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 offer or sale is not permitted.
Subject to completion and amendment, dated November 9, 2006
PROSPECTUS SUPPLEMENT DATED November [o], 2006
(to Prospectus dated September 12, 2006)
$[o]
Granite Master Issuer plc
Issuing Entity
$[o] series 2006-4 callable class A1 notes
$[o] series 2006-4 callable class A3 notes
$[o] series 2006-4 callable class A5 notes
$[o] series 2006-4 callable class B1 notes
$[o] series 2006-4 callable class B2 notes
$[o] series 2006-4 callable class M1 notes
$[o] series 2006-4 callable class M2 notes
$[o] series 2006-4 callable class C1 notes
$[o] series 2006-4 callable class C2 notes
The offering in respect of this series 2006-4 comprises the
following classes of notes:
Underwriters' Net Proceeds
Management to Issuing
Initial Price to and Underwriters' Entity per
Principal Public Underwriting Selling Class of Final Maturity
Class Amount Interest Rate(1) per Note Fee Commission Notes Date
Class A1 $[o] One-month USD LIBOR + [o]% p.a. [o]% [o]% [o]% $[o] [December 2030]
Class A3 $[o] Three-month USD LIBOR + [o]% p.a. [o]% [o]% [o]% $[o] [December 2054]
Class A5 $[o] Three-month USD LIBOR + [o]% p.a. [o]% [o]% [o]% $[o] [December 2054]
Class B1 $[o] Three-month USD LIBOR + [o]% p.a. [o]% [o]% [o]% $[o] [December 2054]
Class B2 $[o] Three-month USD LIBOR + [o]% p.a. [o]% [o]% [o]% $[o] [December 2054]
Class M1 $[o] Three-month USD LIBOR + [o]% p.a. [o]% [o]% [o]% $[o] [December 2054]
Class M2 $[o] Three-month USD LIBOR + [o]% p.a. [o]% [o]% [o]% $[o] [December 2054]
Class C1 $[o] Three-month USD LIBOR + [o]% p.a. [o]% [o]% [o]% $[o] [December 2054]
Class C2 $[o] Three-month USD LIBOR + [o]% p.a. [o]% [o]% [o]% $[o] [December 2054]
------------- ----------- ------------ ------------
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.
The series 2006-4 callable class A1 notes, series 2006-4 callable class
A3 notes, series 2006-4 callable class A5 notes, series 2006-4 callable class
B1 notes, series 2006-4 callable class B2 notes, series 2006-4 callable class
M1 notes, series 2006-4 callable class M2 notes, series 2006-4 callable class
C1 notes and series 2006-4 callable class C2 notes (the "offered notes") are
part of the series 2006-4 issuance of notes by Granite Master Issuer plc.
Interest on, and principal of, (i) the series 2006-4 class A1 notes will
be paid monthly on the 20th day of each calendar month, beginning in December
2006, and (ii) all other classes of offered notes will be paid quarterly on
the 20th day of each March, June, September and December of each calendar
year, beginning in March 2007.
YOU SHOULD REVIEW AND CONSIDER THE DISCUSSION UNDER "RISK FACTORS"
BEGINNING ON PAGE S-15 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 [o], as the issuer
swap provider in respect of the offered 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 proceeds (net of management and underwriting fees and selling
commissions) to the issuing entity from the sale of the offered notes is
expected to be approximately $[o].
Underwriters
Deutsche Bank Lehman Brothers Merrill Lynch & Co.
Barclays Capital Citigroup JPMorgan
Morgan Stanley UBS Investment Bank
TABLE OF CONTENTS
Prospectus Supplement Page
- --------------------- ----
Summary...........................................S-4
Risk factors.....................................S-15
US dollar presentation...........................S-16
Controlled redemption dates......................S-17
Maturity and repayment considerations............S-18
The Funding 2 basis rate swap provider...........S-20
The issuer swap provider[s]......................S-21
Underwriting.....................................S-22
Legal matters....................................S-30
ANNEX A-1 The cut-off date mortgage
portfolio.......................................A-1-1
ANNEX A-2 Characteristics of the United
Kingdom residential mortgage market.............A-2-1
ANNEX B Loan tranches............................B-1
ANNEX C Start-up loan tranche....................C-1
ANNEX D Static pool data.........................D-1
Prospectus Page
Summary of prospectus..................................................6
Fees..................................................................30
Risk factors..........................................................31
Defined Terms.........................................................61
The issuing entity....................................................62
Use of proceeds.......................................................64
Northern Rock plc.....................................................65
Funding 2.............................................................67
The mortgages trustee.................................................68
Holdings..............................................................69
GPCH Limited..........................................................70
Funding issuing entities..............................................71
The Funding 2 security trustee, note trustee and
the issuer security trustee...........................................72
Affiliations and certain relationships and related
transactions of transaction parties...................................73
Issuance of notes.....................................................74
The mortgage loans....................................................79
Certain characteristics of the United Kingdom
residential mortgage market..........................................103
The servicer and the administration agreement........................109
Assignment of the mortgage loans and related
security.............................................................120
The mortgages trust..................................................131
The global intercompany loan agreement...............................150
Cashflows............................................................155
Credit structure.....................................................180
The swap agreements..................................................191
Cash management for the mortgages trustee and
Funding 2............................................................196
Cash management for the issuing entity...............................200
Security for Funding 2's obligations.................................202
Security for the issuing entity's obligations........................207
Description of the trust deed........................................211
The notes............................................................213
Description of the US notes..........................................218
Material legal aspects of the mortgage loans and
the related security.................................................244
Material United Kingdom tax consequences.............................250
Material United States tax consequences..............................253
Material Jersey (Channel Islands) tax
considerations.......................................................258
ERISA considerations.................................................259
Enforcement of foreign judgments in England
and Wales............................................................262
United States legal investment considerations........................263
Legal matters........................................................264
Underwriting.........................................................265
Reports to noteholders...............................................267
Listing and general information......................................268
Glossary.............................................................271
Index of principal terms.............................................297
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 297 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 2006-4 callable class A1
notes, $[o] series 2006-4 callable class A3 notes, $[o] series
2006-4 callable class A5 notes, $[o] series 2006-4 callable class
B1 notes, $[o] series 2006-4 callable class B2 notes, $[o] series
2006-4 callable class M1 notes, $[o] series 2006-4 callable class
M2 notes, $[o] series 2006-4 callable class C1 notes and $[o]
series 2006-4 callable class C2 notes (collectively, the "offered
notes").
The offered notes are part of our series 2006-4 issuance of notes.
The offered notes are issued by us and are solely our obligations.
The series 2006-4 notes also include 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 2006-4
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 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 security The Bank of New York, acting through its London branch at 40th Floor,
trustee 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 2006-4 class A1 notes, monthly on the
20th day of each calendar month (each a "monthly note 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 March, June, September
S-4
and December (each a "quarterly note payment date") 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 a 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 For the series 2006-4 class A1 notes, the note payment date
falling in December 2006.
For all other classes of offered notes, the note payment date
falling in March 2007.
Closing date November [29], 2006.
Interest Interest on the offered notes will be paid on each monthly and
quarterly note payment date (as applicable) up to and including
the final maturity date.
The 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 December 2011 (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 A1 One-month USD LIBOR + [o]% p.a.
Class A3 One-month USD LIBOR + [o]% p.a.
Class A5 One-month USD LIBOR + [o]% p.a.
Class B1 One-month USD LIBOR + [o]% p.a.
Class B2 One-month USD LIBOR + [o]% p.a.
Class M1 One-month USD LIBOR + [o]% p.a.
Class M2 One-month USD LIBOR + [o]% p.a.
Class C1 One-month USD LIBOR + [o]% p.a.
Class C2 One-month USD LIBOR + [o]% p.a.
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.
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:
S-5
(a) in respect of the first interest period, (i) for the series
2006-4 class A1 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 three-month dollar deposits and the arithmetic mean
of the offered quotations to leading banks for four-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. 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 (other than the series 2006-4 class B2 notes,
the series 2006-4 class M2 notes and the series 2006-4 class C2
notes) on the controlled redemption dates for each such class in
an amount up to the controlled amortization amount as set forth
under "Controlled redemption dates" in this prospectus supplement.
We expect to repay the principal amount outstanding of the series
2006-4 class B2 notes, the series 2006-4 class M2 notes and the
series 2006-4 class C2 notes on the final maturity date for such
classes of offered notes. 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 (other than the
series 2006-4 class B2 notes, the series 2006-4 class M2 notes and
the series 2006-4 class C2 notes) is not repaid in full on the
final controlled redemption date for such class, noteholders
generally will not have any remedies against us until the final
maturity date of such classes of the offered notes. 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
S-6
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 classes of offered notes (other than the series 2006-4 class
B2 notes, the series 2006-4 class M2 notes and the series 2006-4
class C2 notes) are controlled amortization notes.
The series 2006-4 class B2 notes, the series 2006-4 class M2 notes
and the series 2006-4 class C2 notes are pass-through notes.
Controlled redemption dates In respect of each class of offered notes (other than the series
2006-4 class B2 notes, the series 2006-4 class M2 notes and the
series 2006-4 class C2 notes), the note payment dates on which
principal repayments are scheduled to be made are set out in
"Controlled redemption dates" in this prospectus supplement.
Pass-through notes In respect of the series 2006-4 class B2 notes, the series 2006-4
class M2 notes and the series 2006-4 class C2 notes, principal
will be repaid on the final maturity date specified for such
classes of offered notes on the cover of this prospectus
supplement.
Issuance of future series and The offered notes (and any future series and class of notes issued
class of notes) 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 particular, a note will be issued
only if there is 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 is 11.60%, the class
enhancement B required subordinated percentage is 8.30%, the class M required
subordinated percentage is 5.11% and the class C required
subordinated percentage is 1.85%. Payments of principal of, and
interest on, the junior classes of the series 2006-4 notes are
subordinated to payments of principal of,
S-7
and interest on, the more senior classes of the series 2006-4
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 2006-4 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 amount (GBP)[440,000,000]
Programme reserve required 1.65%
percentage
Arrears or step-up trigger event An "arrears or step-up trigger" event occurs when (i) the
outstanding principal balance of the mortgage loans in arrears for
more than 90 days divided by the outstanding principal balance of
all of the mortgage loans in the mortgages trust (expressed as a
percentage) exceeds 2% or (ii) 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)[23,000,000].
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)[23,000,000].
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)[46,000,000].
Losses Losses on the mortgage loans may reduce the amount of principal
available to repay principal of the series 2006-4 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 2006-4 class A notes until
the aggregate amount of losses exceeds the principal amount
outstanding of each class of notes junior to the series 2006-4
class A notes. See "The
S-8
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 their aggregate
issuing entity 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 2006-4 notes is less than 10% of the initial
outstanding principal amount of the offered notes and all
other classes of the series 2006-4 notes; or
o on the note payment date falling in December 2011 and on any
note payment date thereafter.
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 2006-4 loan tranches We have entered into a global intercompany loan agreement with
Funding 2. The proceeds of the offered notes will fund the
relevant series 2006-4 loan tranches. The principal terms of such
series 2006-4 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 2006-4 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 2006-4 loan tranche is a tranche of the global
intercompany loan 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
S-9
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 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)43,081,135,070.57. 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 2006-4 notes are the eighth 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 will also issue the series 2006-4
callable class A2 notes, the series 2006-4
S-10
callable class A4 notes, the series 2006-4 callable class A6
notes, the series 2006-4 callable class A7 notes, the series
2006-4 callable class B3 notes, the series 2006-4 callable class
B4 notes, the series 2006-4 callable class M3 notes, the series
2006-4 callable class M4 notes, the series 2006-4 callable class
C3 notes and the series 2006-4 callable class C4 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)546,383,433;
(2) Granite Mortgages 02-1 plc, (GBP)1,129,780,604;
(3) Granite Mortgages 02-2 plc, (GBP)1,345,350,898;
(4) Granite Mortgages 03-1 plc, (GBP)1,741,541,908;
(5) Granite Mortgages 03-2 plc, (GBP)1,237,472,466;
(6) Granite Mortgages 03-3 plc, (GBP)1,121,988,128;
(7) Granite Mortgages 04-1 plc, (GBP)1,961,146,091;
(8) Granite Mortgages 04-2 plc, (GBP)2,170,757,906; and
(9) Granite Mortgages 04-3 plc, (GBP)2,563,181,852.
All notes issued by Granite Mortgages 01-2 plc were redeemed in
full on the note payment date falling in October 2006.
We are not a Funding issuing entity. 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 2006-4 notes will
equal approximately $[o] and (after exchanging, where applicable,
the proceeds of the notes for sterling, calculated at an exchange
rate of (GBP)1.00 = $[o]) will be used by the issuing entity to
make available loan tranches to Funding 2 pursuant to the terms of
the global intercompany
S-11
loan agreement. Funding 2 will 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 A1 AAA/Aaa/AAA
Class A3 AAA/Aaa/AAA
Class A5 AAA/Aaa/AAA
Class B1 AA/Aa3/AA
Class B2 AA/Aa3/AA
Class M1 A/A2/A
Class M2 A/A2/A
Class C1 BBB/Baa2/BBB
Class C2 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.
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
S-12
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 provider[s]" 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 prospectus, in the
consequences 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. For a
description of the principal US federal income tax consequences of
the purchase, ownership and disposition of the offered notes, see
"Material United States tax consequences" in this prospectus
supplement and in the prospectus.
ERISA considerations for investors The offered 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 the
prospectus under "ERISA considerations".
United States legal investment None of the offered notes is a "mortgage related security" under
considerations 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
S-13
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 2006-4 class A1 notes [o] [o] [o]
series 2006-4 class A3 notes [o] [o] [o]
series 2006-4 class A5 notes [o] [o] [o]
series 2006-4 class B1 notes [o] [o] [o]
series 2006-4 class B2 notes [o] [o] [o]
series 2006-4 class M1 notes [o] [o] [o]
series 2006-4 class M2 notes [o] [o] [o]
series 2006-4 class C1 notes [o] [o] [o]
series 2006-4 class C2 notes [o] [o] [o]
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-14
Risk factors
The information under "Risk factors" in the accompanying prospectus
identifies the principal risks associated with an investment in the offered
notes. Before investing in the offered notes, you should read such section
closely and consider the risks carefully.
S-15
US dollar presentation
Translations of pounds sterling into US dollars, unless otherwise stated
in this prospectus supplement, have been made at the rate of (GBP)0.5239 =
$1.00, which reflects the rate for cable transfers in sterling per US$1.00 as
certified for customs purposes by the Federal Reserve Bank on November 1,
2006. Use of this rate does not mean that pound sterling amounts actually
represent those US dollar amounts or could be converted into US dollars at
that rate at any particular time.
References throughout this prospectus supplement to "(GBP)" or "pounds"
are to the lawful currency for the time being of the United Kingdom of Great
Britain and Northern Ireland.
References in this prospectus supplement to "US$", "USD", "$", "US
dollars" or "dollars" are to the lawful currency of the United States of
America.
Sterling/US dollar exchange rate history*
January 1,
2006 Years ended December 31
through ---------------------------------------------------------------
November 6,
2006 2005 2004 2003 2002
- ------------------- --------------------- -------------- -------------- -------------- ---------------
Last(1) 1.8978 1.7230 1.9181 1.7858 1.6100
Average(2) 1.8265 1.8196 1.8334 1.6358 1.5038
High 1.9090 1.9291 1.9467 1.7858 1.6100
Low 1.7199 1.7142 1.7559 1.5541 1.4082
- -------------------
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. 30.
January 1,
2006
through
November 6, October September August June
2006 2006 2006 2006 2006
- ------------------- --------------------- -------------- -------------- -------------- ---------------
High 1.9090 1.9074 1.9070 1.9080 1.8677
Low 1.8978 1.8536 1.8653 1.8763 1.8184
- -------------------
* Source: Bloomberg (New York composite rates)
S-16
Controlled redemption dates
The "controlled amortization amount" for each class of offered notes
(other than the series 2006-4 class B2 notes, the series 2006-4 class M2 notes
and the series 2006-4 class C2 notes) for any note payment date set forth
below (each such date, a "controlled 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 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:
Target balance for series Target balance for series Target balance for series Target balance for series
Controlled 2006-4 class A1 notes 2006-4 class A3 notes 2006-4 class A5 notes 2006-4 class B1 notes
redemption date ------------------------- ------------------------- ------------------------- -------------------------
occurring in: (GBP) ($) (GBP) ($) (GBP) ($) (GBP) ($)
- ---------------- ------------ ----------- ------------ ----------- ---------- ------------- ------------ -----------
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
[o] [o] [o] [o] [o] [o] [o] [o] [o]
Target balance for series Target balance for series
Controlled 2006-4 class M1 notes 2006-4 class C1 notes
redemption date ------------------------- -------------------------
occurring in: (GBP) ($) (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]
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].
S-17
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 and the Funding issuing entities 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 November [29], 2006;
(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 Possible Possible Possible
average Average Average Average Average Average average Average average
life of life of life of life of life of life of life of life of life of
the the the the the the the the the
Constant series series series series series series series series series
payment 2006-4 2006-4 2006-4 2006-4 2006-4 2006-4 2006-4 2006-4 2006-4
rate class A1 class A3 class A5 class B1 class B2 class M1 class M2 class C1 class C2
(% per notes notes notes notes notes notes notes notes notes
annum) (years) (years) (years) (years) (years) (years) (years) (years) (years)
- ------------- -------- --------- ---------- --------- --------- --------- ---------- --------- ---------
5% [o] [o] [o] [o] [o] [o] [o] [o] [o]
10% [o] [o] [o] [o] [o] [o] [o] [o] [o]
15% [o] [o] [o] [o] [o] [o] [o] [o] [o]
20% [o] [o] [o] [o] [o] [o] [o] [o] [o]
25% [o] [o] [o] [o] [o] [o] [o] [o] [o]
30% [o] [o] [o] [o] [o] [o] [o] [o] [o]
S-18
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
The offered notes are all floating rate notes. Consequently, variations
in constant payment rates for the mortgage loans should not have an effect on
the yield to maturity of the offered notes when purchased at par.
S-19
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%.
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.
S-20
The issuer swap provider[s]
The sponsor has determined that the significance percentage for the
issuer swaps in respect of the offered notes is [less than 10%] [10% but less
than 20%] [20% or more].
The significance percentage of the issuer swaps in respect of the
offered 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.
[Disclosure with respect to the issuer swap provider[s] to be included
following selection of the issuer swap provider[s], including appropriate
financial disclosure as contemplated in Item 1115 of Regulation AB if the
significance percentage is 10% or more.]
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 or the accompanying prospectus.
S-21
Underwriting
United States
We have agreed to sell, and Deutsche Bank Securities Inc., Lehman
Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (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 2006-4
Underwriters of the series 2006-4 class A1 notes class A1 notes
- ----------------------------------------------------------------------------------------------------
Deutsche Bank Securities Inc. $[o]
Lehman Brothers Inc. $[o]
Merrill Lynch, Pierce, Fenner & Smith Incorporated $[o]
Barclays Capital Inc. $[o]
Citigroup Global Markets Limited $[o]
J.P. Morgan Securities Inc. $[o]
Morgan Stanley & Co. International Limited $[o]
UBS Securities LLC $[o]
--------------------
Total: $[o]
====================
Principal
amount of the
series 2006-4
Underwriters of the series 2006-4 class A3 notes class A3 notes
- ----------------------------------------------------------------------------------------------------
Deutsche Bank Securities Inc. $[o]
Lehman Brothers Inc. $[o]
Merrill Lynch, Pierce, Fenner & Smith Incorporated $[o]
Barclays Capital Inc. $[o]
Citigroup Global Markets Limited $[o]
J.P. Morgan Securities Inc. $[o]
Morgan Stanley & Co. International Limited $[o]
UBS Securities LLC $[o]
--------------------
Total: $[o]
====================
Principal
amount of the
series 2006-4
Underwriters of the series 2006-4 class A5 notes class A5 notes
- ----------------------------------------------------------------------------------------------------
Deutsche Bank Securities Inc. $[o]
Lehman Brothers Inc. $[o]
Merrill Lynch, Pierce, Fenner & Smith Incorporated $[o]
Barclays Capital Inc. $[o]
Citigroup Global Markets Limited $[o]
J.P. Morgan Securities Inc. $[o]
Morgan Stanley & Co. International Limited $[o]
UBS Securities LLC $[o]
--------------------
Total: $[o]
====================
S-22
Principal
amount of the
series 2006-4
Underwriters of the series 2006-4 class B1 notes class B1 notes
- ----------------------------------------------------------------------------------------------------
Deutsche Bank Securities Inc. $[o]
Lehman Brothers Inc. $[o]
Merrill Lynch, Pierce, Fenner & Smith Incorporated $[o]
--------------------
Total: $[o]
====================
Principal
amount of the
series 2006-4
Underwriters of the series 2006-4 class B2 notes class B2 notes
- ----------------------------------------------------------------------------------------------------
Deutsche Bank Securities Inc. $[o]
Lehman Brothers Inc. $[o]
Merrill Lynch, Pierce, Fenner & Smith Incorporated $[o]
--------------------
Total: $[o]
====================
Principal
amount of the
series 2006-4
Underwriters of the series 2006-4 class M1 notes class M1 notes
- ----------------------------------------------------------------------------------------------------
Deutsche Bank Securities Inc. $[o]
Lehman Brothers Inc. $[o]
Merrill Lynch, Pierce, Fenner & Smith Incorporated $[o]
--------------------
Total: $[o]
====================
Principal
amount of the
series 2006-4
Underwriters of the series 2006-4 class M2 notes class M2 notes
- ----------------------------------------------------------------------------------------------------
Deutsche Bank Securities Inc. $[o]
Lehman Brothers Inc. $[o]
Merrill Lynch, Pierce, Fenner & Smith Incorporated $[o]
Total: --------------------
$[o]
Principal
amount of the
series 2006-4
Underwriters of the series 2006-4 class C1 notes class C1 notes
- ----------------------------------------------------------------------------------------------------
Deutsche Bank Securities Inc. $[o]
Lehman Brothers Inc. $[o]
Merrill Lynch, Pierce, Fenner & Smith Incorporated $[o]
--------------------
Total: $[o]
====================
S-23
Principal
amount of the
series 2006-4
Underwriters of the series 2006-4 class C2 notes class C2 notes
- ----------------------------------------------------------------------------------------------------
Deutsche Bank Securities Inc. $[o]
Lehman Brothers Inc. $[o]
Merrill Lynch, Pierce, Fenner & Smith Incorporated $[o]
--------------------
Total: $[o]
====================
The price to the public as a percentage of the principal balance of the
offered notes will be [o]%.
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:
Selling Management and
Class of Offered Notes Commission Underwriting Fee
- ------------------------------------------ ---------- ----------------
Class A1 [o]% [o]%
Class A3 [o]% [o]%
Class A5 [o]% [o]%
Class B1 [o]% [o]%
Class B2 [o]% [o]%
Class M1 [o]% [o]%
Class M2 [o]% [o]%
Class C1 [o]% [o]%
Class C2 [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
2006-4 class A1 note, [o]% per series 2006-4 class A3 note, [o]% per series
2006-4 class A5 note, [o]% per series 2006-4 class B1 note, [o]% per series
2006-4 class B2 note, [o]% per series 2006-4 class M1 note, [o]% per series
2006-4 class M2 note, [o]% per series 2006-4 class C1 note and [o]% per series
2006-4 class C2 note. The underwriters may allow, and those dealers may
reallow, a concession not in excess of [o]% per series 2006-4 class A1 note,
[o]% per series 2006-4 class A3 note, [o]% per series 2006-4 class A5 note,
[o]% per series 2006-4 class B1 note, [o]% per series 2006-4 class B2 note,
[o]% per series 2006-4 class M1 note, [o]% per series 2006-4 class M2 note,
[o]% per series 2006-4 class C1 note and [o]% per series 2006-4 class C2 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].
France
Each underwriter will represent and agree that it has not offered or
sold and will not offer or sell, directly or indirectly, offered notes to the
public in France, and has not distributed or caused to be distributed and will
not distribute or cause to be distributed to the public in France, the
prospectus or any other offering material relating to the offered notes, and
that such offers, sales and distributions have been and will be made in France
only to (a) providers of investment services relating to portfolio management
for the account of third parties, and/or (b) qualified investors
(investisseurs qualifies), all as defined in, and in accordance with, articles
L.411-1, L.411-2 and D.411-1 of the French Code monetaire et financier.
S-24
The Netherlands
The underwriters have represented and agreed that they have not and
will not, directly or indirectly, offer, sell, transfer or deliver any offered
notes as part of their initial distribution or at any time thereafter
(including rights representing an interest in a global note) to individuals or
legal entities who or which are established, domiciled or have their residence
in The Netherlands ("Dutch Residents") other than to the following entities
(hereinafter referred to as "Professional Market Parties" or "PMPs") provided
they acquire the offered notes for their own account and trade or invest in
securities in the conduct of a business or profession:
(a) anyone who is subject to supervision of the Dutch Central Bank,
the Dutch Authority for the Financial Markets or a supervisory
authority from another member state and who is authorised to be
active on the financial markets;
(b) anyone who otherwise performs a regulated activity on the
financial markets;
(c) the State of the Netherlands, the Dutch Central Bank, a foreign
central government body, a foreign central bank, Dutch regional
and local governments and comparable foreign decentralised
government bodies, international treaty organisations and
supranational organisations;
(d) a company or entity which, according to its last annual
(consolidated) accounts, meets at least two of the following three
criteria: an average number of employees during the financial year
of at least 250, a total balance sheet of at least
(euro)43,000,000 and an annual net turnover of at least
(euro)50,000,000;
(e) a company or entity with its statutory seat in the Netherlands
other than a company as referred to in (d) above, which has
requested the Dutch Authority for the Financial Markets to be
treated as a professional market party;
(f) a natural person, living in the Netherlands, who has requested the
Dutch Authority for the Financial Markets to be treated as a
professional market party, and who meets at least two of the
following three criteria: the person has carried out transactions
of a significant size on securities markets at an average
frequency of, at least, ten per quarter over the previous four
quarters; the size of the securities portfolio is at least
(euro)500,000 and the person works or has worked for at least one
year in the financial sector in a professional position which
requires knowledge of securities investment;
(g) a company or entity whose only purpose is investing in securities;
(h) a company or entity whose purpose is to acquire assets and issue
asset backed securities;
(i) an enterprise or entity with total assets of at least
(euro)500,000,000 (or the equivalent thereof in another currency)
as per the balance sheet as of the year end preceding the
obtaining of the repayable funds;
(j) an enterprise, entity or individual with net assets of at least
(euro)10,000,000 (or the equivalent thereof in another currency)
as of the year end preceding the obtaining of the repayable funds
who has been active in the financial markets on average twice a
month over a period of at least two consecutive years preceding
the obtaining of the repayable funds;
(k) a subsidiary of any of the persons or entities referred to under
(a)-(h) above, provided such subsidiaries are subject to
consolidated supervision; and
(l) an enterprise or entity which has a rating from a rating agency
that, in the opinion of the Dutch Central Bank, has sufficient
expertise, or which issues securities that have a rating from a
rating agency that, in the opinion of the Dutch Central Bank, has
sufficient expertise.
