2 and the seller.
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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 but (in respect of paragraph (1) only) will be made to
the Funding and Funding 2 shares of the trust property. Any subsequent
recoveries on mortgage loans which have been subject to a set-off 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 in, 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 a substantially similar manner to that set out above for the Funding 2
share.
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, or (iii) Funding had received a special distribution
during the immediately preceding trust calculation period from the mortgages
trustee, 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 "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:
(A x B) + (C x D)
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;
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C = the related current 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.
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 (excluding revenue
receipts) as at the relevant distribution date minus the sum of
the current Funding share and the current Funding 2 share as
calculated on such relevant distribution date.
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 as calculated on such relevant
distribution date.
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 (excluding revenue
receipts) as at the relevant recalculation date minus the sum of
the current Funding share and the current Funding 2 share as
calculated on such relevant recalculation date.
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 has
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, or (iii)
Funding had received a special distribution during the immediately preceding
trust calculation period from the mortgages trustee, 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
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that were calculated previously in respect of each interim calculation period
occurring in that immediately preceding trust calculation period, which 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
mortgage portfolio. 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,
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
mortgage portfolio;
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 mortgage portfolio
(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 on mortgage loans included
in the mortgage portfolio 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 further draws
that borrowers may make under personal secured loans which
are flexi-plan loans included in the mortgage portfolio
(whether or not drawn) 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 mortgage portfolio
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 included in the mortgage portfolio as at the last
day of the immediately preceding trust calculation period.
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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 mortgage
portfolio. 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 mortgage portfolio.
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 2".
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):
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 included
in the mortgage portfolio;
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
servicer to the bank making such payment if such bank is
unable to recoup that amount itself from its customer's
account;
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(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 no order of priority between them but in
proportion to the respective amounts due (inclusive of VAT)
due to the servicer and the cash manager or to become due to
the servicer and the cash manager prior to the next
following distribution date under the provisions of the
administration agreement and 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:
(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) to Funding in an amount equal to the lesser of:
(i) that portion of mortgages trustee available
revenue receipts required to be applied by
Funding on the next succeeding scheduled payment
date(s) applicable to the Funding issuing
entities pursuant to the payment priorities in
relation to revenue in the Funding deed of
charge, prior to the enforcement of the Funding
security or, as applicable, following the
enforcement of the Funding security (save for
certain exclusions set out in the mortgages
trust deed); and
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(ii) 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;
(3) to Funding 2 in an amount equal to the lesser of:
(i) the aggregate of the amounts to be applied on
the immediately succeeding monthly payment date
as set forth under the Funding 2 pre-enforcement
revenue priority of payments 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 agreement
(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 sub-ledger 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 (O) 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
monthly payment date, such amount not to be less
than zero, and
(ii) 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
(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 items
(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 servicer 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 the basis on which
the cash manager will distribute principal receipts on the mortgage loans on
each distribution date you need to understand the definitions set out below.
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 principal deficiency sub-ledger in relation to the class A
notes of any Funding issuing entity or to the AAA principal deficiency
sub-ledger of Funding 2. 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 servicer is terminated and a new servicer 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 security, 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 purchase price or special
distribution, on any contribution date) as follows:
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(A) first, to the seller the amount of any initial purchase price or
special distribution which is then allocable and payable to the
seller in accordance with the mortgages trust deed;
(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 mortgages 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 current 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 2 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 mortgages trustee principal receipts by
the current Funding 2 share percentage of the trust
property;
(D) fourth, in no order of priority between them but in proportion to
the respective amounts due to Funding and to Funding 2, to the
extent not already paid pursuant to item (C) above, up to the
amounts set forth in item (C)(1)(a) and item (C)(2)(a) above,
respectively;
(E) fifth, if such distribution date is not a seller share event
distribution date 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 (E) 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 loan tranches under the global
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intercompany loan agreement have become immediately due and
payable as a result of the service of a Funding 2
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 repayment 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 on that
distribution date may not exceed the amount determined under
paragraph (C)(2)(b) above.
(2) If the notes have become immediately due and payable as a
result of the service of an issuer enforcement notice or if
the loan tranches under the global intercompany loan
agreement have become immediately due and payable as a
result of the service of a Funding 2 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 monthly payment date
to repay principal on the loan tranches, but only to the
extent that those amounts would not otherwise be payable on
the loan tranches on that monthly 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
monthly 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 monthly payment date would not
otherwise be payable as principal of the relevant loan
tranches on that monthly payment date.
(4) On a seller share event distribution date, the cash manager
shall deposit all mortgages trustee principal receipts
remaining after (C) 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 of the trust property nor the
Funding share may be reduced below zero.
(6) 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
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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".
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) in no order of priority among 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 among 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 or the Funding 2 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 servicer
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.
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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 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 mortgage portfolio
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 "Credit structure - Principal deficiency
ledger".
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 a Funding 2 intercompany loan event of default occurs and the Funding
2 security trustee enforces the security granted by Funding 2 over its assets
under the 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 Funding 2's rights as a beneficiary under the mortgages trust. For
further information on the security granted by Funding 2 over its assets, see
"Security for Funding 2's obligations".
Additions to, and reductions in, 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
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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 servicer agrees on behalf of the seller to a further
advance being made under a mortgage loan included in the mortgage portfolio,
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.
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 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 mortgage
portfolio will be increased at any time by the amount in which the mortgage
loans that have been assigned to the mortgages trustee 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 deed to fund such non-cash re-draw 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
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 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
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Connections Benefit in relation to Connections mortgage loans included in the
mortgage portfolio that reduces 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 mortgage portfolio (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.
Increasing the Funding 2 share of the trust property
If Funding 2 borrows 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 Funding 2 intercompany loan enforcement notice has been
served under the global intercompany loan agreement;
o that as at the most recent monthly payment date no deficiency was
recorded on the principal deficiency ledger;
o that no event of default in relation to Funding 2 under the
transaction documents shall have occurred which is continuing;
o that the rating agencies have not confirmed in writing to the
mortgages trustee, the security trustee, the Funding 2 security
trustee and the issuing entity that the proposed increase in the
Funding 2 share would cause the then current ratings by the rating
agencies of the existing notes of the issuing entity and of the
Funding issuing entities to be reduced, withdrawn or qualified;
and
o that, as of the last day of the immediately preceding trust
calculation period, the aggregate current balance of mortgage
loans in the mortgage portfolio 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 mortgage portfolio as of such date,
unless the rating agencies have confirmed that the then current
ratings of the notes of the issuing entity and of the Funding
issuing entities will not be reduced, withdrawn or qualified.
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 purchase price 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 purchase price 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 each Funding intercompany loan and all amounts owing under the global
intercompany loan agreement have been repaid in full or there is no
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further claim under each Funding intercompany loan and the global intercompany
loan agreement 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 controlling beneficiary deed
Under the terms of the controlling beneficiary deed dated the Funding 2
program date, as amended from time to time (the "controlling beneficiary
deed"), Funding, Funding 2, the security trustee, the Funding 2 security
trustee and the seller 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.
If there is a conflict of interest between the Funding beneficiaries
and/or the Funding security trustees in respect of directing the mortgages
trustee or the exercising of any rights, powers, discretions or consents under
the transaction documents then, pursuant to the terms of the controlling
beneficiary deed, the Funding beneficiaries and/or the Funding security
trustees agree to act in accordance with the controlling directions. The
seller agrees that, where necessary, it shall provide directions to the
mortgages trustee that are consistent with the controlling directions.
For the purposes of the previous paragraph, "controlling directions"
means:
(a) in respect of the Funding beneficiaries, in all cases, the Funding
beneficiary representing the issuing entity(ies) with the highest
ranking class of notes then outstanding, and if each Funding
beneficiary represents issuing entities with the same class as
their highest ranking class, the Funding beneficiary representing
the issuing entity(ies) with the greatest principal amount
outstanding of the highest ranking class of notes; and
(b) in respect of the Funding security trustees, in all cases, the
directions of:
(i) in relation to the Funding issuing entities, the related
note trustee(s) for the holders of the highest ranking class
of notes outstanding; and
(ii) in relation to us, the issuer security trustee,
and if there is any conflict between the controlling directions
due to two or more issuing entities (for the purposes of this
paragraph, being any of the Funding issuing entities and us)
having notes from the same class as their highest ranking class,
the directions from the note trustee(s) (or, in respect of us, the
note trustee or, as the case may be, the issuer security trustee)
for the holders of the greatest
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aggregate principal amount outstanding of the highest ranking
class of notes will prevail.
For the purposes of (a) and (b):
o all denominations of the principal amount outstanding of any note
shall be calculated in sterling and where the principal amount
outstanding of any note of any Funding issuing entity or us is not
denominated in sterling it shall be converted into sterling at the
rate specified in the hedging agreements applicable to such note;
and
o the highest ranking class of notes outstanding shall mean the
class A notes (for so long as there are class A notes
outstanding), the class B notes (so long as there are no class A
notes outstanding), the class M notes (so long as there are
neither class A notes nor class B notes outstanding), the class C
notes (so long as there are neither class A notes, class B notes
nor class M notes outstanding) or (in our case only) the class D
notes (so long as there are neither class A notes, class B notes,
class M notes or class C notes outstanding).
The controlling 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 issuing
entity 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 agreement. 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 specified currency exchange
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; and/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 an initial purchase price. Upon receipt of a contribution from Funding 2
which constitutes a further contribution, the mortgages trustee (as directed
by Funding 2) 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.
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 notes 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 tranches reflect the rating expected to be assigned to any class D
notes by the rating agencies on the relevant closing date. The foregoing
ratings assigned to a loan tranche are collectively referred to as the "loan
tranche ratings". 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 related loan tranche under the global
intercompany loan agreement.
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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 Funding 2
security trustee in form and substance satisfactory to the Funding
2 security trustee.
Representations, warranties and undertakings
The global intercompany loan agreement contains representations,
warranties and undertakings given by Funding 2 to the issuing entity.
The undertakings include, among others, the following:
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 global
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 save for the issuing entity (and
any other Funding 2 issuing entity created in the future), it will
not have any subsidiaries or subsidiary undertakings as defined in
the Companies Act 1985 (as amended).
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Payment of interest
Payment of interest and fees on each loan tranche made under the global
intercompany loan agreement will be made only from and to the extent of
distributions by the mortgages trustee of amounts constituted from revenue
receipts, to Funding 2 in respect of the Funding 2 share of the trust
property. Such payments of interest and fees will be made on loan payment
dates in the priorities set forth in "Cashflows - Distribution of Funding 2
available revenue receipts prior to enforcement of the Funding 2 security".
The interest rates applicable to the loan tranches from time to time
will be determined by reference to LIBOR for three-month sterling deposits or,
for some loan tranches, such other sterling LIBOR rate as may be specified in
the applicable loan tranche supplement (other than, in each case, in respect
of the first interest period) plus or minus, in each case, a margin which may
differ for each separate loan tranche. Notwithstanding the previous sentence,
following the occurrence of any of the events specified in items (2) and (3)
under "- Due dates of loan tranches", the interest rate applicable to the
relevant loan tranche will be determined by reference to LIBOR for one-month
sterling deposits plus or minus the applicable margin. LIBOR for an interest
period will be determined on the date(s) specified in the applicable loan
tranche supplement.
Subject as provided above and to the limited recourse provisions
described below, in addition, on each loan payment date or as and when
required, Funding 2 will pay an additional fee to the issuing entity. This fee
will be equal to the amount required by the issuing entity to pay or provide
for certain other amounts (but excluding interest and principal due on the
notes and tax that can be met out of the issuing entity's profits) if any,
falling due on that loan 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 loan payment date.
Repayment of the global intercompany loan
Repayment of principal on each loan tranche made under the global
intercompany loan agreement will be made only from and to the extent of
distributions by the mortgages trustee, of amounts constituted from principal
receipts, to Funding 2 in respect of the Funding 2 share of the trust
property. Such principal repayments will be made in respect of each loan
tranche 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 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
controlled repayment dates or (iv) the loan payment date on which an original
pass-through loan tranche is scheduled to be paid, as applicable. Each such
date will be the same as the equivalent dates for the related series and class
of notes. A loan tranche (or a part thereof) will become "due" on the earlier
to occur of:
(1) any date specified in relation to the same in the loan tranche
supplement;
(2) the date upon which a pass-through trigger event occurs; and
(3) the date upon which a step-up date, if any, occurs in relation to
the relevant loan tranche.
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In each case, when a loan tranche becomes due, it shall continue to be
due until it is fully repaid. If there are insufficient funds available to
repay a loan tranche on a loan payment date upon which that loan tranche has
become or remains due, then the shortfall will be repaid on subsequent loan
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 of principal on a
loan tranche if, following such repayment, each tier of loan tranches then
outstanding 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 available principal receipts" below, which must be satisfied in
respect of any repayment of principal on a loan tranche.
Limited recourse
Funding 2 will only be obliged to pay amounts to the issuing entity 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 latest occurring final repayment date of any loan tranche
advanced under the global intercompany loan agreement, there is a shortfall
between the amount of interest and/or principal due on all loan tranches then
outstanding and the amount available to Funding 2 to make that payment, then
that shortfall shall become immediately due and payable irrespective of
whether Funding 2 has the funds to make the payments then due.
Following enforcement of the Funding 2 security and distribution of all
proceeds of such enforcement in accordance with the terms of the Funding 2
deed of charge, all outstanding claims of the issuing entity and the issuer
security trustee against Funding 2 will be extinguished.
Funding 2 intercompany loan events of default
The global intercompany loan agreement will contain events of default
(each, a "Funding 2 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; 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 noncompliance 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
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o it is, or becomes, unlawful for Funding 2 to perform its
obligations under any of the transaction documents to which it is
a party; or
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 Funding 2 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 a Funding 2 intercompany loan enforcement
notice to Funding 2, declare all loan tranches outstanding under the global
intercompany loan agreement to be immediately due and payable and/or declare
all loan tranches outstanding under the global intercompany loan agreement 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
issuing entity or where the repayment tests are not satisfied will not be a
Funding 2 intercompany loan event of default except on the latest occurring
final repayment date of any loan tranche advanced under the global
intercompany loan agreement. Our ability to repay each series and class of
notes will depend, among other things, upon payments received by the issuing
entity 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".
Other Funding 2 intercompany loan agreements
Other Funding 2 issuing entities may be established by Funding 2 for the
purpose of issuing notes to investors and using the proceeds thereof to make
Funding 2 intercompany loans to Funding 2. The issuance of notes by any such
other Funding 2 issuing entity and the making of the related Funding 2
intercompany loans will only be permitted if certain conditions precedent are
satisfied, including, among others, that the ratings of your notes will not be
reduced, withdrawn or qualified at the time of the issuance of such notes (see
"Risk factors - If Funding 2 enters into other Funding 2 intercompany loans,
such other Funding 2 intercompany loans and accompanying notes may be repaid
prior to the global intercompany loan and the notes" and "Risk factors - Other
Funding 2 issuing entities may share in the same security granted by Funding 2
to us, and this may ultimately cause a reduction in the payments you receive
on the notes").
Funding 2 bank accounts
Funding 2 currently maintains the "Funding 2 GIC account" in its name
with Northern Rock subject to the terms of the Funding 2 guaranteed investment
contract, the Funding 2 bank account agreement and the Funding 2 deed of
charge. A separate "Funding 2 reserve ledger" is maintained by the cash
manager in the name of Funding 2 to record amounts standing to the credit of
the Funding 2 reserve fund from time to time and withdrawals from and deposits
into the Funding 2 reserve fund. 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 Funding 2 cash accumulation ledger will be initially
deposited in the Funding 2 GIC account. On each monthly payment date, amounts
required to meet Funding 2's obligations to its various creditors will, with
the consent of the Funding 2 security trustee, be transferred from the Funding
2 GIC account to the "Funding 2 transaction
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account" (held with the account Bank in the name of Funding 2 and maintained
subject to the terms of the Funding 2 bank account agreement and the Funding 2
deed of charge) 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 and the Funding 2 transaction account, together with any other
account (if any) opened in the name of Funding 2, are referred to as the
"Funding 2 bank accounts".
The Funding 2 GIC account referred to above will be maintained with
Northern Rock but may be required to be transferred to another 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 principal amount outstanding of the notes issued by the issuing
entity and the Funding issuing entities, 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".
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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 monthly payment
date will be calculated by the cash manager on the distribution date
immediately preceding such monthly 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
monthly 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 the distribution date(s) during the interest
period ending on such monthly payment date, in each case to be
received on or prior to such monthly 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
standing to the credit of the Funding 2 swap collateral accounts)
and any swap termination payments (other than such swap
termination payments applied or to be applied by Funding 2 in the
purchase of one or more replacement hedging transactions)
recovered by Funding 2 under the Funding 2 basis rate swap
agreement);
(4) (only to the extent required after making the determinations 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 Funding 2 cash
accumulation ledger (as applicable) which are to be applied on the
relevant monthly payment date to pay items (H), (J), (M), (O), and
(Q) of the Funding 2 pre-enforcement revenue priority of payments;
(5) the amount available to be drawn under the Funding 2 reserve fund,
subject to any limits or conditions on the purposes for which the
Funding 2 reserve fund may be utilized;
(6) the amount available to be drawn under 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; and
(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 "Credit structure - Funding 2
liquidity 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 Funding 2 cash accumulation ledger will be initially
deposited in the Funding 2 GIC account. On each monthly payment date, amounts
required to meet
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Funding 2's obligations to its various creditors will 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.
The cash manager directs and monitors the deposits and withdrawals to and from
the Funding 2 bank accounts.
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 monthly payment date. The principal rules are as
follows:
(1) If on any monthly payment date any Funding 2 available revenue
receipts are applied by Funding 2 in reducing any deficiency
recorded on the principal deficiency sub-ledger of any tier of
loan tranches (but only to the extent of any deficiency which has
arisen as a result of (i) losses on the mortgage loans allocated
by Funding 2 to that principal deficiency sub-ledger and/or (ii)
the application of Funding 2 available principal receipts to fund
the Funding 2 liquidity reserve fund but not as a result of any
other principal deficiency of Funding 2), then the Funding 2
available revenue receipts, so applied shall constitute repayments
of principal under the relevant loan tranches and shall reduce the
outstanding principal balance of those loan tranches accordingly.
(2) To the extent that, on any monthly 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 Funding 2 cash accumulation ledger.
Funding 2 available 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. For the purposes of this rule, the amount
of Funding 2 available principal receipts that may be applied to
any deficit of Funding 2 available revenue receipts will be
reduced by the amount that would be available to be drawn from the
issuer reserve fund to cover any deficit in issuer available
revenue receipts to pay items (A) through (I) of the issuer
pre-enforcement revenue priority of payments, if no Funding 2
available principal receipts were to be applied to such deficit in
Funding 2 available revenue receipts.
(3) The amount of Funding 2 available revenue receipts that may be
applied on any monthly payment date to pay items (B), (S), (U) and
(V) (to the extent such amounts are paid to the issuing entity) of
the Funding 2 pre-enforcement revenue priority of payments will be
reduced by the amount of interest earned on the issuer GIC account
and any and all income from authorized investments made on behalf
of the issuing entity, to the extent that such interest and income
is available to the issuing entity on such monthly payment date
(subject to the relevant issuer priority of payments) to pay the
obligations of the issuing entity referred to in items (B), (S),
(U) and (V) (to the extent that such amounts are then payable by
the issuing entity).
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.
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On each monthly payment date or, in respect of amounts due to third
parties by Funding 2 under item (C), 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 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 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 issuing entity in respect of the
issuing entity'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 payments;
(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 monthly 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 make Funding 2 liquidity
facility principal payments 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);
(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 Funding 2 bank account
agreement and (ii) the corporate services provider under the terms
of the corporate services agreement;
(G) seventh, in no order of priority among them but in proportion to
the respective amounts due, towards payment of all amounts
(including such part of any swap termination payment) due under
the Funding 2 basis rate swaps to the Funding 2 basis rate swap
provider 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 sub-ledger
in an amount sufficient to eliminate any debit on that sub-ledger;
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(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 the relevant monthly payment date from
Funding 2 available principal receipts, replenishing the Funding 2
liquidity reserve fund, if any, up to the Funding 2 liquidity
reserve required amount but only to the extent that there are AAA
loan tranches and AA loan tranches outstanding on such monthly
payment date;
(L) twelfth, towards a credit to the AA principal deficiency
sub-ledger in an amount sufficient to eliminate any debit on that
sub-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
sub-ledger in an amount sufficient to eliminate any debit on that
sub-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
sub-ledger in an amount sufficient to eliminate any debit on that
sub-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
sub-ledger in an amount sufficient to eliminate any debit on that
sub-ledger;
(S) nineteenth, to pay amounts due to the issuing entity in respect of
the issuing entity's obligations to make payments under the
start-up loan agreement(s) specified in item (J) of the issuer
pre-enforcement revenue priority of payments or, as the case may
be, item (O) of the issuer post-enforcement priority of payments;
(T) twentieth, after taking account any replenishment of the Funding 2
reserve fund on the relevant monthly 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 (as defined in "Credit structure - Funding 2 reserve fund")
or if an arrears or 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";
(U) twenty-first, to the issuing entity in respect of its obligations
(if any) to make a swap termination payment to any issuer swap
provider (but excluding any issuer swap excluded termination
amount);
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(V) twenty-second, in no order of priority among them but in
proportion to the respective amounts due, to pay amounts due
(without double counting) to:
o the issuing entity in respect of its obligations (if any) to
pay any issuer swap excluded termination amount; 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 in respect of any
Funding 2 basis rate swap excluded termination amount.
(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 (C) above (which amounts may
be distributed to the shareholders of Funding 2 by way of
dividend);
(X) twenty-fourth, towards payment of any deferred contribution due to
the mortgages trustee pursuant to the terms of the mortgages trust
deed; and
(Y) last, any excess to Funding 2, which may (subject to applicable
laws) be distributed by Funding 2 to its shareholders by way of
dividend.
Distribution of issuer available revenue receipts prior to enforcement of the
issuer security
Definition of issuer available revenue receipts
"Issuer available revenue receipts", in respect of any monthly payment
date, will be calculated by the issuer cash manager on the distribution date
immediately preceding that monthly payment date and will be an amount equal to
the sum of:
o interest, fees and any other amount (including the amounts
standing to the credit of the issuer expense sub-ledger but
excluding principal) paid by Funding 2 on or prior to the relevant
monthly payment date in respect of the global intercompany loan;
o other net income of the issuing entity including all amounts of
interest received on the issuer GIC account and the issuer
transaction account and/or all income from authorized investments
(but excluding swap collateral (if any) standing to the credit of
the issuer swap collateral account), in each case to be received
on or prior to the relevant monthly payment date; and
o the amounts available to be drawn under the issuer reserve fund,
subject to any limits or conditions on the purposes for which the
issuer reserve fund may be utilized (see "Credit structure -
Issuer reserve fund").
On each monthly payment date, all Funding 2 available revenue
receipts received by us from Funding 2:
(i) in respect of items (B), (S), (U) and (V) of the Funding 2
pre-enforcement revenue priority of payments shall be credited to
the sub-ledger of the issuer
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revenue ledger relating to certain expenses of the issuing entity
(the "issuer expenses sub-ledger"); and
(ii) being interest paid on a loan tranche shall be credited to a
sub-ledger (in respect of the related series and class of notes)
to the ledger on which the issuer cash manager records issuer
available revenue receipts received and paid out of the issuing
entity (the "issuer revenue ledger").
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 (N) of the issuer pre-enforcement revenue priority of
payments.
Distribution of issuer available revenue receipts prior to enforcement of the
issuer security
The issuer deed of charge 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 monthly payment date. The order
of priority will be as described in this section as supplemented by the
prospectus supplement related to each series of notes.
On (i) each monthly 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 revenue receipts in the following order of
priority (the "issuer pre-enforcement revenue priority of payments"):
(A) first, in no order of priority among them but in proportion to the
amounts due, to pay amounts due to the note trustee and the issuer
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 note trustee and the issuer security trustee, under the
trust deed, the issuer deed of charge or any other transaction
document to which the issuing entity is a party;
(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
issuing entity (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 monthly payment date, which amounts have
been incurred without breach by the issuing entity 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 issuing entity and to pay or discharge any
liability of the issuing entity for corporation tax on any
chargeable income or gain of the issuing entity;
(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
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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 (excluding principal) received by the issuing
entity from Funding 2 in respect of each AAA loan tranche (and, in
respect of (ii) below, the amounts (if any), excluding principal,
received from the issuer swap provider(s) under the issuer swap
agreement(s) in respect of the related series and class of notes):
(i) to pay the amounts due and payable to the relevant issuer
swap provider(s) (if any) in respect of the related series
and class of class A notes (including any swap 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 (if any) on the related
series and class of class A notes on such monthly payment
date;
(F) sixth, from amounts (excluding principal) received by the issuing
entity from Funding 2 in respect of each AA loan tranche (and, in
respect of (ii) below, the amounts (if any), excluding principal,
received from the issuer swap provider(s) under the issuer swap
agreement(s) in respect of the related series and class of notes):
(i) to pay the amounts due and payable to the relevant issuer
swap provider(s) (if any) in respect of the related series
and class of class B notes (including any swap 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 (if any) on the related
series and class of class B notes on such monthly payment
date;
(G) seventh, from amounts (excluding principal) received by the
issuing entity from Funding 2 in respect of each A loan tranche
(and, in respect of (ii) below, the amounts (if any), excluding
principal, received from the issuer swap provider(s) under the
issuer swap agreement(s) in respect of the related series and
class of notes):
(i) to pay the amounts due and payable to the relevant issuer
swap provider(s) (if any) in respect of the related series
and class of class M notes (including any swap 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 (if any) on the related
series and class of class M notes on such monthly payment
date;
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(H) eighth, from amounts (excluding principal) received by the issuing
entity from Funding 2 in respect of each BBB loan tranche (and, in
respect of (ii) below, the amounts (if any), excluding principal,
received from the issuer swap provider(s) under the issuer swap
agreement(s) in respect of the related series and class of notes):
(i) to pay the amounts due and payable to the relevant issuer
swap provider(s) (if any) in respect of the related series
and class of class C notes (including any swap 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 (if any) on the related
series and class of class C notes on such monthly payment
date;
(I) ninth, from amounts (excluding principal) received by the issuing
entity from Funding 2 in respect of each BB loan tranche (and, in
respect of (ii) below, the amounts (if any), excluding principal,
received from the issuer swap provider(s) under the issuer swap
agreement(s) in respect of the related series and class of notes):
(i) to pay the amounts due and payable to the relevant issuer
swap provider(s) (if any) in respect of the related series
and class of class D notes (including any swap 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 (if any) on the related
series and class of class D notes on such monthly payment
date;
(J) tenth, in no order of priority among them but in proportion to the
respective amounts due, towards payment of:
(i) interest amounts due to the start-up loan provider(s); and
(ii) principal amounts due to the start-up loan provider(s) (to
the extent of issuance fees received from Funding 2 under
the global intercompany loan agreement); under the start-up
loan agreement(s);
(K) eleventh, after taking account of any replenishment of the issuer
reserve fund on the relevant monthly payment date from issuer
available principal receipts, to credit the issuer reserve ledger
up to an amount no less than the issuer reserve required amount
(as defined in "Credit structure - Issuer reserve fund");
(L) twelfth, on the monthly payment date falling in December of each
year, to pay 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
monthly payment date;
(M) thirteenth, 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;
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(N) fourteenth, in no order of priority among them but in proportion
to the respective amounts due, towards payment of principal
amounts due to the start-up loan provider(s) under the start-up
loan agreement(s);
(O) fifteenth, to pay to the issuing entity an amount equal to 0.01%
per annum of the interest received under the intercompany loan,
which will be retained by the issuing entity as profit (which may,
subject to applicable laws, be paid to the shareholders of the
issuing entity as a dividend, less corporation tax in respect of
those profits provided for or paid at item (C) above; and
(P) last, to pay amounts due to the issuer GIC provider under the
issuer guaranteed investment contract.
