Registration No. 333-97023
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 2002
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GRANITE MORTGAGES 02-2 PLC
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(Exact name of Registrant 1 as specified in its charter)
FIFTH FLOOR, 100 WOOD STREET, LONDON EC2V 7EX (011 44 20) 7606 5451
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(Address and telephone number of Registrant 1's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 590 9200
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(Name, address and telephone number of Registrant 1's agent for service)
GRANITE FINANCE TRUSTEES LIMITED
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(Exact name of Registrant 2 as specified in its charter)
22 GRENVILLE STREET, ST HELIER, JERSEY JE4 8PX,
CHANNEL ISLANDS (011 44 1534) 609892
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(Address and telephone number of Registrant 2's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 590 9200
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(Name, address and phone number of Registrant 2's agent for service)
GRANITE FINANCE FUNDING LIMITED
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(Exact name of Registrant 3 as specified in its charter)
35 NEW BRIDGE STREET, 4TH FLOOR, BLACKFRIARS, LONDON EC4V 6BW,
UNITED KINGDOM (011 44 20) 7332 6161
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(Address and telephone number of Registrant 3's principal executive offices)
CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 590 9200
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(Name, address and phone number of Registrant 3's agent for service)
-----------------------------
Copies to:
Peter Millican, Esq. Michael Durrer, Esq. Thomas Jones, Esq.
Northern Rock plc Sidley Austin Brown & Wood Allen & Overy
Northern Rock House 1 Threadneedle Street 1 New Change
Gosforth London EC2R 8AW London EC4M 9QQ
Newcastle upon Tyne NE3 4PL United Kingdom United Kingdom
United Kingdom
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |x|
Registration No. 333-97023
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES BEING AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTRATION
REGISTERED REGISTERED UNIT(1) PRICE(1) FEE
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$650,000,000 series 1 class A1 $650,000,000 100% $650,000,000 $59,800
floating rate notes due 2017
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$1,150,000,000 series 1 class $1,150,000,000 100% $1,150,000,000 $105,800
A2 floating rate notes due 2043
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$60,000,000 series 1 class B $60,000,000 100% $60,000,000 $5,520
floating rate notes due 2043
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$88,000,000 series 1 class C $88,000,000 100% $88,000,000 $8,096
floating rate notes due 2043
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Intercompany loan(2) -- -- -- --
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Funding interest in the
mortgages trust(2) -- -- -- --
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Total $1,948,000,000 100% $1,948,000,000 $179,216(3)
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(1) Estimated solely for the purposes of computing the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act of
1933, as amended.
(2) These items are not being offered directly to investors. Granite Finance
Trustees Limited is the registrant for Granite Finance Funding Limited's
interest in the mortgages trust and is holding that interest in the
mortgages trust on behalf of Granite Finance Funding Limited. The interest
of Granite Finance Funding Limited in the mortgages trust will be the
primary source of payment on the intercompany loan listed. Granite Finance
Funding Limited is the registrant for the intercompany loan and is issuing
the intercompany loan to the issuer. The intercompany loan will be the
primary source of payments on the notes. The issuer is the registrant for
the notes.
(3) Filing fees of $92,000, $72,220 and $14,996 were previously paid with the
previous filings of this registration statement on July 24, 2002, August
30, 2002 and September 10, 2002, respectively.
GRANITE MORTGAGES 02-2 PLC
Issuer
INTEREST RATE
(MARGIN OVER PROCEEDS TO
THREE-MONTH PRICE TO PUBLIC ISSUER PER CLASS FINAL MATURITY
CLASS USD LIBOR) PER NOTE OF NOTE DATE
$650,000,000 series 1 class A1 notes 0.11% p.a. 100% $ 650,000,000 January 2017
$1,150,000,000 series 1 class A2 notes 0.18% p.a. 100% $1,150,000,000 January 2043
$60,000,000 series 1 class B notes 0.37% p.a. 100% $ 60,000,000 January 2043
$88,000,000 series 1 class C notes 1.25% p.a. 100% $ 88,000,000 January 2043
o The principal asset from which we will make payments of interest and
principal on the notes is an intercompany loan to an affiliated company
called Granite Finance Funding Limited.
o The principal asset from which Granite Finance Funding Limited will make
payments on the intercompany loan is its interest in a pool of UK
residential mortgage loans originated by Northern Rock plc and held in a
master trust by Granite Finance Trustees Limited.
o Northern Rock plc originated the residential mortgage loans that are being
held in the master trust. Each mortgage loan is secured by a mortgaged
property located in England or Wales. All of the transaction documents are
either governed by the laws of England, Jersey or New York.
o Granite Finance Funding Limited, our parent, is also the parent of each of
the previous issuers, Granite Mortgages 01-1 plc, Granite Mortgages 01-2
plc and Granite Mortgages 02-1 plc, which issued the previous notes
referred to in this prospectus. We share with the previous issuers the
security granted by Granite Finance Funding Limited to secure its
obligations to each of us and the previous issuers under our respective
intercompany loans.
PLEASE CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 36 OF THIS
PROSPECTUS.
THE NOTES OFFERED BY THIS PROSPECTUS WILL BE THE OBLIGATIONS SOLELY OF THE
ISSUER. THE NOTES WILL NOT BE OBLIGATIONS OF NORTHERN ROCK PLC, ANY OF ITS
AFFILIATES OR ANY OF THE OTHER PARTIES NAMED IN THIS PROSPECTUS OTHER THAN THE
ISSUER.
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the Financial
Services and Markets Act 2000 for the notes to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for each class of the notes to be admitted to trading
by the London Stock Exchange plc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE NOTES OR DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
JOINT UNDERWRITERS FOR THE SERIES 1 NOTES
SALOMON SMITH BARNEY JPMORGAN
LEHMAN BROTHERS MERRILL LYNCH & CO. UBS WARBURG
Prospectus dated September 12, 2002
You should note that Granite Finance Funding Limited ("FUNDING") has
established previous issuers which have made previous intercompany loans to
Funding, and that Funding may establish from time to time new issuers which will
make new intercompany loans to Funding. Each previous issuer made a previous
intercompany loan from the proceeds of the previous notes that were issued by
that previous issuer, and any new issuer will make a new intercompany loan from
the proceeds of new notes that are issued by that new issuer. The previous notes
issued by the previous issuers ultimately are, and any new notes issued by a new
issuer ultimately will be, secured by the same trust property (primarily
consisting of the mortgage portfolio) as the notes issued by us under this
prospectus.
Funding will repay each outstanding intercompany loan in proportion to the
relevant issuer's allocable interest in the Funding share of the trust property,
principally consisting of principal and revenue receipts on the underlying
mortgage loans. The amount and timing of payments under an intercompany loan are
determined by the amount and timing of payments on the notes issued by the
relevant issuer and by the priorities for payment applicable to those notes. The
terms of the previous notes issued by the previous issuers and of any new notes
issued by a new issuer may therefore result in those previous notes and the
related previous intercompany loans or those new notes and the related new
intercompany loan being repaid prior to the repayment of the notes issued by us
under this prospectus and our related intercompany loan regardless of the
ratings of such previous notes or new notes relative to the notes.
A note is not a deposit and neither the notes, payments under the
intercompany loan nor the underlying mortgage loans are insured or guaranteed by
any United Kingdom or United States governmental agency.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements including, but not
limited to, statements made under the captions "RISK FACTORS", "THE MORTGAGE
LOANS", "THE ADMINISTRATOR AND THE ADMINISTRATION AGREEMENT" and "MATURITY AND
REPAYMENT considerations". 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.