S-25
Ireland
Each of the underwriters has represented and agreed that:
(a) it will not underwrite the issue of, or place, the offered notes,
otherwise than in conformity with the provisions of the Irish
Investment Intermediaries Act 1995 (as amended), including,
without limitation, Sections 9 and 23 thereof and any codes of
conduct rules made under Section 37 thereof and the provisions of
the Investor Compensation Act 1998;
(b) it will not underwrite the issue of, or place, the offered notes,
otherwise than in conformity with the provisions of the Irish
Central Bank Acts 1942 - 1999 (as amended) and any codes of
conduct rules made under Section 117(1) thereof;
(c) it will not underwrite the issue of, or place, or do anything in
Ireland in respect of the offered notes otherwise than in
conformity with the provisions of the Irish Prospectus (Directive
2003/71/EC) Regulations 2005 and any rules issued under Section 51
of the Irish Investment Funds, Companies and Miscellaneous
Provisions Act 2005, by the Irish Central Bank and Financial
Services Regulatory Authority ("IFSRA"); and
(d) it will not underwrite the issue of, place or otherwise act in
Ireland in respect of the offered notes, otherwise than in
conformity with the provisions of the Irish Market Abuse
(Directive 2003/6/EC) Regulations 2005 and any rules issued under
Section 34 of the Irish Investment Funds, Companies and
Miscellaneous Provisions Act 2005 by IFSRA.
Italy
Each underwriter has represented and agreed, and each further
underwriter appointed under the programme will be required to represent, and
agree that the offering of the offered notes has not been cleared by CONSOB
(the "Italian Securities Exchange Commission") pursuant to Italian securities
legislation and, accordingly, no offered notes may be offered, sold or
delivered by it, nor may copies of this prospectus supplement or of any other
document relating to the offered notes be distributed by it in the Republic of
Italy, except:
(i) to professional investors (operatori qualificati), as defined in
Article 31, second paragraph, of CONSOB Regulation No. 11522 of 1
July 1998, as amended; or
(ii) in circumstances which are exempted from the rules on solicitation
of investments pursuant to Article 100 of Legislative Decree No.
58 of 24 February 1998 (the "Financial Services Act") and Article
33, first paragraph, of CONSOB Regulation No. 11971 of 14 May
1999, as amended.
Any offer, sale or delivery of the offered notes or distribution of
copies of this prospectus supplement or any other document relating to the
offered notes in the Republic of Italy under (i) or (ii) above must be:
(a) made by an investment firm, bank or financial intermediary
permitted to conduct such activities in the Republic of Italy in
accordance with the Financial Services Act and Legislative Decree
No. 385 of 1 September 1993, as amended from time to time (the
"Banking Act");
(b) in compliance with Article 129 of the Banking Act and the
implementing guidelines of the Bank of Italy, as amended from time
to time, pursuant to which the issue or the offer of securities in
the Republic of Italy may need to be preceded and followed by an
appropriate notice to be filed with the Bank of Italy depending,
inter alia, on the aggregate value of the securities issued or
offered in the Republic of Italy and their characteristics; and
(c) in accordance with any other applicable laws and regulations.
S-26
Germany
Each underwriter will represent and agree that the offered notes have
not been and will not be offered or sold or publicly promoted or advertised by
it in the Federal Republic of Germany other than in compliance with the
provisions of the German Securities Prospectus Act (Wertpapierprospektgesetz)
June 22, 2005, or of any other laws applicable in the Federal Republic of
Germany governing the offer and sale of securities. Each underwriter will also
represent and agree that it shall not offer or sell offered notes in the
Federal Republic of Germany in a manner which could result in the issuing
entity being subject to any license requirement under the German Banking Act
(Kreditwesengesetz).
Sweden
Each underwriter will represent and agree that it will not, directly or
indirectly, offer for subscription or purchase or issue invitations to
subscribe for or buy offered notes or distribute any draft or definite
document in relation to any such offer, invitation or sale except in
circumstances that will not result in a requirement to prepare a prospectus
pursuant to the provisions of the Swedish Financial Instruments Trading Act
(lag (1991:980) om handel med finansiella instrument).
Norway
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 the Kingdom of Norway any offered notes other than to persons who are
registered with the Oslo Stock Exchange as professional investors.
Belgium
The prospectus and related documents are not intended to constitute a
public offer in Belgium and may not be distributed to the Belgian public. The
Belgian Commission for Banking, Finance and Insurance has not reviewed nor
approved this (these) document(s) or commented as to its (their) accuracy or
adequacy or recommended or endorsed the purchase of offered notes.
Each underwriter will represent and agree that it will not:
(a) offer for sale, sell or market in Belgium such offered notes by
means of a public offer within the meaning of the law of June 16,
2006 on the public offer of investment instruments and the
admission to trading of investment instruments on a regulated
market; or
(b) sell offered notes to any person qualifying as a consumer within
the meaning of Article 1.7 of the Belgian law of July 14, 1991 on
consumer protection and trade practices unless such sale is made
in compliance with this law and its implementing regulation.
Spain
Each underwriter will represent and agree that offered notes may not be
offered or sold in Spain by means of a public offer as defined and construed
in Chapter I of Title III of Law 24/1988, of 28 July, on the Securities Act
(as amended by Royal Decree Law 5/2005 of 11 March and related legislation).
This prospectus has not been registered with the Comision Nacional del Mercado
de Valores ("CNMV") and therefore it is not intended for any public offer of
Notes in Spain.
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, or 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
S-27
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)
to persons whose ordinary business is to buy or sell shares or
debentures (whether as principal or agent), 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) or which do not
constitute an offer to the public thereunder; 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 securities 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,
S-28
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.
Taiwan
Each underwriter will represent and agree that the offered notes have
not been and will not be registered with the Financial Supervisory Commission
of Taiwan, the Republic of China pursuant to relevant securities laws and
regulations and may not be offered or sold in Taiwan, the Republic of China
through a public offering or in circumstances which constitute an offer within
the meaning of the Securities and Exchange Law of Taiwan, the Republic of
China that requires a registration or approval of the Financial Supervisory
Commission of Taiwan, the Republic of China. No person or entity in Taiwan,
the Republic of China has been authorised to offer or sell the offered notes
in Taiwan, the Republic of China.
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, the
"PRC") as part of the initial distribution of the offered notes.
This prospectus does not constitute an offer to sell or the solicitation
of an offer to buy any securities in the PRC to any person to whom it is
unlawful to make the offer or solicitation in the PRC.
The Issuer does not represent that this prospectus may be lawfully
distributed, or that any offered notes may be lawfully offered, in compliance
with any applicable registration or other requirements in the PRC, or pursuant
to an exemption available thereunder, or assume any responsibility for
facilitating any such distribution or offering. In particular, no action has
been taken by the Issuer which would permit a public offering of any offered
notes or distribution of this document in the PRC. Accordingly, the offered
notes are not being offered or sold within the PRC by means of this prospectus
or any other document. Neither this prospectus nor any advertisement or other
offering material may be distributed or published in the PRC, except under
circumstances that will result in compliance with any applicable laws and
regulations.
S-29
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 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.
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 September 30, 2006 (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 = $1.8702 and have been rounded to the nearest cent
following their conversion from pounds sterling. Columns stating percentage
amounts may not add to 100% due to rounding. A mortgage loan will have been
removed from 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-1-10 in this Annex A-1 reflects the
arrears and losses experience of the mortgage portfolio as at the dates
indicated. Any material change to the seller's lending criteria, which could
lead to arrears and losses deviating 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 cut-off date mortgage portfolio was drawn up as at the cut-off date
and comprised 400,482 mortgage loans having an aggregate current balance of
(GBP)43,081,135,070.57 as at that date. The seller originated the mortgage
loans in the cut-off date mortgage portfolio between July 1, 1995 and July 31,
2006 (save for the Scottish mortgage loans in the cut-off date mortgage
portfolio, which were originated by the seller between July 1, 2001 and July
31, 2006).
The borrowers in respect of 355,721 of the mortgage loans in the cut-off
date mortgage portfolio (or 88.79% 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.
198,588 mortgage loans in the cut-off date mortgage portfolio (or 55.83%
of the aggregate current balance of the mortgage loans as of the cut-off date)
were fixed rate mortgage loans. The remaining 201,894 mortgage loans in the
cut-off date mortgage portfolio (or 44.17% 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.
374,351 of the mortgage loans in the cut-off date mortgage portfolio (or
95.92% of the aggregate current balance of the mortgage loans as of the
cut-off date) were flexible mortgage loans, 126,046 of which (or 27.25% of the
aggregate current balance of the mortgage loans as of the cut-of-date) were
Together mortgage loans.
A-1-1
As of the cut-off date, the seller's standard variable rate for existing
and new borrowers was 6.84% per annum.
Types of property
Number of
Aggregate current Aggregate current mortgage
Type of property balance (GBP) balance (US$) % of total loans % of total
- --------------------- ----------------- ----------------- --------- --------- ----------
Detached Bungalow 1,309,359,882.52 2,448,764,852.29 3.04% 10,679 2.67%
Detached House 9,541,902,225.21 17,845,265,541.59 22.15% 63,745 15.92%
Flat 5,172,209,774.75 9,673,066,720.74 12.01% 52,794 13.18%
Maisonette 665,081,487.39 1,243,835,397.72 1.54% 5,762 1.44%
New Property 16,136,485.17 30,178,454.56 0.04% 119 0.03%
Other 1,491,938,405.09 2,790,223,205.20 3.46% 14,118 3.53%
Semi Detached Bungalow 567,011,350.57 1,060,424,627.84 1.32% 6,193 1.55%
Purpose Built Flat 29,260,929.09 54,723,789.58 0.07% 571 0.14%
Semi Detached House 11,282,106,096.32 21,099,794,821.34 26.19% 108,362 27.06%
Terraced House 13,006,128,434.46 24,324,061,398.13 30.19% 138,139 34.49%
----------------- ----------------- ------ ------- ------
Total 43,081,135,070.57 80,570,338,808.98 100.00% 400,482 100.00%
================= ================= ====== ======= ======
Expected seasoning of mortgage loans at closing
The following table shows length of time since the mortgage loans were
originated as of the expected closing date.
Number of
Aggregate current Aggregate current mortgage
Months balance (GBP) balance (US$) % of total loans % of total
- --------------------- ----------------- ----------------- ---------- --------- ----------
0 to 6 2,576,837,419.18 4,819,201,341.35 5.98% 20,102 5.02%
6 to 12 7,721,776,338.22 14,441,266,107.74 17.92% 62,790 15.68%
12 to 18 9,297,557,588.67 17,388,292,202.33 21.58% 79,114 19.75%
18 to 24 5,938,748,549.01 11,106,647,536.36 13.79% 51,637 12.89%
24 to 30 4,863,055,085.65 9,094,885,621.18 11.29% 44,122 11.02%
30 to 36 2,628,029,620.08 4,914,940,995.47 6.10% 23,992 5.99%
36 to 42 2,704,345,188.32 5,057,666,371.20 6.28% 25,297 6.32%
42 to 48 2,263,467,200.70 4,233,136,358.75 5.25% 23,045 5.75%
48 to 54 1,473,404,099.74 2,755,560,347.33 3.42% 17,333 4.33%
54 to 60 997,754,044.66 1,865,999,614.32 2.32% 12,682 3.17%
60 to 66 688,779,691.27 1,288,155,778.61 1.60% 9,500 2.37%
66 to 72 395,984,562.49 740,570,328.77 0.92% 5,672 1.42%
72 to 78 292,795,264.41 547,585,703.50 0.68% 4,471 1.12%
78 to 84 213,534,809.39 399,352,800.52 0.50% 3,404 0.85%
84 to 90 180,814,908.04 338,160,041.02 0.42% 2,735 0.68%
90 to 96 152,270,512.68 284,776,312.81 0.35% 2,406 0.60%
96 to 102 156,657,664.32 292,981,163.81 0.36% 2,361 0.59%
102 to 108 189,325,148.00 354,075,891.79 0.44% 2,932 0.73%
108 to 114 93,829,237.53 175,479,440.03 0.22% 1,617 0.40%
114 to 120 67,232,068.45 125,737,414.42 0.16% 1,399 0.35%
120 to 126 73,141,058.73 136,788,408.04 0.17% 1,485 0.37%
126 to 132 64,548,079.58 120,717,818.43 0.15% 1,352 0.34%
132 to 138 47,246,931.45 88,361,211.20 0.11% 1,034 0.26%
----------------- ----------------- ------- ------- -------
Total 43,081,135,070.57 80,570,338,808.98 100.00% 400,482 100.00%
================= ================= ======= ======= =======
The weighted average seasoning of mortgage loans as of the closing date is
expected to be 25.91 months. The maximum seasoning of mortgage loans as of the
closing date is expected to be 137.00 months and the minimum seasoning of the
mortgage loans as of the closing date is expected to be 3.98 months.
A-1-2
Years to maturity at closing
Number of
Aggregate current Aggregate current % of mortgage
Years to maturity balance (GBP) balance (US$) total loans % of total
- ----------------- ----------------- ----------------- ------- --------- ----------
0 to 5 272,868,373.20 510,318,431.56 0.63% 6,111 1.53%
5 to 10 2,144,631,964.94 4,010,890,700.83 4.98% 27,460 6.86%
10 to 15 3,871,239,316.40 7,239,991,769.53 8.99% 41,538 10.37%
15 to 20 7,890,760,988.16 14,757,301,200.06 18.32% 73,907 18.45%
20 to 25 22,051,648,769.35 41,240,993,528.44 51.19% 187,429 46.80%
25 to 30 5,589,836,921.52 10,454,113,010.63 12.98% 52,338 13.07%
30 to 35 1,260,078,409.60 2,356,598,641.63 2.92% 11,698 2.92%
35 to 40 70,327.40 131,526.30 0.00% 1 0.00%
----------------- ----------------- ------- ------- -------
Total 43,081,135,070.57 80,570,338,808.98 100.00% 400,482 100.00%
================= ================= ====== ======= ======
The weighted average remaining term of the mortgage loans as of the
closing date is expected to be 21.21 years and the maximum remaining term as of
the closing date is expected to be 35.25 years.
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.
Number of
Aggregate current Aggregate current mortgage
Region balance (GBP) balance (US$) % of total loans % of total
- ------------------------ ----------------- ----------------- ---------- --------- ----------
East Anglia 936,609,113.40 1,751,646,363.88 2.17% 8,558 2.14%
East Midlands 2,823,638,502.58 5,280,768,727.53 6.55% 28,673 7.16%
Greater London 7,911,176,894.11 14,795,483,027.36 18.36% 47,084 11.76%
North 2,627,894,071.65 4,914,687,492.80 6.10% 35,885 8.96%
North West 4,584,678,838.98 8,574,266,364.66 10.64% 51,136 12.77%
Scotland 4,378,473,398.89 8,188,620,950.60 10.16% 56,845 14.19%
South East 8,797,957,020.59 16,453,939,219.91 20.42% 61,969 15.47%
South West 3,390,836,868.67 6,341,543,111.79 7.87% 28,046 7.00%
Wales 1,457,804,564.11 2,726,386,095.80 3.38% 16,062 4.01%
West Midlands 2,786,715,326.72 5,211,715,004.03 6.47% 27,185 6.79%
Yorkshire & Humberside 3,385,350,470.87 6,331,282,450.62 7.86% 39,039 9.75%
---------------- ---------------- ---- ------ ----
Total 43,081,135,070.57 80,570,338,808.98 100.00% 400,482 100.00%
================= ================= ====== ======= ======
Employment rates differ across regions. The South West has the lowest
level of unemployment whilst London has the highest.(1) Each region relies on
different types of industry. The structure of industries throughout England,
Scotland and Wales is summarized in the table below:
Region(2) 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 London) Technological; light engineering
South West Agriculture and food processing; aerospace; tobacco
Wales Coal; iron; steel; agriculture
- ---------------------
(1) Source: Office for National Statistics
(2) The geographic regions shown above are U.K. economic planning regions.
(Sources: Office for National Statistics, www.bized.ac.uk)
A-1-3
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 for
the second quarter of 2006. This ratio is highest in the South East (4.32) and
lowest in Scotland (3.32).
Average
Average Price Earnings Price/ Earnings
Region(1) (GBP) (GBP per annum) Ratio
- ------------------------- ------------- --------------- ---------------
North East 138,621 38,415 3.61
North West 154,830 41,737 3.71
Yorkshire & Humber 155,628 40,914 3.80
East Midlands 159,598 41,196 3.87
West Midlands 172,048 43,572 3.95
East 215,865 51,626 4.18
Scotland 133,066 40,069 3.32
London 302,991 76,735 3.95
South East 250,938 58,031 4.32
South West 208,248 48,308 4.31
Wales 154,461 39,609 3.90
- -----------------
(1) The geographic regions shown above are U.K. economic planning regions.
(Source: The Department for Communities and Local Government)
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".
Number of
Aggregate current Aggregate current mortgage
Current LTV balance (GBP) balance (US$) % of total loans % of total
- ---------------------- ----------------- ----------------- ---------- --------- ----------
0% to 25% 580,470,900.24 1,085,596,677.63 1.35% 15,942 3.98%
25% to 50% 3,701,146,833.65 6,921,884,808.29 8.59% 47,316 11.81%
50% to 55% 1,398,564,969.85 2,615,596,206.61 3.25% 14,373 3.59%
55% to 60% 1,646,170,594.08 3,078,668,245.05 3.82% 15,755 3.93%
60% to 65% 1,969,371,598.11 3,683,118,762.79 4.57% 17,731 4.43%
65% to 70% 2,433,823,645.04 4,551,736,980.95 5.65% 21,711 5.42%
70% to 75% 3,041,342,127.93 5,687,918,047.65 7.06% 25,086 6.26%
75% to 80% 3,510,023,045.36 6,564,445,099.43 8.15% 27,477 6.86%
80% to 85% 5,670,421,970.75 10,604,823,169.70 13.16% 44,636 11.15%
85% to 90% 5,825,804,190.52 10,895,418,997.11 13.52% 46,812 11.69%
90% to 95% 8,737,796,169.47 16,341,426,396.14 20.28% 82,154 20.51%
95% to 100% 4,412,428,246.57 8,252,123,306.74 10.24% 39,871 9.96%
> 100% 153,770,779.00 287,582,110.89 0.36% 1,618 0.40%
----------------- ----------------- ---------- --------- ----------
Total 43,081,135,070.57 80,570,338,808.98 100.00% 400,482 100.00%
================= ================= ====== ======= ======
The weighted average current loan-to-value ratio of the mortgage loans as
of the cut-off date was 77.40%.
A-1-4
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).
Number of
Aggregate current Aggregate current mortgage
Current indexed LTV balance (GBP) balance (US$) % of total loans % of total
- ------------------- ----------------- ----------------- ---------- --------- ----------
0% to 25% 1,233,194,464.51 2,306,320,287.53 2.86% 29,541 7.38%
25% to 50% 5,930,445,718.30 11,091,119,582.36 13.77% 74,077 18.50%
50% to 55% 1,891,320,350.38 3,537,147,319.28 4.39% 18,420 4.60%
55% to 60% 2,243,796,146.59 4,196,347,553.35 5.21% 20,566 5.14%
60% to 65% 2,679,750,825.98 5,011,669,994.75 6.22% 23,409 5.85%
65% to 70% 3,082,555,443.18 5,764,995,189.84 7.16% 24,319 6.07%
70% to 75% 3,809,446,362.00 7,124,426,586.21 8.84% 29,741 7.43%
75% to 80% 5,106,000,227.13 9,549,241,624.78 11.85% 38,586 9.63%
80% to 85% 5,449,774,409.59 10,192,168,100.82 12.65% 44,218 11.04%
85% to 90% 6,509,336,686.28 12,173,761,470.68 15.11% 54,397 13.58%
90% to 95% 3,957,283,055.68 7,400,910,770.73 9.19% 33,413 8.34%
95% to 100% 1,161,638,936.65 2,172,497,139.32 2.70% 9,569 2.39%
> 100% 26,592,444.30 49,733,189.33 0.06% 226 0.06%
----------------- ----------------- ---------- --------- ----------
Total 43,081,135,070.57 80,570,338,808.98 100.00% 400,482 100.00%
================= ================= ========== ========= ==========
The weighted average current indexed loan-to-value ratio of the mortgage
loans as of the cut-off date was 70.32%.
Outstanding balances
The following table shows the outstanding balances of a mortgage loan
(including capitalized fees and/or charges, if applicable) as of the cut-off
date:
Number of
Range of current Aggregate current Aggregate current mortgage
principal balance (GBP) balance (GBP) balance (US$) % of total loans % of total
- ----------------------- ----------------- ----------------- ---------- --------- ----------
0 to 25,000 224,188,024.87 419,276,444.11 0.52% 13,814 3.45%
25,000 to 50,000 2,006,930,001.20 3,753,360,488.24 4.66% 51,698 12.91%
50,000 to 75,000 4,978,843,814.42 9,311,433,701.73 11.56% 79,084 19.75%
75,000 to 100,000 6,714,287,194.46 12,557,059,911.08 15.59% 77,372 19.32%
100,000 to 125,000 6,690,036,140.41 12,511,705,589.79 15.53% 59,749 14.92%
125,000 to 150,000 5,521,962,288.19 10,327,173,871.37 12.82% 40,394 10.09%
150,000 to 175,000 4,284,122,748.77 8,012,166,364.75 9.94% 26,545 6.63%
175,000 to 200,000 3,049,546,959.20 5,703,262,723.10 7.08% 16,355 4.08%
200,000 to 225,000 2,276,761,226.19 4,257,998,845.22 5.28% 10,783 2.69%
225,000 to 250,000 1,694,685,287.50 3,169,400,424.68 3.93% 7,170 1.79%
250,000 to 275,000 1,313,211,063.22 2,455,967,330.43 3.05% 5,025 1.25%
275,000 to 300,000 982,262,347.82 1,837,027,042.89 2.28% 3,429 0.86%
300,000 to 325,000 731,889,043.44 1,368,778,889.04 1.70% 2,352 0.59%
325,000 to 350,000 574,887,344.45 1,075,154,311.59 1.33% 1,706 0.43%
350,000 to 375,000 507,868,810.70 949,816,249.77 1.18% 1,406 0.35%
375,000 to 400,000 405,477,334.50 758,323,710.98 0.94% 1,050 0.26%
400,000 to 425,000 378,313,502.37 707,521,912.13 0.88% 922 0.23%
425,000 to 450,000 276,511,976.76 517,132,698.94 0.64% 634 0.16%
450,000 to 475,000 258,020,652.92 482,550,225.09 0.60% 560 0.14%
475,000 to 500,000 211,329,309.18 395,228,074.03 0.49% 434 0.11%
----------------- ----------------- ---------- --------- ----------
Total 43,081,135,070.57 80,570,338,808.98 100.00% 400,482 100.00%
================= ================= ========== ========= ==========
The largest mortgage loan had a current balance as of the cut-off date of
GBP499,980.10 or $935,062.78. The average current balance as of the cut-off date
was approximately(GBP)107,573.21 or $201,183.42.
A-1-5
Mortgage loan products
Number of
Mortgage loan Aggregate current Aggregate current mortgage
products balance (GBP) balance (US$) % of total loans % of total
- -------------------- ----------------- ----------------- ---------- --------- ----------
Tracker 2,306,581,414.19 4,313,768,560.82 5.35% 17,359 4.33%
Variable 4,171,260,035.52 7,801,090,518.43 9.68% 49,206 12.29%
Capped 64,442,138.90 120,519,688.17 0.15% 1,053 0.26%
Discount 660,022,467.64 1,234,374,018.98 1.53% 6,681 1.67%
Fixed 24,052,062,622.36 44,982,167,516.34 55.83% 198,588 49.59%
Together Connections 89,228,592.97 166,875,314.57 0.21% 1,549 0.39%
Together 11,737,537,798.99 21,951,543,191.67 27.25% 126,046 31.47%
----------------- ----------------- ---------- --------- ----------
Total 43,081,135,070.57 80,570,338,808.98 100.00% 400,482 100.00%
================= ================= ========== ========= ==========
Employment status
Number of
Aggregate current Aggregate current mortgage
Employment status balance (GBP) balance (US$) % of total loans % of total
- ----------------- ----------------- ----------------- ---------- --------- ----------
Full Time 35,135,924,722.89 65,711,206,416.75 81.56% 344,188 85.94%
Part Time 399,651,802.24 747,428,800.55 0.93% 5,226 1.30%
Retired 103,747,247.76 194,028,102.76 0.24% 1,807 0.45%
Self Employed 7,275,300,808.38 13,606,267,571.83 16.89% 46,169 11.53%
Other(1) 166,510,489.30 311,407,917.09 0.39% 3,092 0.77%
----------------- ----------------- ---------- --------- ----------
Total 43,081,135,070.57 80,570,338,808.98 100.00% 400,482 100.00%
================= ================= ====== ======= ======
(1) This category includes borrowers with a private income (e.g. family trust)
and borrowers who are students with mortgage loans guaranteed by a parent.