Prior to the enforcement of the issuer security, on each monthly payment
date, the amounts standing to the credit of any sub-ledger of the issuer
revenue ledger (in respect of a series and class of notes) may only be applied
by the issuer cash manager to pay the interest and other amounts due in
respect of such series and class of notes under the issuer pre-enforcement
revenue priority of payments provided that:
o to the extent that on any monthly payment date, amounts standing
to the credit of the issuer revenue ledger (excluding amounts
standing to the credit of the sub-ledgers for each series and
class of notes) and the issuer reserve ledger are insufficient to
pay items (A) to (D) of the issuer pre-enforcement revenue
priority of payments, then the issuer cash manager will, in no
order of priority among them but in proportion to the amount
required, apply amounts standing to the credit of the sub-ledgers
of the issuer revenue ledger in respect of the class D notes of
each series on such date to meet such shortfall (until the balance
of such sub-ledgers is zero), then amounts standing to the credit
of the sub-ledgers of the issuer revenue ledger in respect of the
class C notes of each series (until the balance of such
sub-ledgers is zero), then amounts standing to the credit of the
sub-ledgers of the issuer revenue ledger in respect of the class M
of notes of each series (until the balance of such sub-ledgers is
zero), then amounts standing to the credit of the sub-ledgers of
the issuer revenue ledger in respect of the class B notes (until
the balance of such sub-ledgers is zero) and then amounts standing
to the credit of the sub-ledgers of the issuer revenue ledger in
respect of the class A notes (until the balance of such
sub-ledgers is zero); and
o where, on a note payment date for a series and class of notes, an
amount standing to the credit of the issuer reserve ledger is
applied to pay interest and other amounts due in respect of such
notes under the issuer pre-enforcement revenue priority of
payments, then to the extent that, on following note payment dates
in respect of such notes (and following payment of interest and
other amounts due in respect of such notes), there remains an
amount credited to the sub-ledger to the issuer revenue ledger in
respect of such notes, the issuer cash manager will apply such
amount towards the replenishment of the issuer reserve fund in
accordance with item (K) of the issuer pre-enforcement revenue
priority of payments.
To the extent that on any note payment date for a series and class of
notes, amounts standing to the credit of any sub-ledger of the issuer revenue
ledger (in respect of such notes) are insufficient to pay the interest and
other amounts due in respect of such series and class of notes under the
issuer pre-enforcement revenue priority of payments, then:
o the issuer cash manager will firstly apply amounts standing to the
credit of the issuer expense sub-ledger on such date to meet such
shortfall; and
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o if amounts standing to the credit of the issuer expense sub-ledger
that are applied in accordance with the previous bullet are
insufficient to meet such shortfall on such date, then the issuer
cash manager will apply amounts standing to the credit of the
issuer reserve ledger on such date to meet such shortfall,
in each case, which are not otherwise required to pay the amounts set
forth in items (A) to (D) of the issuer pre-enforcement revenue priority of
payments or any shortfall in any other sub-ledger of the issuer revenue ledger
(in respect of a more senior class of notes) on such date.
Where a shortfall has arisen on a note payment date in respect of two or
more notes of the same class of any series, the amounts referred to above will
be applied to meet each shortfall in no order of priority among them but in
proportion to the amount required by each series and class of notes.
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 and will ascertain Funding 2's repayment
requirement.
The cash accumulation period will be calculated separately for each
bullet repayment loan amount.
The loan tranche supplement for each bullet loan tranche will set out
the bullet repayment date and bullet repayment loan amount in relation to each
such bullet loan tranche.
"cash accumulation period" means the period beginning on the earlier to
occur of:
(a) the date determined after counting back in time from the bullet
repayment date of the relevant bullet loan repayment amount, the
number of months calculated in respect of the anticipated cash
accumulation period relating to the relevant bullet repayment loan
amount; and
(b) in relation to an original bullet loan tranche, six months prior
to the bullet repayment date of that original bullet loan tranche;
and ending when Funding 2 has fully repaid the relevant 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 bullet repayment loan amount
on its bullet repayment date 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 bullet repayment loan amount;
K = the aggregate principal amount outstanding on that trust
determination date of:
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o each other bullet repayment loan amount that was not fully
repaid on its bullet repayment date and is still
outstanding; and
o each other bullet repayment loan amount, the bullet
repayment date of which falls on or before the bullet
repayment date of the relevant bullet repayment loan amount;
L = the amounts standing to the credit of the Funding 2 cash
accumulation ledger at the start of that trust determination date
which are available to repay bullet repayment loan amounts;
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 included in the mortgage portfolio 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 divided by the aggregate
outstanding principal balance of the mortgage loans included in the mortgage
portfolio as at the immediately preceding trust determination date.
"cash accumulation requirement" means on a trust determination date:
o the principal amount outstanding in relation to each bullet
repayment loan amount that is within a cash accumulation period;
o plus amounts due on the next following monthly payment date in
items (A), (B) and (C) of the Funding 2 pre-enforcement principal
priority of payments;
o less the amount standing to the credit of the Funding 2 cash
accumulation ledger at the last monthly payment date (which amount
was not to be distributed on that monthly payment date to fund the
repayment of any bullet loan repayment amount loan tranche).
The "Funding 2 cash accumulation ledger" means a ledger maintained by
the cash manager for Funding 2, which records amounts accumulated by Funding 2
to pay bullet loan repayment 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 repayment requirement;
o the scheduled repayment requirement; and
o the pass-through requirement.
"controlled repayment requirement" means, on a trust determination date,
the amount required by Funding 2 to repay each controlled repayment loan
amount which is scheduled to
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be repaid or is otherwise due on any of the three monthly payment dates
immediately following such trust determination date (after taking into account
amounts standing to the credit of the Funding 2 principal ledger on such trust
determination date which are available therefor).
"pass-through requirement" means, on any trust determination date, the
lesser of:
o the outstanding principal balance of each pass-through loan
tranche (excluding any original bullet loan tranches) which is due
on the next following monthly payment date; and
o the greater of:
(a) the product of:
(i) 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);
(ii) the aggregate amount of principal receipts received by
the mortgages trustee during the immediately preceding
trust calculation period; and
(iii) the aggregate outstanding principal balance,
determined as of the most recent monthly payment date,
of the pass-through loan tranches (excluding any
original bullet loan tranches) which are due (in the
case of Rule (2) on the next following monthly payment
date), divided by the aggregate outstanding principal
balance of the global intercompany loan as at the most
recent monthly payment date; and
(b) the product of:
(i) 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);
(ii) the aggregate amount of principal receipts received by
the mortgages trustee during the immediately preceding
trust calculation period; less
(iii) the sum of the cash accumulation requirement, the
scheduled amortization requirement and the controlled
amortization requirement as calculated for such trust
determination date as described above.
"scheduled repayment requirement" means, on a trust determination date,
the amount required by Funding 2 to repay:
o each scheduled repayment loan installment which is scheduled to be
repaid on any of the three monthly payment dates immediately
following such trust determination date; and
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o the aggregate amount outstanding on that trust determination date
of each scheduled repayment loan installment then outstanding that
was not fully repaid on its scheduled repayment date,
after taking into account amounts standing to the credit of the Funding
2 principal ledger on such trust determination date which are available
therefor.
Each of the scheduled repayment requirement, the controlled repayment
requirement and the pass-through requirement shall be calculated on the basis
there would be no deferral of loan tranches pursuant to Rule 1 under "-
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 Funding 2 intercompany loan
enforcement notice or the service on the issue of an issuer enforcement notice
- - Rules for application of Funding 2 available principal receipts."
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. The cash manager shall (on behalf of Funding 2) apply
such mortgages trustee principal receipts firstly towards the satisfaction of
the cash accumulation requirement (and shall credit such amount to the Funding
2 cash accumulation ledger). Any remaining mortgages trustee principal
receipts shall be credited by the cash manager (on behalf of Funding 2) to the
Funding 2 principal ledger.
Definition of Funding 2 available principal receipts
"Funding 2 available principal receipts" in respect of a monthly 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 the relevant monthly
payment date and will be an amount equal to the sum of:
o all mortgages trustee principal receipts received by Funding 2
from the mortgages trustee and standing to the credit of the
Funding 2 cash accumulation ledger which are to be applied on the
relevant monthly payment date to repay a bullet 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 monthly payment date occurs on or after a trigger event or
enforcement of the issuer security, the remainder of such receipts
standing to the credit of the Funding 2 cash accumulation ledger;
o all other mortgages trustee principal receipts received by Funding
2 from the mortgages trustee which are to be applied on the
relevant monthly payment date to repay a scheduled repayment loan
installment, a controlled repayment loan amount or a principal
amount repayable in respect of a pass-through loan tranche
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) and (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
(as to which, see "Credit structure - Funding 2 reserve fund"),
any amount available to be drawn under the Funding 2 reserve fund
less any amounts applied or to be applied on the relevant monthly
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 ledger on the relevant
monthly payment date;
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o in so far as needed to make a Funding 2 liquidity reserve
principal payment (as to which, see "Credit structure - Funding 2
liquidity reserve fund"), any amount available to be drawn under
the Funding 2 liquidity reserve fund less any amounts applied or
to be applied on the relevant monthly 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 ledger on the relevant monthly payment
date;
o in so far as needed, any amount available to be drawn under the
Funding 2 liquidity facility to make a Funding 2 liquidity
facility principal payment;
less
o amounts to be applied on the relevant monthly 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 issuer security 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 Funding
2 intercompany loan enforcement notice or the service on the
issuing entity 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 Funding 2 intercompany loan enforcement notice or the service
on the issuing entity 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 Funding 2 intercompany loan enforcement notice or the service on
the issuing entity of an issuer enforcement notice; and
o repayment of loan tranches of each tier following the service on
the issuing entity of an issuer enforcement notice but prior to
the service on Funding 2 of a Funding 2 intercompany loan
enforcement notice.
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 Funding 2 intercompany loan
enforcement notice or the service on the issuing entity of an issuer
enforcement notice
On each monthly payment date prior to the occurrence of a trigger event
or the service on Funding 2 of a Funding 2 intercompany loan enforcement
notice or the service on the issuing entity of an issuer enforcement notice,
the cash manager shall apply Funding 2 available principal receipts in the
following order of priority:
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(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 reserve rating 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 dates, beginning with
the earliest such date (and if two or more AAA loan tranches have
the same final repayment date, in proportion to the respective
amounts due) to repay the principal amounts due (if any) on such
monthly payment date on the AAA loan tranches;
(E) fifth, in no order of priority among them but in proportion to the
respective amounts due, to repay the principal amounts due (if
any) on such monthly payment date on the AA loan tranches;
(F) sixth, in no order of priority among them but in proportion to the
respective amounts due, to repay the principal amounts due (if
any) on such monthly payment date on the A loan tranches;
(G) seventh, in no order of priority among them but in proportion to
the respective amounts due, to repay the principal amounts due (if
any) on such monthly payment date on the BBB loan tranches;
(H) eighth, in no order of priority among them but in proportion to
the respective amounts due, to repay the principal amounts due (if
any) on such monthly payment date on the BB loan tranches;
(I) ninth, towards a credit to the Funding 2 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 to 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 monthly payment date. The principal rules are as follows:
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Rule (1) Deferral of repayment of pass-through loan tranches, scheduled
repayment loan tranches and/or controlled repayment loan tranches
in certain circumstances
(A) If on a loan payment date:
(i) there is a debit balance on the BB principal deficiency
sub-ledger, the BBB principal deficiency sub-ledger, the A
principal deficiency sub-ledger or the AA principal
deficiency sub-ledger after application of the Funding 2
available revenue receipts on that monthly payment date; or
(ii) the adjusted Funding 2 reserve fund level is less than the
Funding 2 reserve fund threshold; or
(iii) the aggregate outstanding principal balance of mortgage
loans included in the mortgage portfolio, 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 included in the mortgage portfolio,
then until the relevant circumstances as described in
sub-paragraphs (i), (ii) or (iii) 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) remains outstanding after making the payments
under item (D) of the Funding 2 pre-enforcement principal
priority of payments, the AA loan tranches will not be
entitled to principal repayments under item (E) of the
Funding 2 pre-enforcement principal 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)
remains outstanding after making the payments under items
(D) and (E) of the Funding 2 pre-enforcement principal
priority of payments, then the A loan tranches will not be
entitled to principal repayments under item (F) of the
Funding 2 pre-enforcement principal priority of payments;
(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) remains outstanding
after making the payments under items (D), (E) and (F) of
the Funding 2 pre-enforcement principal priority of
payments, then the BBB loan tranches will not be entitled to
principal repayments under item (G) of the Funding 2
pre-enforcement principal priority of payments; 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) remains outstanding after making the
payments under items (D), (E), (F) and (G) of the Funding 2
pre-enforcement principal priority of payments, then the BB
loan tranches will not be entitled to principal repayments
under item (H) of the Funding 2 pre-enforcement principal
priority of payments.
(B) On a loan payment date in respect of which principal in respect of
any loan tranche is scheduled to be paid:
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(i) for any AA loan tranche, the amount of principal due (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 on 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;
(ii) for any A loan tranche, the amount of principal due (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 on 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;
(iii) for any BBB loan tranche, the amount of principal due (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 on 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
(iv) for any BB loan tranche, the amount of principal due (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 on 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 each of paragraph (i),
(ii), (iii) and (iv) above, excess spread will be deemed to be
zero.
See "Issuance of notes - Issuance" for a description of the various
required subordinated amounts and available subordinated amounts.
(C) If on any loan payment date:
(i) one or more bullet repayment loan amounts are within a cash
accumulation period at that time; and
(ii) the quarterly CPR is less than 15 per cent.; then, on or
before their step-up dates, the scheduled repayment loan
tranches, the controlled repayment loan tranches and the
pass-through loan tranches will be entitled to principal
repayments under items (D), (E), (F), (G) and (H) (as
applicable) of the Funding 2 pre-enforcement principal
priority of payments only if there is no cash accumulation
shortfall at such time.
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In this prospectus:
"cash accumulation liability" means on any monthly payment date prior to
any payment under item (D) of the above priority of payments the aggregate of
the bullet repayment loan amounts, each of which is then within a cash
accumulation period;
"cash accumulation shortfall" means at any time that the Funding 2 cash
accumulation ledger amount is less than the cash accumulation liability;
"Funding 2 cash accumulation ledger amount" means at any time the amount
standing to the credit of the Funding 2 cash accumulation ledger at that time
(immediately prior to any drawing to be applied on any monthly payment date
and prior to any payment under item (I) of the above priority of payments);
Rule (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") and provided that the Funding 2 share of the trust property is
greater than zero, the aggregate amount repayable on a loan payment date in
relation to loan tranche A 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; and
D = the aggregate outstanding principal balance of the global
intercompany loan.
Rule (3) Deferral of repayment of subordinated tiers of loan tranches in
certain circumstances
If on any loan payment date the issuer reserve requirement and the
issuer arrears test are not satisfied and the class A notes of any series
and/or the AAA loan tranches remain outstanding, then:
(i) the AA loan tranches will not be entitled to principal repayments
under item (E) of the above priority of payments;
(ii) the A loan tranches will not be entitled to principal repayments
under item (F) of the above priority of payments;
(iii) the BBB loan tranches will not be entitled to principal repayments
under item (G) of the above priority of payments; and
191
(iv) the BB loan tranches will not be entitled to principal repayments
under item (H) of the above priority of payments;
The "issuer arrears test" is satisfied on a loan payment date if the
issuing entity or the issuer cash manager on its behalf calculates on the
distribution date immediately preceding that loan payment date that, as of the
last day of the trust calculation period immediately preceding that
distribution date (i) the aggregate current balance of the mortgage loans in
the mortgage portfolio 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 mortgage
portfolio, unless the rating agencies have confirmed that the then current
ratings of the notes will not be reduced, withdrawn or qualified if the issuer
arrears test is not met at that time; and (ii) the aggregate interest arrears
in respect of all the mortgage loans in the mortgage portfolio as a percentage
of the aggregate gross interest due on such mortgage loans during the previous
12 months does not exceed 2%, or such other percentage as is then acceptable
to the rating agencies at such time.
The "issuer reserve requirement" is satisfied on a loan payment date if,
after taking account of any payment of Funding 2 available revenue receipts to
the credit of the Funding 2 reserve ledger and any payment of issuer available
revenue receipts to the issuer reserve ledger, the aggregate amount of funds
in the Funding 2 reserve fund and the issuer reserve fund is equal to the
programme reserve required amount.
Allocations involving Rule (2)
Where Rule (2) 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). However, if the amount so allocated to one or more loan
tranches exceeds the amount permitted under Rule (2) (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 firstly,
between the capped loan tranches in no order of priority among them but in
proportion to the amounts due and then at the next level of that priority of
payments.
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 Funding 2
intercompany loan enforcement notice or the service on the issuing entity 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 Funding 2 intercompany loan enforcement notice or
the service on the issuing entity of an issuer enforcement notice, the bullet
loan tranches and the scheduled repayment loan tranches and the controlled
repayment loan tranches in respect of the global intercompany loan will be
deemed to be pass-through loan tranches and on each monthly 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;
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(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 rating 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 respective 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
respective 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 respective 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 respective 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 respective 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 occurrence of an asset
trigger event but prior to the service on Funding 2 of a Funding 2
intercompany loan enforcement notice or the service on the issuing entity 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 Funding 2 intercompany loan enforcement notice or the service
on the issuing entity of an issuer enforcement notice, the bullet loan
tranches and the scheduled repayment loan tranches and the controlled
repayment loan tranches in respect of the global intercompany loan will be
deemed to be pass-through loan tranches and on each monthly 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;
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(C) third, if a Funding 2 liquidity reserve rating 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 respective 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 respective 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 respective 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 respective 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 respective 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 issuing
entity of an issuer enforcement notice but prior to the service on Funding 2
of a Funding 2 intercompany loan enforcement notice
If an issuer enforcement notice is served on the issuing entity then
that will not result in automatic enforcement of the Funding 2 security under
the Funding 2 deed of charge. In those circumstances, however, any bullet loan
tranches and any scheduled repayment loan tranches and any controlled
repayment loan tranches under the global intercompany loan will be deemed to
be pass-through loan tranches and on each monthly 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 reserve rating 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;
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(D) fourth, in no order of priority among them, but in proportion to
the respective 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 respective 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 respective 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 respective 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 respective 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 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, on the relevant date, 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, if any, to the extent that
such funds were drawn in order to repay the principal amounts of any previous
loan tranches and the remainder shall be applied to repay the relevant loan
tranche. Pending an application of the full repayment amount as described
above, such proceeds shall be credited to the Funding 2 GIC account and shall
not be available for any other purpose.
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 issuing entity in respect of any monthly payment date in
respect of the notes will be calculated by the issuer cash manager on the
distribution date immediately preceding that monthly payment date and will be
an amount equal to the sum of:
o all principal amounts to be repaid by Funding 2 to the issuing
entity under the global intercompany loan agreement on that
monthly payment date; and
o in so far as needed to make an issuer reserve principal payment
(as to which, see "Credit Structure - Issuer reserve fund"), any
amount available to be drawn under the issuer reserve
fund less any amounts to be applied on the relevant monthly
payment date in payment of interest or expenses under the issuer
pre-enforcement revenue priority of payments, plus any amounts to
be credited to the issuer reserve
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ledger under the issuer pre-enforcement principal priority of
payments on the relevant monthly payment date.
On each monthly payment date, all Funding 2 available principal receipts
received by the issuing entity from Funding 2 constituting principal
repayments on a loan tranche, will be credited to a sub-ledger (in respect of
the related series and class of notes) to the issuer principal ledger.
Distribution of issuer available principal receipts prior to enforcement of
the issuer security
Prior to enforcement of the issuer security, the issuing entity, or the
issuer cash manager on its behalf, will apply issuer available principal
receipts on each monthly payment date in the following manner (the "issuer
pre-enforcement principal priority of payments"):
o to the extent that monies have been drawn from the issuer reserve
fund to make issuer reserve principal payments, towards the
replenishment of the issuer reserve fund up to the issuer reserve
required amount, such amount to be debited to the sub-ledger(s) of
the series and class(es) of notes in respect of which such issuer
reserve principal payments were made;
o The class A notes:
from principal amounts received by the issuing entity 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) in
respect of the related series and class of notes):
(i) to pay amounts due and payable (in respect of principal) on
such monthly payment date to the relevant issuer swap
provider(s) in respect of the related series and class of
class A notes in accordance with the terms of the relevant
issuer swap agreement(s); and
(ii) to pay amounts due and payable in respect of principal (if
any) on such monthly payment date on the related series and
class of class A notes;
o The class B notes:
from principal amounts received by the issuing entity 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) in
respect of the related series and class of notes):
(i) to pay amounts due and payable (in respect of principal) on
such monthly payment date to the relevant issuer swap
provider(s) in respect of the related series and class of
class B notes in accordance with the terms of the relevant
issuer swap agreement(s); and
(ii) to pay amounts due and payable in respect of principal (if
any) on such monthly payment date on the related series and
class of class B notes;
o The class M notes:
from principal amounts received by the issuing entity from Funding
2 in respect of each A loan tranche (and, in respect of (ii)
below, the principal amounts received (if
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any) from the issuer swap provider(s) under the relevant issuer
swap agreement(s) in respect of the related series and class of
notes):
(i) to pay amounts due and payable (in respect of principal) on
such monthly payment date to the relevant issuer swap
provider(s) in respect of the related series and class of
class M notes in accordance with the terms of the relevant
issuer swap agreement(s); and
(ii) to pay amounts due and payable in respect of principal (if
any) on such monthly payment date on the related series and
class of class M notes;
o The class C notes:
from principal amounts received by the issuing entity 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) in
respect of the related series and class of notes):
(i) to pay amounts due and payable (in respect of principal) on
such monthly payment date to the relevant issuer swap
provider(s) in respect of the related series and class of
class C notes in accordance with the terms of the relevant
issuer swap agreement(s); and
(ii) to pay amounts due and payable in respect of principal (if
any) on such monthly payment date on the related series and
class of class C notes;
o The class D notes:
from principal amounts received by the issuing entity 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) in
respect of the related series and class of notes):
(i) to pay amounts due and payable (in respect of principal) on
such monthly payment date to the relevant issuer swap
provider(s) in respect of the related series and class of
class D notes in accordance with the terms of the relevant
issuer swap agreement(s); and
(ii) to pay amounts due and payable in respect of principal (if
any) on such monthly payment date on the related series and
class of class D notes.
Generally, on each note payment date, the amounts standing to the credit
of any sub-ledger of the issuer principal ledger (in respect of a series and
class of notes) may only be applied by the issuer cash manager to pay the
principal amounts due (if any) in respect of such series and class of notes
under the issuer pre-enforcement principal priority of payments. If, however,
on a note payment date, an amount standing to the credit of the issuer reserve
ledger is applied to pay principal amounts due in respect of a series and
class of notes under the issuer pre-enforcement principal priority of
payments, then to the extent that, on a following note payment dates in
respect of such series and class of notes, there is an amount credited to the
sub-ledger to the issuer principal ledger in respect of such series and class
of notes, the issuer cash manager will apply such amount towards the
replenishment of the issuer reserve fund in accordance with the issuer
pre-enforcement principal priority of payments.
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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 Funding 2 security trustee, following service of a Funding
2 intercompany loan enforcement notice, of 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 (excluding swap collateral (if any)
standing to the credit of the Funding 2 swap collateral accounts) following
enforcement of the Funding 2 security on each monthly 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, to pay amounts due to the issuing entity in respect of the
issuing entity'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 payments as described under "- Distribution of issuer
available revenue receipts prior to 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, 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;
(D) fourth, 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 Funding 2 bank
account agreement and (ii) the corporate services provider under
the terms of the corporate services agreement;
(E) fifth, 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);
(F) sixth, in no order of priority among them but in proportion to the
respective amounts due towards payment of amounts due under the
Funding 2 basis rate swaps to the Funding 2 basis rate swap
provider (including any swap termination payment but excluding any
Funding 2 basis rate swap excluded termination amount);
(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 AAA loan tranches;
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(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 AA 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 A 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 BBB loan tranches;
(K) eleventh, 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;
(L) twelfth, to pay amounts due to the issuing entity in respect of
the issuing entity's obligations specified in item (J) of the
issuer pre-enforcement revenue priority of payments or, as the
case may be, item (O) of the issuer post-enforcement priority of
payments;
(M) thirteenth, to pay amounts due to the issuing entity in respect of
its obligations, if any, to make a swap termination payment to any
issuer swap provider (but excluding any issuer swap excluded
termination amount);
(N) fourteenth, 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 issuing entity in respect of its obligations (if any) to
pay any issuer swap excluded termination amount;
(ii) the Funding 2 liquidity facility provider, if any, any
Funding 2 liquidity facility subordinated amounts due under
the Funding 2 liquidity facility agreement;
(iii) the Funding 2 basis rate swap provider in respect of any
Funding 2 basis rate swap excluded termination amount;
(O) fifteenth, towards payment of any deferred contribution due to the
mortgages trustee under the mortgages trust deed; and
(P) last, to pay any amount remaining following the application of
principal and revenue set forth in items (A) through (O) above, to
Funding 2.
Distribution of issuer available principal receipts and issuer available
revenue receipts following enforcement of the issuer security
The issuer deed of charge sets out the order of priority of distribution
by or on behalf of the issuer security trustee, following enforcement of the
issuer security, of amounts received or recovered by the issuer security
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 a note event of default.