2
TABLE OF CONTENTS
SUMMARY OF PROSPECTUS................................................................................... 9
Overview of the transaction ........................................................................... 9
STRUCTURAL DIAGRAM OF THE SECURITIZATION PROGRAM ....................................................... 11
DIAGRAM OF OWNERSHIP STRUCTURE ......................................................................... 12
SUMMARY OF THE NOTES ................................................................................... 14
The issuer ............................................................................................ 14
Funding ............................................................................................... 15
The mortgages trustee ................................................................................. 15
The seller, the administrator, the cash manager, the issuer cash manager and the
account bank ......................................................................................... 15
The notes ............................................................................................. 16
Relationship between the notes and the intercompany loan .............................................. 17
Operative documents concerning the notes .............................................................. 17
Payment priority and ranking of notes ................................................................. 17
Optional redemption of the notes for tax and other reasons ............................................ 19
Withholding tax........................................................................................ 20
The closing date....................................................................................... 20
The note trustee....................................................................................... 20
The paying agents and agent bank ...................................................................... 20
The registrar and transfer agent ...................................................................... 20
The mortgage loans..................................................................................... 20
Assignment of the mortgage loans ...................................................................... 22
The mortgages trust ................................................................................... 23
The intercompany loan ................................................................................. 28
The security trustee................................................................................... 28
Security granted by Funding and the issuer ............................................................ 29
Swap providers......................................................................................... 29
Swap agreements ....................................................................................... 30
Post-enforcement call option .......................................................................... 30
Rating of the series 1 notes........................................................................... 31
Listing................................................................................................ 31
The previous issuers and new issuers................................................................... 31
United Kingdom tax status ............................................................................. 32
United States tax status .............................................................................. 33
Jersey (Channel Islands) tax status ................................................................... 33
ERISA considerations for investors .................................................................... 34
Fees .................................................................................................. 34
RISK FACTORS ........................................................................................... 36
DEFINED TERMS .......................................................................................... 61
US DOLLAR PRESENTATION ................................................................................. 61
STERLING/US DOLLAR EXCHANGE RATE HISTORY ............................................................... 61
THE ISSUER.............................................................................................. 63
Introduction .......................................................................................... 63
Directors and secretary................................................................................ 63
Capitalization and borrowings ......................................................................... 64
Management's discussion and analysis of financial condition of the issuer ............................. 65
USE OF PROCEEDS ........................................................................................ 66
THE NORTHERN ROCK GROUP ................................................................................ 67
The seller............................................................................................. 67
Mortgage business...................................................................................... 67
Subsidiaries of the seller ............................................................................ 67
3
FUNDING................................................................................................. 68
Introduction .......................................................................................... 68
Directors and secretary................................................................................ 68
Capitalization and borrowings ......................................................................... 69
Management's discussion and analysis of financial condition............................................ 69
THE MORTGAGES TRUSTEE .................................................................................. 71
Introduction .......................................................................................... 71
Directors and secretary................................................................................ 71
HOLDINGS ............................................................................................... 73
Introduction .......................................................................................... 73
Directors and secretary................................................................................ 73
GPCH LIMITED ........................................................................................... 74
Introduction .......................................................................................... 74
Directors and secretary................................................................................ 74
THE CURRENCY SWAP PROVIDER.............................................................................. 76
DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS ..................................................................................... 77
First issuer........................................................................................... 77
Second issuer.......................................................................................... 78
Third issuer .......................................................................................... 79
Previous issuers - general............................................................................. 79
THE MORTGAGE LOANS ..................................................................................... 81
Introduction .......................................................................................... 81
Characteristics of the mortgage loans ................................................................. 82
Origination of the mortgage loans...................................................................... 94
Buildings insurance policies .......................................................................... 98
The cut-off date mortgage portfolio ................................................................... 101
Types of property...................................................................................... 101
Expected seasoning of mortgages at closing ............................................................ 102
Years to maturity at closing .......................................................................... 102
Geographical distribution of mortgaged properties ..................................................... 103
Current loan-to-value ratios .......................................................................... 103
Outstanding current balances .......................................................................... 104
Mortgage loan products ................................................................................ 104
Employment status ..................................................................................... 104
Distribution of fixed rate mortgage loans.............................................................. 105
Month/year in which fixed rate period ends ............................................................ 105
Repayment terms........................................................................................ 106
CHARACTERISTICS OF UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET .......................................... 107
CPR rates ............................................................................................. 107
Repossession rate ..................................................................................... 110
Arrears information ................................................................................... 110
House price to earnings ratio.......................................................................... 110
House price index ..................................................................................... 111
THE ADMINISTRATOR AND THE ADMINISTRATION AGREEMENT...................................................... 114
The administrator ..................................................................................... 114
Administration of mortgage loans ...................................................................... 114
Arrears and default procedures......................................................................... 114
Arrears experience..................................................................................... 117
The administration agreement .......................................................................... 120
Governing law.......................................................................................... 125
ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY................................................... 126
The mortgage sale agreement ........................................................................... 126
The additional assigned mortgage portfolio ............................................................ 126
Representations and warranties ........................................................................ 127
Repurchase by the seller .............................................................................. 129
4
Product switches and further advances.................................................................. 129
Re-draws under flexible mortgage loans ................................................................ 131
Assignment of new mortgage loans and their related security ........................................... 131
Transfer of legal title to the mortgages trustee ...................................................... 134
Title deeds............................................................................................ 135
Governing law.......................................................................................... 135
THE MORTGAGES TRUST .................................................................................... 136
General legal structure ............................................................................... 136
Fluctuation of the seller share/Funding share of the trust property ................................... 137
Funding share of trust property (distribution date recalculation)...................................... 138
Funding share of trust property (assignment date recalculation) ....................................... 139
Adjustments to trust property.......................................................................... 140
Weighted average Funding share percentage ............................................................. 141
Seller share of trust property (distribution date recalculation) ...................................... 142
Seller share of trust property (assignment date recalculation) ........................................ 142
Weighted average seller share percentage .............................................................. 142
Minimum seller share .................................................................................. 143
Adjustments to distributions .......................................................................... 143
Cash management of trust property - revenue receipts .................................................. 144
Mortgages trust allocation of revenue receipts......................................................... 144
Cash management of trust property - principal receipts ................................................ 146
Mortgages trust allocation and distribution of principal receipts prior to the
occurrence of a trigger event......................................................................... 146
Mortgages trust allocation and distribution of principal receipts after the
occurrence of a trigger event......................................................................... 148
Overpayments .......................................................................................... 148
Losses ................................................................................................ 149
Disposal of trust property ............................................................................ 149
Additions to, and reductions from, the trust property ................................................. 149
Arrears ............................................................................................... 150
Increasing and decreasing the seller share of the trust property ...................................... 150
Increasing the Funding share of the trust property .................................................... 151
Termination of the mortgages trust..................................................................... 151
Retirement of mortgages trustee........................................................................ 151
Governing law.......................................................................................... 151
THE INTERCOMPANY LOAN AGREEMENT......................................................................... 152
The facility .......................................................................................... 152
Conditions precedent to drawdown ...................................................................... 152
The intercompany loan ................................................................................. 152
Representations, warranties and covenants ............................................................. 152
Payment of interest ................................................................................... 153
Repayment of the intercompany loan .................................................................... 154
Allocation of losses .................................................................................. 154
Limited recourse....................................................................................... 154
Intercompany loan events of default ................................................................... 155
Other intercompany loan agreements .................................................................... 155
Funding's bank accounts ............................................................................... 156
CASHFLOWS............................................................................................... 158
Distributions of Funding available revenue receipts ................................................... 158
Distribution of issuer available receipts prior to enforcement of the issuer security ................. 162
Distribution of Funding available principal receipts prior to the enforcement of the
Funding security...................................................................................... 166
Distribution of issuer available principal receipts ................................................... 169
Distribution of issuer available principal receipts prior to enforcement of the issuer
security and/or the occurrence of a trigger event .................................................... 169
5
Distribution of issuer available principal receipts following the occurrence of a
non-asset trigger event .............................................................................. 174
Distribution of issuer available principal receipts following the occurrence of an
asset trigger event .................................................................................. 176
Distribution of Funding available principal receipts and Funding available revenue
receipts following enforcement of the Funding security ............................................... 178
Distribution of issuer available principal receipts and issuer available revenue
receipts following enforcement of the issuer security ................................................ 178
CREDIT STRUCTURE........................................................................................ 182
Credit support for the notes provided by mortgages trustee available revenue
receipts ............................................................................................. 182
Funding reserve fund .................................................................................. 183
Issuer reserve fund ................................................................................... 184
Issuer liquidity reserve fund ......................................................................... 185
Issuer principal deficiency ledger .................................................................... 186
Funding principal deficiency ledger ................................................................... 187
Use of principal receipts to pay issuer income deficiency ............................................. 188
Issuer basis and currency swaps ....................................................................... 188
Priority of payments among the class B notes and the class C notes .................................... 189
Mortgages trustee GIC account/Funding GIC account/Funding (Granite 02-2) GIC
account .............................................................................................. 189
Start-up loan ......................................................................................... 189
THE SWAP AGREEMENTS..................................................................................... 191
General ............................................................................................... 191
The basis rate swap ................................................................................... 191
The dollar currency swaps ............................................................................. 193
The euro currency swaps................................................................................ 194
Ratings downgrade of swap providers.................................................................... 195
Termination of the swaps .............................................................................. 196
Taxation .............................................................................................. 198
Limited recourse and swap payment obligation .......................................................... 198
CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING................................................... 199
Cash management services to be provided in relation to the mortgages trust ............................ 199
Cash management services to be provided to Funding .................................................... 199
Compensation of cash manager .......................................................................... 200
Resignation of cash manager ........................................................................... 201
Termination of appointment of cash manager ............................................................ 201
Governing law.......................................................................................... 201
CASH MANAGEMENT FOR THE ISSUER ......................................................................... 202
Cash management services to be provided to the issuer ................................................. 202
Issuer's bank account ................................................................................. 202
Compensation of issuer cash manager ................................................................... 203
Resignation of issuer cash manager .................................................................... 203
Termination of appointment of issuer cash manager ..................................................... 203
Governing law.......................................................................................... 203
SECURITY FOR FUNDING'S OBLIGATIONS ..................................................................... 204
Covenant to pay........................................................................................ 204
Funding security....................................................................................... 204
Funding pre-enforcement and post-enforcement priority of payments...................................... 206
Enforcement ........................................................................................... 206
Conflicts ............................................................................................. 207
Delegation by the security trustee to an authorized third party........................................ 207
No enforcement by Funding secured creditors ........................................................... 207
Modification and waiver, fees, retirement and responsibilities of the security
trustee .............................................................................................. 208
Governing law.......................................................................................... 209
6
SECURITY FOR THE ISSUER'S OBLIGATIONS .................................................................. 210
Covenant to pay........................................................................................ 210
Issuer security ....................................................................................... 210
Issuer pre-enforcement and post-enforcement priority of payments ...................................... 211
Enforcement ........................................................................................... 211
Conflicts ............................................................................................. 211
No enforcement by issuer secured creditors ............................................................ 212
Modification and waiver, fees, retirement and responsibilities of the note trustee 212
Governing law......................................................................................... 213
DESCRIPTION OF THE TRUST DEED .......................................................................... 214
Trust Indenture Act prevails........................................................................... 215
Governing law.......................................................................................... 215
THE NOTES .............................................................................................. 216
Payment................................................................................................ 217
Clearance and settlement............................................................................... 217
Individual note certificates .......................................................................... 220
DESCRIPTION OF THE OFFERED NOTES ....................................................................... 221
RATINGS OF THE SERIES 1 NOTES .......................................................................... 239
MATURITY AND REPAYMENT CONSIDERATIONS .................................................................. 240
MATERIAL LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE RELATED SECURITY .................................. 241
General ............................................................................................... 241
Registered title ...................................................................................... 241
Unregistered title .................................................................................... 242
Taking security over land ............................................................................. 242
The seller as mortgagee................................................................................ 243
Enforcement of mortgages............................................................................... 243
MATERIAL UNITED KINGDOM TAX CONSEQUENCES................................................................ 245
Taxation of US residents .............................................................................. 245
Withholding tax........................................................................................ 246
Direct assessment of non-UK resident holders of notes to UK tax on interest ........................... 247
Taxation of returns: companies within the charge to UK corporation tax ................................ 247
Taxation of returns: other noteholders ................................................................ 247
Accrued income scheme ................................................................................. 248
Stamp duty and stamp duty reserve tax ................................................................. 248
UK taxation of Funding and the issuer ................................................................. 248
UK taxation of the mortgages trustee .................................................................. 248
MATERIAL UNITED STATES TAX CONSEQUENCES ................................................................ 249
General ............................................................................................... 249
Tax status of the issuer, Funding, mortgages trustee and mortgages trust .............................. 249
Characterization of the US notes ...................................................................... 250
Taxation of US holders of the US notes ................................................................ 250
Backup withholding .................................................................................... 251
MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSIDERATIONS ................................................... 253
Tax status of the mortgages trustee and the mortgages trust ........................................... 253
Tax status of Funding ................................................................................. 253
ERISA CONSIDERATIONS ................................................................................... 254
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES .................................................. 257
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS .......................................................... 258
EXPERTS ................................................................................................ 258
LEGAL MATTERS........................................................................................... 258
UNDERWRITING ........................................................................................... 259
United States ......................................................................................... 259
United Kingdom ........................................................................................ 261
Netherlands ........................................................................................... 261
Italy ................................................................................................. 261
General ............................................................................................... 262
REPORTS TO NOTEHOLDERS ................................................................................. 263
WHERE INVESTORS CAN FIND MORE INFORMATION .............................................................. 263
7
LISTING AND GENERAL INFORMATION ........................................................................ 264
Authorization ......................................................................................... 264
Listing of notes ...................................................................................... 264
Clearing and settlement ............................................................................... 264
Litigation ............................................................................................ 264
Accounts .............................................................................................. 265
Significant or material change ........................................................................ 265
Documents available ................................................................................... 265
GLOSSARY ............................................................................................... 267
INDEX OF APPENDICES .................................................................................... 307
APPENDIX A ............................................................................................. 308
APPENDIX B ............................................................................................. 309
APPENDIX C ............................................................................................. 310
APPENDIX D ............................................................................................. 311
APPENDIX E.............................................................................................. 312
APPENDIX F.............................................................................................. 313
APPENDIX G ............................................................................................. 314
APPENDIX H ............................................................................................. 315
APPENDIX I ............................................................................................. 316
APPENDIX J.............................................................................................. 328
APPENDIX K ............................................................................................. 329
APPENDIX L.............................................................................................. 330
APPENDIX M ............................................................................................. 331
APPENDIX N ............................................................................................. 332
APPENDIX O ............................................................................................. 333
8
SUMMARY OF PROSPECTUS
The information on pages 14 to 35 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 PROGRAM". The numbers in the diagram
refer to the numbered paragraphs in this section.