Approximately 42.97% of the aggregate current balance of the mortgage
loans as of the cut-off date were made to borrowers under the seller's fast
track program as described in the prospectus under "The mortgage loans -
Characteristics of the mortgage loans - Lending criteria".
Distribution of fixed rate mortgage loans
Fixed rate mortgage loans remain at the relevant fixed rate for a period
of time as specified in the offer of advance, after which they move to the
seller's standard variable rate or some other rate as specified in the offer of
advance.
Number of
Aggregate current Aggregate current mortgage
Fixed rate % balance (GBP) balance (US$) % of total loans % of total
- -------------------- ------------------ ----------------- ---------- --------- ----------
0.00-2.99% 212,125,101.02 396,716,363.93 0.88% 1,633 0.82%
3.00-3.99% 497,194,903.32 929,853,908.19 2.07% 3,438 1.73%
4.00-4.99% 14,683,014,459.86 27,460,173,642.83 61.05% 109,496 55.14%
5.00-5.99% 8,437,534,063.37 15,779,876,205.31 35.08% 81,273 40.93%
6.00-6.99% 222,120,500.81 415,409,760.61 0.92% 2,743 1.38%
7.00-7.99% 73,593.98 137,635.46 0.00% 5 0.00%
------------------ ----------------- ---------- --------- ----------
Total 24,052,062,622.36 44,982,167,516.34 100.00% 198,588 100.00%
================== ================= ========= ========= =========
A-1-6
Month/year in which fixed rate period ends
Number of
Month/year in which Aggregate current Aggregate current mortgage
fixed rate period ends balance (GBP) balance (US$) % of total loans % of total
- ---------------------- ----------------- ----------------- ---------- --------- ----------
October 2006 2,083,931.40 3,897,368.50 0.01% 39 0.02%
November 2006 886,203,848.60 1,657,378,437.65 3.68% 7,182 3.62%
January 2007 1,291,154,106.03 2,414,716,409.10 5.37% 10,133 5.10%
February 2007 499,128,881.15 933,470,833.53 2.08% 3,747 1.89%
March 2007 9,626,977.64 18,004,373.58 0.04% 115 0.06%
April 2007 299,583,809.24 560,281,640.04 1.25% 2,766 1.39%
May 2007 183,201,405.45 342,623,268.47 0.76% 1,474 0.74%
June 2007 411,350,505.19 769,307,714.81 1.71% 3,472 1.75%
July 2007 155,787,344.50 291,353,491.68 0.65% 1,099 0.55%
August 2007 408,881,628.36 764,690,421.36 1.70% 3,544 1.78%
September 2007 1,060,079,090.28 1,982,559,914.64 4.41% 7,601 3.83%
October 2007 1,235,131,914.61 2,309,943,706.70 5.14% 8,566 4.31%
November 2007 91,615,678.19 171,339,641.35 0.38% 1,093 0.55%
December 2007 174,132,093.23 325,661,840.76 0.72% 1,713 0.86%
January 2008 1,310,017,838.00 2,449,995,360.63 5.45% 9,484 4.78%
February 2008 1,294,219,454.92 2,420,449,224.59 5.38% 9,753 4.91%
March 2008 1,045,671,523.67 1,955,614,883.57 4.35% 7,119 3.58%
April 2008 130,955,658.95 244,913,273.37 0.54% 1,135 0.57%
May 2008 1,103,193,249.79 2,063,192,015.76 4.59% 8,195 4.13%
June 2008 920,556,680.92 1,721,625,104.66 3.83% 6,802 3.43%
July 2008 1,075,668,691.10 2,011,715,586.10 4.47% 7,378 3.72%
August 2008 488,644,184.97 913,862,354.73 2.03% 3,981 2.00%
September 2008 705,945,981.52 1,320,260,174.64 2.94% 5,951 3.00%
October 2008 578,392,646.53 1,081,709,927.54 2.40% 5,127 2.58%
November 2008 30,951,724.27 57,885,914.73 0.13% 380 0.19%
January 2009 564,468,969.21 1,055,669,866.22 2.35% 4,908 2.47%
February 2009 192,713,951.23 360,413,631.59 0.80% 1,731 0.87%
March 2009 181,679,916.20 339,777,779.28 0.76% 1,523 0.77%
April 2009 87,335,130.37 163,334,160.82 0.36% 1,062 0.53%
May 2009 225,777,626.40 422,249,316.89 0.94% 1,956 0.98%
June 2009 206,177,593.56 385,593,335.48 0.86% 2,022 1.02%
July 2009 97,570,790.81 182,476,892.97 0.41% 916 0.46%
August 2009 167,125,994.51 312,559,034.93 0.69% 1,729 0.87%
September 2009 147,528,245.15 275,907,324.08 0.61% 1,530 0.77%
October 2009 54,251,621.34 101,461,382.23 0.23% 640 0.32%
November 2009 47,480,744.54 88,798,488.44 0.20% 495 0.25%
December 2009 169,417,800.84 316,845,171.13 0.70% 1,943 0.98%
January 2010 161,119,665.09 301,325,997.65 0.67% 1,789 0.90%
February 2010 433,196,025.74 810,163,207.34 1.80% 3,874 1.95%
March 2010 20,163,563.72 37,709,896.87 0.08% 236 0.12%
April 2010 167,095,570.02 312,502,135.05 0.69% 1,446 0.73%
May 2010 265,481,165.27 496,502,875.29 1.10% 2,739 1.38%
June 2010 586,946,118.15 1,097,706,630.16 2.44% 5,184 2.61%
July 2010 142,478,372.75 266,463,052.72 0.59% 1,261 0.63%
August 2010 191,089,074.36 357,374,786.87 0.79% 1,741 0.88%
September 2010 692,730,688.62 1,295,544,933.86 2.88% 6,057 3.05%
October 2010 718,603,133.56 1,343,931,580.38 2.99% 6,391 3.22%
November 2010 7,127,233.61 13,329,352.30 0.03% 91 0.05%
January 2011 640,616,064.14 1,198,080,163.15 2.66% 5,657 2.85%
February 2011 186,100,253.94 348,044,694.92 0.77% 1,622 0.82%
March 2011 88,408,453.82 165,341,490.33 0.37% 896 0.45%
April 2011 4,507,162.18 8,429,294.71 0.02% 61 0.03%
May 2011 433,530,172.32 810,788,128.27 1.80% 3,765 1.90%
June 2011 380,164,998.81 710,984,580.77 1.58% 3,280 1.65%
July 2011 51,966,178.47 97,187,146.97 0.22% 501 0.25%
August 2011 79,444,950.54 148,577,946.50 0.33% 761 0.38%
September 2011 31,905,521.34 59,669,706.01 0.13% 338 0.17%
October 2011 12,055,232.80 22,545,696.38 0.05% 139 0.07%
November 2011 13,719,940.11 25,659,031.99 0.06% 161 0.08%
January 2012 12,407,172.23 23,203,893.50 0.05% 152 0.08%
A-1-7
Number of
Month/year in which Aggregate current Aggregate current mortgage
fixed rate period ends balance (GBP) balance (US$) % of total loans % of total
- ---------------------- ----------------- ----------------- ---------- --------- ----------
February 2012 42,663,270.87 79,788,849.18 0.18% 410 0.21%
April 2012 8,634,599.98 16,148,428.88 0.04% 100 0.05%
May 2012 10,716,204.49 20,041,445.64 0.04% 116 0.06%
June 2012 24,380,259.61 45,595,961.52 0.10% 229 0.12%
July 2012 7,510,549.51 14,046,229.69 0.03% 75 0.04%
August 2012 10,195,742.23 19,068,077.12 0.04% 101 0.05%
September 2012 34,762,117.83 65,012,112.77 0.14% 346 0.17%
October 2012 41,816,346.86 78,204,931.90 0.17% 433 0.22%
November 2012 114,186.94 213,552.42 0.00% 2 0.00%
December 2012 583,684.12 1,091,606.04 0.00% 10 0.01%
January 2013 34,668,989.88 64,837,944.87 0.14% 392 0.20%
February 2013 4,923,654.01 9,208,217.73 0.02% 53 0.03%
March 2013 4,483,528.47 8,385,094.94 0.02% 65 0.03%
May 2013 991,916.73 1,855,082.67 0.00% 18 0.01%
June 2013 5,462,301.45 10,215,596.17 0.02% 57 0.03%
July 2013 283,023.49 529,310.53 0.00% 3 0.00%
August 2013 692,131.67 1,294,424.65 0.00% 12 0.01%
September 2013 1,134,873.85 2,122,441.07 0.00% 18 0.01%
October 2013 847,064.66 1,584,180.33 0.00% 18 0.01%
November 2013 18,061.70 33,778.99 0.00% 1 0.00%
April 2014 5,030,375.22 9,407,807.74 0.02% 55 0.03%
May 2014 1,847,485.44 3,455,167.27 0.01% 24 0.01%
June 2014 8,197,378.29 15,330,736.88 0.03% 112 0.06%
August 2014 6,069,152.34 11,350,528.71 0.03% 77 0.04%
September 2014 15,738,684.28 29,434,487.34 0.07% 176 0.09%
October 2014 7,547,376.50 14,115,103.53 0.03% 93 0.05%
November 2014 10,879,988.55 20,347,754.59 0.05% 135 0.07%
January 2015 12,912,283.80 24,148,553.16 0.05% 161 0.08%
February 2015 71,946,112.61 134,553,619.80 0.30% 694 0.35%
April 2015 22,348,385.25 41,795,950.09 0.09% 229 0.12%
May 2015 14,028,395.30 26,235,904.89 0.06% 162 0.08%
June 2015 38,823,617.35 72,607,929.17 0.16% 392 0.20%
July 2015 11,766,699.14 22,006,080.73 0.05% 122 0.06%
August 2015 12,598,633.63 23,561,964.61 0.05% 128 0.06%
September 2015 65,850,912.43 123,154,376.43 0.27% 611 0.31%
October 2015 77,143,564.35 144,273,894.05 0.32% 781 0.39%
January 2016 60,542,948.58 113,227,422.43 0.25% 615 0.31%
May 2016 50,148.33 93,787.41 0.00% 1 0.00%
July 2016 44,980.15 84,121.88 0.00% 1 0.00%
August 2016 6,490,337.54 12,138,229.27 0.03% 63 0.03%
September 2016 2,164,692.68 4,048,408.25 0.01% 25 0.01%
October 2016 90,781.85 169,780.22 0.00% 1 0.00%
November 2016 90,834.34 169,878.38 0.00% 1 0.00%
January 2017 193,145.42 361,220.56 0.00% 4 0.00%
November 2017 260,065.92 486,375.28 0.00% 3 0.00%
December 2017 259,718.86 485,726.21 0.00% 3 0.00%
January 2018 4,310,253.82 8,061,036.69 0.02% 69 0.03%
February 2018 80,848.18 151,202.27 0.00% 3 0.00%
March 2018 2,458,096.45 4,597,131.98 0.01% 41 0.02%
May 2018 3,936,153.87 7,361,394.97 0.02% 69 0.03%
June 2018 1,978,279.67 3,699,778.64 0.01% 28 0.01%
August 2018 307,993.66 576,009.74 0.00% 4 0.00%
September 2018 1,354,196.40 2,532,618.11 0.01% 17 0.01%
October 2018 1,329,137.49 2,485,752.93 0.01% 17 0.01%
April 2019 4,658,716.21 8,712,731.06 0.02% 46 0.02%
May 2019 4,303,441.13 8,048,295.60 0.02% 43 0.02%
June 2019 12,101,415.15 22,632,066.61 0.05% 113 0.06%
August 2019 11,040,609.35 20,648,147.61 0.05% 113 0.06%
September 2019 14,226,769.91 26,606,905.09 0.06% 152 0.08%
October 2019 7,418,812.15 13,874,662.48 0.03% 87 0.04%
November 2019 12,134,327.81 22,693,619.87 0.05% 139 0.07%
January 2020 16,001,909.55 29,926,771.24 0.07% 171 0.09%
February 2020 78,498,545.61 146,807,980.00 0.33% 713 0.36%
April 2020 21,151,653.37 39,557,822.13 0.09% 206 0.10%
A-1-8
Number of
Month/year in which Aggregate current Aggregate current mortgage
fixed rate period ends balance (GBP) balance (US$) % of total loans % of total
- ---------------------- ----------------- ----------------- ---------- --------- ----------
May 2020 16,195,578.16 30,288,970.27 0.07% 163 0.08%
June 2020 43,102,114.62 80,609,574.76 0.18% 404 0.20%
July 2020 11,306,276.27 21,144,997.88 0.05% 111 0.06%
August 2020 16,064,455.26 30,043,744.23 0.07% 138 0.07%
September 2020 65,293,658.61 122,112,200.33 0.27% 629 0.32%
October 2020 79,888,147.17 149,406,812.84 0.33% 770 0.39%
January 2021 70,085,687.99 131,074,253.68 0.29% 661 0.33%
February 2021 10,156,328.61 18,994,365.77 0.04% 102 0.05%
May 2021 103,905.71 194,324.46 0.00% 2 0.00%
August 2021 39,960.63 74,734.37 0.00% 1 0.00%
September 2021 172,198.79 322,046.18 0.00% 2 0.00%
----------------- ----------------- ---------- --------- ----------
Total 24,052,062,622.36 44,982,167,516.34 100.00% 198,588 100.00%
================= ================= ========== ========= ==========
Repayment terms
Type of repayment Aggregate current Aggregate current Number of
Plan balance (GBP) balance (US$) % of total mortgage loans % of total
- ------------------------- ----------------- ----------------- ---------- -------------- ----------
Endowment 1,413,576,174.70 2,643,670,161.92 3.28% 16,728 4.18%
Interest Only 14,355,643,602.56 26,847,924,665.51 33.32% 94,950 23.71%
Pension Policy 36,503,803.07 68,269,412.50 0.08% 370 0.09%
Personal Equity Plan 47,827,416.11 89,446,833.61 0.11% 667 0.17%
Repayment 27,227,584,074.13 50,921,027,735.44 63.20% 287,767 71.86%
----------------- ----------------- ---------- -------------- ----------
Total 43,081,135,070.57 80,570,338,808.98 100.00% 400,482 100.00%
================= ================= ========== ============== ==========
Arrears and loss experience
The following tables show the arrears and repossession experience in
respect of the mortgage portfolio as at the dates indicated.
The mortgage loans used in the tables 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 mortgage portfolio, as at the dates
indicated, set forth in the following tables.
A-1-9
As at or for the year ended
---------------------------------------------------------------------------------------------------
December 31, 2003(1) December 31, 2004(1) December 31, 2005(1) June 30, 2006
----------------------- ------------------------- ------------------------- ----------------------
(GBP)(m) $(m) % (GBP)(m) $(m) % (GBP)(m) $(m) % (GBP)(m) $(m) %
Current Balance 13,035 24,378 n/a 20,864 39,020 n/a 37,545 70,217 n/a 35,132 65,704 n/a
------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ---
Number of Mortgage
Loans Outstanding 177,469 177,469 n/a 245,813 245,813 n/a 369,522 369,522 n/a 342,038 342,038 n/a
------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ---
Current Balance of
Loans in Arrears
1 - 2 Months 103.63 193.81 0.80% 192.27 359.58 0.92% 433.16 810.10 1.15% 477.63 893.26 1.27%
2 - 3 Months 33.15 62.00 0.25% 61.40 114.83 0.29% 145.89 272.84 0.39% 154.29 288.55 0.41%
3 - 4 Months 10.62 19.86 0.08% 25.28 47.28 0.12% 57.66 107.84 0.15% 70.28 131.44 0.19%
4 - 5 Months 8.56 16.01 0.07% 14.67 27.44 0.07% 26.78 50.08 0.07% 40.51 75.76 0.11%
5 - 6 Months 4.54 8.49 0.03% 7.68 14.36 0.04% 22.82 42.68 0.06% 26.09 48.79 0.07%
6 - 7 Months 3.05 5.70 0.02% 5.26 9.84 0.03% 15.69 29.34 0.04% 17.85 33.38 0.05%
7 - 8 Months 1.80 3.37 0.01% 2.06 3.85 0.01% 5.88 11.00 0.02% 11.35 21.23 0.03%
8 - 9 Months 1.45 2.71 0.01% 1.77 3.31 0.01% 4.36 8.15 0.01% 7.57 14.16 0.02%
9 - 10 Months 0.56 1.05 0.00% 0.06 0.11 0.00% 1.04 1.95 0.00% 3.77 7.05 0.01%
10 - 11 Months 0.71 1.33 0.01% 0.52 0.97 0.00% 0.44 0.82 0.00% 2.43 4.54 0.01%
11 - 12 Months 0.12 0.22 0.00% 0.39 0.73 0.00% 0.36 0.67 0.00% 0.59 1.10 0.00%
12 - 13 Months 0.19 0.36 0.00% 0.00 0.00 0.00% 0.16 0.31 0.00% 0.73 1.37 0.00%
13 - 14 Months 0.17 0.31 0.00% 0.00 0.00 0.00% 0.03 0.06 0.00% 0.00 0.00 0.00%
14 - 15 Months 0.33 0.62 0.00% 0.00 0.00 0.00% 0.00 0.00 0.00% 0.00 0.00 0.00%
15 - 16 Months 0.00 0.00 0.00% 0.00 0.00 0.00% 0.06 0.11 0.00% 0.00 0.00 0.00%
16 - 17 Months 0.00 0.00 0.00% 0.00 0.00 0.00% 0.00 0.00 0.00% 0.00 0.00 0.00%
Total current
Balance of Mortgage
Loans in Arrears 168.88 315.83 1.30% 311.36 582.31 1.49% 714.34 1,335.78 1.90% 813.09 1,520.64 2.17%
------ ------ ---- ------ ------ ---- ------ -------- ---- ------ -------- ----
Number of Mortgage
Loans
Outstanding
in Arrears
1 - 2 Months 1,485 1,485 0.84% 2,204 2,204 0.90% 4,190 4,190 1.13% 4,461 4,461 1.21%
2 - 3 Months 523 523 0.29% 735 735 0.30% 1,434 1,434 0.39% 1,498 1,498 0.41%
3 - 4 Months 172 172 0.10% 340 340 0.14% 590 590 0.16% 671 671 0.18%
4 - 5 Months 134 134 0.08% 180 180 0.07% 291 291 0.08% 412 412 0.11%
5 - 6 Months 76 76 0.04% 102 102 0.04% 238 238 0.06% 262 262 0.07%
6 - 7 Months 50 50 0.03% 67 67 0.03% 163 163 0.04% 190 190 0.05%
7 - 8 Months 25 25 0.01% 31 31 0.01% 60 60 0.02% 100 100 0.03%
8 - 9 Months 22 22 0.01% 25 25 0.01% 42 42 0.01% 64 64 0.02%
9 - 10 Months 13 13 0.01% 2 2 0.00% 12 12 0.00% 40 40 0.01%
10 - 11 Months 10 10 0.01% 6 6 0.00% 5 5 0.00% 18 18 0.00%
11 - 12 Months 3 3 0.00% 3 3 0.00% 2 2 0.00% 6 6 0.00%
12 - 13 Months 3 3 0.00% 0 0 0.00% 1 3 0.00% 8 8 0.00%
13 - 14 Months 2 2 0.00% 0 0 0.00% 1 1 0.00% 0 0 0.00%
14 - 15 Months 5 5 0.00% 0 0 0.00% 0 0 0.00% 0 0 0.00%
15 - 16 Months 0 0 0.00% 0 0 0.00% 1 1 0.00% 0 0 0.00%
16 - 17 Months 0 0 0.00% 0 0 0.00% 0 0 0.00% 0 0 0.00%
Total Number of
Mortgage Loans
Outstanding in
Arrears 2,523 2,523 1.42% 3,695 3,695 1.50% 7,030 7,030 1.90% 7,730 7,730 2.09%
------ ------ ---- ------ ------ ---- ------ -------- ---- ------ -------- ----
Repossessions 80 80 0.05% 208 208 0.08% 687 687 0.19% 495 495 0.14%
------ ------ ---- ------ ------ ---- ------ -------- ---- ------ -------- ----
Amount of Mortgage
Loan Losses 0.01 0.02 n/a 0.00 0.01 n/a 0.88 1.65 n/a 1.51 2.82 n/a
------ ------ ---- ------ ------ ---- ------ -------- ---- ------ -------- ----
Mortgage Loan Losses
as % of Total
Current Balance 0.00% 0.00% n/a 0.00% 0.00% n/a 0.00% 0.00% n/a 0.00% 0.00% n/a
------ ------ ---- ------ ------ ---- ------ -------- ---- ------ -------- ----
- ----------------------
(1) Provided by Northern Rock. Data in respect of arrears and repossession
about the mortgage loans in the mortgages trust for periods prior to 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.
Repossessions expresses the number of mortgaged properties that the
servicer has taken into possession during the period, as a percentage of the
number of mortgage loans in the 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 August 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.
Annualized
Month CPR Month Annualized CPR
- ---------------- --------------- ----------------- ----------------
April 2001 25.94% January 2004 35.49%
May 2001 27.72% February 2004 37.16%
June 2001 28.23% March 2004 54.19%
July 2001 32.05% April 2004 46.85%
August 2001 31.87% May 2004 44.67%
September 2001 28.84% June 2004 49.41%
October 2001 29.28% July 2004 44.04%
November 2001 28.40% August 2004 46.16%
December 2001 27.76% September 2004 44.04%
January 2002 31.34% October 2004 42.82%
February 2002 33.33% November 2004 57.89%
March 2002 27.52% December 2004 50.35%
April 2002 41.78% January 2005 34.48%
May 2002 41.90% February 2005 48.38%
June 2002 33.57% March 2005 41.72%
July 2002 44.13% April 2005 45.31%
August 2002 44.89% May 2005 44.95%
September 2002 38.65% June 2005 55.33%
October 2002 42.50% July 2005 43.37%
November 2002 44.26% August 2005 44.57%
December 2002 43.42% September 2005 47.65%
January 2003 37.28% October 2005 54.40%
February 2003 48.30% November 2005 47.54%
March 2003 44.60% December 2005 39.55%
April 2003 44.77% January 2006 35.90%
May 2003 49.23% February 2006 37.72%
June 2003 48.24% March 2006 42.95%
July 2003 44.96% April 2006 50.49%
August 2003 42.03% May 2006 55.65%
September 2003 38.12% June 2006 54.02%
October 2003 44.14% July 2006 55.68%
November 2003 42.70% August 2006 52.81%
December 2003 45.04%
- -------------
Source: Northern Rock
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
A-2-1
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 December
2005, see "Certain characteristics of the United Kingdom residential mortgage
market" in the prospectus.
The following table, which is based on data from the Council of Mortgage
Lenders, presents historical CPR information for the past 40 years.
Aggregate Aggregate Aggregate Aggregate Aggregate
quarters quarters quarters quarters quarters
Maximum over Maximum over Maximum over Maximum over Maximum over
CPR (%) 40 years CPR (%) 40 years CPR (%) 40 years CPR (%) 40 years CPR (%) 40 years
- ------------ --------- ------- --------- ------- --------- ------- --------- ------- ---------
7.0 0 11.0 14 14.5 3 18.0 1 21.5 1
7.5 4 11.5 18 15.0 2 18.5 2 22.0 2
8.0 1 12.0 12 15.5 4 19.0 3 22.5 0
8.5 5 12.5 8 16.0 2 19.5 4 23.0 0
9.0 10 13.0 4 16.5 1 20.0 3 23.5 0
9.5 9 13.5 6 17.0 1 20.5 0 24.0 0
10.0 16 14.0 2 17.5 3 21.0 3 24.5 0
10.5 17
- ---------
Source of repayment and outstanding mortgage information: Council of Mortgage
Lenders
The prior CPR table presents the historical CPR experience only of
mortgage lenders in the UK. During the late 1990s, 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
generally declined since 1991.
Year Repossessions (%) Year Repossessions (%) Year Repossessions (%)
- ---- ----------------- ---- ----------------- ---- -----------------
1982 0.11 1991 0.77 2000 0.20
1983 0.12 1992 0.69 2001 0.15
1984 0.17 1993 0.58 2002 0.11
1985 0.25 1994 0.47 2003 0.07
1986 0.30 1995 0.47 2004 0.05
1987 0.32 1996 0.40 2005 0.09
1988 0.22 1997 0.31 2006 H1 0.07
1989 0.17 1998 0.31
1990 0.47 1999 0.27
- ----------
Source: Council of Mortgage Lenders
In August 2006, the Council of Mortgage Lenders published arrears figures
for the first half of 2006, which showed that the repossession rate in the
United Kingdom was 0.07%. No assurance can be given as to whether, or for how
long, these low levels will continue.
A-2-2
Arrears information
The percentage of mortgage loans in arrears in the UK has generally
declined since 1993.