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On each monthly payment date the issuer security trustee (or the issuer
cash manager on its behalf) will apply amounts received or recovered
(excluding swap collateral (if any) standing to the credit of the issuer swap
collateral accounts), following enforcement of the issuer security as follows:
(A) first, in no order of priority among them but in proportion to the
amounts due to pay amounts due to the note trustee and the issuer
security trustee (and any receiver appointed by the issuer
security 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 issuer security 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 (excluding any swap termination payment);
(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 and to
pay any swap termination payment due to the issuer swap provider
for each series of class A notes (but excluding any issuer swap
excluded termination amount) 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) and no amounts
are received from any issuer swap provider) would be insufficient
to pay the sterling equivalent of the amounts due and payable
under this item (E), the shortfall shall be divided amongst all
such amounts on a pro rata basis and the amount payable by the
issuing entity to the issuer swap provider in respect of any
series of class A notes 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 (excluding any swap termination payment);
(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 and
to pay any swap termination payment due
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to the issuer swap provider for each series of class B notes (but
excluding any issuer swap excluded termination amount) 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 under this item (G), the shortfall shall
be divided amongst all such amounts on a pro rata basis and the
amount payable by the issuing entity to the issuer swap provider
in respect of any series of class B notes 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 (excluding any swap termination payment);
(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 and to
pay any swap termination payment due to the issuer swap providers
for each series of class M notes (but excluding any issuer swap
excluded termination amount) 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
under this item (I), the shortfall shall be divided amongst all
such amounts on a pro rata basis and the amount payable by the
issuing entity to the issuer swap provider in respect of any
series of class M notes 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 (excluding any swap termination payment);
(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 and
to pay any swap termination payment due to the issuer swap
provider for each series of class C notes (but excluding any
issuer swap excluded termination amounts) 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 under this item (K), the shortfall shall be divided
amongst all such amounts on a pro rata basis and the amount
payable by the issuing entity to the issuer swap provider in
respect of any series of class C notes 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 each series of class
D notes (excluding any swap termination payment);
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(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
and to pay any swap termination payment due to the issuer swap
provider for each series of class D notes (but excluding any
issuer swap excluded termination amounts) 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 under this item (M), the shortfall shall be divided
amongst all such amounts on a pro rata basis and the amount
payable by the issuing entity to the issuer swap provider in
respect of any series of class D notes 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 monthly 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
monthly payment date;
(O) fifteenth, in no order of priority among them but in proportion to
the respective amounts due, towards payment of:
(i) interest amounts due to the start-up loan provider(s); and
(ii) principal amounts due to the start-up loan provider(s) (to
the extent of issuance fees received from Funding 2 under
the global intercompany loan agreement); under the start-up
loan agreement(s);
(P) sixteenth, 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;
(Q) seventeenth, in no order of priority among them but in proportion
to the respective amounts due, towards payment of principal
amounts due to the start-up loan provider(s) under the start-up
loan agreements;
(R) last, to pay any amount remaining following the application of
principal and revenue set forth in items (A) through (Q) above, to
the issuing entity.
Notwithstanding the above, on the date that the issuer security is
enforced, amounts standing to the credit of any sub-ledger to the issuer
revenue ledger and/or the issuer principal ledger (in respect of a series and
class of notes) may only be applied by the issuer security trustee (or the
issuer cash manager on its behalf) to pay the interest, principal and other
amounts due in respect of such series and class of notes or any shortfall in
the amounts available to pay items (A) to (C) under the issuer
post-enforcement priority of payments and may not be applied in payment of
interest principal and other amounts due in respect of any other series and
class of notes.
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Credit structure
The notes will be an obligation of the issuing entity only and will not
be obligations of, or the responsibility of, or guaranteed by, any other
party. However, there are twelve 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 issuing entity under the global
intercompany loan agreement and obligations that rank in priority
thereto;
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, the Funding 2 GIC account and
the issuer GIC account each earn interest at a specified rate;
o a reserve fund will be available to the issuing entity to meet
revenue shortfalls in fees and interest due on the notes and
principal of the original bullet redemption notes that are class A
notes;
o a reserve fund will be available to Funding 2 to meet revenue
shortfalls in fees and interest due on all loan tranches
outstanding under the global intercompany loan agreement and
principal of the original bullet loan tranches that are AAA loan
tranches;
o Funding 2 will be obliged to establish the Funding 2 liquidity
reserve fund 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 reduced, withdrawn or qualified by the ratings downgrade of
the seller);
o start-up loans will be provided to the issuing entity from time to
time to fund the issuer reserve fund; and
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. The sponsor has no present intention to alter the structure of the
enhancement features described above. Any changes to these features in the
future will be made in accordance with the provisions of the relevant
transaction documents, which would in most cases require consent of
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the Funding 2 security trustee or the issuer security trustee, as applicable,
and the rating agencies.
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 expected, however, that during the life of the notes
issued under the Granite 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 loan tranches outstanding under the
global intercompany loan agreement and any other Funding 2 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 loans included
in the mortgage portfolio; and
o the level of arrears experienced.
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 mortgage portfolio 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 mortgage
portfolio 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 loans in the mortgage portfolio. For
historical data on the level of scheduled and unscheduled repayments in the UK
housing market, see "Certain characteristics of the 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 loan 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, repayments of principal) to the
issuing entity under the global intercompany loan agreement on that loan
payment date. If the
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level of arrears of interest payments made by borrowers results in the issuing
entity experiencing an income deficit on any note payment date, then the
issuer reserve fund may be utilised by the issuing entity in making payments
of interest (or in limited circumstances, payments of principal) to
noteholders under the notes on that note payment date.
Issuer reserve fund
The "issuer reserve fund" has been established in the name of the
issuing entity:
o to help meet any deficit in issuer available revenue receipts
available for interest and fees due under the notes;
o to help meet expenses in connection with the issuance of notes by
the issuing entity; and
o to help meet any deficit in issuer available principal receipts
available for:
(a) prior to the occurrence of a trigger event, repayment of
principal due and payable in respect of the original bullet
redemption notes (which are class A notes); and
(b) on or after the occurrence of a trigger event, repayment of
principal due and payable in respect of the original bullet
redemption notes (which are class A notes) on their
respective final maturity dates only,
(each an "issuer reserve principal payment"),
in each case, prior to the service of an issuer enforcement notice.
On each monthly payment date, funds standing to the credit of the issuer
reserve fund will be added to certain other funds of the issuing entity in
calculating issuer available revenue receipts and issuer available principal
receipts.
The issuer reserve fund will be funded and replenished from:
o issuer available revenue receipts in accordance with item (K) of
the issuer pre-enforcement revenue priority of payments up to and
including an amount equal to the issuer reserve required amount;
o issuer available principal receipts, to the extent applied in
making issuer reserve principal payments, in accordance with the
issuer pre-enforcement principal priority of payments up to and
including an amount equal to such issuer reserve principal
payments;
o all or part of the proceeds of a start-up loan tranche made to the
issuing entity by a start-up loan provider under a start-up loan
agreement.
The "issuer reserve required amount", on any date, is the greater of:
(a) the issuer reserve minimum amount; and
(b) the programme reserve required amount less the amount standing to
the credit of the Funding 2 reserve fund on such date (after
taking account of amounts to be debited from and credited to the
Funding 2 reserve fund on such date).
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The "issuer reserve minimum amount", on any date and except as described
below, is calculated as the product of (a) one per cent. and (b) the aggregate
principal amount outstanding of the notes (including the principal amount
outstanding of notes issued on such date).
We may adjust, at any time, the issuer reserve minimum amount or the
method of computing the issuer reserve minimum amount, without the consent of
any noteholders, so long as the issuer security trustee and we have 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 for US tax purposes at the
time of their issuance and (ii) such change will not cause or constitute an
event in which gain or loss would be recognized by any holder of such notes.
The "programme reserve required percentage", on any date and subject to
amendment as described below, is the percentage specified as such in the most
recent prospectus supplement. The "programme reserve required amount", on any
date, is calculated as the product of (a) the programme reserve required
percentage and (b) the aggregate outstanding principal balance of all loan
tranches outstanding under the global intercompany loan agreement (including
the principal amount outstanding of any loan tranche (or the increase in the
principal amount outstanding of any existing loan tranche) that is made on
such date).
We may adjust, at any time, the programme reserve required percentage or
the method of computing the programme reserve required amount, at any time
without the consent of any noteholders, so long as the issuer security trustee
and we obtain confirmation from the rating agencies that such adjustments will
not cause a reduction, qualification or withdrawal of the ratings of any
outstanding notes.
The monies credited to the issuer reserve fund will be deposited into
the issuer GIC account. The issuer cash manager will maintain a separate
"issuer reserve ledger" to record the amount credited to the issuer reserve
fund from time to time and withdrawals from and deposits into the issuer
reserve fund from time to time.
If, on any monthly payment date prior to the enforcement of the issuer
security, the amount in the issuer reserve fund exceeds an amount (not to be
less than zero) equal to (a) the programme reserve required amount less (b)
the amount standing to the credit of the Funding 2 reserve fund, then we will
apply such excess (which will constitute issuer available revenue receipts),
in no order of priority but in proportion to the respective outstanding
amounts, in repayment of principal under the start-up loans under item (N) of
the issuer pre-enforcement revenue priority of payments.
Following the repayment in full of all notes issued by us, the issuer
reserve fund may be utilized by us in payment of any other of our liabilities,
subject to and in accordance with the relevant issuer priority of payments.
Following enforcement of the issuer security, amounts standing to the
credit of the issuer reserve ledger may be applied in making payments of
principal due under the notes.
Funding 2 reserve fund
The "Funding 2 reserve fund" has been established in the name of Funding
2:
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o to help meet any deficit in Funding 2 available revenue receipts
available for payment of interest and fees due under the global
intercompany loan agreement and to help meet any deficit recorded
on the Funding 2 principal deficiency ledger; and
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 in respect of the original bullet loan
tranches (which are AAA loan tranches); and
(b) on or after the occurrence of a trigger event, repayment of
principal in respect of the original bullet loan tranches
(which are AAA loan tranches) on their respective final
repayment dates only,
(each a "Funding 2 reserve principal payment"),
in each case, prior to the service of a Funding 2 intercompany
loan enforcement notice.
On each monthly 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 and Funding 2 available
principal receipts.
Prior to the 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 the 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 (T)
of the Funding 2 pre-enforcement revenue priority of payments up
to an amount equal to the Funding 2 reserve required amount;
o following the occurrence of an arrears or step-up trigger event,
any Funding 2 available revenue receipts to be paid in accordance
with item (T) of the Funding 2 pre-enforcement revenue priority of
payments up to and including an amount equal to the sum of the
Funding 2 reserve required amount and:
(a) if an arrears or step-up trigger event has occurred under
item (i) only of the arrears or step-up trigger event
definition, the amount specified in relation to such event
in the most recent prospectus supplement;
(b) if an arrears or step-up trigger event has occurred under
item (ii) only of the arrears or step-up trigger event
definition, the amount specified in relation to such event
in the most recent prospectus supplement;
(c) if an arrears or step-up trigger event has occurred under
both items (i) and (ii) of the arrears or step-up trigger
event definition, the amount specified in relation to such
event in the most recent prospectus supplement; and
o Funding 2 available principal receipts, to the extent applied in
making Funding 2 reserve principal payments, in accordance with
the issuer pre-enforcement principal priority of payments up to an
amount equal to such Funding 2 reserve principal payments.
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If an arrears or step-up trigger event has occurred under item (i), item
(ii) or items (i) and (ii) of the arrears or step-up trigger event definition
and such event(s) have been cured, the Funding 2 reserve fund will be reduced
by the applicable amount specified in relation to such event(s) in the most
recent prospectus supplement and the amount of such reduction will constitute
Funding 2 available revenue receipts;
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
issuing entity fails to exercise its option to redeem any of its notes on the
relevant step-up date pursuant to the terms and conditions of such notes.
The "Funding 2 reserve required amount" is calculated, on any date, as
the amount (if any) by which the target reserve required amount exceeds the
issuer reserve minimum amount.
The "target reserve required amount", as at any date and subject to
amendment as described below, will be the amount specified as such in the most
recent prospectus supplement.
Funding 2 may adjust, at any time, the target reserve required amount,
the Funding 2 reserve required amount and/or the additional amounts as
described above, at any time without the consent of any noteholders, so long
as the Funding 2 security trustee and Funding 2 obtain confirmation from the
rating agencies that such adjustments will not cause a reduction,
qualification or withdrawal of the ratings of any outstanding notes.
The monies credited to the Funding 2 reserve fund will be deposited
into the Funding 2 GIC account. The cash manager will maintain a separate
Funding 2 reserve ledger to record the balance from time to time of the
Funding 2 reserve fund.
Following the repayment in full of all loan tranches outstanding
under the global intercompany loan agreement, the Funding 2 reserve fund may
be utilized by Funding 2 in paying any other liability of Funding 2, subject
to and in accordance with the relevant Funding 2 priority of payments.
Following enforcement of the Funding 2 security, amounts standing to the
credit of the Funding 2 reserve ledger may be applied in making payments of
principal due under the Funding 2 intercompany loan agreements.
Funding 2 liquidity reserve fund
Funding 2 will be required to establish a liquidity reserve fund 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 reduced, withdrawn or qualified by the ratings downgrade) (a
"Funding 2 liquidity reserve rating event").
Prior to enforcement of the Funding 2 security, the Funding 2 liquidity
reserve fund may be used:
o to help meet any deficit in Funding 2 available revenue receipts
to pay amounts due under the global intercompany loan agreement,
but only to the extent that such amounts are necessary to fund the
payment by Funding 2 of interest and fees due on the relevant
monthly payment date in respect of the AAA loan tranches and the
AA loan tranches and to help meet any deficit recorded on the
principal deficiency ledger in respect of the AAA loan tranches;
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o (provided that there are no AAA loan tranches and AA loan tranches
outstanding) to help meet any deficit in Funding 2 available
revenue receipts which are allocated to pay all interest and fees
due under the global intercompany loan agreement; and
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 original bullet loan
tranches (which are AAA loan tranches); and
(b) on or after the occurrence of a trigger event, repayment of
principal due and payable in respect of original bullet loan
tranches (which are AAA loan tranches) on their respective
final repayment dates,
(each a "Funding 2 liquidity reserve principal payment"),
in each case, prior to the service of a Funding 2 intercompany loan
enforcement notice.
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
(C) 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 monthly payment date equal to the excess,
if any, of 3% of the aggregate outstanding balance of the notes on that
monthly payment date over the aggregate of the amounts standing to the credit
of the Funding 2 reserve fund and the issuer reserve fund on that monthly
payment date.
The monies credited to the Funding 2 liquidity reserve fund will be
deposited into the Funding 2 GIC account. 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 monthly 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 funds of Funding 2 in calculating Funding 2
available revenue receipts and Funding 2 available principal receipts to make
payments then 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 and the AA loan
tranches and the reduction of any deficiency on the principal deficiency
sub-ledger for the AAA loan tranches (but not to fund any payment which would
reduce any deficiency on the principal deficiency sub-ledgers 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 monthly payment date
to replenish the Funding 2 liquidity reserve fund as described under
"Cashflows - Distribution of Funding 2 available principal receipts prior to
enforcement of the Funding 2 security".
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 then due and payable under the global intercompany loan
agreement.
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Principal deficiency ledger
A 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 Funding 2 available principal receipts
to pay Funding 2 income deficiency"; and
o the application of Funding 2 available principal receipts to fund
the Funding 2 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 sub-ledgers 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 then due on the loan tranches under the global intercompany loan
agreement 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 sub-ledger 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 sub-ledger, 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 sub-ledger, 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 sub-ledger, 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 sub-ledger, 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 monthly payment date, be applied as
follows:
o first, on the AAA principal deficiency sub-ledger;
o second, on the AA principal deficiency sub-ledger;
o third, on the A principal deficiency sub-ledger;
o fourth, on the BBB principal deficiency sub-ledger; and
o last, on the BB principal deficiency sub-ledger.
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Use of Funding 2 available principal receipts to pay Funding 2 income
deficiency
On the distribution date immediately preceding each monthly 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, after the application of the Funding 2 reserve fund and the Funding
2 liquidity reserve fund (if any), there is a deficit in the amount of Funding
2 available revenue receipts to pay items (A) through (H), (J), (M), (O) and
(Q) of the Funding 2 pre-enforcement revenue 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 sub-ledger, as described under "- Principal deficiency ledger"
provided that the amount of Funding 2 available principal receipts that may be
applied to any deficit of Funding 2 available revenue receipts will be reduced
by the amount that would be available to be drawn from the issuer reserve fund
to cover any deficit in issuer available revenue receipts to pay items (A)
through (I) of the issuer pre-enforcement revenue priority of payments, if no
Funding 2 available principal receipts are to be applied to such deficit in
Funding 2 available revenue receipts.
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 sub-ledger 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 (H),
(J), (M), (O) and (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 sub-ledger 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 due on the class D notes on any
note payment date will be subordinated to interest payments on the class C
notes, the class M notes, the class B notes and the class A notes due on the
same note payment date, interest payments due on the class C notes on any note
payment date will be subordinated to interest payments on the class M notes,
the class B notes and the class A notes due on the same note payment date,
interest payments due on the class M notes on any note payment date will be
subordinated to interest payments on the class B notes and the class A notes
due on the same note payment date and interest payments due on the class B
notes on any note payment date will be subordinated to interest payments on
the class A notes due on the same note payment date, in each case in
accordance with the issuer priority of payments.
Any revenue shortfall in payments of interest due on any series of the
class B notes, the class M notes, the class C notes or the class D notes on
any note payment date in respect of such notes will be deferred until the
immediately succeeding note payment date in respect of such notes. On that
immediately succeeding note 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 note payment date there is still a revenue shortfall,
that revenue shortfall will be deferred again.
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This deferral process will continue until the final maturity 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 note payment
date in respect of the most senior class of notes then outstanding. The
failure to pay interest on such notes will be a note event of default.
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 and each series of class D 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, Funding 2 GIC account and issuer 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 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 principal amount outstanding of the notes issued by the
issuing entity and the Funding 2 issuing entities, 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".
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 Northern Rock. 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 one-month sterling deposits.
All amounts held by the issuing entity which are not invested in
authorized investments will be deposited in the issuer GIC account. The issuer
GIC account is maintained with Northern Rock. The issuer GIC account is
subject to a guaranteed investment contract such that the issuer GIC provider
has agreed to pay a variable rate of interest on funds in the issuer GIC
account of 0.15% per annum below LIBOR for one-month sterling deposits.
Whilst Northern Rock maintains the issuer GIC account, it will be paid a
fee on each monthly payment date equal to the amount calculated by the issuer
cash manager as the excess of the issuer available revenue receipts on any
monthly payment date available to pay or provide for items (A) through (O) of
the issuer pre-enforcement revenue priority of payments on such monthly
payment date.
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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 interest and/or principal
payments on certain loan tranches and/or other senior expenses of Funding 2
(the payment of which ranks in priority to interest due on the loan tranches).
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 certain loan
tranches.
The obligation to pay interest or fees on any Funding 2 liquidity
facility will be senior to the obligation to pay 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-enforcement priority
of payments.
Repayment of amounts drawn down under any Funding 2 liquidity facility
will be made by Funding 2 prior to making payments of interest and/or
principal 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 Funding 2
intercompany loan enforcement notice on Funding 2, rank in priority to all
amounts of interest and principal then outstanding from Funding 2 under the
global intercompany loan agreement.
Start-up loans
The following section contains a summary of the material terms of the
start-up loan agreement entered into on the Funding 2 program date, as amended
from time to time, among the issuing entity, Funding 2 and the issuer security
trustee (the "NR start-up loan agreement") relating to the provision of
start-up loan tranches to the issuing entity. 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.
General description
Pursuant to the NR start-up loan agreement, Northern Rock plc, in its
capacity as "start-up loan provider", agreed to make available to us a
"start-up loan tranche" on each closing date.
At any time after the Funding 2 program date, we may, with the prior
written consent of the issuer 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 us a start-up loan tranche on
each closing date.
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Each start-up loan tranche will be used to fund (in whole or in part)
the issuer reserve fund and to meet the costs and expenses incurred by Funding
2 and us in connection with the issuance of notes, the making of a loan
tranche and the acquisition by Funding 2 of the additional Funding 2 share of
the trust property. The amount of each start-up loan tranche to be made to us
will be described in the applicable prospectus supplement.
Each start-up loan tranche will constitute a separate debt, due from us
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 start-up loans
Each start-up loan tranche will bear interest until repaid at a rate
which will be described in the applicable prospectus supplement until repaid.
Any unpaid interest will not fall due but will instead be due on the next
following monthly payment date on which sufficient funds are available to pay
such unpaid amount and pending such payment will itself bear interest.
Interest is payable by us on each monthly payment date in respect of such
start-up loan tranche.
Repayment of start-up loans
We will be obliged to repay the start-up loan only to the extent that we
have 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 issuer available revenue receipts prior to
enforcement of the issuer security" or "Cashflows - Distribution of issuer
available principal receipts and issuer available revenue receipts following
enforcement of the issuer security". Amounts due to the start-up loan
provider(s) will be payable on any monthly payment date (and in no order of
priority among them, but in proportion to the amounts due) after amounts of
interest due to the noteholders. We will have no further recourse to the
start-up loan provider(s) after it has repaid the start-up loan(s).
Event of default
It will be an event of default under any start-up loan agreement if we
have available funds to pay amounts due to the start-up loan provider(s) and
we do not pay them.
Acceleration
Subject to the issuer deed of charge, the start-up loan will become
immediately due and payable upon service of a issuer enforcement notice.
Governing law
The NR start-up 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
Funding 2 basis rate swap agreement and the issuer swap agreements (together,
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 swaps
Some of the mortgage loans in the mortgage portfolio pay a variable rate
of interest for a period of time, which may be either 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 an interest 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 on the mortgage
portfolio 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 us under the loan tranches advanced pursuant to the global
intercompany loan agreement, from which amount we will fund, among other
things, our payment obligations under the issuer swaps and the notes, will
generally be calculated by reference to an interest rate based upon
three-month LIBOR, but will be payable in monthly instalments. In the light of
this, on the Funding 2 program date Funding 2 and Northern Rock, as Funding 2
basis rate swap provider, have entered into the Funding 2 basis rate swaps
(which comprise certain hedging arrangements), as amended from time to time
(the "Funding 2 basis rate swaps").
The intention of these arrangements (which are entered into between
Funding 2 and the Funding 2 basis swap provider) is to enable Funding 2 to
receive from the Funding 2 basis swap provider amounts equal to the interest
payments due under the global intercompany loan agreement in return for which
Funding 2 will pay to the Funding 2 basis swap provider amounts based on the
rates of interest on the mortgage loans in the mortgage portfolio applied to
the Funding 2 share of the trust property. In computing the rates of interest
on the mortgage loans in the mortgage portfolio, the hedging arrangements will
assume that on variable rate mortgage loans, the variable rate payable by the
borrowers is determined by reference to the average of the standard variable
mortgage rates or their equivalent charged to 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 plc, HBOS plc, Lloyds TSB Bank plc, National Westminster Bank plc and
Woolwich plc (or such other lenders as may replace such lenders in accordance
with the terms and conditions of the hedging arrangements).
If a payment is to be made by the Funding 2 basis rate swap provider
under the Funding 2 basis rate swaps, once received by Funding 2 that payment
will be included in the Funding 2 available revenue receipts and will be
applied on the relevant monthly payment date according to the relevant Funding
2 priority of payments. If a payment is to be made by Funding 2 under the
Funding 2 basis rate swaps, it will be made according to the relevant Funding
2 priority of payments.
In the event that any of the Funding 2 basis rate swaps terminates prior
to the service of a Funding 2 intercompany loan enforcement notice or the
latest occurring final repayment date of any loan tranche advanced under the
global intercompany loan agreement, Funding 2 shall use its best efforts to
enter into a replacement swap transaction on terms acceptable to the rating
agencies and the Funding 2 security trustee and with a swap provider whom the
rating
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agencies have previously confirmed in writing to Funding 2 and the Funding 2
security trustee will not cause the then current ratings of our notes to be
reduced, withdrawn or qualified.
Under the terms of the Funding 2 basis rate swaps, in the event that the
relevant rating of the Funding 2 basis rate swap provider (or any guarantor of
the Funding 2 basis rate swap provider) 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) 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. Such measures may include providing collateral for its
obligations under the Funding 2 basis rate swaps, arranging for its rights and
obligations under the Funding 2 basis rate swaps 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 swaps 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 swaps, provided that in the event that Funding 2
wishes to designate an early termination date (as defined in the Funding 2
basis rate swap agreement) and there is a payment due to the Funding 2 basis
rate swap provider, Funding 2 may only designate such an early termination
date if it has found a replacement swap provider.
The issuer swaps
To protect us against certain interest rate and/or currency risks in
respect of amounts received by us from Funding 2 under the global intercompany
loan agreement and amounts payable by us under each series and class of notes,
we 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 an
issuer swap provider (each, an "issuer swap agreement" and each transaction
thereunder, an "issuer swap").
Under each issuer swap:
(a) we are scheduled to 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) where a series and class of notes has been issued in a
specified currency other than sterling, on each note payment
date in respect of such series and class of notes, an amount
in sterling equal to the principal payment (in the specified
currency) to be made on such series and class of notes on
that note payment date, such amount to be calculated by
reference to the relevant specified currency swap rate;
(iii) on each monthly payment date, an amount in sterling
calculated by applying a three month sterling LIBOR rate (or
an interpolated sterling LIBOR rate, as applicable) to the
principal amount outstanding of such notes; and
(b) the issuer swap provider is scheduled to pay to us:
(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
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sterling equal to the net proceeds of the issue of such
series and class of notes, converted from the specified
currency into sterling at the specified currency swap rate;
(ii) where a series and class of notes has been issued in a
specified currency other than sterling, on each note payment
date in respect of such series and class of notes, an amount
in the specified currency equal to the principal payments to
be made on the relevant series and class of notes on that
note payment date;
(iii) on each note payment date in respect of such series and
class notes, an amount in the specified currency equal to
the interest to be paid in the specified currency on such
series and class of notes on that note payment date.
On the earlier to occur of a step-up-date in respect of a series and
class of notes and a pass-through trigger event, the issuer swap agreement in
respect of that series and class of notes will be adjusted to provide for
payments under the issuer swap agreement to be due monthly in order to reflect
the monthly payments of interest on the applicable series and class of notes.
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 (and where such notes have not been
repaid in full), we shall use our 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 issuer security 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 reduced, withdrawn or qualified.
Under the terms of each issuer swap, in the event that the relevant
rating of any issuer swap provider (or any guarantor of the issuer swap
provider) 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) (a "swap downgrade event") and, where applicable, the
then-current ratings of the notes would or may, as applicable, be adversely
affected as a result of the downgrade, such issuer swap provider will be
required to take certain remedial measures. Such measures may include
providing collateral for its rights and 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, or guarantor
of, its obligations under the relevant issuer swap agreement or taking such
other action as it may agree with the relevant rating agency. A failure to
take such steps will allow us to terminate the relevant issuer swap agreement,
provided that in the event that we wish to designate an early termination date
(as defined in the relevant issuer swap agreement) and there is a payment due
to the relevant issuer swap provider, we may only designate such an early
termination date if it has found a replacement swap provider.