(1) On March 26, 2001, the seller assigned the initial mortgage portfolio and
the other initial trust property to the mortgages trustee pursuant to the
mortgage sale agreement and retained an interest for itself in the trust
property. On September 28, 2001 and on March 20, 2002, the seller assigned
further mortgage portfolios and the other further trust property to the
mortgages trustee pursuant to the mortgage sale agreement, while
continuing to retain an interest for itself in the trust property. For a
further description of the assignment of the initial and further mortgage
portfolios, see "SUMMARY OF THE NOTES - ASSIGNMENT OF THE MORTGAGE LOANS".
The seller will assign to the mortgages trustee a portfolio of additional
assigned mortgage loans and their related security on the closing date,
while continuing to retain an interest for itself in the trust property.
On the closing date, the trust property will consist of the mortgage
portfolio, which will include the existing mortgage loans and the
additional assigned mortgage loans, their related security, any accrued
interest on those mortgage loans and other amounts derived from those
mortgage loans. The existing mortgage loans are, and the additional
assigned mortgage loans will be, residential mortgage loans originated by
Northern Rock plc and secured over mortgaged properties located in England
and Wales.
(2) The mortgages trustee holds the trust property in trust for the benefit of
the seller and Funding pursuant to a mortgages trust deed. The seller and
Funding each has 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 and Funding according to the share
that each of them then has in the trust property, expressed as a
percentage. These percentages fluctuate as described in "SUMMARY OF THE
NOTES - THE MORTGAGES TRUST".
(4) Funding will pay the proceeds of the intercompany loan from the issuer to
the mortgages trustee in satisfaction of Funding's initial contribution to
the mortgages trustee for the Funding share of the additional trust
property pursuant to the mortgages trust deed. Upon receipt of Funding's
initial contribution, the mortgages trustee will pay these funds to the
seller in satisfaction of the mortgages trustee's obligation to pay to the
seller the initial purchase price for the assignment to the mortgages
trustee of the additional assigned mortgage portfolio pursuant to the
mortgage sale agreement. Funding's initial contribution to the mortgages
trustee for the additional trust property will increase the Funding share
of the trust property. The trust property also will increase following the
assignment by the seller to the mortgages trustee of the additional
assigned mortgage portfolio on the closing date. From time to time Funding
will make deferred contributions to the mortgages trustee pursuant to the
mortgages trust deed in respect of the Funding share of the trust property
and from such deferred contributions the mortgages trustee will from time
to time make payments of deferred purchase price to the seller.
9
(5) In addition to paying certain of its own fees and expenses, Funding will
use amounts received from its share in the trust property to meet its
obligations to pay interest, principal and fees due to the issuer under
the intercompany loan, to pay interest, principal and fees due to the
previous issuers under the previous issuers' intercompany loans and to any
new issuer under any new intercompany loan, to allocate for the issuer
amounts to replenish the issuer reserve fund and to fund and/or replenish
the issuer liquidity reserve fund, if any (and, in respect of the previous
issuers and any new issuer, to allocate for such issuer amounts to
replenish such issuer's reserve fund and to fund and/or replenish such
issuer's liquidity reserve fund, if any) and to replenish the Funding
reserve fund. Funding's obligations to the issuer under the intercompany
loan will be secured under the Funding deed of charge by, among other
things, Funding's rights to its share of the trust property. Funding's
rights to its share in the trust property also secures its obligations to
the previous issuers under the previous intercompany loans and will secure
its obligations to any new issuer under any new intercompany loan.
(6) The issuer's obligations to pay interest and principal on the notes will
be funded primarily from the payments of interest and principal received
by it from Funding under the intercompany loan. The issuer's primary asset
will be its rights under the intercompany loan agreement. Neither you nor
the issuer will have any direct interest in the trust property, although
the issuer will have a security interest (which it will share with the
previous issuers and any new issuer) under the Funding deed of charge in
Funding's rights to its share of the trust property.
(7) The issuer will sell the notes to you and then lend the proceeds to
Funding under the intercompany loan.
(8) These accounts, reserve funds and swaps, and their function in the
transaction structure, are described later in this prospectus. They are
included in this diagram so that you can refer back to see where they fit
into the structure.
10
STRUCTURAL DIAGRAM OF THE SECURITIZATION PROGRAM
[GRAPHIC OMITTED]
11
DIAGRAM OF OWNERSHIP STRUCTURE
[GRAPHIC OMITTED]
This diagram illustrates the ownership structure of the principal parties
to the transaction. The purpose of this diagram is to draw your attention to two
facts:
o Firstly, the seller has no ownership interest in any of the entities
in the above diagram. As a result, the financial condition of the
seller should not directly affect the mortgages trustee, Funding,
the issuer or, ultimately, investors in the notes, although the
seller still has a connection with the transaction for other reasons
(such as acting as administrator of the mortgage loans and as basis
rate swap provider).
o Secondly, Funding has established previous issuers which have made
previous intercompany loans to Funding, and Funding may establish
from time to time new issuers which will make new intercompany loans
to Funding, as described under "SUMMARY OF THE NOTES - THE PREVIOUS
ISSUERS AND NEW ISSUERS ". Each previous issuer made a previous
intercompany loan from the proceeds of the previous notes that were
issued by that previous issuer, and any new issuer will make a new
intercompany loan from the proceeds of new notes that are issued by
that new issuer. The previous notes issued by the previous issuers
ultimately are, and any new notes issued by a new issuer ultimately
will be, secured by the same trust property (primarily consisting of
the mortgage portfolio) as the notes issued by us under this
prospectus. Payments by Funding to new issuers under any new
intercompany loans will rank equally in priority with payments made
by Funding to the
12
previous issuers under the previous intercompany loans and to us
under our intercompany loan. However, you should note that the
amount and timing of payments under an intercompany loan are
determined by the amount and timing of payments on the notes issued
by the relevant issuer and by the priorities for payment applicable
to those notes. The terms of the previous notes issued by the
previous issuers and of any new notes issued by a new issuer may
therefore result in those previous notes and the related previous
intercompany loans or those new notes and the related new
intercompany loan being repaid prior to the repayment of the notes
issued by us under this prospectus and our related intercompany loan
regardless of the ratings of such previous notes or new notes
relative to the notes.
The following is a description of the above diagram:
o Each of the mortgages trustee, Funding and GPCH Limited is a wholly-owned
subsidiary of Granite Finance Holdings Limited.
o We are a wholly-owned subsidiary of Funding.
o The entire issued share capital of Holdings is held on trust by a
professional trust company under the terms of a discretionary trust for
the benefit of one or more charities. The professional trust company is
not affiliated with the seller. Any profits received by Holdings, after
payment of the costs and expenses of Holdings, will be paid for the
benefit of the Down's Syndrome North East Association (U.K.) and for other
charitable purposes selected at the discretion of the professional trust
company. The payments on your notes will not be affected by this
arrangement.
13
SUMMARY OF THE NOTES
In addition to the series 1 class A1 notes, the series 1 class A2 notes,
the series 1 class B notes and the series 1 class C notes, the issuer will issue
series 2 class A notes, series 2 class B notes, series 2 class C notes, series 3
class A notes, series 3 class B notes and series 3 class C notes. The series 1
notes, series 2 notes and series 3 notes will each be secured by the issuer
security, comprising our interest in our intercompany loan and our interest in
the security granted by Funding, including Funding's beneficial interest in the
mortgage loans. The series 2 notes and series 3 notes have not been registered
with the United States Securities and Exchange Commission and are not being
offered by this prospectus. However, the term "NOTES" when used in this
prospectus includes all of the series 1 notes, series 2 notes and series 3
notes, certain features of which are summarized in this section.
Regardless of the subordination of the class B notes and the class C notes
to the class A notes, certain payments on the series 1 class B notes and the
series 1 class C notes may be paid before the series 2 class A notes or the
series 3 class A notes, as described in " - THE NOTES - PAYMENT PRIORITY AND
RANKING OF THE NOTES".
CLASS OF NOTES
SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2 SERIES 2
CLASS CLASS CLASS CLASS CLASS CLASS CLASS
A1 A2 B C A B C
------------- ------------- ------------- ------------ ------------ ------------ -----------
Principal $650,000,000 $1,150,000,000 $60,000,000 $88,000,000 (Euro)1,100,000,000 (Euro)41,000,000 (Euro)53,000,000
Amount:
Credit Subordination Subordination Subordination The Subordination Subordination The
enhancement: of the of the of the issuer of the of the issuer
class B class B class C reserve class B class C reserve
notes, notes, notes fund notes, notes fund
the class the and the the and the
C notes class C issuer class C issuer
and the notes reserve notes reserve
issuer and the fund and the fund
reserve issuer issuer
fund reserve reserve
fund fund
Interest Three-month Three-month Three-month Three-month Three-month Three-month Three-month
rate: USD LIBOR USD USD USD EURIBOR EURIBOR EURIBOR
+ margin LIBOR + LIBOR + LIBOR + + margin + margin + margin
margin margin margin
Margin 0.11% 0.18% 0.37% 1.25% 0.19% 0.37% 1.25%
until p.a. p.a. p.a p.a p.a p.a p.a
payment
date
falling in
January
2008:
Margin 0.22% 0.36% 0.74% 2.25% 0.38% 0.74% 2.25%
after p.a. p.a. p.a p.a p.a p.a p.a
payment
date
falling in
January
2008:
Interest Actual/360 Actual/360 Actual/360 Actual/360 Actual/360 Actual/360 Actual/360
accrual
method:
Payment For all of the notes, interest and principal will be payable quarterly in arrears on the payment dates falling in
dates: January, April, July and October of each year, beginning in January 2003.