Arrears of Arrears of Arrears of Arrears of
6-12 months 12 months + 6-12 months 12 months +
Year (%) (%) Year (%) (%)
- ------- ----------- ----------- --------- ----------- -----------
1985 0.74 0.17 1996 0.95 0.63
1986 0.64 0.16 1997 0.69 0.42
1987 0.67 0.18 1998 0.68 0.32
1988 0.50 0.12 1999 0.52 0.27
1989 0.73 0.15 2000 0.43 0.19
1990 1.31 0.38 2001 0.37 0.16
1991 1.87 0.93 2002 0.30 0.15
1992 2.07 1.48 2003 0.25 0.11
1993 1.62 1.50 2004 0.23 0.10
1994 1.28 1.12 2005 0.30 0.12
1995 1.20 0.81 2006 H1 0.30 0.13
- ----------
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 ratios of simple average house prices and
incomes of borrowers. 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 House price
to Earnings to Earnings
Year ratio Year ratio
- --------------- ----------- -------- -----------
1994 3.45 2000 4.46
1995 3.39 2001 4.54
1996 3.42 2002 5.12
1997 3.64 2003 5.67
1998 3.88 2004 6.04
1999 4.11 2005 6.18
- -----------
Source: Council of Mortgage Lenders
A-2-3
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 quarterly Housing Indices experienced in
respect of residential mortgage loans by building societies between the fourth
quarter of 1973 and the fourth quarter of 2005 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
beginning with the first quarter of 2006.
UK Retail Price Index Nationwide House Price Index Halifax House Price Index
--------------------- ---------------------------- -------------------------
% annual % annual % annual
Time in quarters Index change(1) Index change(1) Index change(1)
- ---------------- ----- --------- ----- --------- ----- ---------
2006 Q1 194.2 2.4 319.8 4.9 561.1 1.8
2006 Q2 197.6 3.0 329.2 4.8 576.4 2.7
2006 Q3 199.3 3.5 336.1 6.9 580.7 0.7
- -----------
(1) The percentage annual change is calculated in accordance with the
following formula: (x/y) where "x" is equal to the current quarter's index
value and "y" is equal to the index 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 2006-4 AAA (Class A1) Loan Tranche
The series 2006-4 callable class A1 notes will fund the series 2006-4 AAA
(class A1) 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 A1)
Series number: Series 2006-4
Initial outstanding principal balance: (GBP)[o]
Closing date: November [29], 2006
Interest commencement date: November [29], 2006
Final repayment date: The loan payment date falling in [December 2030]
Loan payment dates: Each monthly payment date
Series 2006-4 AAA (Class A3) Loan Tranche
The series 2006-4 callable class A3 notes will fund the series 2006-4 AAA
(class A3) 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 A3)
Series number: Series 2006-4
Initial outstanding principal balance: (GBP)[o]
Closing date: November [29], 2006
Interest commencement date: November [29], 2006
Final repayment date: The loan payment date falling in [December 2054]
Loan payment dates: Each monthly payment date
Series 2006-4 AAA (Class A5) Loan Tranche
The series 2006-4 callable class A5 notes will fund the series 2006-4 AAA
(class A5) 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 A5)
Series number: Series 2006-4
Initial outstanding principal balance: (GBP)[o]
Closing date: November [29], 2006
Interest commencement date: November [29], 2006
Final repayment date: The loan payment date falling in [December 2054]
Loan payment dates: Each monthly payment date
Series 2006-4 AA (Class B1) Loan Tranche
The series 2006-4 callable class B1 notes will fund the series 2006-4 AA
(class B1) 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 B1)
Series number: Series 2006-4
Initial outstanding principal balance: (GBP)[o]
Closing date: November [29], 2006
Interest commencement date: November [29], 2006
Final repayment date: The loan payment date falling in [December 2054]
Loan payment dates: Each monthly payment date
B-1
Series 2006-4 AA (Class B2) Loan Tranche
The series 2006-4 callable class B2 notes will fund the series 2006-4 AA
(class B2) 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 B2)
Series number: Series 2006-4
Initial outstanding principal balance: (GBP)[o]
Closing date: November [29], 2006
Interest commencement date: November [29], 2006
Final repayment date: The loan payment date falling in [December 2054]
Loan payment dates: Each monthly payment date
Series 2006-4 A (Class M1) Loan Tranche
The series 2006-4 callable class M1 notes will fund the series 2006-4 A
(class M1) 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 M1)
Series number: Series 2006-4
Initial outstanding principal balance: (GBP)[o]
Closing date: November [29], 2006
Interest commencement date: November [29], 2006
Final repayment date: The loan payment date falling in [December 2054]
Loan payment dates: Each monthly payment date
Series 2006-4 A (Class M2) Loan Tranche
The series 2006-4 callable class M2 notes will fund the series 2006-4 A
(class M2) 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 M2)
Series number: Series 2006-4
Initial outstanding principal balance: (GBP)[o]
Closing date: November [29], 2006
Interest commencement date: November [29], 2006
Final repayment date: The loan payment date falling in [December 2054]
Loan payment dates: Each monthly payment date
Series 2006-4 BBB (Class C1) Loan Tranche
The series 2006-4 callable class C1 notes will fund the series 2006-4 BBB
(class C1) 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 C1)
Series number: Series 2006-4
Initial outstanding principal balance: (GBP)[o]
Closing date: November [29], 2006
Interest commencement date: November [29], 2006
Final repayment date: The loan payment date falling in [December 2054]
Loan payment dates: Each monthly payment date
B-2
Series 2006-4 BBB (Class C2) Loan Tranche
The series 2006-4 callable class C2 notes will fund the series 2006-4 BBB
(class C2) 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 C2)
Series number: Series 2006-4
Initial outstanding principal balance: (GBP)[o]
Closing date: November [29], 2006
Interest commencement date: November [29], 2006
Final repayment date: The loan payment date falling in [December 2054]
Loan payment dates: Each monthly payment date
B-3
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 + 0.90% 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 this Annex D. Static pool information
contained in this Annex D 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 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.
"Vintage 2001", for example, indicates all mortgage loans in the mortgages trust
originated in the calendar year 2001. 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 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
"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 August 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, as of the date of this prospectus supplement, 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 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 this 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
D-1
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
Vintage 2001 mortgage loans
----------------------------------------------------------------------
December 31, 2003
----------------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
----------- --------------------- ---------- ----------
< 1 month 30,611 (GBP)1,997,629,257.69 98.27% 98.48%
1 - < 2 months 297 (GBP)16,502,604.01 0.95% 0.81%
2 - < 3 months 115 (GBP)6,745,062.89 0.37% 0.33%
3 - < 4 months 37 (GBP)2,160,988.63 0.12% 0.11%
4 - < 5 months 31 (GBP)1,890,988.63 0.10% 0.09%
5 - < 6 months 18 (GBP)1,113,472.59 0.06% 0.05%
6 - < 7 months 15 (GBP)756,819.73 0.05% 0.04%
7 - < 8 months 5 (GBP)279,470.69 0.02% 0.01%
8 - < 9 months 8 (GBP)579,241.56 0.03% 0.03%
9 - < 10 months 3 (GBP)104,262.43 0.01% 0.01%
10 - < 11 months 3 (GBP)238,624.93 0.01% 0.01%
11 - < 12 months 1 (GBP)54,893.57 0.00% 0.00%
12 - < 13 months 2 (GBP)149,790.76 0.01% 0.01%
13 - < 14 months 1 (GBP)132,285.24 0.00% 0.01%
14 - < 15 months 2 (GBP)173,210.61 0.01% 0.01%
15 - < 16 months 0 (GBP)0.00 0.00% 0.00%
Total 31,149 (GBP)2,028,510,973.96 100.00% 100.00%
====== ===================== ====== ======
As at
---------------------------------------------------------------------
December 31, 2004
---------------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
----------- --------------------- ---------- ------------
< 1 month 24,406 (GBP)1,691,794,164.96 98.56% 98.61%
1 - < 2 months 185 (GBP)13,026,201.97 0.75% 0.76%
2 - < 3 months 80 (GBP)5,104,331.05 0.32% 0.30%
3 - < 4 months 46 (GBP)2,999,812.07 0.19% 0.17%
4 - < 5 months 18 (GBP)970,402.17 0.07% 0.06%
5 - < 6 months 12 (GBP)799,333.55 0.05% 0.05%
6 - < 7 months 7 (GBP)452,048.01 0.03% 0.03%
7 - < 8 months 4 (GBP)168,790.73 0.02% 0.01%
8 - < 9 months 4 (GBP)208,380.33 0.02% 0.01%
9 - < 10 months 0 (GBP)0.00 0.00% 0.00%
10 - < 11 months 1 (GBP)48,148.95 0.00% 0.00%
11 - < 12 months 0 (GBP)0.00 0.00% 0.00%
12 - < 13 months 0 (GBP)0.00 0.00% 0.00%
13 - < 14 months 0 (GBP)0.00 0.00% 0.00%
14 - < 15 months 0 (GBP)0.00 0.00% 0.00%
15 - < 16 months 0 (GBP)0.00 0.00% 0.00%
Total 24,763 (GBP)1,715,571,613.79 100.00% 100.00%
====== ===================== ====== ======
----------------------------------------------------------------------
As at December 31, 2005
----------------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
----------- --------------------- ---------- ------------
< 1 month 19,514 (GBP)1,399,828,379.99 98.70% 98.51%
1 - < 2 months 148 (GBP)11,581,051.54 0.75% 0.82%
2 - < 3 months 53 (GBP)4,818,310.57 0.27% 0.34%
3 - < 4 months 32 (GBP)2,571,442.62 0.16% 0.18%
4 - < 5 months 8 (GBP)657,870.15 0.04% 0.05%
5 - < 6 months 6 (GBP)496,491.88 0.03% 0.03%
6 - < 7 months 6 (GBP)555,995.46 0.03% 0.04%
7 - < 8 months 1 (GBP)27,460.30 0.01% 0.00%
8 - < 9 months 1 (GBP)248,338.29 0.01% 0.02%
9 - < 10 months 2 (GBP)145,373.33 0.01% 0.01%
10 - < 11 months 0 (GBP)0.00 0.00% 0.00%
11 - < 12 months 0 (GBP)0.00 0.00% 0.00%
12 - < 13 months 0 (GBP)0.00 0.00% 0.00%
13 - < 14 months 0 (GBP)0.00 0.00% 0.00%
14 - < 15 months 0 (GBP)0.00 0.00% 0.00%
15 - < 16 months 0 (GBP)0.00 0.00% 0.00%
Total 19,771 (GBP)1,420,930,714.13 100.00% 100.00%
====== ===================== ====== ======
D-3
Vintage 2002 mortgage loans
--------------------------------------------------------------------
December 31, 2003
--------------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
--------- ---------- ---------- ----------
< 1 month 61,732 (GBP)4,851,279,647.27 98.41% 98.64%
1 - < 2 months 558 (GBP)39,720,946.82 0.89% 0.81%
2 - < 3 months 217 (GBP)13,255,098.51 0.35% 0.27%
3 - < 4 months 74 (GBP)4,748,777.03 0.12% 0.10%
4 - < 5 months 58 (GBP)3,688,874.24 0.09% 0.08%
5 - < 6 months 31 (GBP)1,954,779.06 0.05% 0.04%
6 - < 7 months 23 (GBP)1,617,760.29 0.04% 0.03%
7 - < 8 months 12 (GBP)832,581.99 0.02% 0.02%
8 - < 9 months 11 (GBP)615,238.97 0.02% 0.01%
9 - < 10 months 5 (GBP)209,609.60 0.01% 0.00%
10 - < 11 months 4 (GBP)274,534.66 0.01% 0.01%
11 - < 12 months 1 (GBP)33,765.77 0.00% 0.00%
12 - < 13 months 0 (GBP)0.00 0.00% 0.00%
13 - < 14 months 0 (GBP)0.00 0.00% 0.00%
14 - < 15 months 2 (GBP)118,958.20 0.00% 0.00%
15 - < 16 months 0 (GBP)0.00 0.00% 0.00%
------ --------------------- ------ ------
Total 62,728 (GBP)4,918,350,572.41 100.00% 100.00%
====== ===================== ====== ======
As at
--------------------------------------------------------------------
December 31, 2004
--------------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
--------- --------------------- ---------- ----------
< 1 month 48,254 (GBP)3,811,378,309.74 98.31% 98.41%
1 - < 2 months 498 (GBP)36,985,804.04 1.01% 0.95%
2 - < 3 months 169 (GBP)12,797,531.42 0.34% 0.33%
3 - < 4 months 72 (GBP)5,225,377.28 0.15% 0.13%
4 - < 5 months 38 (GBP)2,960,942.31 0.08% 0.08%
5 - < 6 months 22 (GBP)1,141,887.19 0.04% 0.03%
6 - < 7 months 17 (GBP)1,106,695.39 0.03% 0.03%
7 - < 8 months 8 (GBP)590,951.54 0.02% 0.02%
8 - < 9 months 6 (GBP)486,829.92 0.01% 0.01%
9 - < 10 months 1 (GBP)29,357.81 0.00% 0.00%
10 - < 11 months 0 (GBP)0.00 0.00% 0.00%
11 - < 12 months 1 (GBP)249,623.47 0.00% 0.01%
12 - < 13 months 0 (GBP)0.00 0.00% 0.00%
13 - < 14 months 0 (GBP)0.00 0.00% 0.00%
14 - < 15 months 0 (GBP)0.00 0.00% 0.00%
15 - < 16 months 0 (GBP)0.00 0.00% 0.00%
------ --------------------- ------ ------
Total 49,086 (GBP)3,872,953,310.11 100.00% 100.00%
====== ===================== ====== ======
--------------------------------------------------------------------
As at December 31, 2005
--------------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
------- ------- -------- ---------
< 1 month 40,117 (GBP)3,403,509,620.63 98.41% 98.43%
1 - < 2 months 363 (GBP)31,431,991.46 0.89% 0.91%
2 - < 3 months 148 (GBP)12,708,731.10 0.36% 0.37%
3 - < 4 months 70 (GBP)6,025,682.13 0.17% 0.17%
4 - < 5 months 29 (GBP)1,947,139.98 0.07% 0.06%
5 - < 6 months 17 (GBP)1,325,375.49 0.04% 0.04%
6 - < 7 months 13 (GBP)100,797.06 0.03% 0.00%
7 - < 8 months 5 (GBP)354,365.54 0.01% 0.01%
8 - < 9 months 4 (GBP)165,240.13 0.01% 0.00%
9 - < 10 months 0 (GBP)0.00 0.00% 0.00%
10 - < 11 months 1 (GBP)66,204.39 0.00% 0.00%
11 - < 12 months 0 (GBP)0.00 0.00% 0.00%
12 - < 13 months 0 (GBP)0.00 0.00% 0.00%
13 - < 14 months 0 (GBP)0.00 0.00% 0.00%
14 - < 15 months 0 (GBP)0.00 0.00% 0.00%
15 - < 16 months 0 (GBP)0.00 0.00% 0.00%
------ --------------------- ------ ------
Total 40,767 (GBP)3,457,635,147.91 100.00% 100.00%
====== ===================== ====== ======
D-4
Vintage 2003 mortgage loans
---------------------------------------------------------------------------
December 31, 2003
---------------------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
--------- --------------------- ---------- ----------
< 1 month 36,140 (GBP)3,237,486,743.50 98.45% 98.56%
1 - < 2 months 390 (GBP)32,972,190.38 1.06% 1.00%
2 - < 3 months 101 (GBP)8,461,422.17 0.28% 0.26%
3 - < 4 months 26 (GBP)2,019,251.86 0.07% 0.06%
4 - < 5 months 22 (GBP)1,827,039.81 0.06% 0.06%
5 - < 6 months 15 (GBP)960,879.24 0.04% 0.03%
6 - < 7 months 5 (GBP)377,288.39 0.01% 0.01%
7 - < 8 months 4 (GBP)304,599.37 0.01% 0.01%
8 - < 9 months 3 (GBP)252,558.25 0.01% 0.01%
9 - < 10 months 1 (GBP)38,315.91 0.00% 0.00%
10 - < 11 months 2 (GBP)154,900.42 0.01% 0.00%
11 - < 12 months 0 (GBP)0.00 0.00% 0.00%
12 - < 13 months 0 (GBP)0.00 0.00% 0.00%
13 - < 14 months 0 (GBP)0.00 0.00% 0.00%
14 - < 15 months 0 (GBP)0.00 0.00% 0.00%
15 - < 16 months 0 (GBP)0.00 0.00% 0.00%
--------- --------------------- ---------- ----------
Total 36,709 (GBP)3,284,855,189.31 100.00% 100.00%
========= ===================== ========== ==========
As at
--------------------------------------------------------------------
December 31, 2004
--------------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
--------- --------------------- ---------- ----------
< 1 month 86,836 (GBP)8,324,697,769.72 98.23% 98.31%
1 - < 2 months 938 (GBP)88,802,961.10 1.06% 1.05%
2 - < 3 months 306 (GBP)27,762,138.23 0.35% 0.33%
3 - < 4 months 126 (GBP)10,129,019.44 0.14% 0.12%
4 - < 5 months 81 (GBP)7,202,393.29 0.09% 0.09%
5 - < 6 months 48 (GBP)3,984,664.31 0.05% 0.05%
6 - < 7 months 31 (GBP)2,844,714.20 0.04% 0.03%
7 - < 8 months 15 (GBP)1,067,591.83 0.02% 0.01%
8 - < 9 months 13 (GBP)978,523.70 0.01% 0.01%
9 - < 10 months 1 (GBP)31,311.43 0.00% 0.00%
10 - < 11 months 4 (GBP)292,819.84 0.00% 0.00%
11 - < 12 months 2 (GBP)140,508.75 0.00% 0.00%
12 - < 13 months 0 (GBP)0.00 0.00% 0.00%
13 - < 14 months 0 (GBP)0.00 0.00% 0.00%
14 - < 15 months 0 (GBP)0.00 0.00% 0.00%
15 - < 16 months 0 (GBP)0.00 0.00% 0.00%
--------- --------------------- ---------- ----------
Total 88,401 (GBP)8,467,934,415.64 100.00% 100.00%
========= ===================== ========== ==========
--------------------------------------------------------------------
December 31, 2005
--------------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
--------- --------------------- ---------- ----------
< 1 month 64,463 (GBP)6,314,614,980.37 97.37% 97.24%
1 - < 2 months 921 (GBP)95,293,423.15 1.39% 1.47%
2 - < 3 months 387 (GBP)39,404,803.73 0.58% 0.61%
3 - < 4 months 174 (GBP)18,901,936.82 0.26% 0.29%
4 - < 5 months 83 (GBP)7,806,782.28 0.13% 0.12%
5 - < 6 months 71 (GBP)7,209,066.50 0.11% 0.11%
6 - < 7 months 60 (GBP)6,086,536.52 0.09% 0.09%
7 - < 8 months 18 (GBP)1,842,411.35 0.03% 0.03%
8 - < 9 months 17 (GBP)1,735,753.93 0.03% 0.03%
9 - < 10 months 5 (GBP)379,136.12 0.01% 0.01%
10 - < 11 months 2 (GBP)235,725.53 0.00% 0.00%
11 - < 12 months 2 (GBP)356,093.77 0.00% 0.01%
12 - < 13 months 1 (GBP)164,166.30 0.00% 0.00%
13 - < 14 months 1 (GBP)31,446.58 0.00% 0.00%
14 - < 15 months 0 (GBP)0.00 0.00% 0.00%
15 - < 16 months 1 (GBP)60,571.83 0.00% 0.00%
--------- --------------------- ---------- ----------
Total 66,206 (GBP)6,494,122,834.62 100.00% 100.00%
========= ===================== ========== ==========
D-5
Vintage 2004 mortgage loans
----------------------------------------------------------------
December 31, 2004
----------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
---------- --------------------- ---------- ----------
< 1 month 40,592 (GBP)4,076,062,212.54 98.48% 98.48%
1 - < 2 months 413 (GBP)42,538,937.64 1.00% 1.03%
2 - < 3 months 110 (GBP)11,450,442.89 0.27% 0.28%
3 - < 4 months 61 (GBP)4,562,552.23 0.15% 0.11%
4 - < 5 months 26 (GBP)2,633,692.26 0.06% 0.06%
5 - < 6 months 13 (GBP)1,397,422.92 0.03% 0.03%
6 - < 7 months 3 (GBP)184,717.92 0.01% 0.00%
7 - < 8 months 0 (GBP)0.00 0.00% 0.00%
8 - < 9 months 0 (GBP)0.00 0.00% 0.00%
9 - < 10 months 0 (GBP)0.00 0.00% 0.00%
10 - < 11 months 1 (GBP)179,044.05 0.00% 0.00%
11 - < 12 months 0 (GBP)0.00 0.00% 0.00%
---------- --------------------- ---------- ----------
Total 41,219 (GBP)4,139,009,022.45 100.00% 100.00%
========== ===================== ========== ==========
As at
-------------------------------------------------------------------
December 31, 2005
-------------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
--------- ---------------------- ----------- -----------
< 1 month 105,482 (GBP)11,802,352,508.67 97.69% 97.81%
1 - < 2 months 1,469 (GBP)157,876,825.48 1.36% 1.31%
2 - < 3 months 488 (GBP)51,890,742.66 0.45% 0.43%
3 - < 4 months 212 (GBP)20,986,057.13 0.20% 0.17%
4 - < 5 months 114 (GBP)11,136,005.13 0.11% 0.09%
5 - < 6 months 100 (GBP)9,968,284.10 0.09% 0.08%
6 - < 7 months 61 (GBP)6,396,985.87 0.06% 0.05%
7 - < 8 months 31 (GBP)3,137,747.70 0.03% 0.03%
8 - < 9 months 17 (GBP)1,995,734.33 0.02% 0.02%
9 - < 10 months 5 (GBP)511,776.21 0.00% 0.00%
10 - < 11 months 2 (GBP)135,605.30 0.00% 0.00%
11 - < 12 months 0 (GBP)0.00 0.00% 0.00%
--------- ---------------------- ---------- -----------
Total 107,981 (GBP)12,066,388,272.58 100.00% 100.00%
========= ====================== ========== ===========
D-6
Vintage 2005 mortgage loans
As at
----------------------------------------------------------------
December 31, 2004
----------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
---------- ---------------------- ---------- ----------
< 1 month 101,008 (GBP)11,924,845,535.61 98.45% 98.55%
1 - < 2 months 1,117 (GBP)125,115,631.11 1.09% 1.03%
2 - < 3 months 296 (GBP)33,058,551.14 0.29% 0.27%
3 - < 4 months 74 (GBP)7,296,942.41 0.07% 0.06%
4 - < 5 months 45 (GBP)3,493,720.06 0.04% 0.04%
5 - < 6 months 36 (GBP)3,452,162.36 0.04% 0.03%
6 - < 7 months 15 (GBP)1,566,222.44 0.01% 0.01%
7 - < 8 months 5 (GBP)516,111.51 0.01% 0.00%
8 - < 9 months 3 (GBP)212,257.13 0.00% 0.00%
---------- ---------------------- ---------- ----------
Total 102,599 (GBP)12,100,657,133.77 100% 100%
========== ====================== ========== ==========
D-7
CUMULATIVE LOSS
Vintage 2001 mortgage loans
--------------------------------------------------------------------
December 31, 2003
------------------------------------------------------------------
Number
of
mortgage % of total % of total
loans Balance (GBP) (Number) (Balance)
-------------- --------------- ---------- ----------
Loans taken into possession 20 (GBP)1,073,749.62 0.06% 0.05%
Loans experiencing a loss
(and gross losses) 2 (GBP)1,439.48 0.01% 0.00%
Cumulative number of loans experiencing a
loss
(and aggregate of gross losses) 2 (GBP)1,439.48 0.01% 0.00%
-------------- --------------------- ---------- ----------
Total Vintage 2001 mortgage loans 31,149 (GBP)2,028,510,973.96 100% 100%
============== ===================== ========== ==========
For the year ended
---------------------------------------------------------------------
December 31, 2004
------------------------------------------------------------
Number
of
mortgage % of total % of total
loans Balance (GBP) (Number) (Balance)
-------- ---------------------- ---------- ----------
Loans taken into possession 38 (GBP)1,964,557.83 0.15% 0.11%
Loans experiencing a loss
(and gross losses) 0 (GBP)0.00 0.00% 0.00%
Cumulative number of loans experiencing a
loss
(and aggregate of gross losses) 2 (GBP)1,439.48 0.01% 0.00%
-------- --------------------- ---------- ----------
Total Vintage 2001 mortgage loans 24,763 (GBP)1,715,571,613.79 100% 100%
======== ===================== ========== ==========
------------------------------------------------------------------
December 31, 2005
--------------------------------------------------------------
Number
of
mortgage % of total % of total
loans Balance (GBP) (Number) (Balance)
--------- --------------------- ---------- -----------
Loans taken into possession 42 (GBP)2,577,836.98 0.21% 0.18%
Loans experiencing a loss
(and gross losses) 1 (GBP)73.80 0.01% 0.00%
Cumulative number of loans experiencing a
loss
(and aggregate of gross losses) 3 (GBP)1,513.00 0.02% 0.00%
--------- --------------------- ---------- -----------
Total Vintage 2001 mortgage loans 19,771 (GBP)1,420,930,714.13 100.00% 100.00%
========= ===================== ========== ===========
Vintage 2002 mortgage loans
--------------------------------------------------------------------
December 31, 2003
------------------------------------------------------------------
Number
of
mortgage % of total % of total
loans Balance (GBP) (Number) (Balance)
------------- --------------------- ---------- ----------
Loans taken into possession 28 (GBP)1,407,607.43 0.04% 0.03%
Loans experiencing a loss
(and gross losses) 1 (GBP)28.07 0.00% 0.00%
Cumulative number of loans experiencing a
loss
(and aggregate of gross losses) 1 (GBP)28.07 0.00% 0.00%
------------- --------------------- ---------- ----------
Total Vintage 2002 mortgage loans 62,728 (GBP)4,918,350,572.41 100.00% 100.00%
============= ===================== ========== ==========
For the year ended
-------------------------------------------------------------------
December 31, 2004
---------------------------------------------------------------
Number
of
mortgage % of total % of total
loans Balance (GBP) (Number) (Balance)
-------- --------------------- ---------- ----------
Loans taken into possession 87 (GBP)2,380,469.51 0.18% 0.06%
Loans experiencing a loss
(and gross losses) 1 (GBP)100.53 0.00% 0.00%
Cumulative number of loans experiencing a
loss
(and aggregate of gross losses) 2 (GBP)128.60 0.00% 0.00%
-------- --------------------- ---------- ----------
Total Vintage 2002 mortgage loans 49,086 (GBP)3,872,953,310.11 100.00% 100.00%
======== ===================== ========== ==========
-------------------------------------------------------------------
December 31, 2005
-----------------------------------------------------------------
Number
of
mortgage % of total % of total
loans Balance (GBP) (Number) (Balance)
-------- --------------------- ---------- -----------
Loans taken into possession 148 (GBP)10,703,949.93 0.36% 0.31%
Loans experiencing a loss
(and gross losses) 7 (GBP)139,731.75 0.02% 0.00%
Cumulative number of loans experiencing a
loss
(and aggregate of gross losses) 9 (GBP)139,860.35 0.02% 00.0%
-------- --------------------- ---------- -----------
Total Vintage 2002 mortgage loans 40,767 (GBP)3,457,635,147.91 100.00% 100.00%
======== ===================== ========== ===========
D-8
Vintage 2003 mortgage loans
--------------------------------------------------------------------
December 31, 2003
------------------------------------------------------------------
Number
of
mortgage % of total % of total
loans Balance (GBP) (Number) (Balance)
-------------- --------------------- ---------- ----------
Loans taken into possession 5 (GBP)620,813.59 0.01% 0.02%
Loans experiencing a loss
(and gross losses) 0 (GBP)0.00 0.00% 0.00%
Cumulative number of loans experiencing a
loss
(and aggregate of gross losses) 0 (GBP)0.00 0.00% 0.00%
-------------- --------------------- ---------- ----------
Total Vintage 2003 mortgage loans 36,709 (GBP)3,284,855,189.31 100.00% 100.00%
============== ===================== ========== ==========
For the year ended
-------------------------------------------------------------------
December 31, 2004
-----------------------------------------------------------------
Number
of
mortgage % of total % of total
loans Balance (GBP) (Number) (Balance)
-------- --------------------- ---------- ----------
Loans taken into possession 64 (GBP)557,550.66 0.07% 0.01%
Loans experiencing a loss
(and gross losses) 1 (GBP)3,502.26 0.00% 0.00%
Cumulative number of loans experiencing a
loss
(and aggregate of gross losses) 1 (GBP)3,502.26 0.00% 0.00%
-------- --------------------- ---------- ----------
Total Vintage 2003 mortgage loans 88,401 (GBP)8,467,934,415.64 100.00% 100.00%
======== ===================== ========== ==========
-------------------------------------------------------------------
December 31, 2005
-----------------------------------------------------------------
Number
of
mortgage % of total % of total
loans Balance (GBP) (Number) (Balance)
------------ --------------------- ---------- -----------
Loans taken into possession 313 (GBP)26,507,733.24 0.47% 0.41%
Loans experiencing a loss
(and gross losses) 44 (GBP)645,484.84 0.07% 0.01%
Cumulative number of loans experiencing a
loss
(and aggregate of gross losses) 45 (GBP)648,987.10 0.07% 0.01%
------------ --------------------- ---------- -----------
Total Vintage 2003 mortgage loans 66,206 (GBP)6,494,122,834.62 100.00% 100.00%
============ ===================== ========== ===========
Vintage 2004 mortgage loans
For the year ended
---------------------------------------------------------------------
December 31, 2004
--------------------------------------------------------------------
Number
of
mortgage % of total % of total
loans Balance (GBP) (Number) (Balance)
-------------- --------------------- ---------- ----------
Loans taken into possession 2 (GBP)232,462.39 0.00% 0.00%
Loans experiencing a loss
(and gross losses) 0 (GBP)0.00 0.00% 0.00%
Cumulative number of loans experiencing a
loss
(and aggregate of gross losses) 0 (GBP)0.00 0.00% 0.00%
-------------- --------------------- ---------- ----------
Total Vintage 2004 mortgage loans 41,219 (GBP)4,139,009,022.45 100.00% 100.00%
============== ===================== ========== ==========
------------------------------------------------------------------
December 31, 2005
----------------------------------------------------------------
Number
of
mortgage % of total % of total
loans Balance (GBP) (Number) (Balance)
---------- ---------------------- ---------- -----------
Loans taken into possession 166 (GBP)14,638,506.18 0.15% 0.12%
Loans experiencing a loss
(and gross losses) 16 (GBP)96,096.61 0.01% 0.00%
Cumulative number of loans experiencing a
loss
(and aggregate of gross losses) 16 (GBP)96,096.61 0.01% 0.00%
---------- ---------------------- ---------- -----------
Total Vintage 2004 mortgage loans 107,981 (GBP)12,066,388,272.58 100.00% 100.00%
========== ====================== ========== ===========
D-9
Vintage 2005 mortgage loans
For the year ended
------------------------------------------------------------------------------------------
December 31, 2005
------------------------------------------------------------------------------------------
Number of Balance of
mortgage mortgage
loans in loans in % of total % of total
arrears arrears (Number) (Balance)
------------- ---------------------- ---------- ----------
Loans taken into possession 5 (GBP)491,310.05 0.00% 0.00%
Loans experiencing a loss
(and gross losses) 0 (GBP)0.00 0.00% 0.00%
Cumulative number of loans
experiencing a loss
(and aggregate of gross losses) 0 (GBP)0.00 0.00% 0.00%
------------- ---------------------- ---------- ----------
Total Vintage 2005 mortgage loans 102,599 (GBP)12,100,657,133.77 100.00% 100.00%
============= ====================== ========== ==========
D-10
GRANITE MASTER ISSUER PLC
Issuing entity
* 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.