Termination of the swap transactions
A swap transaction could also be terminated in certain other
circumstances set out in the relevant swap agreement each referred to as a
"swap early termination event" which include, but are not limited to, the
following circumstances:
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o at the option of one party to the swap transaction, 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 in the case of the issuer swaps, the note trustee serving an
issuer enforcement notice and, in the case of the Funding 2 basis
rate swaps, the Funding 2 security trustee serving a Funding 2
intercompany loan enforcement notice;
o if withholding taxes are imposed on a swap provider's payments due
to a change in law;
o upon the occurrence of certain insolvency events in relation to
the parties or its credit support provider, if applicable, or the
merger of the relevant swap provider or its credit support
provider, if applicable, without an assumption of the obligations
under the swap transactions or the relevant credit support
document (as the case may be), or changes in law resulting in the
obligations of one of the parties or its credit support provider
becoming illegal.
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 swap termination payment to the other.
Upon the occurrence of a swap early termination event in relation to an issuer
swap agreement, we or the relevant swap provider may be liable to make a swap
termination payment to the other. This swap termination payment will be
calculated and made in sterling. The amount of any swap 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 swap termination payment could be
substantial.
If any swap termination payment is due by us to an issuer swap provider,
then pursuant to our obligations under the global intercompany loan agreement,
Funding 2 shall pay to us the amount required by us to pay the swap
termination payment due to the relevant swap provider. Following the
termination of an issuer swap, as a result of a swap provider default with
respect to the relevant issuer swap provider, any such swap termination
payment will be made by us to the issuer swap provider only after paying
interest amounts due on the notes, However, if we cause a default to occur
that results in a swap termination payment becoming due from us to an issuer
swap provider, such payment will be made by us in the same priority as we pay
the relevant interest amounts due on that series and class of notes. We shall
apply amounts received from Funding 2 under the global intercompany loan
agreement in respect of swap termination payments in accordance with the
issuer pre-enforcement revenue priority of payments, the issuer
pre-enforcement principal priority of payments or, as the case may be, the
issuer post-enforcement priority of payments. The application by us of swap
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 and interest rate risks").
Following termination of a Funding 2 basis rate swap, as a result of a
swap provider default with respect to the Funding 2 basis rate swap provider,
where a swap termination payment becomes 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
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satisfying any debit balance on the principal deficiency ledger. However, if
Funding 2 causes a default to occur that results in a swap 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 swap 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 - Swap termination payments
may adversely affect the funds available to make payments on the notes").
If Funding 2 receives a swap 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 transaction is entered into and/or to acquire a replacement swap
transaction. We will not receive extra amounts (over and above interest and
principal payable under the global intercompany loan agreement) as a result of
Funding 2 receiving a swap termination payment.
If we receive a swap termination payment from an issuer swap provider,
then we shall use those funds towards meeting our costs in effecting any
applicable hedging transactions 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 us receiving a swap termination
payment.
Taxation
Neither we nor Funding 2 are obliged under any of the swap transactions
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 us (as applicable) if withholding taxes are imposed on payments
made under the swap transactions. If such withholding taxes are imposed due to
a change in tax law, a swap provider may have the right to terminate the
applicable swap transaction.
Limited recourse and swap payment obligation
On any scheduled payment date under the Funding 2 basis rate swaps,
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 basis rate swap provider, subject to and in accordance with the
relevant Funding 2 priority of payments. On any scheduled payment date under
the Funding 2 basis rate swaps, the Funding 2 basis rate swap provider will
only be obliged to pay to Funding 2 an amount that is proportionate to the
amount of the payment that it has received from Funding 2 on that date.
Prior to the enforcement of the issuer security, on any scheduled
payment date under the issuer swaps, we 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 we have 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 scheduled
payment date under the issuer swaps, each issuer swap provider will only be
obliged to pay to us an amount that is proportionate to the amount of the
payment that it has received from us on or prior to that 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,
Funding 2 and the seller in the trust property (including the
relevant weighted average Funding share percentage, 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 Funding share, the current Funding 2
share, the current seller share, the current Funding share
percentage, the current Funding 2 share percentage and the
current seller share percentage 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 (the "principal
ledger");
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 sub-ledgers
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
sub-ledgers to record cash redraws and non-cash re-draws;
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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;
(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 monthly payment date:
o the amount of Funding 2 available revenue receipts to be
applied on that relevant monthly payment date to pay
interest and fees then due under the global intercompany
loan agreement; and
o the amount of Funding 2 available principal receipts to be
applied on that relevant monthly payment date to repay
principal then due under the global intercompany loan
agreement;
(B) maintaining the following ledgers on behalf of Funding 2:
o the Funding 2 cash accumulation ledger which will record the
principal receipts accumulated by Funding 2 to repay each
bullet loan tranche;
o the Funding 2 principal ledger, which will record the all
other 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 Funding 2 intercompany loan ledger, which will record
payments of interest and repayments of principal on each of
the loan tranches made under the global intercompany loan
agreement;
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(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 Funding 2 security trustee (as the case may be);
(D) making withdrawals from the Funding 2 reserve account as and when
required;
(E) making any required withdrawals under the Funding 2 liquidity
reserve fund(s), if any;
(F) 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;
(G) providing Funding 2, the issuing entity, the Funding 2 security
trustee and the rating agencies with a monthly report in relation
to Funding 2;
(H) 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
(I) 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".
Compensation of cash manager
The cash manager is paid an annual fee of (GBP)100,000 for its services
which is paid in equal installments monthly in arrear on a monthly 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 issuing entity under the
global intercompany loan agreement.
Resignation of cash manager
The cash manager may resign only on giving 12 months' prior written
notice to the each Funding security trustee, each Funding beneficiary and the
mortgages trustee provided that the Funding security trustees and the Funding
beneficiaries and the mortgages trustee each consent in writing to the cash
manager's resignation and provided further that:
o a substitute cash manager has been appointed and a new cash
management agreement is entered into on terms satisfactory to the
Funding security trustees, the Funding beneficiaries and the
mortgages trustee; and
o the then current ratings of the issuing entity's notes and the
Funding issuing entities' notes would not be reduced, withdrawn or
qualified as a result of that replacement.
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Termination of appointment of cash manager
The Funding security trustees, the Funding beneficiaries and/or the
mortgages trustee may, upon written notice to the cash manager, terminate the
cash manager's rights and obligations immediately on the occurrence of certain
events including:
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 of such default from the Funding
security trustees;
o the cash manager fails to comply with any of its other obligations
under the cash management agreement which in the opinion of the
Funding 2 security trustee, is materially prejudicial to the
interests of the holders of the notes issued by the issuing entity
and does not remedy that failure within 20 days after the earlier
of becoming aware of the failure and receiving written notice from
the Funding security trustees; or
o the cash manager suffers an insolvency event.
Upon termination of the appointment of the cash manager, each Funding
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 appointment is conditional upon the
rating agencies having previously confirmed in writing to the mortgages
trustee, each Funding beneficiary and each Funding security trustee that the
then current ratings of the issuing entity's notes and the notes of the
Funding issuing entities will not be reduced, 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, the Funding beneficiaries or
the Funding security trustees, 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 all amounts outstanding under the
global intercompany loan agreement and each Funding intercompany loan
agreement 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 issuing entity
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, we appointed Northern Rock to provide
cash management services to us.
Cash management services to be provided to the issuing entity
The issuer cash manager's duties include, but are not limited to:
(A) determining no later than the distribution date immediately
preceding the relevant monthly payment date:
o the issuer available revenue receipts to be applied to pay
interest on the notes on that relevant monthly payment date
to the applicable issuer swap provider or to the
noteholders, as applicable, and to pay amounts due to other
creditors of the issuing entity;
o the issuer available principal receipts to be applied to pay
the applicable swap provider and to repay principal of the
notes on that relevant monthly 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 issuing entity set out in the issuer
cash management agreement;
(C) providing the issuing entity, Funding 2, the note trustee, the
issuer security trustee and the rating agencies with quarterly
reports in relation to the issuing entity;
(D) making all returns and filings required of the issuing entity and
procuring the provision of company secretarial and administration
services to the issuing entity;
(E) arranging payment of all fees to the London Stock Exchange plc or,
as applicable, the Financial Services Authority;
(F) performing, if necessary, all currency and interest rate
conversions free of charge, cost or expense at the relevant
exchange rate; and
(G) calculating required subordinated amounts and determining whether
issuance tests and conditions to the repayment of notes have been
met.
Issuing entity's bank account
As at the Funding 2 program date, the issuing entity maintains in its
name (i) a bank account with the issuer account bank (the "issuer transaction
account") and (ii) a bank account with Northern Rock subject to the terms of
the issuer guaranteed investment contract,
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the issuer bank account agreement and the issuer deed of charge (the "issuer
GIC account"). The issuing entity may, with the prior written consent of the
issuer security 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.
Compensation of issuer cash manager
The issuer cash manager will be paid for its services an annual fee of
(GBP)100,000 which will be paid in equal installments monthly in arrear on a
monthly 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 issuing entity prior to
amounts due on the notes.
Resignation of issuer cash manager
The issuer cash manager may resign only on giving 12 months' prior
written notice to the issuer security trustee and us provided that we and the
issuer security trustee have consented in writing to the issuer cash manager's
resignation and provided further 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 issuer security trustee and us; and
o that replacement would not cause the then current ratings of the
notes to be reduced, withdrawn or qualified.
Termination of appointment of issuer cash manager
The issuing entity or the issuer security 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 of such default from us or the issuer
security 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 issuer security 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 issuer security trustee; or
o the issuer cash manager suffers an insolvency event.
Upon termination of the appointment of the issuer cash manager, the
issuer security 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
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substantially the same terms as the provisions of the issuer cash management
agreement and any appointment is conditional upon the rating agencies having
previously confirmed in writing to the issuing entity and the issuer security
trustee that the then current ratings of the issuing entity's notes will not
be reduced, 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 issuer security
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.
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 an assignment by way of first fixed security of 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 a first fixed charge (which may take effect as a floating charge)
of Funding 2's right, title, interest and benefit in the Funding 2
GIC account, the Funding 2 transaction account, any Funding 2 swap
collateral 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 made by or on behalf of Funding 2 including
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 (and also extending over all Funding 2's
Scottish assets 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.
Nature of security - fixed charge or floating charge
For an asset to be regarded as being subject to a fixed charge, as a
general rule, Funding 2 should not be permitted to deal with such assets
without the consent of the Funding 2 security trustee. 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 encumbers 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
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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
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 as
long as the capital market exemption is available. 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 servicer,
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 servicer of Funding 2 were appointed this would
prevent the appointment of a receiver and freeze the enforcement by the
Funding 2 secured creditors and the Funding 2 security trustee of rights and
remedies without the consent of the servicer or leave of the court.
The interest of the Funding 2 secured creditors in property and assets
over which there is a floating charge will rank behind the expenses of any
liquidation or administration and the claims of certain preferential creditors
on enforcement of the Funding 2 security. Section 250 of the Enterprise Act
2002 abolishes Crown Preference in relation to all insolvencies (and thus
reduces the categories of preferential debts that are to be paid in priority
to debts due to the holder of a floating charge) but a new Section 176A of the
Insolvency Act 1986 (as inserted by Section 251 of the Enterprise Act 2002)
requires a "prescribed part" (up to a maximum amount of (GBP)600,000) of the
floating charge realizations available for distribution to be set aside to
satisfy the claims of unsecured creditors. This means that the expenses of any
liquidation or administration, the claims of preferential creditors and the
beneficiaries of the prescribed part will be paid out of the proceeds of
enforcement of the floating charge ahead of amounts due to Funding 2 secured
creditors. The prescribed part will not be relevant to property subject to a
valid fixed security interest or to a situation in which there are no
unsecured creditors.
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, service of a Funding
2 intercompany loan enforcement notice on Funding 2 (except in relation to
Scottish assets, in respect of which the floating charge will crystallize only
on the appointment of a receiver under it or upon Funding 2 going into
liquidation within the meaning of section 247(2) of the Insolvency Act 1986).
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.
We expect that the appointment of an administrative receiver by the
Funding 2 security trustee under the Funding 2 deed of charge will not be
prohibited by Section 72A of the Insolvency Act 1986 as the appointment will
fall within the exception set out under Section 72B of the Insolvency Act 1986
(First exception: capital market).
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 Funding 2 intercompany loan enforcement notice, of amounts
standing to the credit of the Funding 2 transaction account on each monthly
payment date. This order of priority is described under "Cashflows -
Distribution of Funding 2 available revenue receipts prior to the enforcement
of the Funding 2 security" and "Cashflows - Distribution of Funding 2
available principal receipts prior to the enforcement of the Funding 2
security".
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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 Funding 2 intercompany loan enforcement notice, of amounts
received or recovered by the Funding 2 security trustee or a receiver
appointed on its behalf. This order of priority is described under "Cashflows
- - Distribution of monies following enforcement of the Funding 2 security".
If any other Funding 2 issuing entities are established to issue notes
and accordingly to make advances to Funding 2, such Funding 2 issuing entities
and other applicable creditors of Funding 2 will enter into deeds of accession
or supplemental deeds in relation to the Funding 2 deed of charge which may,
depending on the type of notes to be issued, require amendments, amongst other
things, to any of the Funding 2 pre-enforcement revenue priority of payments,
the Funding 2 pre-enforcement principal priority of payments, and the Funding
2 post-enforcement priority of payments.
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 Funding 2
intercompany loan enforcement notice (see "The global intercompany loan
agreement - Funding 2 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 AAA loan tranches, 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 all amounts owing in respect of all AAA
loan tranches 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 condition 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 all amounts owing in
respect of all AAA loan tranches and all prior ranking amounts due
by Funding 2.
The Funding 2 security trustee shall not be bound to make the
determinations 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 issuer security trustee. The authority of the issuer
security trustee to direct the Funding 2 security trustee to act derives from
the issuer's assignment to the issuer security trustee of its rights under the
Funding 2 deed of charge.
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Delegation by the Funding 2 security trustee to an authorized 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
issuing entity will not result in the ratings on the notes being reduced,
qualified or withdrawn. In the event of any such appointment, the Funding 2
security trustee 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 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 be materially prejudicial to the interests
of the Funding 2 secured creditors or that such modification is of
a formal, minor or technical nature or is required by the rating
agencies in respect of any other Funding 2 issuing entity or other
person which accedes to the Funding 2 deed of charge; 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 be materially
prejudicial to the interests of the Funding 2 secured creditors.
Any such modification, authorization or waiver will be binding on the
Funding 2 secured creditors.
When formulating its opinion and/or when exercising the rights,
benefits, trusts, authorities, directions and obligations under the
transaction documents to which it is a party, the Funding 2 security trustee
shall as a result of the operation of the provisions of the Funding 2 deed of
charge and the issuer deed of charge and the assignment by us of our rights
under the Funding 2 deed of charge to the issuer security trustee, act only at
the request or direction of the issuer security trustee.
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.
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,
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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 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 the issuer security trustee (who must consult with the
Funding 2 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 issuer
security trustee as being given in compliance with the issuer deed
of charge 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;
o may assume that no Funding 2 intercompany loan event of default
has occurred unless it has received notice from a Funding 2
secured creditor or the issuer security trustee stating that a
Funding 2 intercompany loan event of default has occurred and
describing that Funding 2 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
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security trustee's fraud, gross negligence, willful 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 title 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 the
enforcement 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.
Governing law
The Funding 2 deed of charge will be governed by and construed in
accordance with English law, except for any terms of the Funding 2 deed of
charge which are particular to the law of Scotland, which shall be construed
in accordance with Scots law.
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Security for the issuing entity's obligations
To provide security for its obligations under the notes and the other
transaction documents, the issuing entity has entered into the issuer deed of
charge with the issuing entity 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.
Issuer security
The issuing entity has granted the following security to be held by the
issuer security 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 issuing
entity's rights and claims in respect of all security and other
rights held on trust by the Funding 2 security trustee pursuant to
the Funding 2 deed of charge;
o an assignment by way of first fixed security of the issuing
entity'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 a first fixed charge (which may take effect as a floating charge)
of the issuing entity's right, title, interest and benefit in the
issuer transaction account, the issuer GIC account, any issuer
swap collateral account and each other account (if any) of the
issuing entity, 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 issuing entity's right, title, interest and benefit in all
authorized investments made by or on behalf of the issuing entity,
including all monies and income payable under those investments;
and
o a first floating charge over all the assets and undertaking of the
issuing entity which are not otherwise effectively subject to a
fixed charge or assignment by way of security as described in the
preceding paragraphs.
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 such secured party
exercises such control.
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 -
Nature of security - fixed charge or floating charge". We expect that an
appointment of an administrative receiver by the issuer security trustee under
the issuer deed of charge will not be prohibited by Section 72A
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of the Insolvency Act 1986 as the appointment will fall within the exception
set out under Section 72B of the Insolvency Act 1986 (First exception: Capital
Market).
The security interests created by the issuing entity under the issuer
deed of charge are binding on the creditors of the issuing entity and neither
a liquidator, an servicer nor any creditor of the issuing entity has or will
have (save as a result of a preferential claim or lien or priority rights
arising by operation of law) any right or claim against the issuing entity
which ranks in priority to or pari passu with the rights and claims of the
issuer security trustee (as trustee for the issuer secured creditors under the
issuer deed of charge) secured by the issuer deed of charge.
In a liquidation or administration of the issuing entity, neither the
issuing entity nor a liquidator or servicer or creditor of the issuing entity
would be able to contest successfully or avoid or have set aside:
(a) the validity of the security interests created by the issuing
entity pursuant to the issuer deed of charge;
(b) the application by the issuer security trustee of monies received
or recovered by it or by a receiver appointed by it after the
security under the issuer deed of charge becomes enforceable, in
accordance with the issuer post-enforcement priority of payments.
The issuer security trustee's interest may, however, be or become
subject to prior third party rights, claims or interests.
Issuer pre-enforcement and post-enforcement priority of payments
The issuer deed of charge 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 issuer security trustee (or the issuer cash manager on its
behalf), following service of an issuer enforcement notice, of amounts
received or recovered by the issuer security trustee or a receiver appointed
on its behalf. This order of priority is described under "Cashflows".
On the issuance of any series and class of notes, any new issuer swap
providers or start-up loan providers will enter into deeds of accession or
supplemental deeds in relation to the issuer deed of charge which may,
depending on the type of notes to be issued, require amendments, amongst other
things, to any of the issuer pre-enforcement revenue priority of payments, the
issuer pre-enforcement principal priority of payments, and the issuer
post-enforcement priority of payments.
Enforcement
The issuer security will become enforceable upon the service on the
issuing entity of an issuer enforcement notice.
Conflicts
The issuer deed of charge contains provisions which require the issuer
security trustee, whilst the notes are outstanding, to act only at the
direction of the note trustee. If, in the sole opinion of the note trustee,
there may be a conflict as among noteholders, the note trustee will
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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 group of series, or conflict between the class B noteholders of one
series and the class B noteholders of another series or group of series, or
conflict between the class M noteholders of one series and the class M
noteholders of another series or group of series, or conflict between the
class C noteholders of one series and the class C noteholders of another
series or group of series or conflict between the class D noteholders of one
series and the class D noteholders of another series or group of series, then
a resolution directing the note trustee to take any action shall be deemed to
have been duly passed only if passed at separate meetings of 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
issuer security trustee will only be obliged to act if it is indemnified to
its satisfaction. For more information on how conflicts between noteholders
are resolved, 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 issuer security
trustee and the note trustee acting on behalf of the noteholders) agrees under
the issuer deed of charge that only the issuer security trustee may enforce
the security created by the issuer deed of charge and it will not take steps
directly against the issuing entity to recover amounts owing to it by the
issuing entity unless the issuer security trustee has become bound to enforce
the issuer security but has failed to do so within 30 days of becoming so
bound.
Modification and waiver, fees, retirement and responsibilities of the issuer
security trustee
Modification and waiver
Without the consent of any of the noteholders or any of the other issuer
secured creditors, the issuer security trustee may:
o agree to modifications to the transaction documents provided that
the issuer security trustee is of the opinion that such
modification will not be materially prejudicial to the interests
of the issuer secured creditors or that such modification is of a
formal, minor or technical nature; 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 issuer security trustee is of the opinion that such breach
will not be materially prejudicial to the interests of the issuer
secured creditors.
Any such modification, authorization or waiver will be binding on the
issuer secured creditors.
As a result of the operation of the provisions of the issuer deed of
charge, when formulating its opinion and/or when exercising the rights,
benefits, trusts, authorities, directions and obligations under the
transaction documents to which it is a party, the issuer security trustee
shall, whilst any of the notes are outstanding, act only at the request or
direction of the note trustee.
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Fees, expenses and indemnity
The issuing entity will reimburse the issuer security trustee for all
costs and expenses properly incurred in acting as issuer security trustee. In
addition, the issuing entity shall pay to the issuer security trustee a fee of
such amount and on such dates as will be agreed from time to time by the
issuer security trustee and the issuer. The issuing entity shall indemnify the
issuer 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, willful default or breach of the terms of the
issuer deed of charge by the issuer security trustee or any of its officers or
employees.
Retirement and removal
Subject to the appointment of a successor issuer security trustee, the
issuer security trustee may retire after giving three months' notice in
writing to the issuing entity. If within 60 days of having given notice of its
intention to retire, the issuing entity has failed to appoint a replacement
issuer security trustee, the outgoing issuer security 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 issuing entity may remove the issuer security trustee or appoint
a new issuer security 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 issuer security 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 issuer security trustee's duties and liabilities. These
include the following:
o the issuer security 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 issuer security trustee may assume that no note event of
default has occurred unless the issuer security trustee has
received express notice from an issuer secured creditor stating
that a note event of default has occurred and describing that note
event of default;
o the issuer security trustee is not required to monitor or
supervise the functions of the issuer account bank or of any other
person under any transaction document;
o the issuer security 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
issuing entity and every determination made shall bind the
noteholders and all of the other issuer secured creditors;
o each noteholder and each other issuer secured creditor must make
its own independent appraisal, without reliance on the issuer
security trustee, as to the financial condition and affairs of the
issuing entity;
o the issuer 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 issuer deed of
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charge or any other transaction document unless caused by the
issuer security trustee's fraud, gross negligence, willful default
or breach of the terms of the issuer deed of charge;
o the issuer security trustee may accept such title as the issuing
entity has to the issuer charged property and will not be required
to investigate or make inquiry into the issuing entity's title to
such property;
o the issuer security 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 issuer security trustee is not required to take steps or
action in connection with the transaction documents (including
enforcing the issuer security) unless (1) whilst the notes are
outstanding it has been directed or instructed to do so the
noteholders in accordance with Conditions 10 and 11 (see
"Description of the US notes") or (2) following the redemption of
the notes, by any other issuer secured creditor provided that, in
each case, it has been indemnified and/or secured to its
satisfaction against all costs, liabilities and claims which it
may incur or in respect of which it may become liable.
The issuer 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 issuer security 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 is 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 issuing entity 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 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 issuing entity in
favor of the note trustee and the noteholders. The main covenants are that the
issuing entity will pay interest on, and repay the 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 issuing entity also covenants that it will do all things necessary
to maintain the listing on the official list and to maintain trading of the
notes on the Market 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 two directors of the issuing entity to the effect that no note event
of default exists or has existed since the date of the previous annual
statement and that the issuing entity has complied with all its obligations
under the issuer transaction documents (to which it is a party) 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 class A notes of any series are outstanding and
thereafter the interests of class B noteholders take precedence for so long as
the class B notes of any series are outstanding and thereafter the interests
of class M noteholders take precedence for so long as the class M notes of any
series are outstanding and thereafter the interests of the class C noteholders
take precedence for so long as the class C notes of any series are outstanding
and thereafter the interests of the class D notes take precedence for so long
as the class D notes of any series 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 affected 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, as amended (the "Trust Indenture Act"). 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 issuing
entity to the note trustee;
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(c) ability of noteholders to waive certain past defaults of the
issuing entity;
(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
issuing entity in writing, and the ability of the issuing entity
to remove the note trustee under certain circumstances.
Further, the trust deed provides that notwithstanding any other
provision therein, in compliance with Section 315(d) of the Trust Indenture
Act, none of the provisions therein shall, in any case in which the note
trustee has failed to show the degree of care and diligence required of it as
trustee under the trust deed (including any requirement under the Trust
Indenture Act), having regard to the provisions of the trust deed conferring
on the note trustee any powers, authorities or any discretion, relieve the
note trustee from or indemnify the note trustee against any liabilities which
by virtue of any rule of law (including any provision of the Trust Indenture
Act) would otherwise attach to it in respect of any gross negligence, wilful
default, breach of duty or breach of trust of which it may be guilty in
relation to its duties under the trust deed.
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 Trust Indenture Act, 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 issuing entity prior to the relevant closing date. Each
issue of notes will be constituted by a deed or deeds supplemental to the
trust deed between the issuing entity 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 issuing
entity, 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 and the related
prospectus supplement (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 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 issuing
entity expects that DTC, Clearstream, Luxembourg or Euroclear will take any
action permitted to be taken by a beneficial owner of 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
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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 issuing entity will maintain a paying agent in the
United Kingdom until the date on which the listed 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 note 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 note 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 issuing entity. None of the issuing entity, 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
241
o "clearing agency" registered under the provisions of Section 17A
of the United States Securities and Exchange Act of 1934, as
amended (the "Exchange Act").
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
issuing entity 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.
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The issuing entity understands that under existing industry practices,
when the issuing entity 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 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 issuing entity believes to be
reliable, but the issuing entity 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.
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As the holders of book-entry interests, beneficial owners will not have
the right under the trust deed to act on solicitations by the issuing entity
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 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 issuing entity, 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 issuing entity or any paying agent is or will be
required to make any deduction or withholding
244
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 issuing entity 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 issuing
entity 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 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 issuing entity, 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 issuing entity. 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 offered pursuant to this prospectus and the related prospectus
supplement, 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. 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 and a deed or deeds supplemental to the trust deed
entered into between the note trustee and us from time to time;
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
issuer security trustee, the note trustee, the issuer swap
providers, certain other parties and us; and
o if applicable to a series and class of notes, an issuer swap
agreement dated the closing date in respect of such series and
class of notes, between the issuer swap provider 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 issuing entity;
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, issuer
security trustee and note trustee.
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.
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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 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 only be transferred in the minimum denominations specified
in the applicable prospectus supplement. 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
247
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.
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 Conditions 4 and 5 and subject to the
conditions and priorities set out under "Cashflows":
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; and
o the Class D notes of each series will rank without preference or
priority between themselves.