First January January January January January January January
payment 2003 2003 2003 2003 2003 2003 2003
date
(payment
date
occurring
in):
Final January January January January January January January
maturity 2017 2043 2043 2043 2043 2043 2043
date:
Tax Debt for Debt for Debt for Debt for N/A N/A N/A
treatment: United United United United (these (these (these
States States States States notes notes notes
federal federal federal federal are not are not are not
income income income income being being being
tax tax tax tax offered offered offered
purposes, purposes, purposes, purposes, or sold or sold or sold
subject subject subject subject in the in the in the
to the to the to the to the United United United
considerations considerations considerations considerations States) States) States)
contained contained contained contained
in in in in
"Material "Material "Material "Material
United United United United
States States States States
tax tax tax tax
consequences" consequences" consequences" consequences"
ERISA Yes, Yes, Yes, Yes, N/A N/A N/A
eligible: subject subject subject subject (these (these (these
to the to the to the to the notes notes notes
considerations considerations considerations considerations are not are not are not
in "ERISA in in in being being being
considerations" "ERISA "ERISA "ERISA offered offered offered
considerations" considerations" considerations" or sold or sold or sold
in the in the in the
United United United
States) States) States)
Stock London London London London London London London
Exchange
Listing:
ISIN: US38741RAA23 US38741RAB06 US38741RAC88 US38741RAD61 XS0153568638 XS0153568984 XS0153569289
Common 015401761 015401800 015401826 015401834 015356863 015356898 015356928
Code:
CUSIP 38741RAA2 38741RAB0 38741RAC8 38741RAD6 N/A N/A N/A
Number:
Expected Aaa/AAA/AAA Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB
rating
(Moody's/
S&P/Fitch):
SERIES 3 SERIES 3 SERIES 3
CLASS CLASS CLASS
A B C
------------ ------------ ------------
Principal (pound)665,000,000 (pound)25,000,000 (pound)33,000,000
Amount:
Credit Subordination Subordination Subordination
enhancement: of the of the of the
class B class C issuer
notes, notes reserve
the and the fund
class C issuer
notes reserve
and the fund
issuer
reserve
fund
Interest Three-month Three-month Three-month
rate: sterling sterling sterling
LIBOR + LIBOR + LIBOR +
margin margin margin
Margin 0.19% 0.37% 1.25%
until p.a p.a. p.a
payment
date
falling in
January
2008:
Margin 0.38% 0.74% 2.25%
after p.a p.a p.a
payment
date
falling in
January
2008:
Interest Actual/365 Actual/365 Actual/365
accrual
method:
Payment
dates:
First January January January
payment 2003 2003 2003
date
(payment
date
occurring
in):
Final January January January
maturity 2043 2043 2043
date:
Tax N/A N/A N/A
treatment: (these (these (these
notes notes notes
are not are not are not
being being being
offered offered offered
or sold or sold or sold
in the in the in the
United United United
States) States) States)
ERISA N/A N/A N/A
eligible: (these (these (these
notes notes notes
are not are not are not
being being being
offered offered offered
or sold or sold or sold
in the in the in the
United United United
States) States) States)
Stock London London London
Exchange
Listing:
ISIN: XS0153569792 XS0153569875 XS0153569958
Common 015356979 015356987 015356995
Code:
CUSIP N/A N/A N/A
Number:
Expected Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB
rating
(Moody's/
S&P/Fitch):
THE ISSUER
Granite Mortgages 02-2 plc is a public limited company incorporated in
England and Wales. Its registered office is at Fifth Floor, 100 Wood Street,
London EC2V 7EX. Its telephone number is +44 020 7606 5451. References in this
document to "WE" or "US" mean the issuer and references to "YOU" mean potential
investors in the notes.
We are a newly created special purpose company and a wholly-owned
subsidiary of Funding. Our purpose is to issue the notes which represent our
asset-backed obligations and to lend an amount equal to the proceeds of the
notes to Funding. We will not engage in any activities that are unrelated to
these purposes.
14
FUNDING
Granite Finance Funding Limited is a private limited company incorporated
in Jersey, Channel Islands. Its registered office is at 22 Grenville Street, St.
Helier, Jersey JE4 8PX. Its telephone number is 01534-609892.
Funding has been registered under Schedule 21A to the Companies Act 1985
as having established a branch in England and Wales. Its branch address is 4th
Floor, 35 New Bridge Street, Blackfriars, London EC4V 6BW. Its telephone number
is 020 7332 6161.
Funding is a special purpose company. Funding currently owns a share of
the trust property that it acquired with the proceeds of the previous
intercompany loans from the previous issuers in connection with the issuance of
the previous notes. Funding will borrow money from us pursuant to the terms of
our intercompany loan agreement. Funding will use the money borrowed from us to
pay to the mortgages trustee Funding's initial contribution for the Funding
share of the additional trust property pursuant to the mortgages trust deed
which, upon receipt by the mortgages trustee, will be paid to the seller in
satisfaction of the initial purchase price for the assignment to the mortgages
trustee of the additional assigned mortgage portfolio. Funding and the seller
together are beneficially entitled to all of the trust property in accordance
with their respective shares in the trust.
THE MORTGAGES TRUSTEE
Granite Finance Trustees Limited is a private limited company incorporated
in Jersey, Channel Islands. Its registered office is at 22 Grenville Street, St.
Helier, Jersey JE4 8PX. Its telephone number is 01534-609891.
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 and
Funding under the terms of the mortgages trust deed.
THE SELLER, THE ADMINISTRATOR, THE CASH MANAGER, THE ISSUER CASH MANAGER AND THE
ACCOUNT BANK
The seller is a bank incorporated in England and Wales as a public limited
company. It is regulated by the Financial Services Authority. Its registered
office is at Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL. Its
telephone number is +44 191 285 7191.
The seller originated each of the additional assigned mortgage loans which
it will assign to the mortgages trustee on the closing date according to the
seller's lending criteria applicable at the time such mortgage loan was offered,
which lending criteria were the same as or substantially similar to the criteria
described later in this prospectus. Each mortgage loan in the existing mortgage
portfolio was also originated according to the seller's lending criteria
applicable at the time such mortgage loan was offered, which were the same as or
substantially similar to the criteria described later in this prospectus.
The seller acts as administrator of the mortgage portfolio under the terms
of the administration agreement, pursuant to which it has agreed to continue to
perform administrative functions in respect of the mortgage loans on behalf of
the mortgages trustee and the beneficiaries, including collecting payments under
the mortgage loans and taking steps to recover arrears. The seller may not
resign as administrator unless a successor administrator has been appointed. In
addition, the administrator may be replaced by a new administrator if it
defaults in its obligations under the administration agreement.
15
The seller has also been appointed as the cash manager for the mortgages
trustee and Funding to manage their bank accounts, determine the amounts of and
arrange payments to be made by them and keep certain records on their behalf.
The seller will also be appointed as the issuer cash manager to manage our
bank account, determine the amounts of and arrange payments to be made by us and
keep certain records on our behalf.
Citibank, N.A. will be appointed as account bank to provide banking
services to us.
Lloyds TSB Bank plc has also been appointed as account bank to provide
banking services to Funding. Lloyds TSB Bank plc Jersey International Branch has
been appointed as Jersey account bank to provide banking services to the
mortgages trustee. Lloyds TSB Bank plc Jersey International Branch is a branch
of Lloyds TSB Bank plc. Its activities currently include currency exchange, fund
management, private banking, investment advice and treasury operations. The
address of Lloyds TSB Bank plc Jersey International Branch is 4 Bond Street, St.
Helier, Jersey JE4 8ZE.
The seller has a continuing interest in the mortgage loans as one of the
beneficiaries of the mortgages trust.
THE NOTES
CLASSES OF NOTES
In this prospectus, we are offering one series of notes comprising four
classes:
$650,000,000 series 1 class A1 floating rate notes due January 2017
$1,150,000,000 series 1 class A2 floating rate notes due January 2043
$60,000,000 series 1 class B floating rate notes due January 2043
$88,000,000 series 1 class C floating rate notes due January 2043
In addition, we are issuing two separate series of notes each comprising
three classes, which are not being offered by this prospectus:
(euro)1,100,000,000 series 2 class A floating rate notes due January 2043
(euro)41,000,000 series 2 class B floating rate notes due January 2043
(euro)53,000,000 series 2 class C floating rate notes due January 2043
(pound)665,000,000 series 3 class A floating rate notes due January 2043
(pound)25,000,000 series 3 class B floating rate notes due January 2043
(pound)33,000,000 series 3 class C floating rate notes due January 2043
The series 1 class A1 notes and the series 1 class A2 notes are
collectively referred to as the series 1 class A notes. The series 1 class A
notes, the series 1 class B notes and the series 1 class C notes are
collectively referred to as the series 1 notes. The series 2 class A notes, the
series 2 class B notes and the series 2 class C notes are collectively referred
to as the series 2 notes. The series 3 class A notes, the series 3 class B notes
and the series 3 class C notes are collectively referred to as the series 3
notes. The series 1 class A notes, the series 2 class A notes and the series 3
class A notes are also collectively referred to as the class A notes and you
should construe references to the class B notes and class C notes in an
analogous manner.
The series 2 notes and the series 3 notes are not being offered to the
public in the United States by this prospectus. Instead, they will be offered to
institutional investors outside the United States in transactions exempt from
the registration requirements of the Securities Act.
The series 1 notes, the series 2 notes and the series 3 notes collectively
represent our asset-backed obligations.
16
RELATIONSHIP BETWEEN THE NOTES AND THE INTERCOMPANY LOAN
On the closing date we will make an intercompany loan to Funding from the
proceeds of the issue of the notes. For more information on the intercompany
loan, see "THE INTERCOMPANY LOAN". We will repay the notes from payments made to
us by Funding under the intercompany loan and, for notes denominated in US
dollars, from payments made to us by the dollar currency swap provider and, for
notes denominated in euro, from payments made by the euro currency swap
provider. If Funding does not have enough money to pay amounts due under the
intercompany loan to enable us to pay interest or repay principal amounts on the
notes, then in certain circumstances Funding may access funds standing to the
credit of the issuer reserve fund and/or the issuer liquidity reserve fund,
although Funding will only be required to establish the issuer liquidity reserve
fund in limited circumstances. For more information on the issuer reserve fund,
see "CREDIT STRUCTURE - ISSUER RESERVE FUND", and for more information on the
issuer liquidity reserve fund and the circumstances in which Funding will be
required to establish the issuer liquidity reserve fund, see "CREDIT STRUCTURE -
ISSUER LIQUIDITY RESERVE FUND". The ability of Funding to make payments on the
intercompany loan will depend on Funding receiving its share of collections on
the trust property, which will in turn depend principally on the collections the
mortgages trustee receives on the mortgage loans and their related security.