* 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.
* 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.
* 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.
* Only class A, class B, class M and class C notes will be offered
pursuant to this prospectus and the related prospectus supplement.
* 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.
* 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 31 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 September 12, 2006
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:
* the timing of interest and principal payments;
* financial and other information about our assets;
* information about enhancement for your series or class;
* the ratings for your class;
2
* the method for selling the notes; and
* 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 provide 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 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
3
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.................................................................................. 30
RISK FACTORS.......................................................................... 31
DEFINED TERMS......................................................................... 61
THE ISSUING ENTITY.................................................................... 62
USE OF PROCEEDS....................................................................... 64
NORTHERN ROCK PLC..................................................................... 65
FUNDING 2............................................................................. 67
THE MORTGAGES TRUSTEE................................................................. 68
HOLDINGS.............................................................................. 69
GPCH LIMITED.......................................................................... 70
FUNDING ISSUING ENTITIES.............................................................. 71
THE NOTE TRUSTEE AND THE ISSUER SECURITY TRUSTEE...................................... 72
AFFILIATIONS AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF TRANSACTION PARTIES 73
ISSUANCE OF NOTES..................................................................... 74
THE MORTGAGE LOANS.................................................................... 79
CERTAIN CHARACTERISTICS OF THE UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET............. 103
THE SERVICER AND THE ADMINISTRATION AGREEMENT......................................... 109
ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY................................. 120
THE MORTGAGES TRUST................................................................... 131
THE GLOBAL INTERCOMPANY LOAN AGREEMENT................................................ 150
CASHFLOWS............................................................................. 155
CREDIT STRUCTURE...................................................................... 180
THE SWAP AGREEMENTS................................................................... 191
CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING 2............................... 196
CASH MANAGEMENT FOR THE ISSUING ENTITY................................................ 200
SECURITY FOR FUNDING 2'S OBLIGATIONS.................................................. 202
SECURITY FOR THE ISSUING ENTITY'S OBLIGATIONS......................................... 207
DESCRIPTION OF THE TRUST DEED......................................................... 211
THE NOTES............................................................................. 213
DESCRIPTION OF THE US NOTES........................................................... 218
MATERIAL LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE RELATED SECURITY................. 244
MATERIAL UNITED KINGDOM TAX CONSEQUENCES.............................................. 250
MATERIAL UNITED STATES TAX CONSEQUENCES............................................... 253
MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSIDERATIONS.................................. 258
ERISA CONSIDERATIONS.................................................................. 259
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES................................. 262
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS......................................... 263
LEGAL MATTERS......................................................................... 264
UNDERWRITING.......................................................................... 265
REPORTS TO NOTEHOLDERS................................................................ 267
LISTING AND GENERAL INFORMATION....................................................... 268
GLOSSARY.............................................................................. 271
INDEX OF PRINCIPAL TERMS.............................................................. 297
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 AND
RELATED SECURITY". 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:
* 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:
6
(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)
* to fund or replenish the Funding 2 reserve fund and/or to make
a deposit into the Funding 2 GIC account; or
* 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.
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
7
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
9
DIAGRAM OF OWNERSHIP STRUCTURE OF PRINCIPAL PARTIES TO THE SECURITIZATION
TRANSACTION
GRAPHIC
This diagram illustrates the ownership structure of the principal parties to
the securitization transaction:
* Each of the mortgages trustee, Funding and Funding 2 is a wholly-
owned subsidiary of Granite Finance Holdings Limited ("HOLDINGS").
* We are a wholly-owned subsidiary of Funding 2.
* 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.
* 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.
* 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:
10
* 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
* 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 SUBORDINATION1
GRAPHIC
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 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 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 ("NORTHERN ROCK") 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.
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.
13
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 Citigroup Centre, Canada
Square, Canary Wharf, London E14 5LB (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 branch 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.
THE PAYING AGENTS AND AGENT BANK
Citibank, N.A., is the "PRINCIPAL PAYING AGENT". Its address is Citigroup
Centre, Canada Square, Canary Wharf, London E14 5LB. 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.
14
THE SWAP PROVIDERS
Northern Rock 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".
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.
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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 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.
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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.
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
17
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:
* 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;
* 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;
* 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 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;
* 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);
* 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;
* 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
* 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
18
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
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
19
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 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.
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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 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 days 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".
21
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".
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 then
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.
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In addition, we may redeem in principally the same manner as stated in the
previous paragraph, a series and class of notes outstanding:
* 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
* 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, on the first note payment date
in respect of such notes falling after such implementation and any
applicable note payment date thereafter (prior to December 31,
2010) provided that an issuer enforcement notice has not been
served; or
* 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
* 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.
23
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:
* 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;
* fund or replenish the Funding 2 reserve fund and/or to make a
deposit into the Funding 2 GIC account; and/or
* 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").
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,
24
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.
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
25
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 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
26
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.
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.
27
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.
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
28
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.
29
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.
PRIORITY IN
TYPE OF FEE AMOUNT OF FEE 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
trust property Funding 2 by
mortgages trustee
Funding 2 cash [GBP]200,000 each year Ahead of all revenue Each monthly
management fee amounts payable by payment date
Funding 2 and
allocable to the
issuing entity
Issuer cash [GBP]200,000 each year Ahead of all interest Each monthly
management fee payments on the payment date
notes
Corporate expenses Estimated [GBP]13,000 Ahead of all revenue Each distribution date
of mortgages trustee each year amounts payable to
Funding 2 by
mortgages trustee
Corporate expenses Estimated [GBP]10,500 Ahead of all revenue Each monthly
of Funding 2 each year amounts payable by payment date
Funding 2 and
allocable to the
issuing entity
Corporate expenses Estimated [GBP]12,000 Ahead of all interest Each monthly
of the issuing entity each year payments on the payment date
notes
Fee payable by Estimated [GBP]13,000 In respect of Funding Each monthly
Funding 2 to Funding each year 2 security trustee, payment date
2 security trustee, by ahead of all revenue
the issuing entity to amounts payable by
note trustee and Funding 2 and
issuer security trustee allocable to the
and by the issuing issuing entity, and in
entity to principal respect of note
paying agent, paying trustee, issuer
agent, transfer agent, security trustee and
registrar and agent agents, ahead of all
bank 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.
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.
30
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:
* 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;
* Funding 2 receiving funds from the Funding 2 basis rate swap
provider;
* Funding 2 receiving funds from the Funding 2 liquidity facility
provider (if any); and
* (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 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").
31
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 direct the Funding 2
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:
* the note trustee is to have regard only to the interests of the
class A noteholders in the event of a conflict between the
interests of the class A noteholders on the one hand and the class
B noteholders and/or the class M noteholders and/or the class C
noteholders and/or class D noteholders on the other hand;
* (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;
32
* (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
* (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 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
33
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 from a
refinancing of a 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
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
34
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
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.
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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.
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
properties. 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
36
notes which will contain statistical 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".
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
37
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 DATE") (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 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 could 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
38
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 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:
* first, the AAA loan tranches in respect of each Funding 2
intercompany loan until each of those AAA loan tranches is fully
repaid;
* then, the AA loan tranches in respect of each Funding 2
intercompany loan until each of those AA loan tranches is fully
repaid;
* then, the A loan tranches in respect of each Funding 2 intercompany
loan until each of those A loan tranches is fully repaid;
* then, the BBB loan tranches in respect of each Funding 2
intercompany loan until each of those BBB loan tranches is fully
repaid;
* 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.
39
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:
* firstly, the AAA loan tranches in order of final repayment date,
beginning with the earliest final repayment date;
* then, the AA loan tranches in respect of each Funding 2
intercompany loan until each of those AA loan tranches is fully
repaid;
* then, the A loan tranches in respect of each Funding 2 intercompany
loan until each of those A loan tranches is fully repaid;
* then, the BBB loan tranches in respect of each Funding 2
intercompany loan until each of those BBB loan tranches is fully
repaid;
* 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 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 Funding 2.
Following the occurrence of a pass-through trigger event:
* each series and class of notes will be deemed pass-through notes
and each loan tranche will be deemed a pass-through loan tranche;
* 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
* 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.
40
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 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
41
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 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
42
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.
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
43
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 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
44
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 (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 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.
45
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.
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 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.
46
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.
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.
47
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:
* Repayment basis, with principal and interest repaid on a monthly
basis through the maturity date for that mortgage loan (a
"REPAYMENT MORTGAGE LOAN"); or
* An interest-only basis with or without a capital repayment vehicle;
or
* 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 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
48
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:
* 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 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;
* 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
* 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
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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 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:
* 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");
50
* 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;
* 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
* 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.
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.
51
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.
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
52
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 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. 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 [e]50,000 and excludes all
mortgage credit agreements from its scope. The European Commission's current
intention is to address mortgage lending separately
53
following the European Commission's consultation on its Green Paper entitled
"Mortgage Credit in the EU" published in July 2005. The European Commission
intends to publish a white paper in early 2007, setting out its consultation
findings and any proposed initiatives.
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 SERVICER AND MAY ULTIMATELY ADVERSELY AFFECT OUR ABILITY TO
MAKE PAYMENTS ON THE NOTES WHEN DUE
With effect from October 31, 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 October 31, 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 a 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
54
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.
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.
So as to avoid dual regulation all FSA regulated mortgage loans are not
subject to the CCA. A mortgage contract that would (except for this 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 it being regulated under the FSMA.
The Consumer Credit Act 2006 (the "2006 Act") was enacted on March 30, 2006
and when implemented will amend the CCA in a number of respects. The amendments
to be made by the 2006 Act include, amongst others, the removal of 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 three partners. This means any new loan or further
advance made after this time, other than under a FSA regulated mortgage
contract 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.
The 2006 Act also replaces the existing rules on extortionate credit with a
new unfair relationships test that will provide an individual borrower with a
broad right to challenge an unfair credit relationship in respect of any
agreement that includes the provision of credit, whether or not regulated by
the CCA (with the exception of FSA mortgage contracts regulated under the
FSMA). The unfair relationships provisions will have retrospective effect and
therefore, will apply to any loan, which is not a regulated mortgage contract
under the FSMA (including, without limitation, owner occupied mortgages
originated before
55
October 31, 2004 and buy to let mortgages). The amendments brought about by the
2006 Act to the CCA will come into force on such days as the Secretary of State
for Trade and Industry may appoint.
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:
* 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
* the OFT and any "qualifying body" (as defined in the regulations,
such as the FSA) may seek to prevent a business from relying on
unfair terms.
This will not generally affect "CORE TERMS" which set out the main subject
matter of the contract, such as the borrower's obligation to repay principal.
However, it may affect terms that are not considered to be core terms, such as
the right of the lender to vary the interest rate. For example, if a term
permitting a lender to vary the interest rate is found to be unfair, the
borrower will not be liable to pay 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
56
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. In December 2005, the UK
Government published a consultation paper considering how the directive should
be transposed into UK law, and has stated that it expects to draft implementing
regulations during the second half of 2006. 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.
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
57
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 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 in the form of 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 or otherwise.
58
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"), Euroclear Bank S.A./N.V. as operator of the Euroclear system
("EUROCLEAR") or Clearstream Banking, societe anonyme ("CLEARSTREAM,
LUXEMBOURG"). The lack of physical notes could, among other things:
* result in payment delays on the notes because we will be sending
distributions on the notes to DTC instead of directly to you;
* 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
* 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
59
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 (as amended) 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, 2008 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.
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. A draft of such regulations was published on June 13,
2006 for consultation. 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, 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.
60
DEFINED TERMS
We have provided a glossary of certain defined terms which are not otherwise
defined in the text 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 297. 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 "[E]" 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.
61
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 ended on December 31,
2005.
The directors of the issuing entity and their respective business addresses
and principal activities or business occupations are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION AGE
- ----------------------------- ------------------- --------------------- ---
Keith McCallum Currie Northern Rock House Treasury Director of 49
Gosforth Northern Rock plc
Newcastle upon Tyne
NE3 4PL
L.D.C. Fifth Floor Acting as corporate ---
Securitisation 100 Wood Street directors of special
Director No. 1 Limited London purpose companies
EC2V 7EX
L.D.C. Fifth Floor Acting as corporate ---
Securitisation 100 Wood Street directors of special
Director No. 2 Limited London London purpose companies
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.
62
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 Limited 100 Wood Street special purpose vehicles
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 company secretary of the issuing entity is:
NAME BUSINESS ADDRESS
- ---------------------------------------- ----------------
Law Debenture Corporate Services Limited Fifth Floor
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]6,000 and a fee in respect of each issuance of notes in the
amount of [GBP]3,000. 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 shares of [GBP]1 each) 50,000
Total issued and paid up share capital (50,000 ordinary shares of [GBP]1 each,
two fully paid up and 49,998 partly paid up to 25%) 12,501.50
63
USE OF PROCEEDS
An indication of the application of the proceeds from each issue of notes
will be contained in the applicable prospectus supplement.
64
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 sold 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 December 31, 2005, Northern Rock was the eighth 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 December 31, 2005, Northern Rock and its principal subsidiaries had total
assets of approximately [GBP]82.7 billion and employed approximately 5,174
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 year
ended December 31, 2005 (i.e., new residential mortgage lending during the
year/period net of capital repayments and acquisitions) was [GBP]11.4 billion
and [GBP]13.4 billion, respectively, and gross residential mortgage lending
during 2004 and for the year ended December 31, 2005 (i.e., solely on the basis
of new residential mortgage lending during the year/period) was [GBP]20.1
billion and [GBP]23.6 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 [GBP]42.5 billion of notes were issued,
including fourteen securitization transactions backed by residential mortgage
loans held in the mortgages trust. The outstanding 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 December 31, 2005, [GBP]7.3 billion,
[GBP]13.0 billion, [GBP]20.8 billion and [GBP]37.5 billion, 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.
65
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 two commercial mortgage-backed securitization
transactions, 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:
* 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.
* 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.
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.
66
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.
67
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.
68
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 wIntermediary Corporation
p.l.c. under the terms of a trust for the benefit of charitable institutions.
Holdings is organized as a special purpose company and is mostly passive.
The principal objects of Holdings are as set out in its memorandum of
association and are, among other things, to acquire and hold, by way of
investments or otherwise and to deal in or exploit in such manner as may from
time to time be considered expedient, all or any of the shares, stocks,
debenture stocks, debentures or other interests of or in any company. 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 125,000 ordinary shares of [GBP]1.00 each in Funding and
12,501 ordinary shares of [GBP]1.00 each in Funding 2 (each of which is fully
paid up). Holdings 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 Northeast
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.
69
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.
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.
70
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 is under an
obligation to apply receipts received by it in respect of its beneficial
interest in the mortgages trust to the Funding issuing entities. This
obligation arises as a result of its obligation to repay under the intercompany
loan entered into between Funding and each of the Funding issuing entities.
Similarly, Funding 2 is obliged to repay the Loan made by us pursuant to 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 FUNDING 2 SECURITY TRUSTEE, 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 served 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:
* there may be no debit balance on the principal deficiency ledger
(in respect of any loan tranche);
* no note event of default shall have occurred which is continuing or
will occur as a consequence of such issuance;
* no issuer enforcement notice has been served on us by the note
trustee;
* no Funding 2 intercompany loan enforcement notice has been served
on Funding 2 by the Funding 2 security trustee;
* 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);
* each of the applicable transaction documents has been executed by
the relevant parties to those documents;
* we shall have delivered a solvency certificate to the note trustee
in form and substance satisfactory to the note trustee; and
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* 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.
* 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).
* 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).
FOR THE CLASS B NOTES OF ANY SERIES
On the closing date for that series of notes and after giving effect to the
issuance of that series of notes, the class B available subordinated amount
must be equal to or greater than the class B required subordinated amount.
* The "CLASS B REQUIRED SUBORDINATED AMOUNT" is calculated, on any
date, as the product of:
A x B
where:
A = the class B required 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).
* The "CLASS B AVAILABLE SUBORDINATED AMOUNT" is calculated, on any
date, as:
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(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.
* 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
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).
* 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.
* 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
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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).
* 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
(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:
* 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
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* 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.
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:
* "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;
* "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;
* "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;
* "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
* "MORTGAGE PORTFOLIO" means, as of any date of determination, the
initial mortgage portfolio and the further mortgage portfolios
assigned to the mortgages trustee prior to such date of
determination, taking account of, among other things, amortization
of mortgage loans in that portfolio and the addition and/or removal
of any mortgage loans to or from that portfolio since the last such
assignment.
The 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
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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:
* "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.
* "STANDARD VARIABLE RATE MORTGAGE LOANS": mortgage loans subject to
the seller's standard variable rate for the life of the mortgage
loan.
* "TOGETHER MORTGAGE LOANS": flexible mortgage loans, which are
offered in various product types: Together flexible, Together
variable, Together fixed, Together fixed for life, Together
discount tracker and Together stepped tracker. These products allow
the borrower to obtain a mortgage loan, an unsecured loan and, in
some cases (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-
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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.
* "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.
* "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.
* "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.
* "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.
* "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.
* "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.
* "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.
* "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.
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* "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.
* "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.
* "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.
* "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.
* "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:
* "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.
* "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
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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:
* "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;
* "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;
* "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;
* "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
* "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.
* "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.
* "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 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
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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 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
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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 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
86
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 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" (which is also known as the base rate
guarantee) 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:
* the seller's standard variable rate; or
* 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
87
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:
* where there has been, or the lender reasonably expects there to be
in the near future, a general trend to increase rates on mortgages;
* where the lender for good commercial reasons needs to fund an
increase in the interest rate or rates payable to depositors;
* where the lender wishes to adjust its interest rate structure to
maintain a prudent level of profitability;
* 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
* 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. Currently, all of the mortgage loans originated by the
seller offer the flexible features described below and the seller expects that
this will continue to be the case. 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
88
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:
* 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 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.
* 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.
* 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.
* 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
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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.
* 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 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
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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
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.
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(6) "TOGETHER STEPPED TRACKER" mortgage loans. The interest rate on
Together stepped tracker mortgage loans is a fixed rate which steps
up after a period of time (currently one or two years) before
becoming linked to the Bank of England base rate.
The seller also began originating Together Connections variable mortgage
loans (referred to in this prospectus as "TOGETHER CONNECTIONS VARIABLE"
mortgage loans in May 2001 and Together Connections fixed mortgage loans
(referred to in this prospectus as "TOGETHER CONNECTIONS FIXED" mortgage loans)
in August 2002 (Together Connections variable mortgage loans and Together
Connections fixed mortgage loans are together referred to in this prospectus as
"TOGETHER CONNECTIONS" mortgage loans). Together Connections mortgage loans
generally share the same characteristics as Together mortgage loans, but have
the additional feature of allowing the borrower to link the mortgage loan with
one or more deposit accounts that are held with the seller, as described above
under "-- MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER". The interest rate on
Together Connections mortgage loans depends on the LTV ratio of the particular
mortgage loan.
The seller began originating Connections mortgage loans in November 2002.
Connections mortgage loans have similar features to Together Connections
mortgage loans 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
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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%.
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
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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 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:
* intermediaries that range from mortgage clubs to small independent
mortgage advisors;
* its branch network throughout the United Kingdom;
* its website; and
* 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".
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UNDERWRITING
The decision to offer a mortgage loan to a potential borrower is made by one
of the seller's underwriters and/or mandate holders located in its mortgage
service centers or head office in Gosforth, who may liaise with the
intermediaries. Each underwriter and/or mandate holder must pass the seller's
formal training program to gain the authority to approve mortgage loans. The
seller has established various levels of authority for its underwriters who
approve mortgage loan applications. The levels are differentiated by, among
other things, degree of risk, value of the property, 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 generally 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 typically be established
by:
* three monthly payslips from the six month period prior to the date
of the loan application plus the borrower's most recent form P60
(in the case of a prospective borrower with a low credit score);
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* two monthly payslips from the six month period prior to the date of
the loan application plus the borrower's most recent form P60 (in
the case of a prospective borrower with a medium credit score); or
* the borrower's most recent monthly payslip (in the case of a
prospective borrower with a high credit score).