The note trustee is required to have regard to the interests of all
classes of noteholders equally. However, except where the transaction
documents expressly provide otherwise, if there are any class A notes
outstanding (of any series) 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 (of that series or any other series), then the
note trustee will have regard to the interests of the class A noteholders
only. Except where the transaction documents expressly provide otherwise, if
there are no class A notes outstanding and there are any class B notes
outstanding (of any series), 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 (of
that series or any other series), then the note trustee will have regard to
the interests of the class B noteholders only. Except where the transaction
documents expressly provide otherwise, if there are no class A notes
outstanding and no class B notes outstanding and there are any class M notes
outstanding (of any series), 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 (of that series or any other
series), then the note trustee will
248
have regard to the interests of the class M noteholders only. Except where the
transaction documents expressly provide otherwise, 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 (of any series), 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 (of that series or any other
series), then the note trustee will have regard to the interests of the class
C noteholders only.
Except in certain limited circumstances described in Condition 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 Condition 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 Condition 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 Condition 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
Condition 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 Condition
11 there are provisions limiting the power of the class C noteholders and the
class D noteholders to pass an effective extraordinary resolution, depending
on its effect on the class M noteholders. Likewise, except in the limited
circumstances described in Condition 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
Condition 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, in determining whether 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), will have regard to confirmations (if issued)
from each of the rating agencies that the then current ratings of the relevant
notes will not be reduced, withdrawn or qualified by that exercise and any
other confirmation which it considers, in its sole and absolute discretion, is
appropriate. The rating agencies will not be obliged to provide such
confirmations if so requested by the note trustee.
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
issuer security trustee who will hold it for itself and on behalf of the
issuer secured creditors (which definition includes the note trustee and 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;
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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 issuer security
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.
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 note payment date(s) in each year specified for
such note in the applicable prospectus supplement up to (and including) the
final maturity date.
If interest is required to be calculated in respect of any fixed rate
note for a period other than an interest period, such interest shall be
calculated by applying the rate of interest specified for such note 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
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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 for such note 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 note
payment date for such notes (or, if none, the interest
commencement date) to (but excluding) the relevant note
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 for such note in the applicable
prospectus supplement, the number of days in the period from (and
including) the most recent note payment date for such note (or, if
none, the interest commencement date) to (but excluding) the
relevant note payment date (such number of days being calculated
on the basis of a year of 360 days with twelve 30-day months)
divided by 360.
(B) Interest on floating rate notes
(i) Note payment dates
Each floating rate 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 note payment
date(s) in each year specified for such note in the applicable
prospectus supplement. Such interest will be payable in respect of
each interest period.
If a business day convention is specified for a floating rate note
in the applicable prospectus supplement and (x) if there is no
numerically corresponding day in the calendar month in which a
note payment date should occur or (y) if any note
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payment date would otherwise fall on a day that is not a business
day, then, if the business day convention specified is:
(a) in any case where specified periods are specified in
accordance with paragraph (i)(b) above, the "floating rate
convention", the note payment date for such note (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 note payment date
shall be brought forward to the immediately preceding
business day and (B) each subsequent note payment date shall
be the last business day in the month which falls the
specified period after the preceding applicable note payment
date occurred; or
(b) the "following business day convention", the note payment
date for such note shall be postponed to the next day which
is a business day; or
(c) the "modified following business day convention", the note
payment date for such note 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 note
payment date shall be brought forward to the immediately
preceding business day; or
(d) the "preceding business day convention", the note payment
date for such note shall be brought forward to the
immediately preceding business day.
(ii) Rate of interest
The rate of interest payable from time to time in respect of a
floating rate note will be determined in the manner specified in
the applicable prospectus supplement.
(a) ISDA Determination for floating rate notes
Where "ISDA Determination" is specified for such note 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 for such note in the applicable
prospectus supplement) the margin (if any). For the purposes
of this subparagraph (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 for such note
in the applicable prospectus supplement;
(2) the designated maturity is the period specified for
such note in the applicable prospectus 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
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day of that interest period, or (ii) in any other
case, as specified for such note 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 notes
Where "Screen Rate Determination" is specified for a
floating rate note in the applicable prospectus supplement
as the manner in which the rate of interest for such note 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 agent bank. If five or more
of such offered quotations are 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 agent bank for
the purpose of determining the arithmetic mean
(rounded as provided above) of such offered
quotations.
If the reference rate from time to time in respect of a
floating rate note is specified for such note in the
applicable prospectus supplement as being other than LIBOR
or EURIBOR, the rate of interest in respect of such note
will be determined as provided for such note 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 a floating rate note for any interest
period, then, in the event that the rate of interest for
such note 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 note for such interest period shall be
such minimum rate of interest.
If the applicable prospectus supplement specifies a maximum
rate of interest for such note for any interest period,
then, in the event that the rate of interest for such note
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
note for such interest period shall be such maximum rate of
interest.
(iv) Determination of rate of interest and calculation of
interest amounts
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The agent bank 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.
The agent bank will calculate the amount of interest payable
on the floating rate 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-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 for a floating rate note in accordance
with this paragraph (iv) for any interest period:
(a) if "Actual/365" or "Actual/Actual (ISDA)" is specified
for such note 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 for such note in
the applicable prospectus supplement, the actual
number of days in the interest period divided by 365;
(c) if "Actual/365 (Sterling)" is specified for such note
in the applicable prospectus supplement, the actual
number of days in the interest period divided by 365
or, in the case of a note payment date falling in a
leap year, 366;
(d) if "Actual/360" is specified for such note 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
for such note 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 twelve 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 for such
note 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 twelve 30-day months, without
regard to the date of the first day or last day of the
interest period unless, in the case of
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the final interest period, the final maturity date
(or, as the case may be, extended due for note 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 agent bank will cause the rate of interest and each
interest amount for each interest period and the relevant
note payment date to be notified to the note trustee, the
issuer security 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 are for the time being
listed, quoted and/or traded 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. Each interest amount and note 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 are for the time being
listed or by which they have been admitted to listing and to
noteholders in accordance with Condition 14.
(vi) Determination or calculation by note trustee
If for any reason at any relevant time after the closing
date, the agent bank or, as the case may be, the calculation
agent defaults in its obligation to determine the rate of
interest for a floating rate note or the agent bank defaults
in its obligation to calculate any interest amount for such
note 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 for such note 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 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 Condition 4(b), whether by the 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 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) Accrual of interest
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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 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 trust deed.
(D) Deferred interest
To the extent that the funds available to us, subject to and in
accordance with the relevant issuer priority of payments, to pay interest on
any series and class of notes (other than the most senior class of notes of
any series then outstanding) on a note payment date (after discharging our
liabilities of a higher priority) are insufficient to pay the full amount of
such interest, payment of the shortfall attributable to such series and class
of notes ("deferred interest"), will not then fall due but will instead be
deferred until the first note payment date for such notes thereafter on which
sufficient funds are available (after allowing for our liabilities of a higher
priority and subject to and in accordance with the relevant issuer priority of
payments) to fund the payment of such deferred interest to the extent of such
available funds.
Such deferred interest will accrue interest ("additional interest") at
the rate of interest applicable from time to time to the applicable series and
class of notes and payment of any additional interest will also be deferred
until the first note payment date for such notes thereafter on which funds are
available (after allowing for our liabilities of a higher priority subject to
and in accordance with the relevant issuer priority of payments) to us to pay
such additional interest to the extent of such available funds.
Amounts of deferred interest and additional interest shall not be
deferred beyond the final maturity date of the applicable series and class of
notes, when such amounts will become due and payable.
Payments of interest due on a note payment date in respect of the most
senior class of notes of any series then outstanding will not be deferred. In
the event of the delivery of an issuer enforcement notice (as described in
Condition 9), the amount of interest in respect of such notes that was due but
not paid on such note payment date will itself bear interest at the applicable
rate until both the unpaid interest and the interest on that interest are
paid.
5. Redemption, purchase and cancellation
(A) Final redemption
If the US notes have not previously been redeemed in full as described
in this Condition 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 note payment date, other than a note payment date on which a
series and class of notes are to be redeemed under Conditions 5(A), (D), (E)
or (F), we shall repay principal in respect of such notes in an amount equal
to:
(i) (a) prior to the earlier to occur of the step-up date (if any)
in respect of such notes and a pass-through trigger event
(and subject to the terms of the issuer deed of charge
regarding the funding, replenishment and application of the
issuer reserve fund) the lower of:
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(1) the amount due to be paid on such note payment date as
specified for such notes in the applicable prospectus
supplement; and
(2) the amount (if any) repaid on the corresponding loan
payment date in respect of the related loan tranche
and pursuant to the global intercompany loan agreement
(and which is available, under the terms of the issuer
deed of charge and the issuer cash management
agreement to repay principal in respect of such notes)
converted, where the specified currency for such notes
is not sterling, into the specified currency at the
specified currency exchange rate for such notes;
provided that, in the case of any series and class of
pass-through notes, the amount of principal to be repaid by
us in respect of such notes on the applicable note payment
date shall be calculated in accordance with sub-paragraph
(2) above; or
(b) following the earlier to occur of the step-up date (if any)
in respect of such notes and a pass-through trigger event
(whereupon each following monthly payment date shall
constitute a note payment date) and subject to the terms of
the issuer deed of charge regarding the funding,
replenishment and application of the issuer reserve fund,
the amount (if any) repaid on the corresponding loan payment
date in respect of the related loan tranche and pursuant to
the global intercompany loan agreement converted, where the
specified currency for such notes is not sterling, into the
specified currency at the specified currency exchange rate;
and
(ii) the amount standing to the credit of the issuer reserve fund which
is available (subject to the terms of the issuer deed of charge)
to repay principal in respect of such notes converted where the
specified currency for such notes is not sterling, into sterling
at the specified currency exchange rate for such notes.
To the extent that there are insufficient funds available to us to repay
the amount due to be paid on such note payment date, we will be required to
repay the shortfall, to the extent that we receive funds therefor (and subject
to the terms of the issuer deed of charge and the issuer cash management
agreement) on subsequent note payment dates in respect of such notes.
(C) Note principal payments and principal amount outstanding
On the distribution date immediately preceding each note 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
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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 issuer security 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 Condition 14 by no later than the
business day after the relevant note 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 30 and not more than 60 days prior
notice to the note trustee and the noteholders, redeem a series and class of
notes at the then redemption amount together with any accrued interest on the
following dates:
o the date specified as the "step-up date" for such notes in the
applicable prospectus supplement and on any payment date for such
notes thereafter. This gives us the option to redeem a series and
class of notes on or after the step-up date for interest for that
series and class of notes; and
o any such note payment date for such notes on which the aggregate
principal amount outstanding of such notes and all other classes
of notes of the same series is less than 10% of the aggregate
principal amount outstanding of such series of notes as at the
closing date on which such notes were issued.
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 (1) we will have funds available to make the required payment of
principal and interest due in respect of the notes on the relevant note
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 deed
of charge and the cash management agreement and (2) the repayment tests will
be satisfied following the making of such redemptions.
(E) Optional redemption for tax and other reasons
If we satisfy the note trustee that on the next note payment date for a
series and class of notes either:
(i) we would be required to withhold or deduct from amounts due on a
series and class of 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
in respect of the loan tranche under the global intercompany loan
agreement which was funded by such notes, any amount on account of
any present or future taxes or duties or governmental charges; and
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(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 us or 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
such notes at their redemption amount together with any accrued interest on
the next following note payment date in respect of such notes, 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 (1) that we will have
funds available to make the required payment of principal and interest due in
respect of the notes on the relevant note 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 deed of charge and the issuer cash
management agreement and (2) the repayment tests will be satisfied following
the making of such redemptions.
In addition to the foregoing, if at any time it becomes unlawful for us
to make, fund or allow to remain outstanding under the global intercompany
loan agreement, 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 us, the issuer security trustee and the
note trustee (whereupon we will notify you in accordance with Condition 14),
to prepay the global intercompany loan on any loan 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, together with any accrued interest, on
the equivalent note payment date.
(F) Optional Redemption for Implementation of Capital Requirements Directive
If the Capital Requirements Directive has been implemented in the United
Kingdom, whether by rule of law, recommendation or best practice or by any
other regulation, then on the note payment date for a series and class of
notes specified in the applicable prospectus supplement (if any) and any note
payment date for such notes 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 such series and class of notes at their redemption
amount together with any accrued interest on the next following note payment
date for such notes, provided that an issuer enforcement notice has not been
served. We may only redeem the notes as described above if we have prior to
the date of such notice provided to note trustee a certificate to the effect
that (1) we will have the funds available to make the required payment of
principal and interest due in respect of the notes on the relevant note
payment date, including any amounts required to be paid in priority to
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or in the same priority as the notes outstanding in accordance with the issuer
deed of charge and the cash management agreement, and (2) the repayment tests
will be satisfied following the making of such redemptions.
(G) Redemption amounts
For the purposes of this Condition 5, "redemption amount" means, in
respect of any series and class of notes, the amount specified in relation to
such notes in the applicable prospectus supplement or, if not specified:
(i) in respect of each note (other than a zero coupon note), the
principal amount outstanding of such note; and
(ii) in respect of each zero coupon note, an amount calculated in
accordance with the following formula:
redemption amount = RP x (1 + AYy)
where:
RP = the reference price (as specified in the applicable
prospectus supplement);
AY = the accrual yield expressed as a decimal (as specified in
the applicable prospectus supplement); and
y = a fraction, the numerator of which is equal to the number
of days (calculated on the basis of a 360-day year
consisting of 12 months of 30 days each) from (and
including) the first closing date of the applicable series
and class of notes to (but excluding) the date fixed for
redemption or, as the case may be, the date upon which such
note becomes due and payable and the denominator of which is
360.
If the amount payable in respect of any zero coupon note upon redemption
of such zero coupon note pursuant to Condition 5(A), (B), (D), (E) or (F)
above or upon its becoming due and repayable as provided in Condition 9 is
improperly withheld or refused, the amount due and repayable in respect of
such note shall be the amount calculated as provided in paragraph (b) above as
though the reference therein to the date fixed for the redemption or, as the
case may be, the date upon which such note becomes due and payable were
replaced by reference to the date which is the earlier of:
(i) the date on which all amounts due in respect of such note have
been paid; and
(ii) the date on which the full amount of the moneys payable in respect
of such note 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 Condition 14.
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
wiring
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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 Condition 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 Condition 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 or on account of any tax unless a withholding or
deduction is required by any applicable law. If a withholding or deduction for
or on account of tax is made, the relevant paying agent or we will account to
the relevant authority for the amount so withheld or deducted. Neither we nor
any paying agent are required to make any additional payments to noteholders
for such withholding or deduction.
9. Events of default
An event of default under the provisions of the notes will constitute a
"note event of default" as described below.
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(A) Class A Noteholders
The note trustee in its absolute discretion may give notice to us of a
class A note event of default (as defined below) in respect of the class A
notes, 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 class
A notes (which for this purpose and the purpose of any
extraordinary resolution referred to in this Condition 9(A) means
the class A notes of all series instituted by the trust deed); or
o directed to do so by an extraordinary resolution passed at a
meeting of the noteholders of the class A notes.
If any of the following events occurs and is continuing it is called a
"class A note event of default":
o we fail to pay for a period of seven business days any amount of
principal of the class A notes of any series 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 the class A notes of any series 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 class A notes of any series, 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 holders of the
class A notes of such series; 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 holders of the class A notes; 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 or the making of an application 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 servicer in relation to us or an administration order
being granted or an administrative receiver
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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
o if a Funding 2 intercompany loan enforcement notice is served in
respect of any Funding 2 intercompany loan agreement while the
class A notes of any series are outstanding.
(B) Class B Noteholders
The terms described in this Condition 9(B) will have no effect so long
as any class A notes of any series are outstanding. Subject thereto, for so
long as any class B notes are outstanding, the note trustee may, in its
absolute discretion, give notice of a class B note event of default (as
defined below) in respect of the class B notes, 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 not less than 25
per cent. in aggregate principal amount outstanding the class B
Notes (which for this purpose and the purpose of any extraordinary
resolution referred to in this Condition 9(B) means the class B
notes of all series constituted by the trust deed); or
o directed to do so by an extraordinary resolution passed at a
meeting of the holders of the class B notes.
If any of the following events occurs and is continuing it is called a
"class B note event of default":
o we fail to pay a period of seven business days any amount of
principal of the class B notes of any series 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 the class B notes of any series when such payment
ought to have been paid in accordance with the conditions; or
o the occurrence of any of the events in Condition 9(A) above but so
that any reference to class A notes and class A noteholders shall
be read as references to class B notes and class B noteholders.
(C) Class M Noteholders
The terms described in this Condition 9(C) will have no effect so long
as any class A notes or class B notes of any series are outstanding. Subject
thereto, for so long as any class M notes are outstanding, the note trustee
may, in its absolute discretion, give notice of a class M note event of
default (as defined below) in respect of the class M notes, and shall give
such notice if it is indemnified to its satisfaction and it is:
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o requested to do so in writing by the holders of not less than 25
per cent. in aggregate principal amount outstanding of the class M
Notes, (which for this purpose and the purposes of any
extraordinary resolution referred to in this Condition 9(C) means
the class M note, of all series constituted by the trust deed); or
o directed to do so by an extraordinary resolution passed at a
meeting of the holders of the class M notes.
If any of the following events occurs and is continuing it is called a
"class M note event of default":
o we fail to pay a period of seven business days any amount of
principal of the class M notes of any series 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 the class M notes of any series when such payment
ought to have been paid in accordance with the conditions; or
o the occurrence of any of the events in Condition 9(A) above but so
that any reference to class A notes and class A noteholders shall
be read as references to class M notes and class M noteholders.
(D) Class C Noteholders
The terms described in this Condition 9(D) will have no effect so long
as any class A notes, class B notes or class M notes of any series are
outstanding. Subject thereto, for so long as any class C notes are
outstanding, the note trustee may, in its absolute discretion, give notice of
a class C note event of default (as defined below) in respect of the class C
notes, 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 not less than 25
per cent. in aggregate principal amount outstanding of the class C
notes (which for this purpose and the purpose of any extraordinary
resolution referred to in this Condition 9(D) means the class C
notes of all series constituted by the trust deed); or
o directed to do so by an extraordinary resolution passed at a
meeting of the holders of the class C notes.
If any of the following events occurs and is continuing it is called a
"class C note event of default":
o we fail to pay a period of seven business days any amount of
principal of the class C notes of any series 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 the class C notes of any series when such payment
ought to have been paid in accordance with the conditions; or
o the occurrence of any of the events in Condition 9(A) above but so
that any reference to class A notes and class A noteholders shall
be read as references to class C notes and class C noteholders.
(E) Class D Noteholders
The terms described in this Condition 9(E) will have no effect so long
as any class A notes, class B notes, class M notes or class C notes of any
series are outstanding. Subject
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thereto, for so long as any class D notes are outstanding, the note trustee
may, in its absolute discretion, give notice of a class D note event of
default (as defined below) in respect of the class D notes, 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 not less than 25
per cent. in aggregate principal amount outstanding of the class D
notes (which for this purpose and the purpose of any extraordinary
resolution referred to in this Condition 9(E) means the class D
notes of all series constituted by the trust deed); or
o directed to do so by an extraordinary resolution passed at a
meeting of the holders of the class D notes.
If any of the following events occurs and is continuing it is called a
"class D note event of default":
o we fail to pay a period of seven business days any amount of
principal of the class D notes of any series 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 the class D notes of any series when such payment
ought to have been paid in accordance with the conditions; or
o the occurrence of any of the events in Condition 9(A) above but so
that any reference to class A notes and class A noteholders shall
be read as references to class D notes and class D noteholders.
An issuer enforcement notice is a written notice from the note trustee
to the issuer security trustee, the Funding 2 security trustee and to us
declaring the notes to be immediately due. When it is given, the notes of all
series and classes will become immediately due at their principal amount
outstanding together with accrued and unpaid interest (or, in the case of a
zero coupon note, at its redemption amount calculated in accordance with
Condition 5(G)) 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 or the trust deed (including the terms and conditions of the notes) or
any of the other transaction documents to which it is a party and may, at its
discretion and without notice, at any time after the issuer security has
become enforceable (including after the service of an issuer enforcement
notice in accordance with Condition 9), instruct the issuer security trustee
to take such steps as it may think fit to enforce the issuing entity security.
The note trustee shall not be bound to take steps or institute such
proceedings unless:
o (subject in all cases to restrictions contained in the trust deed
to protect the interests of any higher ranking class of
noteholders) it shall have been so directed by an extraordinary
resolution (as described in Condition 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 one quarter 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 and/or secured to its satisfaction.
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The issuer security trustee shall not be bound to take such steps or
take any such other action unless it is so directed by the note trustee and
indemnified and/or secured 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, the trust deed or the issuer deed of
charge unless (1) the note trustee or the issuer security trustee, as
applicable, 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 one quarter 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 issuer security 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 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 (b) such proceeds of enforcement have
been so distributed in accordance with the terms of the issuer
deed of charge and (c) 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 issuer security trustee certifies that there is
no further amount outstanding under the global intercompany loan
agreement,
o 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.
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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.
In respect of the class A notes, the trust deed provides that:
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class A notes of one
series only shall be deemed to have been duly passed if passed at
a meeting of the holders of the class A notes of that series;
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class A notes of any
two or more series but does not give rise to a conflict of
interest between the holders of such two or more series of class A
notes, shall be deemed to have been duly passed if passed at a
single meeting of the holders of such two or more series of class
A notes;
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class A notes of any
two or more series and gives or may give rise to a conflict of
interest between the holders of such two or more series of class A
notes, shall be deemed to have been duly passed only if, in lieu
of being passed at a single meeting of the holders of such two or
more series of class A notes, it shall be passed at separate
meetings of the holders of such two or more series of class A
notes.
In respect of the class B notes, the trust deed provides that:
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class B notes of one
series only shall be deemed to have been duly passed if passed at
a meeting of the holders of the class B notes of that series;
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class B notes of any
two or more series but does not give rise to a conflict of
interest between the holders of such two or more series of class B
notes, shall be deemed to have been duly passed if passed at a
single meeting of the holders of such two or more series of class
B notes;
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class B notes of any
two or more series and gives or may give rise to a conflict of
interest between the holders of such two or more series of class B
notes, shall be deemed to have been duly passed only if, in lieu
of being passed at a single meeting of the holders of such two or
more series of class B notes, it shall be passed at separate
meetings of the holders of such two or more series of class B
notes.
In respect of the class M notes, the trust deed provides that:
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class M notes of one
series only shall be deemed to have been duly passed if passed at
a meeting of the holders of the class M notes of that series;
267
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class M notes of any
two or more series but does not give rise to a conflict of
interest between the holders of such two or more series of class M
notes, shall be deemed to have been duly passed if passed at a
single meeting of the holders of such two or more series of class
M notes;
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class M notes of any
two or more series and gives or may give rise to a conflict of
interest between the holders of such two or more series of class M
notes, shall be deemed to have been duly passed only if, in lieu
of being passed at a single meeting of the holders of such two or
more series of class M notes, it shall be passed at separate
meetings of the holders of such two or more series of class M
notes.
In respect of the class C notes, the trust deed provides that:
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class C notes of one
series only shall be deemed to have been duly passed if passed at
a meeting of the holders of the class C notes of that series;
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class C notes of any
two or more series but does not give rise to a conflict of
interest between the holders of such two or more series of class C
notes, shall be deemed to have been duly passed if passed at a
single meeting of the holders of such two or more series of class
C notes;
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class C notes of any
two or more series and gives or may give rise to a conflict of
interest between the holders of such two or more series of class C
notes, shall be deemed to have been duly passed only if, in lieu
of being passed at a single meeting of the holders of such two or
more series of class C notes, it shall be passed at separate
meetings of the holders of such two or more series of class C
notes.
In respect of the class D notes, the trust deed provides that:
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class D notes of one
series only shall be deemed to have been duly passed if passed at
a meeting of the holders of the class D notes of that series;
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class D notes of any
two or more series but does not give rise to a conflict of
interest between the holders of such two or more series of class D
notes, shall be deemed to have been duly passed if passed at a
single meeting of the holders of such two or more series of class
D notes;
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of the class D notes of any
two or more series and gives or may give rise to a conflict of
interest between the holders of such two or more series of class D
notes, shall be deemed to have been duly passed only if, in lieu
of being passed at a single meeting of the holders of such two or
more series of class D notes, it shall be passed at separate
meetings of the holders of such two or more series of class D
notes.
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In respect of a class of notes of any series constituting two or more
sub-classes, the trust deed provides that:
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of notes of one sub-class
only of such class, shall be deemed to have been duly passed if
passed at a meeting of the holders of the notes of such sub-class;
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of more than one sub-class of
notes of such class but does not give rise to a conflict of
interest between the holders of such sub-classes of notes, shall
be deemed to have been duly passed if passed at a single meeting
of the holders of all such sub-classes of notes; and
o a resolution which, in the sole opinion of the note trustee,
affects the interests of the holders of more than one sub-class of
notes of such class and gives or may give rise to a conflict of
interest between the holders of such sub-classes of notes, shall
be deemed to have been duly passed only if, in lieu of being
passed at a single meeting of the holders of such sub-classes of
notes, it shall be passed at separate meetings of the holders of
such sub-classes of notes.
The quorum for any meeting of the noteholders of any series and class of
notes or any one or more series of notes of the same class convened to
consider a resolution (except for the purpose of passing an extraordinary
resolution or a programme resolution) will be one or more persons holding or
representing not less than one-twentieth of the aggregate principal amount
outstanding of such series and class of notes or such one or more series of
notes of notes of the same class or, at any adjourned meeting, one or more
persons being or representing noteholders of such series and class of notes or
such one or more series of notes of the same class, whatever the total
principal amount of the outstanding notes so represented. A "resolution" means
a resolution (excluding an extraordinary resolution or a programme resolution)
passed at a meeting duly convened and held in accordance with the provisions
of the trust deed by a simple majority of the voting thereat upon a show of
hands or if a poll is duly demanded by a simple majority of the votes cast on
such poll.
Subject as provided in the following paragraph, the quorum for a meeting
of the noteholders of any series and class of notes or any one or more series
of notes of the same class convened to consider an extraordinary resolution
will be one or more persons holding or representing not less than half of the
aggregate principal amount outstanding of such series and class of notes or
such one or more series of notes of the same class or, at any adjourned
meeting, one or more persons being or representing noteholders of such series
and class of notes or such one or more series of notes of the same 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 a series and class of notes, the currency of payment, the issuer
priority of payments or the quorum or majority required in relation to these
terms, require a quorum for passing an extraordinary resolution of one or more
persons holding or representing in total not less than three quarters of the
aggregate principal amount outstanding of the relevant series and class of
notes or of the relevant one or more series of notes of the same class or, at
any adjourned meeting, at least one quarter of the aggregate principal amount
outstanding of such series and class of notes or such one or more series of
notes of the same class.