OPERATIVE DOCUMENTS CONCERNING THE NOTES
We will issue the notes under the trust deed. The notes also will be
subject to a paying agent and agent bank agreement. The security for the notes
will be created under the issuer deed of charge between us, the note trustee and
our other secured creditors. Operative legal provisions relating to the notes
will be 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.
PAYMENT PRIORITY AND RANKING OF NOTES
Payments of interest on the notes will be made from issuer available
revenue receipts available to the issuer following payment of amounts owing to
the security trustee, the note trustee, the agent bank and paying agents, the
transfer agent, the registrar, third party creditors of the issuer, the issuer
cash manager and the corporate services provider.
Among the series 1 notes, payments of interest will be made on the series
1 class A1 notes and the series 1 class A2 notes in no order of priority between
them but in proportion to the respective amounts due on the series 1 class A
notes, payments of interest on the series 1 class A notes will be made ahead of
payments of interest on the series 1 class B notes and the series 1 class C
notes, and payments of interest on the series 1 class B notes will be made ahead
of payments of interest on the series 1 class C notes.
As between the series 1 notes, the series 2 notes and the series 3 notes,
payments of interest will be made on the series 1 class A1 notes, the series 1
class A2 notes, the series 2 class A notes and the series 3 class A notes in no
order of priority between them but in proportion to the respective amounts due
on the class A notes (such payments to be made ahead of payments on the class B
notes), payments of interest will be made on the series 1 class B notes, the
series 2 class B notes and the series 3 class B notes in no order of priority
between them but in proportion to the respective amounts due on the class B
notes (such payments to be made ahead of payments on the class C notes), and
payments of interest will be made on the series 1 class C notes, the series 2
class C notes and the series 3 class C notes in no order of priority between
them but in proportion to the respective amounts due on the class C notes.
For more information on the priority of interest payments to you, see
"CASHFLOWS".
17
If not already paid in full in accordance with the paragraph below or
redeemed earlier, the principal amount outstanding of each class of notes will
be repaid by the issuer on the final maturity date for that class of notes.
On each payment date prior to the final maturity date, however, we will be
obliged to make payments of principal on the notes to the extent of issuer
available principal receipts subject to and in accordance with the relevant
issuer priority of payments applicable to us on that date.
Subject to there being no trigger event and no enforcement of the Funding
security and/or the issuer security, no class of notes will be repaid an amount
of principal which is greater than the controlled amortization amount in respect
of that class of notes for the relevant payment date and, subject also to the
satisfaction of certain conditions in relation to the payment of principal on
the class B notes and the class C notes at any time when class A notes are
outstanding as specified below, payments of principal will be made in accordance
with the following priority. Repayments of principal in respect of the series 1
class A1 notes will be made ahead of repayment of principal in respect of the
series 1 class A2 notes, the series 2 class A notes and the series 3 class A
notes. Repayment of principal in respect of the series 1 class A2 notes and the
series 2 class A notes will be made in no order of priority between them.
However, repayment of principal in respect of the series 1 class A2 notes and
the series 2 class A notes will be made ahead of repayment of principal in
respect of the series 3 class A notes. Repayment of principal in respect of the
class A notes will be made ahead of repayment of principal in respect of the
class B notes. Repayment of principal in respect of the series 1 class B notes,
the series 2 class B notes and the series 3 class B notes will be made in no
order of priority between them. However, repayment of principal in respect of
the class B notes will be made ahead of repayment of principal in respect of the
class C notes. Repayment of principal in respect of the series 1 class C notes,
the series 2 class C notes and the series 3 class C notes will be made in no
order of priority between them.
If any class A notes remain outstanding and any of the issuer arrears
test, the issuer reserve requirement or the subordinated principal test are not
satisfied on the relevant payment date, no amount of principal will be payable
in respect of the class B notes or the class C notes.
The controlled amortization amount payable in respect of each class of
notes is determined by a schedule that indicates the target balance for that
class of notes on the relevant payment date, as set forth under "CASHFLOWS -
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY AND/OR OCCURRENCE OF A TRIGGER EVENT". However, you should be
aware that not all classes of notes are scheduled to receive payments of
principal on each payment date. The controlled amortization amount payable on
some classes of notes will be zero, which means that, despite the principal
priority of payments described above, lower ranking classes of notes may
nevertheless be repaid principal before higher ranking classes of notes.
Payments of principal are expected to be made to each class of notes in
scheduled amounts up to the amounts set forth under "CASHFLOWS - DISTRIBUTION OF
ISSUER AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY
AND/OR OCCURRENCE OF A TRIGGER event".
Following the occurrence of a trigger event, the enforcement of the
Funding security and/or the enforcement of the issuer security, the above
priority of payments will change and we will make repayments of principal in
accordance with and subject to the relevant issuer priority of payments as
described in "CASHFLOWS".
The issuer reserve fund provides credit enhancement for the class C notes.
The issuer reserve fund and the class C notes provide credit enhancement for the
class B notes. The issuer reserve fund, the class C notes and the class B notes
provide credit enhancement for the class A notes. You should note, however, that
the series 2 notes as
18
a group do not provide credit enhancement for the series 1 notes and the series
3 notes as a group do not provide credit enhancement for the series 1 notes or
the series 2 notes.
For more information on the priority of principal repayments to you, see
"CASHFLOWS". For more information on the redemption of the notes, including a
description of asset trigger events and non-asset trigger events, see "THE
MORTGAGES TRUST - CASH MANAGEMENT OF TRUST PROPERTY - PRINCIPAL RECEIPTS" and
"CASHFLOWS".
You should note that Funding has established previous issuers, each of
which has made a previous intercompany loan to Funding, and that Funding may
establish from time to time new issuers which will make new intercompany loans
to Funding, as described under "- THE PREVIOUS ISSUERS AND NEW ISSUERS" and "THE
INTERCOMPANY LOAN AGREEMENT - OTHER INTERCOMPANY LOAN AGREEMENTS". Each previous
issuer made a previous intercompany loan from the proceeds of the previous notes
that were issued by that previous issuer, and any new issuer will make a new
intercompany loan from the proceeds of new notes that are issued by that new
issuer. The previous notes issued by the previous issuers ultimately are, and
any new notes issued by a new issuer ultimately will be, secured by the same
trust property (primarily consisting of the mortgage portfolio) as the notes
issued by us under this prospectus.
You should also note that payments by Funding to the previous issuers
under the previous intercompany loans and to new issuers under any new
intercompany loans will rank equally in priority with payments made by Funding
to us under our intercompany loan. In other words, interest and principal
payments under our intercompany loan will not have priority over interest and
principal payments on the previous intercompany loans or any new intercompany
loans that are made at later dates. Instead, Funding will initially allocate
interest and principal to make payments under each outstanding intercompany loan
in no order of priority between them but in proportion to each relevant issuer's
allocable interest in the Funding share of the trust property (or, if provided
under the relevant intercompany loan agreement, will set aside that allocable
interest in the Funding share of principal receipts for that issuer). However,
the amount and timing of payments under an intercompany loan are determined by
the amount and timing of payments on the notes issued by the relevant issuers
and by the priorities for payment applicable to those notes. The terms of the
previous notes issued by the previous issuers and of any new notes issued by a
new issuer may therefore result in those previous notes and the related previous
intercompany loans or those new notes and the related new intercompany loan
being repaid prior to the repayment of the notes issued by us under this
prospectus and our related intercompany loan regardless of the ratings of such
previous notes or new notes relative to the notes.
OPTIONAL REDEMPTION OF THE NOTES FOR TAX AND OTHER REASONS
We may redeem all of the notes at their principal amount outstanding in
the event of particular tax changes affecting the notes or the intercompany loan
which cannot be avoided by us or Funding, as the case may be, taking reasonable
measures available to us or Funding 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 the notes, 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 the notes on the relevant payment date.
In addition, we may redeem in principally the same manner all of the notes
outstanding:
o on the payment date falling in January 2008 and on any payment date
thereafter. This gives us the option to redeem the notes after the
January 2008 step-up date for interest; or
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o on any payment date on which the aggregate principal amount
outstanding of the notes is less than 10% of the aggregate principal
amount outstanding of the notes as at the closing date; or
o on any payment date after it has become unlawful for us to make,
fund or allow to remain outstanding the intercompany loan and we
have required Funding to prepay the intercompany loan.
Any notes that we redeem under these circumstances will be redeemed at
their principal amount outstanding together with accrued but unpaid interest on
that principal amount.
For a detailed description of the circumstances in which the notes may be
redeemed see "DESCRIPTION OF THE OFFERED NOTES".
WITHHOLDING TAX
Payments of interest and principal with respect to the 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 CLOSING DATE
We will issue the notes on or about September 23, 2002.
THE NOTE TRUSTEE
The Bank of New York is the note trustee. Its address is One Canada
Square, 48th Floor, London E14 5AL. The note trustee will act as trustee for you
under the trust deed.
THE PAYING AGENTS AND AGENT BANK
Citibank, N.A., London branch is the principal paying agent. Its address
is 5 Carmelite Street, London EC4Y 0PA. Citibank, N.A. is the US paying agent
and its address is 14th Floor Zone 3, 111 Wall Street, New York, New York 10043.
The paying agents will make payments on the notes to you.
Citibank, N.A. is the agent bank. Its address is 5 Carmelite Street,
London EC4Y 0PA. The agent bank will calculate the interest rate on the notes.
THE REGISTRAR AND TRANSFER AGENT
Citibank, N.A. is also the registrar and transfer agent. Its address is 5
Carmelite Street, London EC4Y 0PA. The registrar will maintain a register in
respect of the notes. The transfer agent is responsible for administering any
transfer of notes.