Proof of income for self-employed prospective borrowers may typically be
established by:
* a certificate from the borrower's accountant in acceptable form,
the borrower's accounts for the three years prior to the date of
the loan application or the borrower's tax assessments for the
three years prior to the date of the loan application (in the case
of a prospective borrower with a low credit score); or
* a certificate from the borrower's accountant in acceptable form,
the borrower's accounts for the two years prior to the date of the
loan application or the borrower's tax assessments for the two
years prior to the date of the loan application (in the case of a
prospective borrower with a medium or high credit score).
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. Borrowers of Together mortgage loans are ineligible for the fast track
program. In order to qualify, the prospective borrower must have a valuation
made on the mortgaged property and must meet certain requirements set by the
seller with respect to the credit score attained on the seller's initial credit
review, the value of the mortgaged property and the LTV ratio of the mortgage
loan. The minimum value of the mortgaged property required and the maximum LTV
ratio allowed for the fast track program have each varied over time. At
different times during the period May 2001 through March 2004, the seller
required that a prospective borrower eligible for the fast track program have a
property value ranging from at least [GBP]100,000 to at least [GBP]150,000 and
have applied for a mortgage loan with an LTV ratio ranging from no greater than
60% to no greater than 85%. In March 2004, the seller discontinued the fast
track program in favor of a new set of procedures under which verification of a
borrower's income was not required in certain circumstances. For mortgage loans
with an LTV ratio no greater than 85% (or no greater than 80% in the case of
mortgage loans in excess of [GBP]500,000) a borrower receiving a medium to high
credit score did 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 were ineligible for a non-verified
mortgage loan. In June 2006, the seller made some minor amendments to its
income verification process and procedures and reinstated the fast track name.
Currently, in order to be eligible for the fast track program, the seller
requires that a prospective borrower attain a high or medium credit score, have
a valuation made on the mortgaged property, have a property value of at least
[GBP]100,000 and be applying for a mortgage loan with an LTV ratio no greater
than 85% (or no greater than 80% in the case of mortgage loans in excess of
[GBP]500,000). First time buyers, borrowers with low credit scores, borrowers
employed less than six months and borrowers of Together mortgage loans are
ineligible for a fast track mortgage loan. The eligibility requirements for the
seller's fast track program are subject to change from time to time.
Notwithstanding these procedures, the seller carries out reasonability checks
on all non verified applications and retains the right to require proof of
income or other credit related information in any case it deems necessary. An
existing borrower could also have been eligible for the May 2001 -- March 2004
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 does not exceed [GBP]50,000 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
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existing borrower could also have been eligible for the May 2001 -- March 2004
fast track program if the borrower was moving from one property (for which the
seller is the mortgagee) to another property and either (a) the borrower 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 was equal to or less than the amount of the original mortgage loan, and
the borrower's personal circumstances (for example, income and employment) had
not changed since the date of the original mortgage loan.
(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]2,000,000, 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.
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The seller will deduct the annual cost of existing commitments of twelve months
or more from the applicant's gross income. Positive proof of the applicant's
identity and address is obtained in all cases.
In cases where an applicant requests that the seller takes a secondary
income into account, the seller will consider the sustainability of the
applicant's work hours, the similarity of the jobs and/or skills, the commuting
time and distance between jobs, the length of employment at both positions and
whether the salary is consistent with the type of employment. The seller will
determine, after assessing the above factors, if it is appropriate to use both
incomes. If so, a portion of the secondary income will be used as part of the
normal income calculation.
Where there are two applicants, the seller adds joint incomes together for
the purposes of calculating the applicants' total income. In determining the
loan amount available to the applicants the seller may use the higher of the
joint income multiplied by the appropriate income multiple or the highest of
the two incomes multiplied by the appropriate income multiple plus the lower
income. The seller may at its discretion consider the income of one additional
applicant as well, but only at a maximum income multiple of 1.
The seller may exercise discretion within its lending criteria in applying
those factors that are used to determine the maximum amount an applicant can
borrow. Accordingly, these parameters may vary for some mortgage loans. The
seller may take the following into account when applying discretion: credit
score result, existing customer relationship, LTV and total income needed to
support the mortgage loan.
(8) Credit history
(a) Credit search
A credit search is carried out in respect of all applicants.
Applications may be declined where an adverse credit history (for
example, county court 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 a
quantitative measure 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, closed
user group data obtained from credit reference agencies 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 and closed user group data obtained from credit reference agencies to
make further lending decisions, calculate impairment allowances and 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:
* the valuation made by an independent valuer from the panel of
valuers appointed by the seller or an employee valuer of the
seller; or
* 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".
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
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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.
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
100
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
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
101
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 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".
102
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 method of calculating CPR.
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) December 2005.
FOUR FOUR
CPR FOR QUARTER CPR FOR QUARTER
THE ROLLING THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
DATE (%) (%) DATE (%) (%)
- -------------- ------- ------- ------------- ------- -------
March 1999 13.20 NA June 1999 17.40 NA
September 1999 19.35 NA December 1999 17.96 16.98
March 2000 14.68 17.35 June 2000 16.68 17.17
September 2000 17.33 16.66 December 2000 17.01 16.43
March 2001 16.68 16.93 June 2001 20.02 17.76
September 2001 22.33 19.01 December 2001 21.88 20.23
March 2002 20.51 21.18 June 2002 24.06 22.20
September 2002 27.00 23.36 December 2002 26.00 24.39
March 2003 23.35 25.10 June 2003 25.12 25.37
September 2003 27.10 25.39 December 2003 27.74 25.83
March 2004 23.21 25.79 June 2004 25.16 25.80
September 2004 26.24 25.59 December 2004 21.94 24.14
March 2005 18.57 22.98 June 2005 21.66 22.10
September 2005 25.39 21.89 December 2005 25.51 22.78
Source of repayment and outstanding mortgage information: Bank of England
103
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
September 1986 17.52 14.45 December 1986 15.60 14.92
104
FOUR FOUR
CPR FOR QUARTER CPR FOR QUARTER
THE ROLLING THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
DATE (%) (%) DATE (%) (%)
- -------------- ---------- ------- ------------- --------- -------
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 Northern Rock) converted to stock form UK banks, and the
CPR experience of these banks is therefore not included in the foregoing
building society CPR data.
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.
105
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 2005. 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 2006 to
the date of such prospectus supplement.
NATIONWIDE
UK RETAIL 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 24.9 N/A 19.5 N/A N/A N/A
1974 Q1 26.0 N/A 19.8 N/A N/A N/A
1974 Q2 27.6 15.3 20.0 N/A N/A N/A
1974 Q3 28.1 15.8 20.2 N/A N/A N/A
1974 Q4 29.6 17.5 20.4 4.4 N/A N/A
1975 Q1 31.5 19.2 20.7 4.5 N/A N/A
1975 Q2 34.8 23.2 21.4 6.8 N/A N/A
1975 Q3 35.6 23.5 21.9 7.9 N/A N/A
1975 Q4 37.0 22.2 22.5 10.1 N/A N/A
1976 Q1 38.2 19.2 23.0 10.3 N/A N/A
1976 Q2 39.5 12.9 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 14.0 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 14.5 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 8.7 27.6 10.8 N/A N/A
1978 Q2 50.0 7.2 28.9 13.3 N/A N/A
1978 Q3 50.8 7.5 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 9.3 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 15.2 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 19.0 46.6 20.2 N/A N/A
1980 Q3 68.5 14.7 47.1 14.3 N/A N/A
1980 Q4 69.9 14.1 46.9 6.7 N/A N/A
1981 Q1 72.0 11.9 47.3 4.5 N/A N/A
1981 Q2 75.0 10.7 48.1 3.2 N/A N/A
1981 Q3 76.3 10.8 48.3 2.3 N/A N/A
1981 Q4 78.3 11.4 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 7.0 49.8 3.2 N/A N/A
1982 Q4 82.5 5.3 51.0 7.2 N/A N/A
1983 Q1 83.1 4.5 52.5 8.4 97.1 N/A
1983 Q2 84.8 3.6 54.6 10.4 99.4 N/A
1983 Q3 86.1 5.0 56.2 12.1 101.5 N/A
106
NATIONWIDE
UK RETAIL HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE(1) INDEX CHANGE(1) INDEX CHANGE(1)
- ---------------- ------- -------- ----- -------- ----- --------
1983 Q4 86.9 5.2 57.1 11.2 102.3 N/A
1984 Q1 87.5 5.1 59.2 12.0 104.1 7.0
1984 Q2 89.2 5.0 61.5 11.9 106.0 6.4
1984 Q3 90.1 4.6 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 5.5 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 3.9 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
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
107
NATIONWIDE
UK RETAIL HOUSE HALIFAX HOUSE
PRICE INDEX PRICE INDEX PRICE INDEX
----------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE(1) INDEX CHANGE(1) INDEX CHANGE(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 15.6 480.3 17.3
2004 Q2 186.8 3.0 298.7 17.8 508.4 19.3
2004 Q3 188.1 3.0 308.8 17.6 522.0 18.3
2004 Q4 189.9 3.4 306.8 13.8 523.5 14.0
2005 Q1 190.5 3.1 307.4 9.4 527.1 9.3
2005 Q2 192.2 2.8 316.9 5.9 528.0 3.8
2005 Q3 193.1 2.6 317.2 2.7 538.7 3.1
2005 Q4 194.1 2.2 316.7 3.2 549.9 4.9
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.
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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.
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
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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:
* 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
* 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 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
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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:
* arrangements to make each monthly payment as it falls due plus an
additional amount to pay the arrears over a period of time;
* arrangements to pay only a portion of each monthly payment as it
falls due; and/or
* 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 two 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.
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:
* securing, maintaining or protecting the property and putting it
into a suitable condition for sale;
* creating (other than in Scotland) any estate or interest on the
property, including a leasehold;
* 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
* 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
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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 then up-to-date information on the arrears and
repossession experience in respect of the relevant cut-off date mortgage
portfolio.
There can be no assurance that the arrears and repossession experience with
respect to the mortgage loans included in any cut-off date 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.
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
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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 a given cut-off date mortgage portfolio, see the related
prospectus supplement.
THE ADMINISTRATION AGREEMENT
The following section describes, in summary, the material terms of the
administration agreement. The description does not purport to be complete and
is subject to the provisions of the administration agreement, a form of which
has been filed as an exhibit to the registration statement of which this
prospectus is a part.
APPOINTMENT
On 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:
* the terms and conditions of the mortgage loans and the mortgages;
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* 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
* 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 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
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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 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;
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(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 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:
* 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;
* 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;
* 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
* 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 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.
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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:
* 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;
* 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;
* 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
* 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.
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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:
* if possible, to have experience in administering mortgage loans
secured on residential properties in England, Wales and Scotland;
and
* 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.
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:
* 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;
* the assignment of other mortgage loans and their related security
to the mortgages trust;
* (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);
* the making of re-draws in respect of flexible mortgage loans
contained in the trust property; and
* 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").
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
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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:
* 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;
* 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;
* 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;
* each relevant mortgaged property is located in England, Wales or
Scotland;
* 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;
* the seller's lending criteria are consistent with the criteria that
would be used by a reasonable and prudent mortgage lender;
* in relation to each mortgage loan, the borrower has a good and
marketable title to the relevant mortgaged property;
* prior to making a mortgage loan, an independent valuer from the
panel of valuers appointed by the seller or an employee valuer of
the seller valued the relevant mortgaged property, and the results
of such valuation would be acceptable to a reasonable and prudent
mortgage lender;
* 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;
* 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;
* so far as the seller is aware, no borrower is in material breach of
its mortgage loan;
* the first payment due has been paid by the relevant borrower in
respect of each mortgage loan and each mortgage loan is fully
performing;
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* 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;
* 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;
* 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;
* each borrower is a natural person, and no borrower is, as of the
assignment date, an employee or an officer of the seller;
* 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;
* 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;
* no mortgage loan has a current balance of more than [GBP]500,000;
* in respect of any mortgage loan where the borrower also has a
personal secured loan or in respect of any personal secured loan,
the combined LTV of the maximum amount of credit provided under
such personal secured loan and other mortgage loans secured on the
same property is not greater than 95 per cent.; and
* 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.
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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 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:
* a variation in the financial terms and conditions of the mortgage
loan involving a permitted product switch (as described below);
* a change between interest-only and repayment mortgage loans;
* a transfer of equity;
* a release of a party to a mortgage loan or a release of part of the
land subject to the mortgage;
* any variation agreed with borrowers to control or manage arrears on
a mortgage loan;
* 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;
* any variation imposed by statute; and
* 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
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loan is to be exchanged is a permitted replacement mortgage loan. A "PERMITTED
REPLACEMENT MORTGAGE LOAN" is a mortgage loan:
* that is subject to a variable rate of interest; and
* 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 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,
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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
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);
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(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;
(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%;
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(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;
(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:
* 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
* 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
* 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.
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.
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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:
* 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);
* 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
* 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 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
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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:
* 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;
* 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;
* 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;
* 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;
* the occurrence of an insolvency event in relation to the seller; or
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* 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:
* the sum of [GBP]100 settled by Law Debenture Corporate Services
Limited on trust on the date of the mortgages trust deed;
* the mortgage portfolio, including the mortgage loans and their
related security, the rights under any MIG policies and the other
seller arranged insurance policies;
* 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;
* 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;
* any interest and principal paid by borrowers on their mortgage
loans on or after the relevant assignment date;
* any other amounts received under the mortgage loans and related
security on or after the relevant assignment date excluding third
party amounts;
* any re-draws under flexible mortgage loans included in the trust
property;
* any further draws under personal secured loans included in the
mortgage portfolio;
* any further advances made by the seller to existing borrowers which
are assigned to the mortgages trustee in accordance with the
mortgage sale agreement;
* 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;
* amounts on deposit (and interest earned on such amounts) in the
mortgages trustee transaction account and the mortgages trustee GIC
account; and
* 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;
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less
* 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
* 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:
* the allocation of principal receipts from the mortgage loans to
Funding, Funding 2 and/or the seller on each distribution date;
* losses arising on the mortgage loans;
* the assignment of new mortgage loans and their related security to
the mortgages trustee;
* 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;
* a borrower making a re-draw under a flexible mortgage loan;
* a borrower making a further draw under a personal secured loan;
* the capitalization of arrears in respect of any mortgage loan;
* 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
* the mortgages trustee making a special distribution to any
beneficiary on a distribution date.
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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:
* 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
* 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:
* on each distribution date;
* 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
* 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".
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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:
* The "CURRENT FUNDING 2 SHARE" of the trust property will be an
amount equal to:
A - B - C + D
* The "CURRENT FUNDING 2 SHARE PERCENTAGE" of the trust property will
be an amount equal to:
A - B - C + D
------------- x100
H
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),
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(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.
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:
* The "CURRENT FUNDING 2 SHARE" of the trust property will be an
amount equal to:
A + E + F
* The "CURRENT FUNDING 2 SHARE PERCENTAGE" of the trust property will
be an amount equal to:
A + E + F
--------- x100
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
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(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 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.
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
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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;
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.
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SELLER SHARE OF TRUST PROPERTY (DISTRIBUTION DATE RECALCULATION)
On each relevant distribution date, the "CURRENT SELLER SHARE" of the trust
property will be recalculated for the then current trust calculation period or
related interim calculation period, as applicable, in accordance with the
following formula:
* 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:
* 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:
* 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:
* 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
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,
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W = 100% of the sum of the average cleared credit balance of all
applicable accounts linked to Together Connections mortgage loans
and Connections mortgage loans in respect of each calendar month or
part of any such calendar month;
X = 2.0% of the aggregate current balance of mortgage loans in the
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.
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):
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* 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);
* interest payable to the mortgages trustee on the mortgages trustee
transaction account and the mortgages trustee GIC account; and
* 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
* 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;
(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
* 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:
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(1) to the seller in an amount determined by multiplying the total
amount of the remaining mortgages trustee available revenue
receipts by the seller share percentage of the trust property;
(2) 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
(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
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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.
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:
* an insolvency event occurs in relation to the seller;
* the seller's role as servicer is terminated and a new servicer is
not appointed within 60 days; or
* 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:
(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;
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(B) second, to Funding the amount of any special distribution which is
then allocable and payable to Funding in accordance with the
mortgages trust deed;
(C) third, in no order of priority between them but in proportion to
the respective amounts due:
(1) to Funding in an amount equal to the lesser of:
(a) the amount of 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 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
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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 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
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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.
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).
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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 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".
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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 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:
* that no Funding 2 intercompany loan enforcement notice has been
served under the global intercompany loan agreement;
* that as at the most recent monthly payment date no deficiency was
recorded on the principal deficiency ledger;
* that no event of default in relation to Funding 2 under the
transaction documents shall have occurred which is continuing;
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* that the rating agencies have 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 not 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
* 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 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.
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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 aggregate principal amount outstanding
of the highest ranking class of notes will prevail.
For the purposes of (a) and (b):
* 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
* 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:
* 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;
* fund the Funding 2 reserve fund or to make a deposit into the
Funding 2 GIC account; and/or
* 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:
* 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;
* 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;
* 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;
* 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;
* 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;
* 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).
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".
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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.
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.
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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:
* 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
* 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
* 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
* an insolvency event occurs in relation to Funding 2; or
* 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
* 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
153
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 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 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.
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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.
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;
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(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;
(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;
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(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);
(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:
* the issuing entity in respect of its obligations (if any) to
pay any issuer swap excluded termination amount;
* the Funding 2 liquidity facility provider, if any, any Funding
2 liquidity facility subordinated amounts due under the Funding
2 liquidity facility agreement;
* 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:
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* 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;
* 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
* 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 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
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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 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);
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(ii)to pay interest due and payable (if any) on the related series
and class of class M notes on such monthly payment date;
(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;
(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
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(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:
* 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
* 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:
* 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
* 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.
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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:
* each other bullet repayment loan amount that was not fully
repaid on its bullet repayment date and is still outstanding;
and
* 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:
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* the principal amount outstanding in relation to each bullet
repayment loan amount that is within a cash accumulation period;
* 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;
* 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:
* the cash accumulation requirement;
* the controlled repayment requirement;
* the scheduled repayment requirement; and
* 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 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:
* 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
* 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
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(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:
* 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
* 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:
* 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;
* 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;
* 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;
* 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
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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;
* 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;
* 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
* 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":
* 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;
* 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;
* 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
* 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:
(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 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:
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,
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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:
(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
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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.
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.
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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
(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
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Funding 2 will be required to apply Funding 2 available principal receipts in
the following order of priority:
(A) first, in accordance with the terms of the Funding 2 liquidity
facility agreement, towards repayment of the amounts outstanding
under the Funding 2 liquidity facility (if any) that were drawn in
order to make Funding 2 liquidity facility principal payments;
(B) second, to the extent that monies have been drawn from the Funding
2 reserve fund to make Funding 2 reserve principal payments,
towards the replenishment of the Funding 2 reserve fund up to the
Funding 2 reserve required amount;
(C) third, if a Funding 2 liquidity facility reserve 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;
171
(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;
(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;
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(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:
* 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
* 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 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"):
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* 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;
* 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;
* 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;
* 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 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;
* 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;
* The class D notes:
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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.
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;
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(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;
(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.
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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.
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);
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(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 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);
(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
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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; and
(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:
* 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;
* a revenue shortfall in Funding 2 available revenue receipts may be
met from Funding 2 available principal receipts;
* 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;
* 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;
* payments on the class M notes will be subordinated to payments on
the class A notes and the class B notes;
* payments on the class B notes will be subordinated to payments on
the class A notes;
* the mortgages trustee GIC account, the Funding 2 GIC account and
the issuer GIC account each earn interest at a specified rate;
* 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;
* 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;
* 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);
* start-up loans will be provided to the issuing entity from time to
time to fund the issuer reserve fund; and
* 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 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
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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:
* the weighted average interest rate on the mortgage loans included
in the mortgage portfolio; and
* 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:
* 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
* 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 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:
* to help meet any deficit in issuer available revenue receipts
available for interest and fees due under the notes;
* to help meet expenses in connection with the issuance of notes by
the issuing entity; and
* 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
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(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:
* 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;
* 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;
* 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).
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.
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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:
* 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
* 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:
* 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;
* 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;
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(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
* 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.
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").
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Prior to enforcement of the Funding 2 security, the Funding 2 liquidity
reserve fund may be used:
* 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;
* (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
* 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
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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.
PRINCIPAL DEFICIENCY LEDGER
A principal deficiency ledger has been established to record:
* any principal losses on the mortgage loans allocated to Funding 2;
* 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
* 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:
* 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;
* 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;
* 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;
* 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
* 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:
* first, on the AAA principal deficiency sub-ledger;
* second, on the AA principal deficiency sub-ledger;
* third, on the A principal deficiency sub-ledger;
* fourth, on the BBB principal deficiency sub-ledger; and
* last, on the BB principal deficiency sub-ledger.
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.
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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. 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
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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.
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
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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.
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
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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
agencies have previously confirmed in writing
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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; and
(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 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;
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(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; and
(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:
* 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";
* 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;
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* if withholding taxes are imposed on a swap provider's payments due
to a change in law; or
* 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 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.
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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:
* 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;
* the losses ledger, which will record losses on the mortgage
loans;
* 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");
* 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;
* 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;
* the non-flexible underpayments ledger, which will record
underpayments on non-flexible mortgage loans;
* 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;
* 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
* the further draw ledger which will record further draws on
personal secured loans.
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(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:
* 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
* 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:
* the Funding 2 cash accumulation ledger which will record the
principal receipts accumulated by Funding 2 to repay each
bullet loan tranche;
* the Funding 2 principal ledger, which will record the all other
principal receipts received by Funding 2 on each distribution
date;
* the Funding 2 revenue ledger, which will record all other
amounts received by Funding 2 on each distribution date;
* 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
* 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;
(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.
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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:
* 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
* 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.
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:
* 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;
* 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
* 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.
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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:
* 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;
* 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
* 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, 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.
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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:
* 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
* 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:
* 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;
* 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
* 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 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:
* an assignment by way of first fixed security of the Funding 2 share
of the trust property;
* 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;
* 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);
* 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
* 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
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
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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".
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
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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:
* 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
* 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.
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.
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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:
* 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
* 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, 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.
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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:
* 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;
* is not responsible for the legality, admissibility in evidence,
adequacy or enforceability of the Funding 2 deed of charge or any
other transaction document;
* may rely on documents believed by it to be genuine provided by any
of the mortgages trustee, Funding 2 or the cash manager;
* 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;
* is not required to monitor or supervise the functions of the
account bank or of any other person under any transaction document;
* 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;
* 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;
* the Funding 2 security trustee will not be liable for any loss,
cost, damage or expense which may be caused by anything done or not
done by it under the Funding 2 deed of charge or any other
transaction document unless caused by the Funding 2 security
trustee's fraud, gross negligence, willful default or breach of the
terms of the Funding 2 deed of charge;
* 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
* 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):
* 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;
* 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;
* 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);
* 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
* 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 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 administrator 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
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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 administrator 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; or
(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 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
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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:
* 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
* 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.
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
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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:
* 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;
* 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;
* 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;
* 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;
* 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;
* 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 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;
* 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;
* 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
* 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;
(c) ability of noteholders to waive certain past defaults of the
issuing entity;
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(d) duty of the note trustee (following a note event of default) to use
the same degree of care in exercising its responsibilities as would
be exercised by a prudent person conducting their own affairs;
(e) duty of the note trustee to notify all noteholders of any note
event of default of which it has actual knowledge; and
(f) right of the note trustee to resign at any time by notifying the
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
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portion of the aggregate principal amount of notes as to which that participant
or those participants has or have given that direction.
Beneficial owners will be entitled to the benefit of, will be bound by and
will be deemed to have notice of, all the provisions of the trust deed and the
paying agent and agent bank agreement. Beneficial owners can see copies of
these agreements at the principal office for the time being of the note
trustee, which is, as of the date of this document, The Bank of New York,
London Branch and at the specified office for the time being of each of the
paying agents. Pursuant to its obligations under the Listing Rules made by the
UK Listing Authority, the 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:
* limited-purpose trust company organized under New York Banking Law;
* "BANKING ORGANIZATION" within the meaning of New York Banking Law;
* member of the Federal Reserve System;
* "CLEARING CORPORATION" within the meaning of the New York Uniform
Commercial Code; and
* "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
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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.
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.
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Clearstream, Luxembourg and Euroclear provide various services including
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg and
Euroclear also deal with domestic securities markets in several countries
through established depository and custodial relationships.
Clearstream, Luxembourg and Euroclear have established an electronic bridge
between their two systems across which their respective participants may settle
trades with each other. Transactions may be settled in Clearstream, Luxembourg
and Euroclear in any of numerous currencies, including United States dollars
and euro. Clearstream, Luxembourg is incorporated under the laws of Luxembourg
as a professional depository. Clearstream, Luxembourg participants are
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, and clearing corporations.
Indirect access to Clearstream, Luxembourg is also available to others,
including banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Clearstream, Luxembourg participant,
either directly or indirectly.
The Euroclear system was created in 1968 to hold securities for its
participants and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment. The Euroclear system is operated by Euroclear Bank S.A./N.V. (the
"EUROCLEAR OPERATOR"). All operations are conducted by the Euroclear operator.
All Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear operator.
Euroclear participants include banks -- including central banks --
securities brokers and dealers and other professional financial intermediaries.
Indirect access to the Euroclear system is also available to other firms that
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing use of Euroclear and the
related Operating Procedures of the Euroclear system. These terms and
conditions govern transfers of securities and cash within the Euroclear system,
withdrawal of securities and cash from the Euroclear system, and receipts of
payments for securities in the Euroclear system. All securities in the
Euroclear system are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear operator
acts under these terms and conditions only on behalf of Euroclear participants
and has no record of or relationship with persons holding through Euroclear
participants.
As the holders of book-entry interests, beneficial owners will not have the
right under the trust deed to act on solicitations by the 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".