An "extraordinary resolution" means (a) a resolution passed at a meeting
duly convened and held in accordance with the provisions of the trust deed by
a majority consisting of not less than three-fourths of the persons voting
thereat upon a show of hands or if a poll is
269
duly demanded by a majority consisting of not less than three-fourths of the
votes cast on such poll or (b) a resolution in writing signed by or on behalf
of all the noteholders of a particular class of notes which resolution may be
contained in one document or several documents in like form each signed by or
on behalf of one or more of the relevant noteholders.
A resolution signed by or on behalf of all the noteholders of the
relevant series and class or of the relevant one or more series of notes of
the same class who for the time being are entitled to receive notice of a
meeting under the 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 in Condition 11(3):
o no extraordinary resolution of the class B noteholders of any
series shall take effect while the class A notes (of that series
or of any other series) 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.
o no extraordinary resolution of the class M noteholders of any
series shall take effect while the class A notes or class B notes
(in each case, of that series or of any other series) remain
outstanding unless sanctioned by an extraordinary resolution of
the class A noteholders and an extraordinary resolution of the
class B noteholders, in each case of each series, or the note
trustee, is of the opinion that it would not be materially
prejudicial to the respective interests of the class A noteholders
and/or the class B noteholders of each series (as applicable).
o no extraordinary resolution of the class C noteholders of any
series shall take effect while the class A notes, class B notes or
class M notes (in each case, of that series or of any other
series) 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, in each case of each series, or the note
trustee, is of the opinion that it would not be materially
prejudicial to the respective interests of the class A
noteholders, the class B noteholders and the class M noteholders
of each series (as applicable).
o no extraordinary resolution of the class D noteholders of any
series shall take effect while the class A notes, class B notes,
class M notes or class C notes (in each case, of that series or of
any other series) 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, in each case
of each series, or the note trustee, is of the opinion that it
would not be materially prejudicial to the respective interests of
the class A noteholders, the class B noteholders, the class M
noteholders and/or the class C noteholders of each series (as
applicable).
(2) Programme resolution
Notwithstanding the provisions set out in Condition 11(1), any
extraordinary resolution of the noteholders of any class of notes to direct
the note trustee to take any enforcement action pursuant set out in Conditions
9 and 10 (a "programme resolution") shall only be capable of being passed at a
single meeting of the noteholders of all series of such 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
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notes of such class or, at any adjourned and reconvened meeting, two or more
persons being or representing noteholders of such class of notes, whatever the
aggregate principal amount outstanding of such class of notes so held or
represented by them.
(3) Approval of modifications and waivers by Noteholders
No extraordinary resolution of the noteholders of any one or more series
of class A notes to sanction a modification of, or any waiver or authorization
of any breach, or proposed breach of, any of the provisions of the issuer
transaction documents or the terms and conditions of such notes shall take
effect unless it has been sanctioned by an extraordinary resolution of the
class B noteholders, an extraordinary resolution of the class M noteholders,
an extraordinary resolution of the class C noteholders and an extraordinary
resolution of the class D noteholders, in each case of each series, or the
note trustee is of the opinion that it would not be materially prejudicial to
the respective interests of the class B noteholders, the class M noteholders,
the class C noteholders and the class D noteholders of each series.
After the class A notes have been fully redeemed, no extraordinary
resolution of the noteholders of any one or more series of class B notes to
sanction a modification of, or any waiver or authorization of any breach, or
proposed breach of, any of the provisions of the issuer transaction documents
or the terms and conditions of such notes shall take effect unless it has been
sanctioned by an extraordinary resolution of the class M noteholders, an
extraordinary resolution of the class C noteholders and an extraordinary
resolution of the class D noteholders, in each case of each series, or the
note trustee is of the opinion that it would not be materially prejudicial to
the respective interests of the class M noteholders, the class C noteholders
and the class D noteholders of each series.
After the class A notes and class B notes have been fully redeemed, no
extraordinary resolution of the noteholders of any one or more series of class
M notes to sanction a modification of, or any waiver or authorization of any
breach, or proposed breach of, any of the provisions of the issuer transaction
documents or the terms and conditions of such notes shall take effect unless
it has been sanctioned by an extraordinary resolution of the class C
noteholders and an extraordinary resolution of the class D noteholders, in
each case of each series, or the note trustee is of the opinion that it would
not be materially prejudicial to the respective interests of the class C
noteholders and the class D noteholders of each series.
After the class A notes, class B notes and class M notes have been fully
redeemed, no extraordinary resolution of the noteholders of any one or more
series of class C notes to sanction a modification of, or any waiver or
authorization of any breach, or proposed breach of, any of the provisions of
the issuer transaction documents or the terms and conditions of such notes
shall take effect unless it has been sanctioned by an extraordinary resolution
of the class D noteholders, in each case of each series, or the note trustee
is of the opinion that it would not be materially prejudicial to the interests
of the class D noteholders of each series.
(4) Modifications and waivers by the note trustee
The note trustee, may, without the consent of the noteholders, (1) agree
to any modification of, or to the waiver or authorization of any breach or
proposed breach of, the terms and conditions of any series and class 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 such
series and class of notes or any other series and class of notes or (2)
determine that any note event of default in respect of a series and class of
notes shall not be treated as such, provided that, in any such case, it is not
in the opinion of the note trustee materially prejudicial to the interest of
the noteholders of such series and class of notes or of any other series and
class of notes or (3) agree to any modification of any of the
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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 or, as the
case may be, the issuer security 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 or, as the case may be, the
issuer security trustee, agrees otherwise, shall be promptly notified to the
noteholders and the rating agencies in accordance with Condition 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 a class,
series or series and class thereof 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 and the issuer security trustee
The note trustee and the issuer security trustee are entitled to be
indemnified and relieved from responsibility in certain circumstances,
including provisions, among others, relieving them from taking enforcement
proceedings unless indemnified to their satisfaction. The note trustee and the
issuer security trustee are also entitled to be paid their costs and expenses
in priority to any interest payments to noteholders.
The note trustee and the issuer security trustee and their 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 or
as security 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 and the issuer security 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 or the issuer security trustee, as applicable.
Furthermore, the note trustee and the issuer security trustee will be
relieved of liability for making searches or other inquiries in relation to
the assets comprising the issuer security. The note trustee and the issuer
security trustee do not have any responsibility in relation to the legality
and the enforceability of the trust arrangements and the related issuer
security. Neither the note trustee nor the issuer security trustee will be
obliged to take any action that might result
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in its incurring personal liabilities. Neither the note trustee nor the issuer
security trustee is obliged to monitor or investigate the performance of any
other person under the issuing entity 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 persons are properly performing their duties, unless it receives express
notice to the contrary.
Neither the note trustee nor the issuer security trustee will 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 paragraphs of this
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Condition 14 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 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
nonexclusive 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 homeowner and who
grants the mortgage over his 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 regulated 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, 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 the Land Registry. The
registrar allocates a unique title number. Consequently if there are freehold
and leasehold registered interests in the same property, then there will be
more than one register of title and a separate title number is allocated to
each interest in such 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 that is the subject of that title number. 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 prior to the
Land Registration Act 2002, practice varied 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
absolute title. A person registered with absolute title owns the
specified estate in the land free from all interests other than
those entered on the register, those classified as notice,
caution, unregistered interests which override registered
disposition (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.
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The charges register details security interests and encumbrances
registered against the property.
The property is also identified by a plan retained at the 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 the 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 the 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 the Land Charges Registry in order to be
effective against a subsequent purchaser or mortgagee of the land.
Taking security over land
A legal charge of registered land may only be effected once the charge
has been registered with the Land Registry. Prior to registration, it will
take effect only as an equitable mortgage or charge. A registered legal charge
is subject to pre-existing registered legal charges but has priority over
pre-existing mortgages which are not registered and legal charges registered
subsequent to it. Where land is registered therefore, a mortgagee must
register its legal charge at the Land Registry in order to secure priority
over any subsequent holder of a legal charge. Priority of mortgages (whether
legal, including legal charges, 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 legal charge. 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 the 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
his land without the consent of the mortgagee. Priority
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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 the Land
Charges Registry and the date of creation of the mortgage/legal charge.
Generally speaking where all else is equal between two competing mortgages,
the priority will be determined by the date of creation of the mortgage/legal
charge.
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 the Land Registry or the 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 conditions 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 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.
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.
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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 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 regulated
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
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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 and certain interests implied by law) 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 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".
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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
(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 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, 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
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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, which applies only to persons who are the absolute
beneficial owners of notes, is a discussion of our understanding of current UK
tax law and HM Revenue & Customs practice as at the date of this prospectus
relating to certain aspects of the UK taxation of the notes. Sidley Austin, UK
tax advisers to Northern Rock plc, has prepared and reviewed the discussion
below of material United Kingdom tax consequences and confirmed to us that
this discussion represents its opinion. The discussion assumes that the final
documentation conforms with the description in the prospectus. The discussion
also assumes that all payments made pursuant to the final documentation are
calculated on arms' length terms. The discussion is not a comprehensive
analysis of the tax consequences arising in respect of the notes and some
aspects of the discussion do not apply to certain classes of taxpayer (such as
dealers). If you are in any doubt about your tax position or if you may be
subject to tax in a jurisdiction other than the UK you should seek your own
professional advice.
Withholding tax
Where interest is payable on notes which have a maturity of less than
one year (and which are not issued under arrangements the effect of which is
to render such notes part of a borrowing with a total term of a year or more),
the interest will not be "yearly interest" for the purposes of the Income and
Corporation Taxes Act 1988 (the "Taxes Act") and accordingly payments of
interest on such notes may be made without deduction or withholding for or on
account of UK income tax.
In respect of all other notes, interest bearing notes will constitute
"quoted Eurobonds" within the meaning of section 349 of the Taxes Act while
the notes are listed on a "recognized stock exchange" within the meaning of
section 841 of the Taxes Act. The London Stock Exchange is such a recognized
stock exchange. Under HM Revenue & Customs published practice, securities will
be treated as listed on the London Stock Exchange while they are admitted to
the official list and admitted to trading by the London Stock Exchange.
Payments of interest on such notes as fall outside the scope of the preceding
paragraph, but which are quoted Eurobonds, may be made without deduction or
withholding for or on account of UK income tax irrespective of whether the
notes are in global form or in definitive form. In other cases, UK income tax
may have to be withheld at the lower rate (currently 20 per cent.) from
payments of interest on the notes, subject to any direction to the contrary
from the HM Revenue & Customs 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 Taxes Act.
Where notes are to be, or may be redeemed at, a premium, any such
element of premium may constitute a payment of interest. Payments of interest
are subject to deduction or withholding for or on account of UK income tax as
outlined above.
Any discount element associated with zero coupon notes will not be
subject to deduction or withholding for or on account of UK income tax.
Payments of interest and principal with respect to the notes will be
subject to any applicable withholding taxes and the issuing entity will not be
obliged to pay additional amounts in relation thereto.
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Direct assessment of non-UK resident holders of the notes to UK tax on interest
Interest on the notes constitutes UK source income and, as such, may be
subject to income tax by direct assessment even where paid without deduction
or withholding for or on account of UK tax, subject to any direction to the
contrary from the HM Revenue & Customs in respect of such relief as may be
available pursuant to the provisions of an applicable double taxation treaty.
However, interest with a UK source received without deduction or
withholding for or on account of UK income 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 or withholding for or on
account of UK income tax, noteholders who are not resident in the UK may be
able to recover all or part of the tax deducted or withheld 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 UK corporation tax and obtain
relief as income on all returns (including interest), profits or gains arising
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 income tax on the amount of
any interest received in respect of such notes.
Notes will not be regarded by HM Revenue & Customs 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 note 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. For notes which constitute
variable rate securities, taxation in respect of such a disposal will be
computed on the basis that such amount as HM Revenue & Customs considers to be
just and reasonable will be treated as accrued income. However, the transferee
of a variable rate security will not be
283
entitled to any relief on such amount. Notes which have a step-up date for
interest will constitute variable rate securities for this purpose.
Noteholders who are individuals may wish to note that HM Revenue &
Customs has power to obtain information (including the name and address of the
beneficial owner of the interest) from any person in the United Kingdom who
either pays interest to or receives interest for the benefit of an individual,
or who either pays amounts payable on the redemption of Notes to or receives
such amounts for the benefit of an individual. Information so obtained may, in
certain circumstances, be exchanged by HM Revenue & Customs with the tax
authorities of the jurisdiction in which the Noteholder is resident for tax
purposes.
Stamp duty and stamp duty reserve tax
No UK stamp duty or stamp duty reserve tax is payable on the issue or
transfer of the notes, whether such notes are in global or definitive form.
The EU Savings Directive (2003/48/EC)
Under the EU Savings Directive EU Member States are required to provide
to the tax authorities of another Member State details of payments of interest
(or similar income) paid by a person within its jurisdiction to an individual
resident in that other Member State. However, for a transitional period,
Belgium, Luxembourg and Austria are instead required (unless during that
period they elect otherwise) to operate a withholding system in relation to
such payments (the ending of such transitional period being dependent upon the
conclusion of certain other agreements relating to information exchange with
certain other countries).
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Material United States tax consequences
General
The following section is a discussion of the anticipated 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"), subject to
the qualifications set forth in the applicable prospectus supplement.
In general, the discussion assumes that a holder acquires a US note at
original issuance at its issue price (generally the first price at which a
substantial amount of substantially similar notes are sold for money,
excluding sales to bond houses, brokers, or similar persons or organizations
acting in the capacity of underwriters, placement agents or wholesalers) 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; insurance companies; tax-exempt organizations;
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 synthetic security 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 discussion does not describe any tax consequences
arising under the laws of any taxing jurisdiction other than the US federal
government. In addition, please consult the applicable prospectus supplement
in the event the US notes are denominated in a currency other than US dollars.
This discussion is based on the US federal income 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
discussion. Further, the following discussion assumes that the issuing entity,
Funding 2 and the mortgages trustee, in its capacity as trustee for the
mortgage trust, will conduct their affairs as described in this prospectus and
in accordance with assumptions made by, and representations made to, counsel.
Sidley Austin LLP, US federal income tax counsel to Northern Rock ("US
federal income tax counsel"), has prepared and reviewed the statements under
the heading "Material United States tax consequences". As described under "-
Tax status of the issuing entity, Funding 2, mortgages trustee and mortgages
trust", US federal income tax counsel is of the opinion that the mortgages
trustee, acting as trustee of the mortgages trust, Funding 2 and the issuing
entity 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 federal income tax counsel is also of the opinion that, although
there is no authority on the treatment of instruments substantially similar to
the US notes, the class A, class B and class M US notes will be treated as
debt for US federal income tax purposes and the class C US notes should be
treated as debt for US federal income tax purposes.
An opinion of US federal income tax counsel is not binding on the
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. As a
result, the IRS or a court may disagree with all or part of the discussion
herein. Accordingly, the issuing entity encourages persons considering the
purchase of US notes to consult their own tax advisors as to the personal US
tax
285
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 federal income 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 eligible to elect, and has made a
valid election, to be treated as a United States person despite not meeting
those requirements.
If an entity that is treated as a partnership for US federal income tax
purposes holds US notes, the US federal income tax treatment generally will
depend upon the activities of the partnership and the status of the partners.
Tax status of the issuing entity, Funding 2, mortgages trustee and mortgages
trust
Under the transaction documents, each of the issuing entity, 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 federal income tax counsel is of
the opinion that, assuming compliance with the transaction documents, none of
the issuing entity, 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 issuing entity, Funding 2, or the
mortgage trust or any of their assets as a REMIC (a type of securitization
vehicle 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, it is the opinion of US
federal income tax counsel that the class A, class B and class M US notes will
be treated as debt for US federal income tax purposes and that the class C US
notes should be treated as debt for US federal income tax purposes. See "-
Alternative Characterization of the US notes". The issuing entity intends to
treat the US notes as debt of the issuing entity for all purposes, including
US federal income tax purposes. In general, the characterization of an
instrument for US federal income tax purposes as debt or equity by its issuing
entity as of the time of issuance is binding on a holder (but not the IRS),
unless the holder takes an inconsistent position and discloses such position
on its US federal income tax return.
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"). For
purposes of this discussion, it is assumed that the US notes will accrue
interest at a rate equal to LIBOR plus a
286
margin (or other qualified floating rate within the meaning of Treas. Reg. ss.
1.1275-5), and, hence the US notes should be treated as "variable rate debt
instruments" for US federal income tax purposes. Please consult the applicable
prospectus supplement in the event the US notes accrue interest at a rate
other than a qualified floating rate.
With respect to US notes that have a stated maturity of more than one
year (i.e., other than short-term obligations, discussed below), the issuing
entity 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, assuming that
such interest is treated as qualified stated interest, discount on such 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 such US notes. It is possible that interest
on certain US notes could be treated as OID because such interest is subject
to deferral in certain limited circumstances (as described under "Description
of the US Notes - 4(E) Deferred Interest").
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 issuing entity
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.
With respect to US notes that have a stated maturity of not greater than
one year ("short-term obligations"), US holders that report income for US
federal income tax purposes under the accrual method are required to accrue
OID on short-term obligations on a straight-line basis unless an election is
made to accrue the OID under a constant yield method (based on daily
compounding). A US holder who is an individual or other cash method holder is
not required to accrue OID on a short-term obligation unless such holder
elects to do so. If such an election is not made, any gain recognized by such
holder on the sale, exchange or maturity of such short-term obligation will be
ordinary income to the extent of the holder's ratable share of OID accrued on
a straight-line basis, or upon election under the constant yield method (based
on daily compounding), through the date of the sale, exchange or maturity.
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 qualified 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
287
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 issuing
entity and the holders of the US notes is not clear because there is no
authority on transactions comparable to that contemplated herein. Prospective
investors are encouraged to consult their own tax advisors regarding the
personal tax consequences with respect to the potential impact of an
alternative characterization of the US notes for US federal income tax
purposes. One possible alternative characterization is that the IRS could
assert that the lowest subordinated class of notes or any other class of notes
should be treated as equity in the issuing entity for US federal income tax
purposes because the issuing entity may not have substantial equity. If any
class of US 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
("CFC") for such US holder.
A US note that is treated as an equity interest in a PFIC or CFC rather
than a debt instrument for US federal income tax purposes would have certain
timing and character consequences to a US holder and could require certain
elections and disclosures that would need to be made shortly after acquisition
to avoid potentially adverse US federal income tax consequences. If the
issuing entity was treated as a PFIC in which a US holder owns an equity
interest, 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). The issuing entity does not intend
to provide information that would enable a holder of a US note to make a QEF
election and the mark to market election will only be available during any
period in which the US notes are traded on a qualifying exchange or market.
The issuing entity encourages persons considering the purchase or ownership of
10 per cent. or more of any class of US notes (or combination of classes) that
is treated as equity for US federal income tax purposes to consult their own
tax advisors regarding the personal US tax consequences resulting from such an
acquisition under the special rules applicable to CFCs under the Code.
288
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 withhold 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 considering purchasing US notes are encouraged to
consult their own tax advisors as to the personal US tax consequences of the
foregoing withholding tax requirements.
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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.
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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 issuing entity, the servicer, 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 issuing entity, the
servicer, 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 or local law of the United States that is substantially similar
to the provisions of section 406 of ERISA or
291
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 issuing entity 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 issuing entity and transactions
by the issuing entity 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 lowest subordinated class of 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 class
A, class B and class M US notes will, and the class C US notes should, be
treated as 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 issuing entity. If the underlying assets of the
issuing entity 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 issuing
entity, and any other parties with authority or control with respect to the
issuing entity, 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
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things, that such investment will not result in a non-exempt prohibited
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 issuing entity, the servicer, 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.
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Enforcement of foreign judgments in England and Wales
The issuing entity 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 issuing entity 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 issuing entity 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 issuing entity 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 of the issuing entity 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 issuing entity has been advised by Sidley Austin, English counsel
to Northern Rock, 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.
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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.
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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 Northern Rock by Sidley Austin, 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 Northern Rock by
Sidley Austin 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 by Mourant du
Feu & Jeune, London.
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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 class or sub-class of such series 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 US
notes 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 Securities Act. Any
underwriters of the US notes that are not US registered broker dealers will
agree that they will offer and sell the US notes within the United States
through US registered broker-dealers.
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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.
United Kingdom
Each underwriter will represent and agree that:
o in relation to any US notes which have a maturity of less than
one year, (i) it is a person whose ordinary activities involve it
in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of its business and (ii) it
has not offered or sold and will not offer or sell any US notes
other than to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as
principal or as agent) for the purposes of their businesses or
who it is reasonable to expect will acquire, hold, manage or
dispose of investments (as principal or agent) for the purposes
of their businesses where the issue of the US notes would
otherwise constitute a contravention of Section 19 of the FSMA by
the issuing entity;
o it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an 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 US notes in circumstances in which section
21(1) of the FSMA does not apply to the issuing entity; 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
US notes in, from or otherwise involving the United Kingdom.
Italy
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 any US notes in the Republic of Italy.
Spain
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 any US notes 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 37/1998, of November
16 and Decree 5/2005 of March 2005, among others) and regulations developing
it from time to time, 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 US notes other than to persons whose ordinary business it
is to buy or sell shares or debentures whether as principal or agent.
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The Netherlands
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 any US notes in The Netherlands.
General
The underwriters will represent and agree that they have complied and
will comply with all applicable securities laws and regulations in force in
any jurisdiction in which they purchase, offer, sell or deliver US notes or
possess them or distribute the prospectus or any other offering material and
will obtain any consent, approval or permission required by them for the
purchase, offer, sale or delivery by them of US 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 issuing entity
shall have no responsibility for them. Furthermore, the underwriters will
represent and agree that they have not and 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 issuing entity 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 (other than as
described above), or pursuant to any exemption available thereunder, or assume
any responsibility for facilitating such sale.
The underwriters will agree that they 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.
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Reports to noteholders
The servicer will prepare annual and monthly reports that will
contain information about the issuing entity, the notes and the mortgage
portfolio. The financial information contained in the reports will not be
prepared in accordance with generally accepted accounting principles of any
jurisdiction. Annual and monthly reports prepared by the servicer will be sent
by the servicer on behalf of the issuing entity to Cede & Co. and Citivic, as
applicable, as the registered holder of the notes, unless and until individual
note certificates are issued. Reports will not be sent to beneficial owners of
the notes by the servicer. Cede & Co. and Citivic, as applicable, may make
such reports available to beneficial owners upon request in accordance with
their rules.
The registrants will file with the SEC all required annual reports on
Form 10-K, periodic reports on Form 10-D and reports on Form 8-K.
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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 issuing entity
passed on January 18, 2005.
Listing of notes
Application has been made to the FSA 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 will also be made to the London Stock Exchange for
each class of the notes to be admitted to trading on the Gilt Edged and Fixed
Income Market of the London Stock Exchange.
It is expected that each series and class of notes which is to be
admitted to the official list and to trading on the Gilt Edged and Fixed
Income Market of 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
and to making the final terms relating to the notes available to the public in
accordance with the Prospectus Directive and associated UK and EU implementing
legislation.
This prospectus has been prepared in compliance with the Prospectus
Rules Instrument, 2005, made pursuant to the FSMA.
The issuing entity and the directors of the issuing entity accept
responsibility for the information contained in this prospectus. To the best
of the knowledge and belief of the issuing entity and the directors of the
issuing entity (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 issuing entity and the directors of the issuing entity 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
Currently, none of the issuing entity, Funding 2, Holdings, the
post-enforcement call option holder, the mortgages trustee or Northern Rock is
or has been involved in the preceding 12 calendar months involved in any
governmental, legal or arbitration proceedings or enforcement proceedings
which may have or have had in the recent past a significant effect upon the
financial position or profitability of the issuing entity, Funding 2,
Holdings, the post-enforcement call option holder, the mortgages trustee or
Northern Rock nor, so far as the issuing entity, Funding 2, Holdings, the
post-enforcement call option holder, the mortgages trustee or Northern Rock,
respectively, is aware, are any such governmental legal or arbitration
proceedings or enforcement proceedings pending or threatened.
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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
issuing entity have been prepared. So long as the notes are listed on the
official list and are traded on the Gilt Edged and Fixed Income Market of the
London Stock Exchange, the most recently published audited annual accounts of
the issuing entity from time to time shall be available at the specified
office of the UK principal paying agent in London. The issuing entity does not
publish interim accounts.
Since the date of its incorporation, the issuing entity has not
entered into any contracts or arrangements not being in the ordinary course of
business.
Significant or material change
Since the date of incorporation of the issuing entity (5 October,
2004) and Funding 2 (4 October, 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 no material adverse
change in the financial position or prospects of the issuing entity, Funding
2, Holdings, the post-enforcement call option holder or the mortgages trustee.
Documents available
From the date of this prospectus and for so long as any series and
class of notes issued by the issuing entity may be admitted to the Official
List, copies of the following documents may, when published, be inspected at
the registered office of the Issuing entity 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
issuing entity, Funding 2, Holdings, the mortgages trustee
and the post-enforcement call option holder;
(B) a copy of the prospectus and the related prospectus
supplement;
(C) any future offering circulars, prospectuses, prospectus
supplements, information memoranda and supplement including
prospectus supplements (as applicable) (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, as 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 which the
prospectus supplement relates) to the prospectus and any
other documents incorporated therein or therein by
reference.
(D) all other reports, letters, statements prepared by an expert
and included in the prospectus;
(E) each of the following documents:
o the programme agreement;
o each subscription agreement;
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o each underwriting agreement;
o the global intercompany loan agreement;
o the mortgages trust deed;
o the controlling beneficiary deed;
o the mortgage sale agreement;
o the issuer deed of charge;
o each deed of accession to the issuer deed of charge;
o the Funding 2 deed of charge;
o each deed of accession to the 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 issuer guaranteed investment contract;
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 Funding 2 bank account agreement;
o the issuer bank account agreement;
o the collection bank agreement;
o the master definitions schedule;
o each start-up loan agreement;
o the corporate services agreement;
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o any other deeds of accession or supplemental deeds
relating to any such documents.
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Glossary
Set forth below in this glossary are definitions of certain defined
terms used and not defined elsewhere in this prospectus.