THE MORTGAGE LOANS
In describing the characteristics of the mortgage loans, references in
this prospectus to the "INITIAL MORTGAGE PORTFOLIO" mean the portfolio of
mortgage loans, their related security, accrued interest and other amounts
derived from such mortgage loans that the seller assigned to the mortgages
trustee on March 26, 2001. References in this prospectus to the "FURTHER
MORTGAGE PORTFOLIOS" mean the portfolios of further mortgage loans, their
related security, accrued interest and other amounts derived from such further
mortgage loans that the seller assigned to the mortgages trustee on September
28, 2001 and on March 20, 2002. References in this prospectus to the "EXISTING
MORTGAGE PORTFOLIO" mean the initial mortgage portfolio and the further mortgage
portfolios as it is constituted as of any date of determination prior to the
closing date, taking account of, among other things, amortization of mortgage
loans in that portfolio and the addition and/ or removal of any mortgage loans
to or from that portfolio since March 26, 2001. References in this prospectus to
the "ADDITIONAL MORTGAGE PORTFOLIO" mean the portfolio
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of additional mortgage loans that the seller anticipates assigning to the
mortgages trustee on the closing date. References in this prospectus to the
"ADDITIONAL ASSIGNED MORTGAGE PORTFOLIO" mean the portfolio of additional
assigned mortgage loans, their related security, accrued interest and other
amounts derived from such additional assigned mortgage loans that the seller
will assign to the mortgages trustee on the closing date. References in this
prospectus to the "CUT-OFF DATE MORTGAGE PORTFOLIO" mean, as of the cut-off
date, the existing mortgage portfolio combined with the additional mortgage
portfolio. References in this prospectus to the "MORTGAGE PORTFOLIO" mean the
combined existing mortgage portfolio and the additional assigned mortgage
portfolio following the assignment of additional assigned mortgage loans to the
mortgages trustee on the closing date as it is constituted as of any date of
determination following the closing date, 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 closing date.
The mortgage loans in the mortgage portfolio on the closing date will
comprise:
o mortgage loans which are subject to variable rates of interest set
by the seller or by reference to a specified market rate from time
to time; and
o mortgage loans which are subject to fixed rates of interest set by
reference to a predetermined rate or series of rates for a fixed
period or periods.
60,316 mortgage loans in the cut-off date mortgage portfolio (or 42.04% of
the aggregate current balance of the mortgage loans as of the cut-off date) are
flexible mortgage loans. Flexible mortgage loans that will be included in the
mortgage portfolio are subject to variable or fixed rates of interest, and
generally allow the borrower to make larger repayments than are due on a given
monthly payment date (which may reduce the life of the mortgage loan). These
flexible mortgage loans may also allow the borrower, in certain circumstances,
to make authorized underpayments or take payment holidays under the mortgage
loan (collectively referred to in this prospectus as "NON-CASH RE-DRAWS") and to
make cash re-draws of amounts previously overpaid (which together with non-cash
re-draws ultimately may reduce the amount of money available to make payments
under the notes and may extend the life of the related mortgage loan). Cash
re-draws and non-cash re-draws under flexible mortgage loans are collectively
referred to in this prospectus as "RE-DRAWS". Additional features of the
mortgage loans in the cut-off date mortgage portfolio are described in "THE
MORTGAGE LOANS - CHARACTERISTICS OF THE MORTGAGE LOANS".
In addition to the mortgage loans in the mortgage portfolio on the closing
date, after the closing date the trust property may also include new mortgage
loans, including redraws under flexible mortgage loans. The existing mortgage
portfolio already includes redraws under flexible mortgage loans. In all cases,
re-draws have been or will be funded solely by the seller. This means that for
any cash re-draw under a flexible mortgage loan, the seller has paid the amount
of that cash re-draw to the borrower, and both the size of the trust property
and the seller share of the trust property has increased by the amount of that
cash payment. It also means that for any non-cash re-draw under a flexible
mortgage loan, the seller has paid to the mortgages trustee an amount equal to
the unpaid interest associated with that non-cash re-draw, and both the size of
the trust property and the seller share of the trust property has increased by
the amount of that payment. The seller will make the foregoing payments (which
will result in a corresponding increase in the overall size and seller share of
the trust property described above) for future re-draws under flexible mortgage
loans.
The seller currently intends to repurchase from the mortgages trustee
mortgage loans that become subject to further advances (which represent new
mortgage loans made to existing borrowers that are secured by a first priority
legal charge on the existing borrower's mortgaged property). However, in the
future these mortgage loans may remain within (and the further advances may be
assigned to and form part of) the trust property.
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New mortgage loans that the seller assigns to the mortgages trustee will
be required to comply with specified criteria (see "ASSIGNMENT OF THE MORTGAGE
LOANS AND RELATED SECURITY - ASSIGNMENT OF NEW MORTGAGE LOANS AND THEIR RELATED
SECURITY"). These new mortgage loans may include mortgage loans that are
currently being offered to borrowers and have some of the characteristics
described in this prospectus, but may also include mortgage loans with other
characteristics that the seller currently is not offering to borrowers or that
the seller has not yet developed. Any new mortgage loans that the seller assigns
to the mortgages trustee will increase the total size of the trust property, and
will increase the Funding share of the trust property only to the extent that
Funding has provided a contribution (excluding any deferred contribution) to the
mortgages trustee for those new mortgage loans. To the extent that Funding does
not provide a contribution for the new mortgage loans, only the seller share of
the trust property will increase by a corresponding amount.
All of the mortgage loans in the mortgage portfolio at the closing date,
and any new mortgage loans added to the trust property in the future, will be
secured by first priority legal charges over freehold or leasehold mortgaged
properties located in England or Wales.
The existing mortgage loans and the additional mortgage loans have been
originated according to the seller's lending criteria applicable at the time
each mortgage loan was offered, which lending criteria in the case of each
mortgage loan to be included in the mortgage portfolio as of the closing 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". The seller has given 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 of the relevant mortgage loan. If a mortgage loan or its
related security does not materially comply with these warranties, then the
seller will have 28 days in which to remedy the situation. If the breach cannot
be or is not remedied to the satisfaction of Funding and the security trustee
within that period, then the seller will be required to repurchase the mortgage
loan or mortgage loans under the relevant mortgage account and their related
security from the mortgages trustee. If the seller does not repurchase those
mortgage loans and their related security, then the trust property will be
deemed to be reduced by an amount equal to the aggregate current balances of
those mortgage loans. The size of the seller share of the trust property will be
deemed to be reduced by that amount but the size of the Funding share of the
trust property will not alter, and the respective percentage shares of the
seller and Funding in the trust property will alter accordingly.
ASSIGNMENT OF THE MORTGAGE LOANS
The seller assigned the initial mortgage portfolio to the mortgages
trustee on March 26, 2001 and assigned the further mortgage portfolios to the
mortgages trustee on September 28, 2001 and on March 20, 2002, and on the
closing date, the seller will assign the additional assigned mortgage portfolio
to the mortgages trustee, in each case subject to the terms of the mortgage sale
agreement. After the closing date, the seller may assign new mortgage loans and
their related security to the mortgages trustee in order to increase or maintain
the size of the trust property. The seller also may increase the size of the
trust property from time to time in connection with an issue of new notes by any
new issuer, the proceeds of which are applied ultimately to fund the assignment
of the new mortgage loans and their related security to the mortgages trustee as
described under "ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY -
ASSIGNMENT OF NEW MORTGAGE LOANS AND THEIR RELATED SECURITY". Any new issuer
will be a wholly-owned subsidiary of Funding.
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The existing mortgage loans and their related security were, and the
additional assigned mortgage loans and their related security will be, assigned
by the seller to the mortgages trustee by way of an English law equitable
assignment. This means that the beneficial interest in the mortgage loans and
the related security passes 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 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 assignments is described under "ASSIGNMENT
OF THE MORTGAGE LOANS AND RELATED SECURITY - TRANSFER OF LEGAL TITLE TO THE
MORTGAGES TRUSTEE".
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 closing 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, those 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.
When new mortgage loans are assigned to the mortgages trustee, the amount
of the trust property will increase. Depending on the circumstances, the
increase in the trust property may result in an increase in the seller share of
the trust property and/or the Funding 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 of the trust property, see "THE MORTGAGES TRUST".
The mortgages trustee has re-assigned to the seller the benefit of any
early repayment charges which may become payable on any mortgage loans which are
assigned to the mortgages trustee. This means that neither of the beneficiaries
of the mortgages trust is entitled, as a beneficiary, to any early repayment
charges received by the mortgages trustee, which, upon receipt and
identification by the administrator, will be paid to the seller. For more
information on the mortgage sale agreement, see "ASSIGNMENT OF THE MORTGAGE
LOANS AND RELATED SECURITY".
THE MORTGAGES TRUST
The mortgages trust was established on March 26, 2001 among the mortgages
trustee, the seller, Funding and Law Debenture Corporate Services Limited. The
mortgages trustee holds the trust property on trust for both Funding and the
seller. Funding and the seller each has a joint and undivided beneficial
interest in the trust property. Unless otherwise expressly provided in the
mortgages trust deed, payments of interest and principal arising from the
mortgage loans in the trust property are allocated to Funding and the seller as
described later in this section. The only beneficiaries of the trust are Funding
and the seller.
The trust property currently consists of the existing mortgage portfolio.
On and after the closing date the trust property will consist of the existing
mortgage portfolio, the additional assigned mortgage portfolio and each new
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 and any early repayment charges which the mortgages trustee
has re-assigned to the seller). In addition, re-draws that have been made under
flexible mortgage loans that were assigned to the mortgages trustee also form
part of the existing trust property, and future re-draws that are made under
flexible
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mortgage loans that are assigned to the mortgages trustee will also form part of
the trust property. The trust property also includes any contribution paid by
either beneficiary to the mortgages trustee (until the relevant funds are
applied by the mortgages trustee in accordance with the mortgages trust deed)
and includes any money in the mortgages trustee transaction account and the
mortgages trustee guaranteed investment contract, or GIC, account. The mortgages
trustee GIC account is the bank account in which the mortgages trustee holds any
cash that is part of the trust property until it is distributed to the
beneficiaries.
The administrator has agreed to ensure that all payments due under the
mortgage loans which are included in the trust property will be made by direct
debit or, if that payment is late or borrowers choose not to pay by direct
debit, by check or other means into collection accounts in the name of the
administrator. Amounts standing to the credit of the collection accounts
representing receipts or recoveries in respect of the mortgage loans in the
mortgage portfolio are transferred by the administrator to the mortgages trustee
transaction account for further transfer to the mortgages trustee GIC account in
the manner and in the time limits described in "THE ADMINISTRATOR AND THE
ADMINISTRATION AGREEMENT - THE ADMINISTRATION AGREEMENT - COLLECTION OF
PAYMENTS". The administrator may, from time to time, change its administration
policy in respect of the mortgage loans.