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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:
* 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 from any payment on
the notes that would not be required if the notes were represented
by individual note certificates; or
* 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:
* 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;
* 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;
* 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
* 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:
* Granite Master Issuer plc, as issuing entity;
* Citibank, N.A., as principal paying agent, US paying agent, agent
bank, transfer agent and registrar; and
* The Bank of New York, as Funding 2 security trustee, issuer
security trustee and note trustee.
Noteholders can view drafts of the trust deed (including each deed
supplemental thereto), the paying agent and agent bank agreement, the issuer
deed of charge, the Funding 2 deed of charge and the issuer swap agreements at
our registered office and the specified office of any of the paying agents
after the Funding 2 program date.
There is no English law that prohibits US residents from holding notes
solely because of their residence outside the UK.
There are no UK governmental laws or regulations other than in relation to
withholding tax, as described under "MATERIAL UNITED KINGDOM TAX CONSEQUENCES
- -- WITHHOLDING TAX", that restrict payments made to non-UK resident
noteholders.
1. FORM, DENOMINATION, REGISTER, TITLE AND TRANSFERS
The US notes are being offered and sold to the public in the United States
and to institutional investors outside the United States.
The US notes are in global registered form, without coupons attached.
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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 be) such transfer agent may require in respect of
any tax or other duty of whatsoever nature which may be levied or imposed in
connection with such transfer.
Noteholders may not require transfers to be registered during the period of
15 days ending on the due date for any payment of principal or interest in
respect of the US notes.
All transfers of US notes and entries on the register are subject to the
detailed regulations concerning the transfer of US notes scheduled to the
paying agent and agent bank agreement. We may change the regulations with the
prior written approval of the note trustee and the registrar. A copy of the
current regulations will be mailed (free of charge) by the registrar to any
noteholder who requests in writing a copy of such regulations.
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2. STATUS, SECURITY AND PRIORITY
The notes of each series and class are our direct, secured and unconditional
obligations and will at all times rank equally, without preference or priority
amongst themselves.
Subject to the provisions of Conditions 4 and 5 and subject to the
conditions and priorities set out under "CASHFLOWS":
* 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;
* 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;
* 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
* 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
* 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 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.
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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:
* 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;
* 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;
* 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;
* have an interest in any bank account other than our bank accounts
maintained pursuant to the transaction documents;
* 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;
* 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;
* consolidate with or merge with any person or transfer substantially
all of its properties or assets to any person;
* waive or consent to the modification or waiver of any of the
obligations relating to the issuer security;
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* have any employees, premises or subsidiaries;
* 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;
* purchase or otherwise acquire any notes; or
* 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 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
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(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 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:
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(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 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.
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(iv) Determination of rate of interest and calculation of interest amounts
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 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).
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(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
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
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(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:
(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
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(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:
* the amount of each principal payment payable on each US note of
each series and class, called the "NOTE PRINCIPAL PAYMENT";
* 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
* 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:
* 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
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* 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
(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
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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 (prior to December 31, 2010), 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 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
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(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 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.
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9. EVENTS OF DEFAULT
An event of default under the provisions of the notes will constitute a
"NOTE EVENT OF DEFAULT" as described below.
(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:
* 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
* 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":
* 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
* 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
* 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
* 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
* 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 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
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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
* 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:
* 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
* 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":
* 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
* 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:
* 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
* 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":
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* 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
* 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:
* 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
* 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":
* 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
* 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 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:
* 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
* 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":
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* 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
* 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 issuer security. The note trustee
shall not be bound to take steps or institute such proceedings unless:
* (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
* it shall have been indemnified and/or secured to its satisfaction.
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
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principal amount of the class or classes of notes outstanding (as defined in
the trust deed) with higher priority.
In the event that:
* 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
* 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,
then all interests in each global note certificate will be automatically
exchanged for equivalent interests in an equivalent amount of notes in an
equivalent principal amount outstanding in individual note certificates and
each such global note certificate will be cancelled on the date of such
exchange.
The note trustee is required to transfer or (as the case may be) procure
transfer of all (but not some only) of the notes, for the consideration of one
penny per note, to the post enforcement call option holder pursuant to the
option granted to it by the note trustee (as agent for the noteholders). The
option is granted to acquire all of the notes plus accrued interest on the
notes. This is called the post enforcement call option. Immediately upon such
transfer, no such former noteholder shall have any further interest in the
notes. Each of the noteholders acknowledges that the note trustee has the
authority and the power to bind the noteholders in accordance with the terms
and conditions set out in the issuer post-enforcement call option agreement and
each noteholder, by subscribing for or purchasing notes, agrees to be so bound.
11. MEETINGS OF NOTEHOLDERS, MODIFICATIONS AND WAIVER
(1) MEETINGS OF NOTEHOLDERS
The trust deed contains provisions for convening meetings of noteholders to
consider any matter affecting their interests, including the sanctioning by
extraordinary resolution of a modification of any provision of the terms and
conditions of the notes or the provisions of any of the transaction documents.
In respect of the class A notes, the trust deed provides that:
* 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;
* 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;
* 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
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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:
* 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;
* 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;
* 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:
* 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;
* 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;
* 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:
* 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;
* 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;
* 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
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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:
* 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;
* 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;
* 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.
In respect of a class of notes of any series constituting two or more sub-
classes, the trust deed provides that:
* 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;
* 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
* 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 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 persons 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
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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 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):
* 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.
* 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).
* 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).
* 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
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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 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
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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 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
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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 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
242
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 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:
* 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.
* Restrictions on the ability of the registered proprietor to deal
with the property e.g. a restriction imposed by a mortgagee
prohibiting registration of subsequent mortgagees.
The charges register details security interests and encumbrances registered
against the property.
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.
244
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:
* Overriding interests; and
* 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 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
245
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:
* 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.
* The mortgagee may lease the mortgaged property to third parties.
* 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.
* 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.
* 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.
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.
246
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 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
247
land is proved by establishing a chain of documentary evidence of title going
back at least ten years. Where the land is affected by third party rights, some
of those rights can be proved by documentary evidence or by proof of continuous
exercise of the rights for a prescribed period and do not require registration.
However, other rights (including standard securities) would have to be recorded
in the Sasine Register in order to be effective against a subsequent purchaser
of the land.
TAKING SECURITY OVER LAND
A heritable creditor must register its standard security in the Land
Register or the Sasine Register (as applicable) in order to perfect its
security and to secure priority over any subsequent standard security. Until
such registration occurs, a standard security will not be effective against a
subsequent purchaser or the heritable creditor under another standard security
over the secured property. Priority of standard securities is (subject to
express agreement to the contrary between the security holders) governed by the
date of registration (being the date of creation) rather than the date of
execution. There is no equivalent in Scotland to the priority period system
which operates in relation to registered land in England and Wales.
THE SELLER AS HERITABLE CREDITOR
The sale of the Scottish mortgage loans by the seller to the mortgages
trustee will be given effect by a declaration of trust by the seller (and any
sale of Scottish mortgage loans in the future will be given effect by further
declarations of trust), by which the beneficial interest in the Scottish
mortgage loans will be transferred to the mortgages trustee. Such beneficial
interest (as opposed to the legal title) cannot be registered in the Land or
Sasine Registers. The consequences of this are explained in the section "RISK
FACTORS -- THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE MORTGAGES
TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGE LOANS AND THEIR RELATED SECURITY
WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES".
ENFORCEMENT OF MORTGAGES
If a borrower defaults under a mortgage loan, the Scottish mortgage
conditions provide that all monies under the mortgage loan will become
immediately due and payable. The seller would then be entitled to recover all
outstanding principal, interest and fees under the obligation of the borrower
contained in the Scottish mortgage conditions to pay or repay those amounts. In
addition, the seller as heritable creditor may enforce its standard security in
relation to the defaulted mortgage loan. Enforcement may occur in a number of
ways, including the following (all of which arise under the 1970 Act):
(i) the heritable creditor may enter into possession of the secured
property. If it does so, it does so in its own right and not as
agent of the borrower, and so may be personally liable for
mismanagement of the secured property and to third parties as
occupier of the secured property;
(ii) the heritable creditor may lease the secured property to third
parties;
(iii) the heritable creditor may sell the secured property, subject to
various duties to ensure that the sale price is the best that can
reasonably be obtained. The purchaser of a property sold pursuant
to a heritable creditor's power of sale becomes the owner of the
property; and
(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
248
(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 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.
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.
250
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.
The 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 Notes may 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 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.
251
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).
252
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 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.
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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 margin (or other qualified floating rate within the
meaning of Treas. Reg. {section mark} 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
254
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(D) 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 US 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 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
255
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 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 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.
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
256
exemption, the paying agent will require such beneficial holder to provide a
statement from the individual or corporation that:
* is signed under penalties of perjury by the beneficial owner of the
note,
* certifies that such owner is not a United States person, and
* 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.
257
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.
258
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 section 4975 of the Code or (B)
its purchase, holding and disposition of such note will not result in a
prohibited transaction under
259
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 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,
260
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.
261
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:
* 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;
* enforcement of the judgment is contrary to the public policy of
England or Wales;
* the judgment was obtained by fraud or duress or was based on a
clear mistake of fact;
* the judgment is of a public nature (for example, a penal or revenue
judgment);
* 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;
* the enforcement would contravene section 5 of the Protection of
Trading Interests Act 1980; or
* 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.
262
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.
263
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.
264
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.
* 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.
* Stabilizing transactions permit bids to purchase the US notes so
long as the stabilizing bids do not exceed a specified maximum.
* 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.
* 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.
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.
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UNITED KINGDOM
Each underwriter will represent and agree that:
* 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;
* 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
* 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.
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 will be 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 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.
ACCOUNTS
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
268
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.
MATERIAL ADVERSE CHANGE
Since the date of the issuing entity's last accounts (December 31, 2005),
the date of Funding 2's last accounts (December 31, 2005), 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, respectively.
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:
* the programme agreement;
* each subscription agreement;
* each underwriting agreement;
* the global intercompany loan agreement;
* the mortgages trust deed;
* the controlling beneficiary deed;
* the mortgage sale agreement;
* the issuer deed of charge;
* each deed of accession to the issuer deed of charge;
* the Funding 2 deed of charge;
* each deed of accession to the Funding 2 deed of charge;
* the Funding 2 basis rate swap agreement;
* each issuer swap agreement;
269
* the trust deed;
* the paying agent and agent bank agreement;
* the administration agreement;
* the cash management agreement;
* the issuer cash management agreement;
* the issuer guaranteed investment contract;
* the Funding 2 guaranteed investment contract;
* the mortgages trustee guaranteed investment contract;
* the post-enforcement call option agreement;
* the bank account agreement;
* the Funding 2 bank account agreement;
* the issuer bank account agreement;
* the collection bank agreement;
* the master definitions schedule;
* each start-up loan agreement;
* the corporate services agreement;
* 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 One of five sub-ledgers on the principal deficiency
DEFICIENCY SUB- ledger which records any principal deficiency in
LEDGER" respect of any AAA loan tranches
"AA PRINCIPAL One of five sub-ledgers on the principal deficiency
DEFICIENCY SUB- ledger which records any principal deficiency in
LEDGER" respect of any AA loan tranches
"A PRINCIPAL One of five sub-ledgers on the principal deficiency
DEFICIENCY SUBLEDGER" ledger which records any principal deficiency in
respect of any A loan tranches
"ADDITIONAL MORTGAGE Any mortgage loan (being an English mortgage loan or a
LOAN" 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 The sum of:
RESERVE FUND LEVEL"
(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 (a) sterling gilt-edged securities; and
INVESTMENTS"
(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 The agreement dated the initial closing date, as
AGREEMENT" 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 The Bank of England's official dealing rate (the repo
RATE" 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 One of five sub-ledgers or the principal deficiency
DEFICIENCY SUB- ledger which records any principal deficiency in
LEDGER" respect of any BBB loan tranches
"BB PRINCIPAL One of five sub-ledgers or the principal deficiency
DEFICIENCY SUB- ledger which records any principal deficiency in
LEDGER" respect of any BB loan tranches
"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
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"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 The bullet redemption date for any series and class of
DATE" 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 Any series and class of notes which is scheduled to be
NOTES" 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 The bullet repayment date for any bullet loan tranche
DATE" will be the monthly payment date specified as such for
such loan tranche in the applicable loan tranche
supplement
"BULLET REPAYMENT The amount required to be repaid on the bullet
LOAN AMOUNT" 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 with the mortgage conditions or otherwise by
arrangement with the relevant borrower
"CAPITALIZED For any mortgage loan at any date, interest which is
INTEREST" 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
273
"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 On any controlled redemption date before the occurrence
AMORTIZATION of a trigger event or the enforcement of the issuer
INSTALLMENT" 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 Any series and class of notes the conditions of which
AMORTIZATION NOTE" 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
(c) the step-up date (if any) in relation to such notes
occurs
"CONTROLLED The controlled redemption dates for any series and
REDEMPTION DATES" 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 The controlled repayment dates for any controlled
DATES" repayment loan tranche will be the monthly payment
dates specified as such for such loan tranche in the
applicable loan tranche supplement
"CONTROLLED REPAYMENT On any controlled repayment date before the occurrence
LOAN AMOUNT" 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
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"CONTROLLED REPAYMENT Any loan tranche which by its terms imposes a limit on
LOAN TRANCHE" 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 With respect to (1) the issuing entity and Funding 2,
AGREEMENT" 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 With respect to (1) the issuing entity and Funding 2,
PROVIDER" 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 The 1995 Credit Support Annex (Bilateral Form --
ANNEX" 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:
(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
275
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 The consideration in the form of cash payable by
CONTRIBUTION" 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 That portion of the purchase price for the initial
PRICE" mortgage portfolio and of the purchase price (if any)
of any other mortgage portfolio assigned to the
mortgages trustee which was not paid to the seller on
the initial closing date or (in the case of any other
mortgage portfolio) the relevant assignment date and
which is to be paid by the mortgages trustee from time
to time to the seller from deferred contributions
received by the mortgages trustee from Funding 2 and
otherwise in accordance with the mortgage sale
agreement
"DETERMINATION Each period from (and including) a determination date
PERIOD" 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
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"EXISTING BORROWERS' At any date, the fixed rate then being offered to those
RE-FIX RATE" 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 In relation to any loan tranche the date specified as
DATE" 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
"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 A reserve fund established in the name of Funding for
ENTITY) RESERVE FUND" the benefit of a Funding issuing entity
"FUNDING ISSUING The several note issuing entities, each of which is a
ENTITIES" 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 As the context requires, any of the Funding pre-
PAYMENTS" enforcement revenue priority of payments, the Funding
pre-enforcement principal priority of payments and/or
the Funding post-enforcement priority of payments
"FUNDING RESERVE A reserve fund established in the name of Funding
FUND"
"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 The security trustee and the Funding 2 security trustee
TRUSTEES"
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"FUNDING 2 BANK The agreement entered into on or about the Funding
ACCOUNT AGREEMENT" 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 The ISDA master agreement, the schedule thereto and the
SWAP AGREEMENT" 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 In relation to the Funding 2 basis rate swap agreement,
SWAP EXCLUDED an amount equal to:
TERMINATION AMOUNT"
(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 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 The property, assets and undertaking of Funding 2 which
PROPERTY" 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 The deed of charge entered into on the Funding 2
CHARGE" 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 Northern Rock or any other person or persons as are for
PROVIDER" the time being the Funding 2 GIC provider under the
applicable Funding 2 guaranteed investment contract
"FUNDING 2 GUARANTEED The guaranteed investment contract entered into on the
INVESTMENT CONTRACT" 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 A loan (or the aggregate of a number of separate loans)
INTERCOMPANY LOAN" 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;
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"FUNDING 2 means a loan agreement entered into between Funding
INTERCOMPANY LOAN 2 and a Funding 2 issuing entity in relation to a
AGREEMENT" Funding 2 intercompany loan;
"FUNDING 2 An enforcement notice served by the Funding 2 security
INTERCOMPANY LOAN trustee on Funding 2 for the enforcement of the Funding
ENFORCEMENT NOTICE" 2 security following the occurrence of Funding 2
intercompany loan event of default
"FUNDING 2 An event of default under the global intercompany loan
INTERCOMPANY LOAN agreement and/or under any other Funding 2 intercompany
EVENT OF DEFAULT" 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 A liquidity facility entered into at any time after the
FACILITY" Funding 2 program date
"FUNDING 2 LIQUIDITY The provider of the Funding 2 liquidity facility
FACILITY PROVIDER"
"FUNDING 2 LIQUIDITY The amounts specified as such in the Funding 2
FACILITY SUBORDINATED liquidity facility agreement (if any)
AMOUNTS"
"FUNDING 2 LIQUIDITY The payments specified as such in the Funding 2
FACILITY PRINCIPAL liquidity facility agreement (if any)
PAYMENT"
"FUNDING 2 LIQUIDITY The liquidity reserve fund in Funding 2's name which
RESERVE FUND" 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 A ledger maintained by the cash manager to record the
RESERVE LEDGER" balance from time to time of the Funding 2 liquidity
reserve fund, if any and, if the context so requires
"FUNDING 2 PRINCIPAL The ledger maintained by the Funding 2 cash manager
DEFICIENCY LEDGER" 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 The ledger on which receipts and payments of Funding 2
LEDGER" available principal receipts (other than amounts
recorded on the Funding 2 cash accumulation ledger)
will be recorded by the cash manager
"FUNDING 2 PRIORITY As the context requires, any of the Funding 2 pre-
OF PAYMENTS" 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 On any date, the lesser of:
FUND THRESHOLD"
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(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
"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 The accounts, if any, opened in the name of Funding 2
COLLATERAL ACCOUNTS" 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 Each of the following documents:
TRANSACTION
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 Any mortgage loan which was assigned by the seller to
LOAN" 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
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"INITIAL PURCHASE That portion of the purchase price paid by the
PRICE" mortgages trustee to the seller on the initial closing
date in consideration for the assignment to the
mortgages trustee of the initial mortgage portfolio or
that portion of the purchase price (if any) payable by
the mortgages trustee to the seller on the relevant
assignment date in consideration for the assignment to
the mortgages trustee of the further mortgage
portfolios or any new mortgage portfolio, in each case
in accordance with the provisions of the mortgage sale
agreement
"INITIAL TRUST The sum of [GBP]100 that the corporate services
PROPERTY" 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
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
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(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
(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
282
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 (a) In respect of any series and class of notes, the
COMMENCEMENT DATE" 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 In respect of any series and class of notes, the
DETERMINATION DATE" 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 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 The bank account agreement entered into on or about the
AGREEMENT" 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
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"ISSUER CASH The issuer cash management agreement entered into on or
MANAGEMENT AGREEMENT" 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 The deed of charge entered into on the Funding 2
CHARGE" 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 A notice served by the note trustee for the
NOTICE" 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 The guaranteed investment contract entered into on the
INVESTMENT CONTRACT" 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
"ISSUER PRINCIPAL The ledger on which the issuer cash manager records
LEDGER" issuer available principal receipts received and paid
out by the issuing entity
"ISSUER PRIORITY OF An issuer pre-enforcement revenue priority of payments,
PAYMENTS" the issuer pre-enforcement principal priority of
payments and the issuer post-enforcement priority of
payments
"ISSUER SECURED The issuer security trustee (and any receiver appointed
CREDITORS" 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 The ISDA master agreements, schedules thereto and
AGREEMENTS" 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
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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 The accounts, if any, opened in the name of the issuing
COLLATERAL ACCOUNTS" 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 In relation to an issuer swap agreement an amount equal
TERMINATION AMOUNT" 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 The institutions identified in respect of each issuer
PROVIDERS" swap in the prospectus supplement related to the
relevant series and class of notes
"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 In relation to any loan tranche, the document between,
SUPPLEMENT" 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 In respect of (1) any mortgage loan assigned to the
TO VALUE RATIO" 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
285
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 Together, the master definitions schedule dated January
SCHEDULE" 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 In respect of any series and class of notes, the rate
INTEREST" of interest specified as such in the applicable
prospectus supplement
"MINIMUM RATE OF In respect of any series and class of notes, the rate
INTEREST" of interest specified as such in the applicable
prospectus supplement
"MONTHLY PAYMENT (a) In respect of any mortgage loan, the date in each
DATE" 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
(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 A certain percentage resulting from the application of
VARIATION TEST VALUE" the Moody's portfolio variation test
"MOODY'S PORTFOLIO The calculation methodology provided by Moody's to the
VARIATION TEST" 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
286
"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 As defined in the United States Secondary Mortgage
SECURITY" Markets Enhancement Act 1984, as amended
"MORTGAGE SALE The mortgage sale agreement entered into on the initial
AGREEMENT" 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
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 Northern Rock or any other person or persons as are for
GIC PROVIDER" the time being the mortgages trustee GIC provider under
the applicable mortgages trustee guaranteed investment
contract
"MORTGAGES TRUSTEE The guaranteed investment contract entered into on May
GUARANTEED INVESTMENT 26, 2004, as amended, restated, supplemented or
CONTRACT" 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 On any distribution date, any mortgages trustee
PRINCIPAL RECEIPTS" 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 The account in the name of the mortgages trustee held
TRANSACTION ACCOUNT" 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 Any portfolio of new mortgage loans, the mortgages and
PORTFOLIO" 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
287
mortgages trustee after the Funding 2 program date
under the mortgage sale agreement but excluding any
mortgage loan and its related security which has been
redeemed in full on or before the relevant assignment
date
"NEW RELATED The security for the new mortgage loans (including the
SECURITY" 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 A loan tranche which has, at any time, been a bullet
TRANCHE" loan tranche, whether or not the step-up date in
respect of such loan tranche has occurred
"ORIGINAL BULLET A note which has, at any time, been a bullet redemption
REDEMPTION NOTE" note, whether or not the step-up date in respect of
such note has occurred
"ORIGINAL PASS- A loan tranche which, at the time it was advanced, was
THROUGH LOAN TRANCHE" a pass-through loan tranche
"PASS-THROUGH LOAN A loan tranche which has no specified repayment dates
TRANCHE" 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 The paying agent and agent bank agreement entered into
AGENT BANK AGREEMENT" 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
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"PAYMENT BUSINESS DAY" A day which is:
(i) a day on which a day on which commercial banks and
foreign exchange markets settle payments and are
open for general business (including dealing in
foreign exchange and foreign currency deposits) in:
(a)the relevant place of presentation;
(b)London
(c)any additional financial centre specified in
the applicable 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 As applicable, a bullet redemption date, a scheduled
DATE" redemption date, a controlled redemption date or the
date on or after which principal repayments of pass-
through notes may be made
"PREVIOUS MORTGAGES Lloyds TSB Bank plc acting through its office at
TRUSTEE GIC PROVIDER" 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 For each series and class of notes and as of any date
OUTSTANDING" 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 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
289
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 September 12, 2006 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 Each prospectus supplement relating to one or more
SUPPLEMENT" series and classes of notes issued on a single closing
date
"RATE OF INTEREST" and In respect of any series and class of notes, the rate
"RATES OF INTEREST" or rates (expressed as a percentage per annum) on
interest payable in respect of such notes specified in
the applicable prospectus supplement or calculated and
determined in accordance with the applicable
prospectus supplement
"RATING 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 As at any given date, a mortgage loan which on or
LOAN" 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 Gilt Edged and Fixed Interest Market
for listed securities
"REGISTERED LAND" Land in England and Wales, title to which is
registered at the Land Registry
"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 The sum of the following:
AMOUNT"
(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
290
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 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
291
(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
"SCHEDULED REDEMPTION The scheduled redemption dates for any series and
DATES" 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 Any series and class of notes scheduled to be repaid
NOTES" 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 On any scheduled redemption date before the occurrence
AMORTIZATION of a trigger event or the enforcement of the issuer
INSTALLMENT" 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 The scheduled repayment dates for any scheduled
DATES" 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 That part of a scheduled repayment loan tranche which
LOAN INSTALLMENT" is payable on a scheduled repayment date for that loan
tranche
292
"SCHEDULED REPAYMENT Any loan tranche scheduled to be repaid in full in two
LOAN TRANCHE" 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 London branch
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 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 In relation to a series and class of notes, the
EXCHANGE RATE" 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 In respect of any series and class of notes, the
DENOMINATION" 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 In respect of the mortgages trustee GIC account,
PROVIDER" 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
293
"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 An agreement supplemental to the programme agreement
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
"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 An account opened in the name of the issuing entity
ACCOUNT" 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 In relation to (1) the issuing entity, any document
ANCILLARY 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 (i) The occurrence of:
DEFAULT"
(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
294
(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
"SWAP REPLACEMENT Any payment received from a replacement swap provider
PREMIUM" in order to enter into a replacement swap agreement
with such replacement swap provider replacing a swap
agreement
"SWAP TERMINATION The amount payable because of a swap early termination
PAYMENT" 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 The documents listed in "LISTING AND GENERAL
DOCUMENTS" 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 The period from (and including) the first day of each
PERIOD" 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 The first day (or, if not a London business day, the
DATE" 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
295
"UNDERWRITERS" The underwriters for the US notes specified in the
prospectus supplement relating to any series and class
of notes offered thereunder
"UNDERWRITING The underwriting agreement relating to the sale of a
AGREEMENT" 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
"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 The rate of interest which determines the amount of
RATE" interest payable each month on a variable rate
mortgage loan
"VARIABLE RATE A mortgage loan where the interest rate payable by the
MORTGAGE LOAN" 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)
296
INDEX OF PRINCIPAL TERMS
$............................................................................................ 61
[e].......................................................................................... 61
[GBP]........................................................................................ 61
1970 Act..................................................................................... 248
2001 Act..................................................................................... 250
A loan tranches.............................................................................. 272
A principal deficiency subledger............................................................. 272
AA........................................................................................... 144
AA loan tranches............................................................................. 272
AA principal deficiency sub-ledger........................................................... 272
AAA loan tranches............................................................................ 272
AAA principal deficiency sub-ledger.......................................................... 272
account bank................................................................................. 14
accrual period............................................................................... 223
accrued income scheme........................................................................ 252
additional interest.......................................................................... 228
additional mortgage loan..................................................................... 272
additional mortgage portfolio................................................................ 79
adjusted Funding 2 reserve fund level........................................................ 272
administration fee........................................................................... 118
administration procedures.................................................................... 109
agent bank................................................................................... 14
alternative insurance requirements........................................................... 100
anticipated cash accumulation period......................................................... 164
anticipates.................................................................................. 2
arrears of interest.......................................................................... 126, 272
arrears or step-up trigger event............................................................. 185
asset trigger event.......................................................................... 22, 143
assign....................................................................................... 121
assigned..................................................................................... 121
assignment................................................................................... 121
assignment date.............................................................................. 134
authorized investments....................................................................... 273
authorized underpayment...................................................................... 89
AXA.......................................................................................... 99
bank account agreement....................................................................... 273
Bank of England base rate.................................................................... 273
banking organization......................................................................... 215
Barclays..................................................................................... 116
base rate pledge............................................................................. 87
Basel Committee.............................................................................. 58
Basel II..................................................................................... 58
basis rate swaps............................................................................. 273
BB........................................................................................... 144
BB loan tranche.............................................................................. 273
BB principal deficiency sub-ledger........................................................... 273
BBB loan tranches............................................................................ 273
BBB principal deficiency sub-ledger.......................................................... 273
believes..................................................................................... 2
beneficiaries................................................................................ 13
borrower..................................................................................... 61, 273
bullet loan tranche.......................................................................... 274
297
bullet redemption date....................................................................... 274
bullet redemption notes...................................................................... 274
bullet repayment date........................................................................ 274
bullet repayment loan amount................................................................. 274
calculation agent............................................................................ 225
calendar year................................................................................ 274
capital balance.............................................................................. 274
capital payment.............................................................................. 85
capitalized.................................................................................. 274
capitalized arrears.......................................................................... 274
capitalized interest......................................................................... 274
capped loan tranches......................................................................... 171
capped rate mortgage loans................................................................... 82
cash accumulation liability.................................................................. 170
cash accumulation period..................................................................... 164
cash accumulation requirement................................................................ 164
cash accumulation shortfall.................................................................. 170
Cash management for the issuing entity....................................................... 65, 285
Cash management for the mortgages trustee and Funding 2...................................... 65, 140
cash manager................................................................................. 14
cashback mortgage loans...................................................................... 83
CAT standard mortgage loans.................................................................. 82
CCA.......................................................................................... 50
Certain characteristics of the United Kingdom residential mortgage market.................... 79
Certain characteristics of the United Kingdom residential mortgage market -- CPR rates....... 182
CFC.......................................................................................... 257
Characteristics of the United Kingdom residential mortgage market............................ 38
class........................................................................................ 61
class A available subordinated amount........................................................ 75
class A note event of default................................................................ 233
class A noteholders.......................................................................... 274
class A notes................................................................................ 274
class A required subordinated amount......................................................... 75
class B available subordinated amount........................................................ 75
class B note event of default................................................................ 234
class B noteholders.......................................................................... 274
class B notes................................................................................ 275
class B required subordinated amount......................................................... 75
class C available subordinated amount........................................................ 77
class C note event of default................................................................ 235
class C noteholders.......................................................................... 275
class C notes................................................................................ 275
class C required subordinated amount......................................................... 76
class D note event of default................................................................ 235
class D noteholders.......................................................................... 275