"AAA loan tranches" The loan tranches made by the issuing entity to Funding 2 under the
global intercompany loan agreement from the proceeds of issue of any
series of class A notes
"AA loan tranches" The loan tranches made by the issuing entity to Funding 2 under the
global intercompany loan agreement from the proceeds of issue of any
series of class B notes
"A loan tranches" The loan tranches made by the issuing entity to Funding 2 under the
global intercompany loan agreement from the proceeds of issue of any
series of class M notes
"AAA principal deficiency sub-ledger" One of five sub-ledgers on the principal deficiency ledger which
records any principal deficiency in respect of any AAA loan tranches
"AA principal deficiency sub-ledger" One of five sub-ledgers on the
principal deficiency ledger which records any principal deficiency
in respect of any AA loan tranches "A principal deficiency
subledger" One of five sub-ledgers on the principal deficiency
ledger which records any principal deficiency in respect of any A
loan tranches
"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 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
"adjusted Funding 2 reserve fund level" The sum of:
(a) the aggregate amount standing to the credit of the issuer
reserve ledger and the Funding 2 reserve ledger; and
(b) the amount (if any) then to be credited to the issuer reserve
ledger in accordance with to the issuer pre-enforcement
principal priority of payments and the amount (if any) then to
be credited to the Funding 2 reserve ledger in accordance with
to the Funding 2 pre-enforcement principal priority of payments
"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
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"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 note payment date or loan
payment date (as applicable) 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
"bank account agreement" The agreement dated the initial closing date, as amended from time
to time, among the account bank, the cash manager, the mortgages
trustee, Funding, Funding 2, the security trustee and the Funding 2
Security Trustee which governs the operation of the mortgages
trustee bank accounts and the Funding 2 bank accounts
"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
"basis rate swaps" The Funding 2 basis rate swaps and the swap agreements entered into
by each of the Funding issuing entities 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
issuing entities
"BBB loan tranches" The loan tranches made by the issuing entity 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 issuing entity to Funding 2 under the
global intercompany loan agreement from the proceeds of the issue of
any series of class D notes
"BBB principal deficiency sub-ledger" One of five sub-ledgers or the principal deficiency ledger which
records any principal deficiency in respect of any BBB loan tranches
"BB principal deficiency sub-ledger" One of five sub-ledgers or the principal deficiency ledger which
records any principal deficiency in respect of any BB loan tranches
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"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
"bullet loan tranche" Any loan tranche which is scheduled to be repaid in full on one loan
payment date. Bullet loan tranches will be deemed to be pass-through
loan tranches if:
(a) a date specified in relation to the same in the applicable loan
tranche supplement occurs;
(b) a pass-through trigger event occurs; or
(c) the step-up date (if any) in relation to such loan tranche
occurs
"bullet redemption date" The bullet redemption date for any series and class of bullet
redemption notes will be the monthly payment date specified as such
for such series and class of notes in the applicable prospectus
supplement
"bullet redemption notes" Any series and class of notes which is scheduled to be repaid in
full on one note payment date. Bullet redemption notes will be
deemed to be pass-through notes if:
(a) a date specified in relation to the same in the prospectus
supplement occurs
(b) pass-through trigger event occurs; or
(c) the step-up date (if any) in relation to such notes occurs
"bullet repayment date" The bullet repayment date for any bullet loan tranche will be the
monthly payment date specified as such for such loan tranche in the
applicable loan tranche supplement
"bullet repayment loan amount" The amount required to be repaid on the bullet repayment date in
respect of a bullet loan tranche in order to repay such loan tranche
in full
"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
"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 capital balance of that mortgage loan
either in accordance
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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)
"class A noteholders" The holders of the class A notes
"class A notes" The notes of any series designated as such in the applicable
prospectus supplement
"class B noteholders" The holders of the class B notes
"class B notes" The notes of any series designated as such in the applicable
prospectus supplement
"class C noteholders" The holders of the class C notes
"class C notes" The notes of any series designated as such in the applicable
prospectus supplement
"class D noteholders" The holders of the class D notes
"class D notes" The notes of any series designated as such in the applicable
prospectus supplement
"class M noteholders" The holders of the class M notes
"class M notes" The notes of any series designated as such in the applicable
prospectus supplement
"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
"controlled amortization installment" On any controlled redemption 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 are controlled amortization notes,
the maximum aggregate principal amount which may be repaid by the
issuing entity to the relevant noteholder or noteholders of such
series and class on that controlled redemption date in accordance
with the terms and conditions of the relevant notes
"controlled amortization note" Any series and class of notes the conditions of which impose a limit
on the amount of principal which may be repaid on such notes on each
controlled redemption date for such notes. Controlled amortization
notes will be deemed to be pass-through notes if:
(a) a date specified in relation to the same in the prospective
supplement occurs;
(b) a pass-through trigger event occurs; or
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(c) the step-up date (if any) in relation to such notes occurs
"controlled redemption dates" The controlled redemption dates for any series and class of
controlled amortization notes will be the monthly payment dates
specified as such for such series and class of notes in the
applicable prospectus supplement
"controlled repayment dates" The controlled repayment dates for any controlled repayment loan
tranche will be the monthly payment dates specified as such for such
loan tranche in the applicable loan tranche supplement
"controlled repayment loan amount" On any controlled repayment date before the occurrence of a trigger
event or the enforcement of the Funding 2 security, for any
controlled repayment loan tranche, the maximum aggregate principal
amount which may be repaid by Funding 2 to the issuing entity on
that controlled repayment date
"controlled repayment loan tranche" Any loan tranche which by its terms imposes a limit on the amount of
principal which may be repaid on such loan tranche on any controlled
repayment date for such loan tranche. Controlled repayment loan
tranches will be deemed to be pass-through loan tranche if:
(a) date specified in relation to the same in the applicable loan
tranche supplement occurs;
(b) a pass-through trigger event occurs; or
(c) the step-up date (if any) in relation to such loan tranche
occurs
"corporate services agreement" With respect to (1) the issuing entity and Funding 2, 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, Funding 2 and the issuing entity and (2) the mortgages
trustee, the corporate services agreement entered into on the
initial closing date, as amended from time to time, among, inter
alios, the corporate services provider, Funding and the mortgages
trustee
"corporate services provider" With respect to (1) the issuing entity and Funding 2, Law Debenture
Corporate Services Limited and (2) 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
"credit support annex" The 1995 Credit Support Annex (Bilateral Form - Transfer) published
by the International Swaps and Derivatives Association, Inc.,
entered into or to be entered into by Funding 2 or the issuing
entity and a swap provider
"current balance" For any mortgage loan as at any given date, the aggregate (but
avoiding double counting) of:
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(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
(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
"cut-off date" The cut-off date in relation to the issuance of any series of notes,
which will be specified in the prospectus supplement for such notes
"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
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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 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 applicable final note 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)
"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
"EURIBOR" The Euro-zone inter-bank offered rate, as determined by the agent
bank in accordance with the paying agent and agent bank agreement
"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
"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
"final maturity date" In respect of any series and class of notes, the date specified as
such for such series and class of notes in the related prospectus
supplement
"final repayment date" In relation to any loan tranche the date specified as such for such
loan tranche in the related loan tranche supplement
"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
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"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
"Funding GIC Account" An account in the name of Funding held at Northern Rock and
maintained pursuant to the terms of a guaranteed investment contract
"Funding (issuing entity) reserve fund" A reserve fund established in the name of Funding for the benefit of
a Funding issuing entity
"Funding issuing entities" The several note issuing entities, 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 priority of payments" As the context requires, any of the Funding pre-enforcement revenue
priority of payments, the Funding pre-enforcement principal priority
of payments and/or the Funding post-enforcement priority of payments
"Funding reserve fund" A reserve fund established in the name of Funding
"Funding security" The mortgages, charges, assignments, pledges and/or other security
created by Funding under or pursuant to deeds of charge in favor of
the security trustee for the benefit of the secured creditors or
Funding.
"Funding security trustees" The security trustee and the Funding 2 security trustee
"Funding 2 bank account agreement" The agreement entered into on or about the Funding 2 program date,
as amended from time to time, among the account bank, the cash
manager, Funding 2 and the Funding 2 security trustee which governs
the operation of the Funding 2 bank accounts
"Funding 2 basis rate swap agreement" The ISDA master agreement, the schedule thereto and the
confirmations 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 and the Funding
2 basis rate swap provider, 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 excluded In relation to the Funding 2 basis rate swap agreement, an amount
termination amount" equal to:
(a) the amount of any swap termination payment due and payable to
the Funding 2 basis rate swap provider as a result of a swap
provider default in
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respect of the Funding 2 basis rate swap provider; less
(b) the swap replacement premium (if any) received by Funding 2
upon entry by Funding 2 into an agreement to replace such swap
agreement which has terminated as a result of such 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 Funding 2
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
"Funding 2 GIC provider" Northern Rock or any other person or persons as are for the time
being the Funding 2 GIC provider under the applicable Funding 2
guaranteed investment contract
"Funding 2 guaranteed investment contract" The guaranteed investment contract entered into on the Funding 2
program date, 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 intercompany loan" A loan (or the aggregate of a number of separate loans) of the net
proceeds of any issue (or all issues) of notes by a Funding 2
issuing entity, such loan(s) being advanced to Funding 2 by such
Funding 2 issuing entity pursuant to the terms of a Funding 2
intercompany loan agreement;
"Funding 2 intercompany loan agreement" means a loan agreement entered into between Funding 2 and a Funding
2 issuing entity in relation to a Funding 2 intercompany loan;
"Funding 2 intercompany loan An enforcement notice served by the Funding 2 security trustee on
enforcement notice" Funding 2 for the enforcement of the Funding 2 security following
the occurrence of Funding 2 intercompany loan event of default
"Funding 2 intercompany loan event of An event of default under the global intercompany loan
default" agreement and/or under any other Funding 2 intercompany loan
agreement "Funding 2 issuing entity" A wholly-owned subsidiary of
Funding 2, which is established to issue notes and to make a Funding
2 intercompany loan to Funding 2
"Funding 2 liquidity facility" A liquidity facility entered into at any time after the Funding 2
program date
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"Funding 2 liquidity facility provider" The provider of the Funding 2 liquidity facility
"Funding 2 liquidity facility The amounts specified as such in the Funding 2 liquidity facility
subordinated amounts" agreement (if any)
"Funding 2 liquidity facility principal The payments specified as such in the Funding 2 liquidity facility
payment" agreement (if any) "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 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). The Funding 2 liquidity reserve fund, if
any, will be funded up to the Funding 2 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 Funding 2 liquidity reserve fund, if any and, if
the context so requires
"Funding 2 principal deficiency ledger" The ledger maintained by the Funding 2 cash manager which will be
established on the Funding 2 program date and will be sub-divided
into sub-ledgers corresponding to the loan tranches made under the
global intercompany loan agreement in order to record losses
allocated to the global intercompany loan which are to be applied to
the notes or the application of Funding 2 available principal
receipts in paying interest on the loan tranches and certain amounts
ranking in priority thereto in accordance with the Funding 2
pre-enforcement revenue priority of payments
"Funding 2 principal ledger" The ledger on which receipts and payments of Funding 2 available
principal receipts (other than amounts recorded on the Funding 2
cash accumulation ledger) will be recorded by the cash manager
"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 fund threshold" On any date, the lesser of:
(a) the target reserve required amount; or
(b) the highest amount which the adjusted Funding 2 reserve fund
level has been since the first loan 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
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"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 Funding 2 security trustee for the
benefit of the Funding 2 secured creditors
"Funding 2 swap collateral accounts" The accounts, if any, opened in the name of Funding 2 for the
purpose of holding swap collateral delivered to Funding 2 and
maintained in accordance with the terms of the cash management
agreement
"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 corporate services agreement;
(f) the bank account agreement;
(g) the Funding 2 bank account agreement;
(h) the Funding 2 guaranteed investment contract;
(i) the cash management agreement;
(j) the collection bank agreement;
(k) the global intercompany loan agreement;
(l) the controlling beneficiary deed;
(m) each other transaction document to which Funding 2 is a party;
and
(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 (m) above or the transactions contemplated in them
"further mortgage loan" Any mortgage loan which was assigned by the seller to the mortgages
trustee after the initial closing 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 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
"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
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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 servicer, 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
servicer over the relevant entity (except, in any such case, a
winding-up or dissolution for the purpose of a 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 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, servicer, 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, diligence or other process is
enforced upon the whole or any
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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 issuing entity (each, for the
purposes of this definition, a "relevant entity") means:
(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
servicer 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 issuer 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 issuer security trustee (as the case may be),
being disputed in good faith with a reasonable prospect
of success; or
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(ii) an administration order being granted or an
administrative receiver or other receiver, servicer,
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 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) 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" (a) 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; and
(b)In respect of any loan tranche, the closing date of the related
series and class of notes or such other date as may be specified as
such in the applicable loan tranche supplement
"interest determination date" In respect of any series and class of notes, the date(s) specified
as such (if any) in the applicable prospectus supplement
"interest period" (a) In respect of any series and class of notes, (i) with respect to
the first note payment date for such notes, the period from (and
including) the applicable interest commencement date to (but
excluding) such first note payment date, and (ii) thereafter, with
respect to each note payment date for such notes, the period from
and including the preceding note payment date to but excluding such
current note payment date; and
(b) In respect of any loan tranche, (i) with respect to the first
loan payment date for such loan tranche, the period from (and
including) the applicable interest commencement date to (but
excluding) such first loan payment date, and (ii) thereafter, with
respect to each loan payment date for such loan tranche, the period
from (and
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including) the preceding loan payment date to (but excluding) such
current loan payment date
"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
"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
"issuance fees" The fees payable by Funding 2 to the issuing entity under the global
intercompany loan agreement being an amount equal to the expenses
incurred by the issuing entity and Funding 2 (and paid by the
issuing entity under the global intercompany loan agreement) in
connection with the issuance of notes, the making of loan tranches
and the acquisition by Funding 2 of an additional share of the trust
property
"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 issuing
entity, the issuer cash manager, the issuer account bank and the
issuer security 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 issuing entity and the issuer security
trustee, as described further in "Cash management for the issuing
entity"
"issuer deed of charge" The deed of charge entered into on the Funding 2 program date, as
amended from time to time, between, the issuing entity, the issuer
security trustee and the issuer secured creditors as at the Funding
2 program date including any deeds of accession or supplements
thereto, under which the issuing entity charges the issuer security
in favor of the issuer secured creditors, as described further under
"Security for the issuing entity's obligations"
"Issuer enforcement notice" A notice served by the note trustee for the acceleration of the
amounts outstanding in respect of the notes and the enforcement of
the issuer security following a note event of default
"issuer GIC provider" Northern Rock or any other person or persons as are for the time
being the issuer GIC provider under the applicable issuer guaranteed
investment contract
"issuer guaranteed investment contract" The guaranteed investment contract entered into on the Funding 2
program date, as amended, restated supplemented or otherwise
modified from time to time, among the issuing entity, the issuer GIC
provider and others, under which the issuer GIC provider, agrees to
pay the issuing entity a guaranteed rate of interest on the balance
from time to time of the issuer GIC account
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"issuer principal ledger" The ledger on which the issuer cash manager records issuer available
principal receipts received and paid out by the issuing entity
"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 issuer security trustee (and any receiver appointed under the
issuer deed of charge), the note trustee, the issuer swap providers,
any start-up loan provider the corporate services provider in
respect of the issuing entity, the issuer account bank, the issuer
cash manager, the paying agents, the agent bank, the transfer agent,
the registrar and the noteholders and any new issuer secured
creditor who accedes to the issuer deed of charge from time to time
under a deed of accession or a supplemental deed
"issuer security" The mortgages, charges, assignments, pledges and/or any other
security created by the issuing entity under the issuer deed of
charge in favor of the issuer security 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 issuing entity and the applicable issuer
swap provider and/or any credit support provider and includes any
additional and/or replacement issuer swap agreement entered into by
the issuing entity from time to time in connection with the notes
"issuer swap collateral accounts" The accounts, if any, opened in the name of the issuing entity for
the purpose of holding swap collateral delivered to the issuing
entity and maintained in accordance with the terms of the issuer
cash management agreement
"issuer swap excluded termination amount" In relation to an issuer swap agreement an amount equal to:
(a) the amount of any swap termination payment due and payable to
the relevant swap provider as a result of a swap provider
default in relation to such issuer swap provider
less
(b) the swap replacement premium (if any) received by the issuing
entity upon entry by the issuing entity into an agreement 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
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"LIBOR" The London Interbank Offered Rate for deposits in the relevant
currency, as determined by the agent bank in accordance with the
paying agent and agent bank agreement
"loan payment date" In respect of a loan tranche, the monthly payment date(s) specified
in the loan tranche supplement for the payment of interest and/or
principal, subject to the terms of the global intercompany loan
agreement
"loan tranche supplement" In relation to any loan tranche, the document between, amongst
others, Funding 2 and the issuing entity recording the principal
terms of such loan tranche
"London business day" A day (other than a Saturday, Sunday or public holiday) on which
banks are generally open for business in London
"LTV ratio" or "loan to value ratio" In respect of (1) 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 (2)
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
"master definitions schedule" Together, the master definitions schedule dated January 19, 2005, as
amended from time to time, and the issuer master definitions
schedule dated January 19, 2005, as amended from time to time, which
are schedules of definitions used in the transaction documents
"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
"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
"monthly payment date" (a) In respect of 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
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(b) in respect of the issuing entity (and each series of class of
notes) and Funding 2 (and each loan tranche), the date falling
on the 20th day of each calendar month subject to the
appropriate business day convention (if any) specified (in
relation to a series and class of notes) in the applicable
prospectus supplement or (in relation to a loan tranche) in the
applicable loan tranche supplement
"Moody's portfolio variation test value" A certain percentage resulting from the application of the Moody's
portfolio variation test
"Moody's portfolio variation test" The calculation methodology provided by Moody's to the servicer from
time to time for the purpose of calculating the Moody's portfolio
variation test value
"mortgage conditions" 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
"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 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 the initial closing
date, as amended from time to time, among the seller, the mortgages
trustee, Funding, Funding 2, the security trustee and the Funding 2
security trustee regarding the assignment of the mortgage portfolio
to the mortgages trustee including any documents ancillary
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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
"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 The guaranteed investment contract entered into on May 26, 2004, as
investment contract" 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 receipts" On any distribution date, any mortgages trustee retained principal
receipts 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 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
"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
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"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
"note payment date" In respect of a series and class of notes, the monthly payment
date(s) specified in the prospectus supplement for the payment of
interest and/or principal subject to the terms and conditions of the
notes
"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
"original bullet loan tranche" A loan tranche which has, at any time, been a bullet loan tranche,
whether or not the step-up date in respect of such loan tranche has
occurred
"original bullet redemption note" A note which has, at any time, been a bullet redemption note,
whether or not the step-up date in respect of such note has occurred
"original pass-through loan tranche" A loan tranche which, at the time it was advanced, was a
pass-through loan tranche
"pass-through loan tranche" A loan tranche which has no specified repayment dates other than the
final repayment date. On the occurrence of a date specified for a
bullet loan tranche, a scheduled repayment loan tranche or a
controlled repayment loan tranche in the applicable loan tranche
supplement or if a step-up date in relation to such loan tranche
occurs or if a pass-through trigger event occurs, then such loan
tranche will be deemed to be a pass-through loan tranche
"pass-through notes" Any series and class of notes which has no specified redemption
dates other than a final maturity date. On the occurrence of a date
specified for a series and class of bullet redemption notes,
scheduled redemption notes or a controlled amortization notes in the
applicable prospectus supplement or if a step-up date in relation to
such series and class of notes occurs or if a pass-through trigger
event occurs then such notes will be deemed to be pass-through notes
"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
issuing entity, the note trustee, the issuer security trustee, the
principal paying agent, the paying agents, the transfer agent, the
registrar and the agent bank
"payment business day" A day which is:
324
(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 prospectus 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 authorized or
required by law or regulation to be closed in New York
"permitted redemption date" As applicable, a bullet redemption date, a scheduled redemption
date, a controlled redemption date or the date on or after which
principal repayments of pass-through notes may be made
"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 aggregate amount of all principal
payments in respect of such series and notes that have been paid
since the closing date for
325
such series and class notes and on or prior to that determination
date
"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
"programme agreement" The agreement entered into on or around the Funding 2 program date,
as amended from time to time, between, amongst others, the issuing
entity, Funding 2 and the dealers named therein (or deemed named
therein)
"prospectus" This prospectus dated [o] relating to the issue of US notes,
together with the prospectus supplement relating to each series and
class of notes
"prospectus rules" The rules contained in the Prospectus Rules Instrument 2005, made
pursuant to the Financial Services and Market Act 2000
"prospectus supplement" Each prospectus supplement relating to one or more series and
classes of notes issued on a single closing date
"rate of interest" and "rates of In respect of any series and class of notes, the rate or rates
interest" (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 agencies" Moody's, Standard & Poor's and Fitch
"receiver" A receiver appointed by the issuer security trustee under the issuer
deed of charge and/or the Funding 2 security trustee under the
Funding 2 deed of charge
"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 servicer, 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 (other than US notes) admitted to the official list and
admitted to trading on the London Stock Exchange's market for listed
securities
"registered land" Land in England and Wales, title to which is registered at the Land
Registry
326
"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
issuing entity, an amount equal to the aggregate of:
the Funding share of the trust property (as most
recently calculated)/the Funding share of the trust
property on the relevant closing date x the outstanding
balance in the Funding reserve fund plus the outstanding
balance in the Funding (issuing entity) reserve fund (as
most recently calculated); and
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 plus the
outstanding balance in the issuing entity reserve fund
(as most recently calculated); or
(ii) if the issuing entity 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 aggregate of:
the Funding share of the trust property (as most
recently calculated)/the Funding share of the trust
property on the relevant closing date x the outstanding
balance in the Funding reserve fund plus the outstanding
balance in the Funding (issuing entity) reserve fund (as
most recently calculated) x 2; and the Funding 2 share
of the trust property (as most recently calculated)/the
327
Funding 2 share of the trust property on the relevant
closing date x the outstanding balance in the Funding 2
reserve fund plus the outstanding balance in the issuer
reserve fund (as most recently calculated) x 2;
(b) any amounts standing to the credit of the Funding GIC Account
and the Funding 2 GIC account which will be applied on the
next following date on which amounts are due under any Funding
intercompany loan or any Funding 2 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 and/or
Funding 2 on the next following distribution date and which
will be applied by Funding and/or Funding 2 on the next
following date on which amounts are due under any Funding
intercompany loan or any Funding 2 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, Funding 2 or the
issuing entity 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 screen page" In respect of any series and class of notes, the screen page
specified as such in the applicable prospectus supplement
"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 monthly
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 monthly payment date over the
amounts due by the issuing entity under the issuer pre-enforcement
revenue priority of payments, as the context requires
328
"scheduled redemption dates" The scheduled redemption dates for any series and class of scheduled
redemption notes will be the monthly payment dates set out in 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 date specified in relation to the same in the prospective
supplement occurs;
(b) a pass-through trigger event occurs; or
(c) the step-up date (if any) in relation to such notes occurs
"scheduled amortization installment" On any scheduled redemption 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 are scheduled redemption notes, the
maximum aggregate principal amount which may be repaid by the
issuing entity to the relevant noteholder or noteholders of such
series and class on that scheduled redemption date in accordance
with the terms and conditions of the relevant notes "scheduled
repayment dates" The scheduled repayment dates for any scheduled
repayment loan tranche will be the monthly payment dates specified
as such for such loan tranche set out in the applicable loan tranche
supplement
"scheduled repayment loan installment" That part of a scheduled repayment loan tranche which is payable on
a scheduled repayment date for that loan tranche
"scheduled repayment loan tranche" Any loan tranche scheduled to be repaid in full in two or more
installments on scheduled repayment dates. Scheduled repayment loan
tranches will be deemed to be pass-through loan tranches if:
(a) a date specified in relation to the same in the applicable
loan tranche supplement occurs
(b) a pass-through trigger event occurs; or
(c) the step-up date (if any) in relation to such loan tranche
occurs
"Scottish assets" Any asset, property, right or benefit situated in or the rights of
which are governed by the laws of Scotland
"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'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
329
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
"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 distribution" A payment made by the mortgages trustee:
(a) to the seller (excluding any payment of initial purchase
price) which is funded by a further contribution made to the
mortgages trustee by Funding or by Funding 2; or
(b) to Funding which is funded by a further contribution made to
the mortgages trustee by Funding 2 "specified denomination" In
respect of any series and class of notes, the denomination
specified as such in the applicable prospectus supplement and
in respect of listed notes, shall be no less than euro 50,000
(or its equivalent in any other currency as at the date of
issue of such notes).