If the administrator and the mortgages trustee are notified or are
otherwise aware that a borrower has requested a further advance or a product
switch and the mortgages trustee has received confirmation of the seller's
election to repurchase the mortgage loan and its related security from the
mortgages trustee, the mortgages trustee shall sell and the seller shall
repurchase that mortgage loan together with its related security at any time at
a price not less than the current balance as of the date of completion of the
repurchase together with all unpaid interest (including all accrued interest and
arrears of interest) and other sums. The administrator may not itself make any
offer of a further advance or a product switch (other than a re-fixed mortgage
loan) without first having received confirmation of the seller's election to
repurchase the mortgage loan. The administrator may, however, agree to a
borrower's request for a re-fixed mortgage loan if so required by the terms of
that mortgage loan notwithstanding the seller's election not to repurchase the
relevant mortgage loan. Any such application for a further advance or a product
switch 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 or switch to an alternative mortgage product.
Although the seller is entitled, but not obliged, to repurchase any
mortgage loans that are the subject of a further advance, this arrangement may
change if the seller decides at a later date to retain these mortgage loans
within the trust property and to assign these further advances to the mortgages
trustee. Any further advance made to an existing borrower (in respect of a
mortgage loan within the mortgages trust) that the seller at a later date
decides to assign to the mortgages trustee will be funded solely by the seller,
will comply with the applicable conditions to the assignment of new mortgage
loans and their related security to the mortgages trust as described in this
prospectus, will be secured by the same mortgaged property securing that
borrower's mortgage loan, will form part of the trust property, and will
increase only the seller share of the trust property, unless at the time of
assignment Funding provides a contribution (excluding any deferred contribution)
to the mortgages trustee in respect of that new trust property.
The seller is solely responsible for funding re-draws under flexible
mortgage loans. This means that for any cash re-draw under a flexible mortgage
loan, the seller will pay the amount of that cash re-draw to the borrower, and
both the size of the trust property and the seller share of the trust property
will increase by the amount of that cash payment. It also means that for any
non-cash re-draw under a flexible mortgage loan, the
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seller will pay to the mortgages trustee an amount equal to the unpaid interest
associated with that non-cash re-draw, and both the size of the trust property
and the seller share of the trust property will increase by the amount of that
payment.
The composition of the trust property fluctuates as re-draws under
flexible mortgage loans, 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 repurchased by the seller.
At the closing date:
o Funding's beneficial interest in the trust property is expected to
be approximately (pound)7,430,000,000, representing approximately
87.40% of the trust property; and
o the seller's beneficial interest in the trust property is expected
to be approximately (pound)1,070,000,000, representing approximately
12.60% of the trust property.
The actual amounts of the Funding share of the trust property and the
seller share of the trust property as of the closing date will not be determined
until the day before the closing date, which will be after the date of this
prospectus.
The Funding share of the trust property and the seller share of the trust
property, and the percentage of the total which each represents, will be
recalculated on each distribution date to take into account:
o principal payments on the mortgage loans distributed to Funding
and/or the seller either on that distribution date or, in the case
of any special distribution paid to the seller, in the immediately
preceding trust calculation period (in general, a principal payment
made to a party will reduce that party's share of the trust
property);
o losses arising on the mortgage loans;
o the assignment of any new mortgage loans and their related security
to the mortgages trustee during the immediately preceding trust
calculation period which increases the total size of the trust
property (and the Funding share and/or seller share of the trust
property will increase depending on whether Funding has provided a
contribution (excluding any deferred contribution) to the mortgages
trustee);
o Funding increasing its beneficial interest in, and the Funding share
of, the trust property by making further contributions to the
mortgages trustee during the immediately preceding trust calculation
period;
o a borrower making a re-draw under a flexible mortgage loan, which
will be funded by the seller and the seller share of the trust
property will increase accordingly;
o the capitalization of arrears in respect of any mortgage loan; and
o the seller making a further advance to an existing borrower and the
seller electing to repurchase that relevant mortgage loan in
accordance with the mortgage sale agreement. Although the seller
does not currently intend to assign further advances made in respect
of mortgage loans included in the trust property to the mortgages
trustee, it may do so in the future.
The Funding share of the trust property and the seller share of the trust
property, and the percentage of the total which each represents, also will be
recalculated (1) on the closing date to take account of the additional assigned
mortgage loans assigned to the mortgages trust on the closing date and (2) on
any other date on which a new mortgage portfolio is assigned by the seller to
the mortgages trust to take account of the new mortgage loans and their related
security assigned to the mortgages trust on that assignment date, as described
under "THE MORTGAGES TRUST - FUNDING SHARE OF TRUST PROPERTY (ASSIGNMENT DATE
RECALCULATION)".
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On each distribution date, income from the trust property (less certain
third party payments) is distributed to Funding and the seller in no order of
priority between them but in proportion to the respective amounts due to Funding
and the seller. This income generally is distributed:
o to the seller in an amount equal to the amount of income received on
the mortgage loans during the immediately preceding trust
calculation period and available for distribution multiplied by the
seller share percentage (as determined on the immediately preceding
distribution date or, in the case of the first distribution date
immediately following the closing date, as of the closing date);
o to Funding in an amount equal to the lesser of:
(x) the amount of income received on the mortgage loans during the
immediately preceding trust calculation period and available
for distribution multiplied by the Funding share percentage
(as determined on the immediately preceding distribution date
or, in the case of the first distribution date immediately
following the closing date, as of the closing date), and
(y) the aggregate of Funding's obligations on the immediately
succeeding payment date to certain third parties and to us, to
the previous issuers and to any new issuers that issue new
notes from time to time under the relevant Funding
pre-enforcement revenue priority of payments or the Funding
post-enforcement priority of payments, as the case may be
(excluding principal due under any intercompany loan and
certain other items of the relevant Funding priority of
payments) less any income generated by the Funding GIC
account, the Funding (Granite 02-2) GIC Account, the Funding
(Granite 02-1) GIC account, the Funding (Granite 01-2) GIC
account and the Funding (Granite 01-1) GIC account and certain
other income which will constitute Funding available revenue
receipts and/or issuer available revenue receipts on the
immediately succeeding payment date, such amount not to be
less than zero.
For a more detailed description of how the cash manager calculates the
distributions to be made on each distribution date, and for a description of how
the foregoing calculations may vary on a distribution date following a trust
calculation period during which the seller has assigned new mortgage loans to
the mortgages trustee, see "THE MORTGAGES TRUST - FLUCTUATION OF THE SELLER
SHARE/FUNDING SHARE OF THE TRUST PROPERTY".
Certain excess amounts of income to which Funding is entitled from time to
time on distribution dates will be paid by the mortgages trustee to the seller
as deferred purchase price for the purchase of the mortgage portfolio, which
payments will satisfy Funding's obligation to pay deferred contributions from
time to time to the mortgages trustee in respect of the Funding share of the
trust property. See "THE MORTGAGES TRUST - MORTGAGES TRUST ALLOCATION OF REVENUE
RECEIPTS" for a detailed description of the distribution of income from the
trust property on each distribution date.
Principal received on the mortgage loans is distributed to each of Funding
and the seller prior to the occurrence of a trigger event as described in "THE
MORTGAGES TRUST - MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF PRINCIPAL
RECEIPTS PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT". In general and subject to
the provisos referred to in that section dealing with, for example, reductions
for amounts recorded on each issuer's principal deficiency ledgers and other
matters, prior to the occurrence of a trigger event and/or enforcement of the
Funding security and/or enforcement of the issuer security, the mortgages
trustee distributes principal:
o first, to the seller to the extent of any special distribution then
payable to the seller;
o then, to Funding an amount in respect of each issuer equal to the
lesser of:
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o the controlled amortization amount due on the immediately succeeding
payment date on that issuer's intercompany loan; and
o the product of (i) the amount of principal receipts received on the
mortgage loans during the immediately preceding trust calculation
period and available for distribution, (ii) the Funding share
percentage (as determined on the immediately preceding distribution
date or, in the case of the first distribution date immediately
following the closing date, as of the closing date) or, in certain
circumstances, the weighted average Funding share percentage as
calculated on the relevant distribution date, and (iii) a percentage
equal to the outstanding principal balance on that issuer's
intercompany loan divided by the aggregate outstanding principal
balance on all outstanding intercompany loans; and
o then, to Funding an amount in respect of each issuer towards any
principal amount remaining due on the immediately succeeding payment
date under any such issuer's intercompany loan; and
o last, all remaining principal receipts to the seller.
See "THE MORTGAGES TRUST - MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF
PRINCIPAL RECEIPTS PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT" for a detailed
description of the distribution of principal received on the mortgage loans on
each distribution date prior to a trigger event.
Funding is entitled to receive distributions of principal after the
occurrence of certain trigger events in the following amounts:
o following the occurrence of an asset trigger event, principal
receipts on the mortgage loans will be paid to Funding in proportion
to its percentage share of the trust property and to the seller in
proportion to its percentage share of the trust property; and
o following the occurrence of a non-asset trigger event and until the
occurrence of an asset trigger event, all principal receipts on the
mortgage loans will be distributed to Funding until the Funding
share of the trust property is zero.
See "THE MORTGAGES TRUST - MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF
PRINCIPAL RECEIPTS AFTER THE OCCURRENCE OF A TRIGGER EVENT" for a detailed
description of the distribution of principal received on the mortgage loans on
each distribution date following a trigger event.
Adjustments are made in calculating and making the distributions made on
each distribution date in the following manner:
o any increase in the Funding share of the trust property as a result
of Funding paying a contribution to the mortgages trustee is deemed
to have taken effect on the date of payment to the mortgages
trustee; and
o any decrease in the seller share of the trust property as a result
of the payment of any special distribution is deemed to have taken
effect on the date of payment to the seller.
Losses on the mortgage loans generally are allocated to each of Funding
and the seller in accordance with each of Funding's and the seller's respective
percentage share of the trust property calculated on the immediately preceding
distribution date (or, in certain circumstances, each of Funding's 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. For a detailed description of how losses on the
mortgage loans are allocated to the intercompany loan of each issuer, see "THE
INTERCOMPANY LOAN AGREEMENT - ALLOCATION OF LOSSES".
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THE INTERCOMPANY LOAN
On the closing date, we will lend an amount in sterling equal to the
proceeds of the issue of the notes to Funding. Funding will use the proceeds of
the intercompany loan to pay to the mortgages trustee Funding's initial
contribution for the Funding share of the additional trust property pursuant to
the mortgages trust deed which, upon receipt by the mortgages trustee, will be
paid to the seller in satisfaction of the initial purchase price for the
assignment to the mortgages trustee of the additional assigned mortgage
portfolio pursuant to the mortgage sale agreement.