class D notes................................................................................ 275
class M available subordinated amount........................................................ 76
class M note event of default................................................................ 234
class M noteholders.......................................................................... 275
class M notes................................................................................ 275
class M required subordinated amount......................................................... 76
clearing agency.............................................................................. 215
clearing corporation......................................................................... 215
Clearstream, Luxembourg...................................................................... 59
closing date................................................................................. 15
298
CML.......................................................................................... 53
CML Code..................................................................................... 53
Code......................................................................................... 254
collection account........................................................................... 116
collection bank.............................................................................. 116
collection bank agreement.................................................................... 117
combination mortgage loan.................................................................... 48
combination repayment and interest-only...................................................... 84
combined credit balance...................................................................... 81
combined debit balance....................................................................... 81
commercial business day...................................................................... 220
Connections Benefit.......................................................................... 82
Connections combined credit balance.......................................................... 82
Connections debit balance.................................................................... 82
Connections Interest......................................................................... 82
Connections mortgage loans................................................................... 82
contribution................................................................................. 275
contribution date............................................................................ 134
controlled amortization installment.......................................................... 275
controlled amortization note................................................................. 275
controlled redemption dates.................................................................. 275
controlled repayment dates................................................................... 275
controlled repayment loan amount............................................................. 275
controlled repayment loan tranche............................................................ 276
controlled repayment requirement............................................................. 165
controlling beneficiary deed................................................................. 149
controlling directions....................................................................... 150
core terms................................................................................... 56
corporate services agreement................................................................. 276
corporate services provider.................................................................. 276
CPR.......................................................................................... 103
credit support annex......................................................................... 276
current balance.............................................................................. 276
current Funding 2 share...................................................................... 135, 136
current Funding 2 share percentage........................................................... 135, 136
current seller share......................................................................... 139
current seller share percentage.............................................................. 139
cut-off date................................................................................. 277
cut-off date mortgage portfolio.............................................................. 79
day count fraction........................................................................... 223, 226
deferred contribution........................................................................ 277
deferred interest............................................................................ 228
deferred purchase price...................................................................... 277
deferred tax................................................................................. 257
designated maturity.......................................................................... 225
determination period......................................................................... 277
Diagram of ownership structure............................................................... 71
direct debit................................................................................. 83
discount rate mortgage loans................................................................. 83
disqualified persons......................................................................... 260
distribution date............................................................................ 277
Distribution of Funding 2 available principal receipts....................................... 174
DM Regulations............................................................................... 54
dollars...................................................................................... 61
DTC.......................................................................................... 59
employee benefit plans....................................................................... 260
299
endowment.................................................................................... 84
English mortgage............................................................................. 80
English mortgage loan........................................................................ 80
equity interest.............................................................................. 261
ERISA........................................................................................ 260
ERISA considerations......................................................................... 29
ERISA Plans.................................................................................. 260
EURIBOR...................................................................................... 277
euro......................................................................................... 61
Euroclear.................................................................................... 59
Euroclear operator........................................................................... 217
event of default............................................................................. 277
excess distributions......................................................................... 257
Excess spread................................................................................ 77
Exchange Act................................................................................. 215
existing borrowers' re-fix rate.............................................................. 278
expects...................................................................................... 2
extraordinary resolution..................................................................... 240
filed plan................................................................................... 245
final maturity date.......................................................................... 278
final repayment date......................................................................... 278
Fitch........................................................................................ 16
fixed rate mortgage loans.................................................................... 80
fixed rate note.............................................................................. 278
fixed rate period............................................................................ 278
fixed security............................................................................... 278
flexi plan loan.............................................................................. 92
flexible capped rate mortgage loans.......................................................... 82
flexible cash re-draw capacity............................................................... 140
flexible discount rate mortgage loans........................................................ 82
flexible fixed rate mortgage loans........................................................... 82
flexible mortgage loans...................................................................... 88
flexible tracker rate mortgage loans......................................................... 83
floating rate................................................................................ 225
floating rate note........................................................................... 278
floating rate option......................................................................... 225
floating security............................................................................ 278
FSMA......................................................................................... 51
full repayment amount........................................................................ 174
Funding...................................................................................... 2
Funding (issuing entity) reserve fund........................................................ 278
Funding 2.................................................................................... 2, 13, 62
Funding 2 available principal receipts....................................................... 166
Funding 2 available revenue receipts......................................................... 156
Funding 2 bank account agreement............................................................. 279
Funding 2 bank accounts...................................................................... 155
Funding 2 basis rate swap agreement.......................................................... 279
Funding 2 basis rate swap excluded termination amount........................................ 279
Funding 2 basis rate swap provider........................................................... 15
Funding 2 basis rate swaps................................................................... 192
Funding 2 cash accumulation ledger........................................................... 165
Funding 2 cash accumulation ledger amount.................................................... 170
Funding 2 charged property................................................................... 279
Funding 2 deed of charge..................................................................... 279
Funding 2 GIC account........................................................................ 155
Funding 2 GIC provider....................................................................... 279
300
Funding 2 guaranteed investment contract..................................................... 279
Funding 2 intercompany loan.................................................................. 279
Funding 2 intercompany loan agreement........................................................ 280
Funding 2 intercompany loan enforcement notice............................................... 280
Funding 2 intercompany loan event of default................................................. 154, 280
Funding 2 liquidity facility................................................................. 280
Funding 2 liquidity facility principal payment............................................... 280
Funding 2 liquidity facility provider........................................................ 280
Funding 2 liquidity facility subordinated amounts............................................ 280
Funding 2 liquidity reserve fund............................................................. 280
Funding 2 liquidity reserve ledger........................................................... 280
Funding 2 liquidity reserve principal payment................................................ 186
Funding 2 liquidity reserve rating event..................................................... 185
Funding 2 liquidity reserve required amount.................................................. 186
Funding 2 post-enforcement priority of payments.............................................. 176
Funding 2 pre-enforcement principal priority of payments..................................... 167
Funding 2 pre-enforcement revenue priority of payments....................................... 157
Funding 2 principal deficiency ledger........................................................ 280
Funding 2 principal ledger................................................................... 280
Funding 2 priority of payments............................................................... 280
Funding 2 program date....................................................................... 23
Funding 2 reserve fund....................................................................... 184
Funding 2 reserve fund threshold............................................................. 280
Funding 2 reserve ledger..................................................................... 155
Funding 2 reserve principal payment.......................................................... 184
Funding 2 reserve required amount............................................................ 185
Funding 2 security........................................................................... 281
Funding 2 security trustee................................................................... 14
Funding 2 swap collateral accounts........................................................... 281
Funding 2 transaction account................................................................ 155
Funding 2 transaction documents.............................................................. 281
Funding beneficiaries........................................................................ 33
Funding GIC Account.......................................................................... 278
Funding intercompany loans................................................................... 118
Funding issuing entities..................................................................... 278
Funding priority of payments................................................................. 278
Funding reserve fund......................................................................... 278
Funding security............................................................................. 278
Funding security trustees.................................................................... 278
further advance.............................................................................. 90
further contribution......................................................................... 134
further draw capacity........................................................................ 140
further draws................................................................................ 83
further mortgage loan........................................................................ 281
further mortgage portfolio................................................................... 79
global note certificates..................................................................... 59
Glossary..................................................................................... 61
GPCH Limited -- Post-enforcement call option................................................. 23
Granite Program.............................................................................. 23
heritable creditor........................................................................... 102
holder....................................................................................... 220
Holdings..................................................................................... 10
Housing Indices.............................................................................. 105
IFRS......................................................................................... 59
in arrears................................................................................... 109
individual note certificates................................................................. 59
301
individual savings accounts.................................................................. 84
initial closing date......................................................................... 6
initial contribution......................................................................... 134
initial mortgage portfolio................................................................... 79
initial purchase price....................................................................... 282
initial trust property....................................................................... 282
insolvency event............................................................................. 282
intends...................................................................................... 2
interest amount.............................................................................. 226
interest commencement date................................................................... 284
interest determination date.................................................................. 284
interest period.............................................................................. 284
interest-only................................................................................ 83, 84
interim calculation period................................................................... 134
investment plan.............................................................................. 284
IRS.......................................................................................... 60, 254
ISAs......................................................................................... 84
ISDA definitions............................................................................. 284
ISDA rate.................................................................................... 224
issuance fees................................................................................ 284
Issuance of notes............................................................................ 43, 44, 71
Issuance of notes -- issuance................................................................ 15
Issuance of notes -- Issuance................................................................ 170
issuance tests............................................................................... 74
issuer account bank.......................................................................... 14
issuer arrears test.......................................................................... 171
issuer available principal receipts.......................................................... 174
Issuer available revenue receipts............................................................ 159
issuer bank account agreement................................................................ 284
issuer cash management agreement............................................................. 285
issuer cash manager.......................................................................... 14
issuer deed of charge........................................................................ 285
Issuer enforcement notice.................................................................... 285
issuer expenses sub-ledger................................................................... 160
issuer GIC account........................................................................... 201
issuer GIC provider.......................................................................... 285
issuer guaranteed investment contract........................................................ 285
issuer pre-enforcement principal priority of payments........................................ 174
issuer pre-enforcement revenue priority of payments.......................................... 160
issuer principal ledger...................................................................... 285
issuer priority of payments.................................................................. 285
issuer reserve fund.......................................................................... 182
issuer reserve ledger........................................................................ 183
issuer reserve minimum amount................................................................ 183
issuer reserve principal payment............................................................. 183
issuer reserve required amount............................................................... 183
issuer reserve requirement................................................................... 171
issuer revenue ledger........................................................................ 160
issuer secured creditors..................................................................... 285
issuer security.............................................................................. 285
issuer security trustee...................................................................... 14
issuer swap.................................................................................. 193
issuer swap agreement........................................................................ 193
issuer swap agreements....................................................................... 285
issuer swap collateral accounts.............................................................. 286
issuer swap excluded termination amount...................................................... 286
302
issuer swap providers........................................................................ 286
issuer transaction account................................................................... 201
issuing entity............................................................................... 13, 61
lender....................................................................................... 88
lending criteria............................................................................. 13
LIBOR........................................................................................ 286
Listing and general information.............................................................. 296
Lloyds TSB................................................................................... 116
loan payment date............................................................................ 286
loan to value ratio.......................................................................... 286
loan tranche................................................................................. 6
loan tranche A............................................................................... 170
loan tranche ratings......................................................................... 151
loan tranche supplement...................................................................... 286
loan tranches................................................................................ 6
London business day.......................................................................... 286
London Stock Exchange........................................................................ 16
losses....................................................................................... 28
low-start flexible fixed rate mortgage loans................................................. 82
LTV ratio.................................................................................... 286
Mandate holders.............................................................................. 95
mark to market election...................................................................... 257
Market....................................................................................... 16
master definitions schedule.................................................................. 287
maximum rate of interest..................................................................... 287
may.......................................................................................... 2
MCoB......................................................................................... 53
MIG policy................................................................................... 101
minimum rate of interest..................................................................... 287
minimum seller share......................................................................... 139
Money market notes........................................................................... 21
monthly CPR.................................................................................. 164
monthly payment date......................................................................... 38, 287
Moody's...................................................................................... 16
Moody's portfolio variation test............................................................. 287
Moody's portfolio variation test value....................................................... 287
mortgage..................................................................................... 80, 102
mortgage account............................................................................. 80
mortgage conditions.......................................................................... 287
mortgage deed................................................................................ 287
mortgage loan................................................................................ 287
mortgage loan files.......................................................................... 288
mortgage portfolio........................................................................... 79
mortgage related security.................................................................... 264, 288
mortgage sale agreement...................................................................... 288
mortgaged property........................................................................... 288
mortgagee.................................................................................... 102
mortgagees trustee........................................................................... 13
mortgages trust.............................................................................. 27, 132
mortgages trust allocation of revenue receipts............................................... 141
mortgages trust deed......................................................................... 6
Mortgages trustee available revenue receipts................................................. 140
mortgages trustee bank accounts.............................................................. 27
mortgages trustee GIC account................................................................ 27
mortgages trustee GIC provider............................................................... 288
mortgages trustee guaranteed investment contract............................................. 288
303
mortgages trustee principal receipts......................................................... 288
mortgages trustee retained principal receipts................................................ 145
mortgages trustee transaction account........................................................ 288
N(m)......................................................................................... 52
new mortgage loans........................................................................... 288
new mortgage portfolio....................................................................... 288
new related security......................................................................... 289
new trust property........................................................................... 289
new UK GAAP.................................................................................. 60
non-asset trigger event...................................................................... 22, 143
non-cash re-draw............................................................................. 89, 90
non-cash re-draws............................................................................ 82
non-performing mortgage loan................................................................. 111
NORMIC....................................................................................... 66
Northern Rock................................................................................ 13
note certificate............................................................................. 220
note certificates............................................................................ 59
note determination date...................................................................... 229
note event of default........................................................................ 233
note payment date............................................................................ 289
note principal payment....................................................................... 229
note trustee................................................................................. 14
noteholder................................................................................... 220
noteholders.................................................................................. 289
notes........................................................................................ 15, 61, 219
NR start-up loan agreement................................................................... 190
NRG.......................................................................................... 66
official list................................................................................ 16
OFT.......................................................................................... 54
OID.......................................................................................... 255
OID regulations.............................................................................. 255
Ombudsman.................................................................................... 57
original bullet loan tranche................................................................. 289
original bullet redemption note.............................................................. 289
original pass-through loan tranche........................................................... 289
overpayments ledger.......................................................................... 197
parties in interest.......................................................................... 260
pass-through loan tranche.................................................................... 289
pass-through notes........................................................................... 289
pass-through requirement..................................................................... 165
pass-through trigger event................................................................... 40
paying agent and agent bank agreement........................................................ 289
paying agents................................................................................ 14, 214
payment business day......................................................................... 290
pension policy............................................................................... 84
PEPs......................................................................................... 84
permitted product switch..................................................................... 124
permitted redemption date.................................................................... 290
permitted replacement mortgage loan.......................................................... 125
personal equity plans........................................................................ 84
personal secured loans....................................................................... 83
PFIC......................................................................................... 257
Plan Asset Regulation........................................................................ 261
Plans........................................................................................ 260
post-enforcement call option agreement....................................................... 70
post-enforcement call option holder.......................................................... 23, 70
304
pounds sterling.............................................................................. 61
previous mortgages trustee GIC Provider...................................................... 290
principal amount outstanding................................................................. 290
principal ledger............................................................................. 197
principal paying agent....................................................................... 14, 214
principal receipts........................................................................... 290
product switch............................................................................... 94
programme agreement.......................................................................... 291
programme reserve required amount............................................................ 183
programme reserve required percentage........................................................ 183
programme resolution......................................................................... 241
properties in possession policy.............................................................. 101
prospectus................................................................................... 291
prospectus rules............................................................................. 291
prospectus supplement........................................................................ 291
PTCE......................................................................................... 260
publicly-offered security.................................................................... 261
QEF election................................................................................. 257
qualified professional asset manager......................................................... 260
qualified stated interest.................................................................... 255
qualifying corporate bonds................................................................... 252
rate of interest............................................................................. 291
rates of interest............................................................................ 291
rating agencies.............................................................................. 291
re-draws..................................................................................... 27
re-fix....................................................................................... 94
re-fixed mortgage loan....................................................................... 291
receiver..................................................................................... 291
recognized stock exchange.................................................................... 251
record date.................................................................................. 232
redemption amount............................................................................ 231
Reg S notes.................................................................................. 291
registered land.............................................................................. 291
registrants.................................................................................. 3
registrar and transfer agent................................................................. 14
regulated mortgage contract.................................................................. 52
regulated personal secured loan.............................................................. 83
reinstatement................................................................................ 291
related security............................................................................. 291
relevant deposit amount...................................................................... 291
relevant distribution date................................................................... 135
relevant entity.............................................................................. 282, 283
relevant recalculation date.................................................................. 136
relevant screen page......................................................................... 293
repayment.................................................................................... 83
repayment mortgage loan...................................................................... 48
repayment requirement........................................................................ 165
reset date................................................................................... 225
resolution................................................................................... 239
revenue ledger............................................................................... 197
revenue receipts............................................................................. 293
revenue shortfall............................................................................ 293
Rules for application of Funding 2 available revenue receipts................................ 156
scheduled amortization installment........................................................... 293
scheduled redemption dates................................................................... 293
scheduled redemption notes................................................................... 293
305
scheduled repayment dates ................................................................... 293
scheduled repayment loan installment......................................................... 293
scheduled repayment loan tranche............................................................. 294
scheduled repayment requirement.............................................................. 166
Scottish assets.............................................................................. 294
Scottish mortgage............................................................................ 80
Scottish mortgage loan....................................................................... 80
SEC.......................................................................................... 3
secured property............................................................................. 248
Securities Act............................................................................... 15
Security for Funding 2's obligations......................................................... 47, 72, 147
Security for Funding 2's obligations -- Nature of security -- fixed charge or floating charge 208
Security for the issuing entity's obligations................................................ 72, 285
security trustee............................................................................. 294
seller....................................................................................... 13
seller arranged insurer...................................................................... 99
seller share event........................................................................... 143
seller share event distribution date......................................................... 143
seller's policy.............................................................................. 294
seller's standard variable rate.............................................................. 87
series....................................................................................... 61
series and class............................................................................. 61
servicer..................................................................................... 13
servicer termination event................................................................... 118
short-term obligations....................................................................... 256
should....................................................................................... 2
special distribution......................................................................... 294
specified currency exchange rate............................................................. 294
specified denomination....................................................................... 294
sponsor...................................................................................... 13
stand-by GIC provider........................................................................ 294
Standard & Poor's............................................................................ 16
standard variable rate mortgage loans........................................................ 80
start-up loan provider....................................................................... 190
start-up loan tranche........................................................................ 190
step-up date................................................................................. 229, 294
sterling..................................................................................... 61
sterling equivalent.......................................................................... 295
Structural diagram of the securitisation transaction......................................... 71
Structural diagram of the securitization transaction......................................... 6
sub-class.................................................................................... 295
subscription agreement....................................................................... 295
subsidiary................................................................................... 295
substantial equity features.................................................................. 261
Summary of prospectus........................................................................ 7, 71
swap agreements.............................................................................. 192
swap collateral.............................................................................. 295
swap collateral account...................................................................... 295
swap collateral ancillary document........................................................... 295
swap downgrade event......................................................................... 194
swap early termination event................................................................. 194
swap provider default........................................................................ 295
swap providers............................................................................... 296
swap replacement premium..................................................................... 296
swap termination payment..................................................................... 296
306
swap transactions............................................................................ 296
target reserve required amount............................................................... 185
Taxes Act.................................................................................... 251
The cut-off date mortgage portfolio.......................................................... 36
The issuing entity........................................................................... 60
The notes.................................................................................... 74
third party amounts.......................................................................... 141
tier......................................................................................... 296
title deeds.................................................................................. 296
Together Connections......................................................................... 92
Together Connections Benefit................................................................. 81
Together Connections fixed................................................................... 92
Together Connections Interest................................................................ 81
Together Connections mortgage loans.......................................................... 81
Together Connections variable................................................................ 92
Together discount tracker.................................................................... 91
Together fixed............................................................................... 91
Together fixed for life...................................................................... 91
Together flexible............................................................................ 91
Together mortgage loans...................................................................... 80, 91
Together stepped tracker..................................................................... 91
Together variable............................................................................ 91
tracker rate mortgage loans.................................................................. 83
transaction documents........................................................................ 296
transfer of equity........................................................................... 296
trigger event................................................................................ 22, 143
trust calculation period..................................................................... 296
trust deed................................................................................... 296
trust determination date..................................................................... 296
Trust Indenture Act.......................................................................... 212
trust property............................................................................... 132
trust property calculation adjustments....................................................... 135
UK Listing Authority......................................................................... 296
unauthorized underpayment.................................................................... 89
underpayment................................................................................. 85, 296
underwriters................................................................................. 297
Underwriting................................................................................. 17
underwriting agreement....................................................................... 297
unit trusts.................................................................................. 84
United Kingdom............................................................................... 297
United States person......................................................................... 255
unpaid interest.............................................................................. 297
unregistered land............................................................................ 297
unregulated personal secured loan............................................................ 83
us........................................................................................... 13, 61
US dollars................................................................................... 61
US federal income tax counsel................................................................ 254
US global note certificates.................................................................. 214
US holder.................................................................................... 254
US notes..................................................................................... 16
US paying agent.............................................................................. 14
US........................................................................................... 61
USD.......................................................................................... 61
UTCCR........................................................................................ 56
variable mortgage rate....................................................................... 297
variable rate mortgage loan.................................................................. 297
307
VAT.......................................................................................... 30
W............................................................................................ 140
W-8BEN....................................................................................... 258
WAFF......................................................................................... 127
WALS......................................................................................... 127
we........................................................................................... 13, 61
weighted average Funding 2 share percentage.................................................. 138
weighted average Funding share percentage.................................................... 138
x............................................................................................ 108
X............................................................................................ 140
y............................................................................................ 108
Y............................................................................................ 140
you.......................................................................................... 13
Z............................................................................................ 140
zero coupon notes............................................................................ 20
308
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, Canada Square
One Canada Square Canary Wharf
London E14 5AL London E14 5LB
US PAYING AGENT
CITIBANK, N.A., LONDON BRANCH AGENT BANK
14th Floor CITIBANK, N.A., LONDON BRANCH
388 Greenwich Street Citigroup Centre, Canada Square
New York, New York 10013 Canary Wharf
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 Edinburgh Quay,
25 Basinghall Street 133 Fountainbridge,
London EC2V 5HA Edinburgh EH3 9AG
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 LIMITED MERRILL LYNCH INTERNATIONAL
5 The North Colonnade Citigroup Centre 2 King Edward Street
Canary Wharf Canary Wharf London EC1A 1HQ
London E14 4BB London E14 5LB
Through and including February [o], 2007, 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 2006-4 callable class A1 notes
$[o] series 2006-4 callable class A3 notes
$[o] series 2006-4 callable class A5 notes
$[o] series 2006-4 callable class B1 notes
$[o] series 2006-4 callable class B2 notes
$[o] series 2006-4 callable class M1 notes
$[o] series 2006-4 callable class M2 notes
$[o] series 2006-4 callable class C1 notes
$[o] series 2006-4 callable class C2 notes
--------------------------------------------------------
PROSPECTUS
SUPPLEMENT
--------------------------------------------------------
Lead Underwriters
Deutsche Bank Lehman Brothers Merrill Lynch & Co.
Barclays Capital Citigroup JPMorgan
Morgan Stanley UBS Investment Bank
Underwriters
November [o], 2006