"stand-by GIC provider" In respect of the mortgages trustee GIC account, Lloyds TSB Bank plc
acting through its office at Financial Markets Division, 25 Monument
Street, London EC2R 8BQ
"step-up date" In respect of any loan tranche or any series and class of notes, the
monthly payment date on which the interest rate on that loan
tranche, or those notes, as applicable, increases by a predetermined
amount following the payment made by Funding 2 or the issuing
entity, as applicable, on such monthly payment date, which date for
any loan tranche series and class of notes, will be specified in the
300 applicable loan tranche supplement and, for any series and class
of notes, will be specified in the applicable prospectus supplement
"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 exchange 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 in or
substantially in the form set out in the programme agreement or in
such other form as may be agreed between the issuing entity 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
330
"swap collateral" At any time, any asset (including, without limitation, cash and/or
securities) which is paid or transferred by a swap provider to, or
held by, the issuing entity or to Funding 2, as applicable, as
collateral to support 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 (if the
issuing entity or Funding 2, as applicable, is entitled to retain
the same)
"swap collateral account" An account opened in the name of the issuing entity 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
"swap collateral ancillary document" In relation to (1) the issuing entity, 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 issuing entity from time to time in connection
with the swap collateral and (2) 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 provider default" (i) The occurrence of:
(a) an event of default (as defined in the relevant swap
agreement) where the relevant swap provider is the
defaulting party (as defined in the relevant swap
agreement); or
(b) an additional termination event (as defined in the
relevant swap agreement) as a result of the failure by
the relevant swap provider to remedy a swap downgrade
event in accordance with the relevant swap agreement
where the relevant swap provider is the sole affected
party (as defined in the relevant swap agreement); or
(c) the additional tax representation (as defined in the
relevant swap agreement) proves to be incorrect or
misleading in any material respect as a result of any
action and/or any omission to take action by the
relevant swap provider which could have prevented such
breach of representation
"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
331
"swap replacement premium" Any payment received from a replacement swap provider in order to
enter into a replacement swap agreement with such replacement swap
provider replacing a swap agreement
"swap termination payment" The amount payable because of a swap early termination event
"swap transactions" The Funding 2 basis rate swaps and the issuer swaps, or any of them,
and individually each a "swap transaction"
"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
"transaction documents" The documents listed in "Listing and general information" and any
swap collateral ancillary document
"transfer of equity" A transfer of the equitable or beneficial and legal title by
coowners 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
"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 issuing entity 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
"UK Listing Authority" The Financial Services Authority in its capacity as competent
authority under Part VI of the Financial Services and Markets Act
2000
"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 underwriters for the US notes specified in the prospectus
supplement relating to any series and class of notes offered
thereunder
"underwriting agreement" The underwriting agreement relating to the sale of a series or class
of US notes among the issuing entity and the underwriters designated
therein
"United Kingdom" The United Kingdom of Great Britain and Northern Ireland
332
"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 the
Land Registry
"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)
333
Index of principal terms
$..................................................66
(GBP)..............................................66
(EURO).. ..........................................66
1970 Act..........................................278
2001 Act..........................................280
A loan tranches...................................305
A principal deficiency subledger..................305
AA................................................160
AA loan tranches..................................305
AA principal deficiency sub-ledger................305
AAA loan tranches.................................305
AAA principal deficiency sub-ledger...............305
account bank.......................................14
accrual period....................................251
additional interest...............................256
additional mortgage loan..........................305
additional mortgage portfolio......................88
adjusted Funding 2 reserve fund level.............305
administration fee................................131
administration procedures.........................121
agent bank.........................................15
alternative insurance requirements................110
anticipated cash accumulation period..............183
arrears of interest..........................140, 305
arrears or step-up trigger event..................208
asset trigger event...........................23, 159
assign............................................134
assigned..........................................134
assignment........................................134
assignment date...................................149
authorised underpayment............................99
authorized investments............................306
AXA...............................................110
bank account agreement............................306
Bank of England base rate.........................306
banking organization..............................241
Barclays..........................................129
base rate pledge...................................97
basis rate swaps..................................306
BB................................................160
BB loan tranche...................................306
BB principal deficiency sub-ledger................306
BBB loan tranches.................................306
BBB principal deficiency sub-ledger...............306
beneficiaries......................................14
borrower......................................66, 307
bullet loan tranche...............................307
bullet redemption date............................307
bullet redemption notes...........................307
bullet repayment date.............................307
bullet repayment loan amount......................307
calculation agent.................................253
calendar year.....................................307
capital balance...................................307
capital payment....................................94
Capital Requirements Directive.....................24
capitalized.......................................307
capitalized arrears...............................307
capitalized interest..............................308
capped loan tranches..............................192
capped rate mortgage loans.........................91
cash accumulation liability.......................191
cash accumulation period..........................183
cash accumulation requirement.....................184
cash accumulation shortfall.......................191
cash manager.......................................14
cashback mortgage loans............................92
CAT standard mortgage loans........................91
CCA................................................54
CFC...............................................288
class..............................................66
class A available subordinated amount..............83
class A note event of default.....................262
class A noteholders...............................308
class A notes.....................................308
class A required subordinated amount...............83
class B available subordinated amount..............84
class B note event of default.....................263
class B noteholders...............................308
class B notes.....................................308
class B required subordinated amount...............84
class C available subordinated amount..............85
class C note event of default.....................264
class C noteholders...............................308
class C notes.....................................308
class C required subordinated amount...............85
class D note event of default.....................265
class D noteholders...............................308
class D notes.....................................308
class M available subordinated amount..............85
class M note event of default.....................264
class M noteholders...............................308
class M notes.....................................308
class M required subordinated amount...............84
clearing agency...................................242
clearing corporation..............................241
Clearstream, Luxembourg............................63
closing date.......................................15
CML................................................57
CML Code...........................................57
Code..............................................285
collection account................................129
collection bank...................................129
collection bank agreement.........................130
combination mortgage loan..........................51
combination repayment and interest-only............93
combined credit balance............................90
combined debit balance.............................90
commercial business day...........................247
Connections Benefit................................91
Connections combined credit balance................91
Connections debit balance..........................91
Connections Interest...............................91
Connections mortgage loans.........................91
contribution......................................308
contribution date.................................149
controlled amortization installment...............308
controlled amortization note......................308
controlled redemption dates.......................309
controlled repayment dates........................309
controlled repayment loan amount..................309
controlled repayment loan tranche.................309
controlled repayment requirement..................184
controlling beneficiary deed......................166
controlling directions............................166
core terms.........................................61
334
corporate services agreement......................309
corporate services provider.......................309
CPR...............................................114
credit support annex..............................309
current balance...................................309
current Funding 2 share......................149, 151
current Funding 2 share percentage...........149, 151
current seller share..............................154
current seller share percentage...................154
cut-off date......................................310
cut-off date mortgage portfolio....................88
day count fraction...........................251, 254
deferred contribution.............................310
deferred interest.................................256
deferred purchase price...........................310
deferred tax......................................288
designated maturity...............................253
determination period..............................311
direct debit.......................................92
discount rate mortgage loans.......................92
disqualified persons..............................291
distribution date.................................311
DM Regulations.....................................58
dollars............................................66
DTC................................................63
endowment..........................................93
English mortgage...................................89
English mortgage loan..............................89
ERISA.............................................291
ERISA Plans.......................................291
EURIBOR...........................................311
euro...............................................66
Euroclear..........................................63
Euroclear operator................................243
event of default..................................311
Excess spread......................................86
Exchange Act......................................242
existing borrowers' re-fix rate...................311
extraordinary resolution..........................269
filed plan........................................276
final maturity date...............................311
final repayment date..............................311
Fitch..............................................16
fixed rate mortgage loans..........................89
fixed rate note...................................311
fixed rate period.................................311
fixed security....................................311
flexi plan loan...................................102
flexible capped rate mortgage loans................91
flexible cash re-draw capacity....................155
flexible discount rate mortgage loans..............91
flexible fixed rate mortgage loans.................91
flexible mortgage loans............................98
flexible tracker rate mortgage loans...............92
floating rate.....................................253
floating rate note................................312
floating rate option..............................253
floating security.................................312
FSA................................................13
FSMA...............................................54
full repayment amount.............................195
Funding.............................................2
Funding (issuing entity) reserve fund.............312
Funding 2...................................2, 13, 67
Funding 2 available principal receipts............186
Funding 2 available revenue receipts..............174
Funding 2 bank account agreement..................312
Funding 2 bank accounts...........................173
Funding 2 basis rate swap agreement...............312
Funding 2 basis rate swap excluded termination
amount............................................312
Funding 2 basis rate swap provider.................15
Funding 2 basis rate swaps........................215
Funding 2 cash accumulation ledger................184
Funding 2 cash accumulation ledger amount.........191
Funding 2 charged property........................313
Funding 2 deed of charge..........................313
Funding 2 GIC account.............................172
Funding 2 GIC provider............................313
Funding 2 guaranteed investment contract..........313
Funding 2 intercompany loan.......................313
Funding 2 intercompany loan agreement.............313
Funding 2 intercompany loan enforcement notice....313
Funding 2 intercompany loan event of default.171, 313
Funding 2 liquidity facility......................313
Funding 2 liquidity facility principal payment....314
Funding 2 liquidity facility provider.............314
Funding 2 liquidity facility subordinated amounts.314
Funding 2 liquidity reserve fund..................314
Funding 2 liquidity reserve ledger................314
Funding 2 liquidity reserve principal payment.....209
Funding 2 liquidity reserve rating event..........208
Funding 2 liquidity reserve required amount.......209
Funding 2 post-enforcement priority of payments...198
Funding 2 pre-enforcement principal priority of
payments..........................................187
Funding 2 pre-enforcement revenue priority of
payments..........................................176
Funding 2 principal deficiency ledger.............314
Funding 2 principal ledger........................314
Funding 2 priority of payments....................314
Funding 2 reserve fund............................206
Funding 2 reserve fund threshold..................314
Funding 2 reserve ledger..........................172
Funding 2 reserve principal payment...............207
Funding 2 reserve required amount.................208
Funding 2 security................................315
Funding 2 security trustee.........................14
Funding 2 swap collateral accounts................315
Funding 2 transaction account.....................173
Funding 2 transaction documents...................315
Funding beneficiaries..............................35
Funding GIC Account...............................312
Funding intercompany loans........................131
Funding issuing entities..........................312
Funding priority of payments......................312
Funding reserve fund..............................312
Funding security..................................312
Funding security trustees.........................312
further advance...................................100
further contribution..............................148
further draw capacity.............................155
further draws......................................92
further mortgage loan.............................315
further mortgage portfolio.........................88
global note certificates...........................63
Granite Program....................................24
heritable creditor................................113
holder............................................247
Holdings...........................................10
335
Housing Indices...................................117
IFRS...............................................64
in arrears........................................122
individual note certificates.......................63
individual savings accounts........................93
initial closing date................................6
initial contribution..............................148
initial mortgage portfolio.........................88
initial purchase price............................315
initial trust property............................316
insolvency event..................................316
interest amount...................................254
interest commencement date........................318
interest determination date.......................318
interest period...................................318
interest-only......................................93
interim calculation period........................149
investment plan...................................319
IRS...........................................65, 285
ISAs...............................................93
ISDA definitions..................................319
ISDA rate.........................................252
issuance fees.....................................319
issuance tests.....................................82
issuer account bank................................14
issuer arrears test...............................192
issuer available principal receipts...............195
Issuer available revenue receipts.................178
issuer bank account agreement.....................319
issuer cash management agreement..................319
issuer cash manager................................14
issuer deed of charge.............................319
Issuer enforcement notice.........................319
issuer expenses sub-ledger........................179
issuer GIC account................................225
issuer GIC provider...............................319
issuer guaranteed investment contract.............319
issuer pre-enforcement principal priority of
payments..........................................196
issuer pre-enforcement revenue priority of
payments..........................................179
issuer principal ledger...........................320
issuer priority of payments.......................320
issuer reserve fund...............................205
issuer reserve ledger.............................206
issuer reserve minimum amount.....................206
issuer reserve principal payment..................205
issuer reserve required amount....................205
issuer reserve requirement........................192
issuer revenue ledger.............................179
issuer secured creditors..........................320
issuer security...................................320
issuer security trustee............................14
issuer swap.......................................216
issuer swap agreement.............................216
issuer swap agreements............................320
issuer swap collateral accounts...................320
issuer swap excluded termination amount...........320
issuer swap providers.............................320
issuer transaction account........................224
issuing entity.................................13, 66
lender.............................................98
lending criteria...................................13
LIBOR.............................................321
Lloyds TSB........................................129
loan payment date.................................321
loan to value ratio...............................321
loan tranche........................................6
loan tranche A....................................191
loan tranche ratings..............................168
loan tranche supplement...........................321
loan tranches.......................................6
London business day...............................321
London Stock Exchange..............................17
losses.............................................29
low-start flexible fixed rate mortgage loans.......92
LTV ratio.........................................321
Mandate holders...................................105
Market.............................................17
master definitions schedule.......................321
maximum rate of interest..........................321
MCoB...............................................57
MIG policy........................................111
minimum rate of interest..........................321
minimum seller share..............................155
money market notes.................................22
monthly CPR.......................................184
monthly payment....................................40
monthly payment date..............................321
Moody's............................................16
Moody's portfolio variation test..................322
Moody's portfolio variation test value............322
mortgage......................................89, 112
mortgage account...................................89
mortgage conditions...............................322
mortgage deed.....................................322
mortgage loan.....................................322
mortgage loan files...............................322
mortgage portfolio.................................88
mortgage related security....................295, 322
mortgage sale agreement...........................322
mortgaged property................................323
mortgagee.........................................113
mortgagees trustee.................................13
mortgages trust...............................28, 146
mortgages trust allocation of revenue receipts....157
mortgages trust deed................................6
Mortgages trustee available revenue receipts......156
mortgages trustee bank accounts....................28
mortgages trustee GIC account......................28
mortgages trustee GIC provider....................323
mortgages trustee guaranteed investment contract..323
mortgages trustee principal receipts..............323
mortgages trustee retained principal receipts.....161
mortgages trustee transaction account.............323
N(m)...............................................56
new mortgage loans................................323
new mortgage portfolio............................323
new related security..............................324
new trust property................................324
new UK GAAP........................................64
non-asset trigger event.......................23, 159
non-cash re-draw...................................99
non-cash re-draws..................................91
non-performing mortgage loan......................123
NORMIC.............................................72
note certificate..................................247
note certificates..................................63
note determination date...........................257
336
note event of default.............................261
note payment date.................................324
note principal payment............................257
note trustee.......................................14
noteholder........................................247
noteholders.......................................324
notes.....................................16, 66, 246
NR start-up loan agreement........................213
NRG................................................72
official list......................................17
OFT................................................58
OID...............................................286
OID regulations...................................287
Ombudsman..........................................62
original bullet loan tranche......................324
original bullet redemption note...................324
original pass-through loan tranche................324
overpayments ledger...............................220
parties in interest...............................291
pass-through loan tranche.........................324
pass-through notes................................324
pass-through requirement..........................185
pass-through trigger event.........................43
paying agent and agent bank agreement.............324
paying agents.................................15, 240
payment business day..............................324
PBR................................................64
pension policy.....................................93
PEPs...............................................93
permitted product switch..........................138
permitted redemption date.........................325
permitted replacement mortgage loan...............138
personal equity plans..............................93
personal secured loans.............................92
PFIC..............................................288
Plan Asset Regulation.............................292
Plans.............................................291
post-enforcement call option agreement.............77
post-enforcement call option holder............24, 77
pounds sterling....................................66
previous mortgages trustee GIC Provider...........325
principal amount outstanding......................325
principal ledger..................................220
principal paying agent........................15, 240
principal receipts................................326
product switch....................................103
programme agreement...............................326
programme reserve required amount.................206
programme reserve required percentage.............206
programme resolution..............................270
properties in possession policy...................111
prospectus........................................326
prospectus rules..................................326
prospectus supplement.............................326
PTCE..............................................291
rate of interest..................................326
rates of interest.................................326
rating agencies...................................326
receiver..........................................326
record date.......................................260
redemption amount.................................260
re-draws...........................................28
re-fix............................................103
re-fixed mortgage loan............................326
Reg S notes.......................................326
registered land...................................326
registrants.........................................3
registrar and transfer agent.......................15
regulated mortgage contract........................56
regulated personal secured loan....................92
reinstatement.....................................327
related security..................................327
relevant deposit amount...........................327
relevant distribution date........................149
relevant entity..............................316, 317
relevant recalculation date.......................151
relevant screen page..............................328
repayment..........................................93
repayment mortgage loan............................51
repayment requirement.............................184
reset date........................................253
resolution........................................269
revenue ledger....................................220
revenue receipts..................................328
revenue shortfall.................................328
scheduled amortization installment................329
scheduled redemption dates........................329
scheduled redemption notes........................329
scheduled repayment dates.........................329
scheduled repayment loan installment..............329
scheduled repayment loan tranche..................329
scheduled repayment requirement...................185
Scottish assets...................................329
Scottish mortgage..................................89
Scottish mortgage loan.............................89
SEC.................................................3
secured property..................................278
Securities Act.....................................16
security trustee..................................329
seller.............................................13
seller arranged insurer...........................110
seller share event................................159
seller share event distribution date..............159
seller's policy...................................329
seller's standard variable rate....................96
series.............................................66
series and class...................................66
servicer...........................................14
servicer termination event........................131
short-term obligations............................287
special distribution..............................330
specified currency exchange rate..................330
sponsor............................................13
Standard & Poor's..................................16
standard variable rate mortgage loans..............89
stand-by GIC provider.............................330
start-up loan provider............................213
start-up loan tranche.............................213
step-up date.................................258, 330
sterling...........................................66
sterling equivalent...............................330
sub-class.........................................330
subscription agreement............................330
subsidiary........................................330
swap agreements...................................215
swap collateral...................................331
swap collateral account...........................331
swap collateral ancillary document................331
swap downgrade event..............................217
337
swap early termination event......................217
swap provider default.............................331
swap providers....................................331
swap replacement premium..........................332
swap termination payment..........................332
swap transactions.................................332
target reserve required amount....................208
Taxes Act.........................................282
the Funding 2 program date.........................24
third party amounts...............................156
tier..............................................332
title deeds.......................................332
Together Connections..............................101
Together Connections Benefit...................90, 91
Together Connections fixed........................101
Together Connections Interest......................90
Together Connections mortgage loans................90
Together Connections variable.....................101
Together discount tracker.........................101
Together fixed....................................101
Together fixed for life...........................101
Together flexible.................................101
Together mortgage loans.......................89, 101
Together stepped tracker..........................101
Together variable.................................101
tracker rate mortgage loans........................92
transaction documents.............................332
transfer of equity................................332
trigger event.................................23, 159
trust calculation period..........................332
trust deed........................................332
trust determination date..........................332
trust property....................................146
trust property calculation adjustments............150
UK Listing Authority..............................332
unauthorized underpayment..........................99
underpayment..................................94, 332
underwriters......................................332
underwriting agreement............................332
unit trusts........................................93
United Kingdom....................................332
United States person..............................286
unpaid interest...................................333
unregistered land.................................333
unregulated personal secured loan..................92
us.............................................13, 66
US dollars.........................................66
US federal income tax counsel.....................285
US global note certificates.......................240
US holder.........................................285
US notes...........................................16
US paying agent....................................15
US$................................................66
USD................................................66
UTCCR..............................................60
variable mortgage rate............................333
variable rate mortgage loan.......................333
VAT................................................31
W-8BEN............................................289
WAFF..............................................141
WALS..............................................141
we.............................................13, 66
weighted average Funding 2 share percentage.......153
weighted average Funding share percentage.........154
you................................................13
YY................................................158
zero coupon notes..................................20
ZZ................................................158
338
REGISTERED OFFICE OF THE ISSUING ENTITY
Granite Master Issuer plc
Fifth Floor
100 Wood Street
London EC2V 7EX
SPONSOR, ORIGINATOR, SELLER AND SERVICER
Northern Rock plc
Northern Rock House
Gosforth
Newcastle upon Tyne
NE3 4PL
NOTE TRUSTEE AND PRINCIPAL PAYING AGENT, COMMON
SECURITY TRUSTEE DEPOSITARY AND REGISTRAR
The Bank of New York Citibank, N.A., London Branch
48th Floor Citigroup Centre
One Canada Square Canary Wharf
London E14 5AL London E14 5LB
US PAYING AGENT AGENT BANK
Citibank, N.A., London Branch Citibank, N.A., London Branch
14th Floor Citigroup Centre
388 Greenwich Street Canary Wharf
New York, New York 10013 London E14 5LB
LEGAL ADVISERS TO NORTHERN ROCK PLC IN ITS VARIOUS CAPACITIES
as to English and US law as to Scots Law
Sidley Austin Tods Murray LLP
Woolgate Exchange 25 Basinghall Street 66 Queen Street
London EC2V 5HA Edinburgh EH2 4NE
LEGAL ADVISERS TO THE UNDERWRITERS, THE DEALERS, THE NOTE TRUSTEE,
THE ISSUER SECURITY TRUSTEE AND THE FUNDING 2 SECURITY TRUSTEE
as to English and US law as to Scots Law
Allen & Overy LLP Dundas & Wilson
One New Change Saltire Court
London EC4M 9QQ 20 Castle Terrace
Edinburgh EH1 2EN
LEGAL ADVISERS TO THE MORTGAGES TRUSTEE
as to Jersey law
Mourant du Feu & Jeune
4 Royal Mint Court
London EC3N 4HJ
ARRANGERS
Barclays Bank PLC Citigroup Global Markets Merrill Lynch
5 The North Colonnade Limited International
Canary Wharf Citigroup Centre 2 King Edward Street
London E14 4BB Canary Wharf London EC1A 1HQ
London E14 5LB
339
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=(pound)0.56), 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......... $1,070,000
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....................................................... $10,000,000
* All amounts are estimates except for the SEC registration fee
Item 15. Indemnification of Directors and Officers
Granite Master Issuer plc (the "issuing entity")
Subject to the provisions of the Companies Act 1985, the laws which
govern the organization of the issuing entity provide for every director or
other officer or auditor of the issuing entity to be indemnified out of the
assets of the issuing entity 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
issuing entity.
Granite Finance Funding 2 Limited, as depositor ("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
A list of exhibits filed herewith or incorporated by reference is
contained in the Exhibit Index which is incorporated herein by reference.
II-1
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 (the "Securities Act");
(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.
Notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(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:
(A) Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) above do not
apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
reports filed with or furnished to the Commission 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 the registration statement, or is contained in a
form of prospectus filed pursuant to Rule 424(b) that is part of
this registration statement;
(B) Provided further, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) above do not apply if the information required to be
included in a post-effective amendment is provided pursuant to
Item 1100(c) of Regulation AB (ss.229. 1100(c)).
(2) That, for the purpose of determining any liability under the
Securities Act, 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) That for the purpose of determining liability under the Securities
Act to any purchaser:
If the Registrant is relying on Rule 430B:
II-2
(A) Each prospectus filed by the registrant pursuant to Rule
424(b)(3) shall be deemed to be part of the registration statement
as of the date the filed prospectus was deemed part of and
included in the registration statement; and
(B) Each prospectus required to be filed pursuant to Rule
424(b)(2), (b)(5), or (b)(7) as part of a registration statement
in reliance on Rule 430B relating to an offering made pursuant to
Rule 415(a)(1)(i), (vii) or (x) for the purpose of providing the
information required by Section 10(a) of the Securities Act shall
be deemed to be part of and included in the registration statement
as of the earlier of the date such form of prospectus is first
used after effectiveness or the date of the first contract of sale
of securities in the offering described in the prospectus. As
provided in Rule 430B, for liability purposes of the issuer and
any person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which
that prospectus relates, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof. Provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as
to a purchaser with a time of contract of sale prior to such
effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such effective date.
(5) That, for the purpose of determining liability of the registrant
under the Securities Act to any purchaser in the initial distribution of
the securities:
The undersigned registrant undertakes that in a primary offering
of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or
sold to such purchaser by means of any of the following communications,
the undersigned registrant will be a seller to the purchaser and will be
considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used or
referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about the
undersigned registrant or its securities provided by or on behalf
of the undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
(b) As to filings incorporating subsequent Exchange Act documents by
reference: Each of the undersigned registrants hereby undertakes that,
for purposes of determining any liability
II-3
under the Securities Act, 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.
(c) As to indemnification: Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers
and controlling persons of each of the registrants pursuant to the
provisions described under Item 15 above, 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 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 and will be governed by
the final adjudication of such issue.
(d) As to Rule 430A: Each of the undersigned registrants hereby undertakes
that:
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in 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.
(e) As to qualification of Trust Indentures under Trust Indenture Act of
1939 for delayed offerings: The undersigned registrant hereby undertakes
to file an application for the purpose of determining the eligibility of
the trustee to act under subsection (a) of Section 310 of the Trust
Indenture Act in accordance with the rules and regulations prescribed by
the Securities and Exchange Commission under Section 305(b)(2) of the
Act.
(f) As to Regulation AB:
Each of the undersigned registrants hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act, each filing of the annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 of a third party
that is incorporated by reference in the registration statement in
accordance with Item 1100(c)(1) of Regulation AB (17 CFR 229.1100(c)(1))
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.
(2) That, except as otherwise provided by Item 1105 of Regulation AB (17
CFR 229.1105), information provided in response to that Item pursuant to
Rule 312 of Regulations S-T (17 CFR 232.312) through the specified
Internet address in the prospectus is deemed to be a part of the
prospectus included in the registration statement.
(3) To provide to any person without charge, upon request, a copy of the
information provided in response to Item 1105 of Regulation AB pursuant
to Rule 312 of Regulation S-T through the specified Internet address as
of the date of the prospectus included in the registration statement if
a subsequent update or change is made to the information.
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 April 13, 2006.
GRANITE MASTER ISSUER PLC
By: L.D.C. Securitisation Director No. 1 Limited
By: /s/ Sharon Tyson
Director
GRANITE FINANCE FUNDING 2 LIMITED
By: L.D.C. Securitisation Director No. 1 Limited
By: /s/ Sharon Tyson
Director
GRANITE FINANCE TRUSTEES LIMITED
By: /s/ Dean Godwin
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 April 13, 2006
By: /s/ Sharon Tyson
Name: Sharon Tyson
L.D.C. SECURITISATION DIRECTOR NO. 2 LIMITED Director April 13, 2006
By: /s/ Ian Bowden
Name: Ian Bowden
Additional Signature Pages Follow
II-6
Granite Finance Funding 2 Limited
Signature Title Date
L.D.C. SECURITISATION DIRECTOR NO. 1 LIMITED Director April 13, 2006
By: /s/ Sharon Tyson
Name: Sharon Tyson
L.D.C. SECURITISATION DIRECTOR NO. 2 LIMITED Director April 13, 2006
By: /s/ Ian Bowden
Name: Ian Bowden
Additional Signature Pages Follow
II-7
Granite Finance Trustees Limited
Signature Title Date
By: /s/ Dean Godwin Director April 13, 2006
Name: Dean Godwin
By: /s/ Helen Grant Director April 13, 2006
Name: Helen Grant
By: /s/ Daniel LeBlancq Director April 13, 2006
Name: Daniel LeBlancq
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 April 13, 2006.
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 April 13, 2006.
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 April 13, 2006.
By: /s/ Donald J. Puglisi
Name: Donald J. Puglisi
Office: Managing Director
II-9
EXHIBIT INDEX
Exhibit No. Description of Exhibit
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 Global Intercompany Agreement
4.1.2 Form of Loan Tranche Supplement (included as Schedule 2 in Exhibit 4.1.1)
4.2 Mortgages Trust Deed
4.3 Mortgage Sale Agreement
4.4.1 Issuer Deed of Charge
4.4.2 Form of Deed of Accession to Issuer Deed of Charge
(included as Schedule 5 in Exhibit 4.4.1)
4.5.1 Funding 2 Deed of Charge
4.5.2 Form of Deed of Accession to Funding 2 Deed of Charge (included as
Schedule 2 in Exhibit 4.5.1)
4.6.1 Issuer Trust Deed
4.6.2 Form of Sixth Supplemental Trust Deed
4.6.3 Terms and Conditions of the Notes (included as Schedule 3 to Exhibit 4.6.1)
4.7 Issuer Paying Agent and Agent Bank Agreement
4.8 Cash Management Agreement
4.9 Issuer Cash Management Agreement
4.10 Form of Administration Agreement
4.11 Issuer Post-Enforcement Call Option Agreement
5.1 Form of Opinion of Sidley Austin as to legality
8.1 Form of Opinion of Sidley Austin LLP as to U.S. tax matters
8.2 Form of Opinion of Sidley Austin as to U.K. tax matters
8.3 Opinion of Mourant du Feu & Jeune as to Jersey tax matters
10.1 Funding 2 Basis Rate Swap Agreement
10.2 Form of Issuer Dollar Currency Swap Agreement
10.3 Form of Issuer Euro Currency Swap Agreement
10.4.1 Issuer Start-up Loan Agreement
10.4.2 Form of Start-up Loan Supplement (included as Schedule 2 in Exhibit 10.4.1)
10.5.1 Programme Master Definitions Schedule
10.5.2 Issuer Master Definitions Schedule
10.6.1 Corporate Services Agreement (Issuer and Funding 2)
10.6.2 Corporate Services Agreement (Mortgages Trustee)
23.1 Consent of Sidley Austin (included in Exhibits 5.1, 8.1 and 8.2)
23.2 Consent of Mourant du Feu & Jeune (included in Exhibit 8.3)
25.1 Statement of Eligibility of Trustee (Form T-1)
II-10