Funding will repay the intercompany loan from payments received from the
mortgages trustee, as described in "- THE MORTGAGES TRUST". We will make
payments of interest and principal on the notes principally from payments of
interest and principal made by Funding to us under the intercompany loan. We do
not intend to accumulate surplus cash. Under the terms of the intercompany loan
agreement and prior to the occurrence of a trigger event and enforcement of the
Funding security and/or the issuer security, Funding is required to distribute
to us:
o an amount up to our allocable share of all of the revenue receipts
and other income from the trust property that Funding received from
the mortgages trustee prior to the relevant payment date (our
allocable share being equal to the outstanding principal balance of
our intercompany loan divided by the aggregate outstanding principal
balance of our intercompany loan, the previous intercompany loans
and any new intercompany loans, after subtracting certain fees and
expenses payable by Funding in priority to us); and
o an amount equal to the principal amount due on our intercompany loan
or an amount up to our allocable share (as described in the previous
bullet point) of all of the principal receipts from the trust
property that Funding received from the mortgages trustee prior to
the relevant payment date.
In certain circumstances, our allocable share may be increased by the
amount standing to the credit of the issuer reserve fund and/or the issuer
liquidity reserve fund, if any, held by Funding in respect of our intercompany
loan. In other circumstances (for example, to the extent of amounts recorded on
our issuer principal deficiency ledger) we may receive less than our allocable
share.
For a detailed description of Funding's payments of interest and principal
under the intercompany loan, see "THE INTERCOMPANY LOAN AGREEMENT - PAYMENT OF
INTEREST" and "THE INTERCOMPANY LOAN AGREEMENT - REPAYMENT OF THE INTERCOMPANY
LOAN".
The circumstances under which we can take action against Funding if it
does not make a payment under the intercompany loan are limited. In particular,
it will not be an event of default in respect of the intercompany loan if
Funding does not pay some or all amounts due in respect of the intercompany loan
where Funding does not have the money to make the relevant payment. However, the
occurrence of an event of default under the previous intercompany loans and/or
any new intercompany loan may trigger an acceleration of the intercompany loan
between Funding and us, because each previous issuer and any new issuer will
share in the same security as us under the Funding deed of charge. For more
information on events of default under the intercompany loan generally, see "THE
INTERCOMPANY LOAN AGREEMENT".
THE SECURITY TRUSTEE
The Bank of New York is the security trustee. Its address is One Canada
Square, 48th Floor, London E14 5AL.
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SECURITY GRANTED BY FUNDING AND THE ISSUER
To secure its obligations to the previous issuers under the previous
intercompany loans and to secure its obligations to its other secured creditors,
Funding entered into a Funding deed of charge (with respect to the first issuer)
on March 26, 2001 and entered into deeds of accession to the Funding deed of
charge on September 28, 2001 (with respect to the second issuer) and on March
20, 2002 (with respect to the third issuer). On the closing date, Funding will
enter into a deed of accession with us and the other parties that entered into
the original deed of charge on March 26, 2001 to secure its obligations to us
under the intercompany loan and to the start-up loan provider under the start-up
loan agreement. Together, we refer to the deed of charge and the deeds of
accession as the Funding deed of charge. Pursuant to the Funding deed of charge,
Funding grants security under English law and (in relation to any property
situated in Jersey) Jersey law over all of its assets in favor of the security
trustee for itself and on behalf of the Funding secured creditors. Funding will
also grant a security interest for our benefit (but not for the benefit of any
other Funding secured creditor) in respect of the Funding (Granite 02-2) GIC
account. Besides the previous issuers (in relation to the issuance of the
previous notes) and ourselves, Funding's secured creditors are the account bank,
the Funding GIC provider, the mortgages trustee, the corporate services
provider, the security trustee, each start-up loan provider, Northern Rock, in
its capacity as cash manager, and any new Funding secured creditor who accedes
to the Funding deed of charge from time to time (including any new issuer).
Save as otherwise provided in relation to any Funding (Issuer) GIC
account, the security trustee will hold that security for the benefit of
Funding's secured creditors, including us, the previous issuers and, after the
closing date, any new issuers or other creditors who accede to the Funding deed
of charge. This means that Funding's obligations to us under the intercompany
loan and to the other secured creditors will be secured over the same assets.
Except in very limited circumstances, only the security trustee will be entitled
to enforce the security granted by Funding. For more information on the security
granted by Funding, see "SECURITY FOR FUNDING'S OBLIGATIONS". For details of the
Funding post-enforcement priority of payments, see "CASHFLOWS".
To secure our obligations to you and to our other secured creditors, we
will grant security under English law and (in relation to any property situated
in Jersey) Jersey law over all of our assets in favor of the note trustee. Our
secured creditors are the note trustee, the issuer cash manager, the issuer
account bank, the paying agents, the agent bank, the transfer agent, the
registrar, the dollar currency swap provider, the euro currency swap provider,
the basis rate swap provider, the corporate services provider and you.
The note trustee will hold that security for the benefit of our secured
creditors. This means that our obligations to our other secured creditors will
be secured over the same assets that secure our obligations under the notes.
Except in very limited circumstances, only the note trustee will be entitled to
enforce the security granted by us, and as the note trustee will not be entitled
to assign to a third party its or our rights under the intercompany loan
agreement following the service of a note enforcement notice, the most likely
consequence of the issuer security becoming enforceable will be that monies
received by the note trustee from Funding will be applied by the note trustee
(or the issuer cash manager on its behalf) to make payments on the notes in
accordance with the issuer post-enforcement priority of payments. For more
information on the security granted by us, see "SECURITY FOR THE ISSUER'S
OBLIGATIONS". For details of post-enforcement priority of payments, see
"CASHFLOWS".
SWAP PROVIDERS
The basis rate swap provider is Northern Rock plc. Its registered office
is at Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL England. The
dollar currency swap provider and the euro currency swap provider is CDC IXIS
Capital Markets.
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The basis rate swap provider will enter into a basis rate swap agreement
with us and the note trustee. The dollar currency swap provider will enter into
the dollar currency swap agreements with us and the note trustee. The euro
currency swap provider will enter into the euro currency swap agreements with us
and the note trustee.
SWAP AGREEMENTS
Borrowers make payments under the mortgage loans in pounds sterling. 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 intercompany loan
will not necessarily match the floating and/or fixed rates on the notes. To deal
with this potential mismatch, we will enter into a basis rate swap documented
under the basis rate swap agreement. Under the basis rate swap, we will make
payments to the basis rate swap provider based on the weighted average of each
of the variable rates from several UK mortgage lenders, the different rates of
interest payable on the fixed rate mortgage loans and the different rates of
interest payable on the seller's flexible mortgage loans, and the basis rate
swap provider will make payments to us based on a margin over 3-month sterling
LIBOR.
Payments made by the mortgages trustee to Funding under the mortgages
trust deed are, and payments made by Funding to us under the intercompany loan
and by the basis rate swap provider to us under the basis rate swap will be,
made in pounds sterling. So that you can receive payments on the series 1 notes
in US dollars, we will enter into the dollar currency swap agreements with the
dollar currency swap provider and the note trustee. Under the dollar currency
swaps, we will pay to the dollar currency swap provider a portion of sterling
amounts received on the intercompany loan and the basis rate swap in the same
priority as payments on the related class of notes, and the dollar currency swap
provider will pay to us amounts in US dollars that are in proportion to the
amounts paid by us to fund the payment of the relevant classes of series 1
notes.
Similarly, to enable us to make payments on the series 2 notes in euro, we
will enter into the euro currency swap agreements with the euro currency swap
provider and the note trustee. Under the euro currency swaps, we will pay to the
euro currency swap provider a portion of sterling amounts received on the
intercompany loan and the basis rate swap in the same priority as payments on
the related class of notes, and the euro currency swap provider will pay to us
amounts in euro that are in proportion to the amounts paid by us to fund the
payment of the relevant classes of series 2 notes.
POST-ENFORCEMENT CALL OPTION
The post-enforcement call option agreement will be entered into between
us, the note trustee (as agent for the noteholders) and by a subsidiary of
Holdings called GPCH Limited. The terms of the option will require, upon
exercise of the option granted to GPCH Limited by the note trustee, the transfer
to GPCH Limited of all (but not some only) of the notes. The option may be
exercised upon the earlier of (1) within 20 days following the final maturity
date of the latest maturing notes, the note trustee certifying that there is no
further amount outstanding under the related intercompany loan, and (2) the
enforcement by the note trustee of the security granted by us under the issuer
deed of charge as certified by the note trustee (following the note trustee's
determination that there are no further assets available to pay amounts due and
owing to the noteholders). If the earlier of the foregoing two events is the
enforcement of the security under the issuer deed of charge, the option may only
be exercised if the note trustee has determined that there is not enough money
to pay all amounts due to the noteholders and has distributed to the noteholders
their respective shares of the remaining proceeds. The noteholders will be bound
by the terms of the notes to transfer the notes to GPCH Limited in these
circumstances. The noteholders will not be paid for that transfer.
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As the post-enforcement call option may only be exercised in the two
situations described above, the economic position of the noteholders will not be
further disadvantaged. In addition, exercise of the post-enforcement call option
and delivery by the noteholders of the notes to GPCH Limited will not extinguish
any other rights or claims that these noteholders may have against us other than
the rights to payment of interest and repayment of principal under the notes.
RATING OF THE SERIES 1 NOTES
The series 1 class A notes are expected to be assigned an AAA rating by
Standard & Poor's Rating Services, a division of The McGraw-Hill Companies,
Inc., an Aaa rating by Moody's Investors Service Limited and an AAA rating by
Fitch Ratings. The series 1 class B notes are expected to be assigned an AA
rating by Standard & Poor's, an Aa3 rating by Moody's and an AA rating by Fitch.
The series 1 class C notes are expected to be assigned a BBB rating by Standard
& Poor's, a Baa2 rating by Moody's and a BBB rating by Fitch.
The ratings assigned to each class of notes address the likelihood of full
and timely payment to you of all payments of interest on each payment date under
those classes of notes. The ratings also address the likelihood of ultimate
payment of principal on the final maturity date of each class of notes. The
ratings do not address the likely actual rate of prepayments on the mortgage
loans. The rate of prepayments, if different than originally anticipated, could
adversely affect the yield realized on your notes.
A credit rating is not a recommendation to buy, sell or hold securities
and may be subject to revision, suspension or withdrawal at any time by the
assigning rating organization if, in its judgement, circumstances in the future
so warrant.
Standard & Poor's, Moody's and Fitch collectively are referred to in this
document as the "RATING AGENCIES", which term includes any further or
replacement rating agency of similar standing in the international market
appointed by us to give a credit rating to the notes or any class of the notes.
LISTING
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the Financial
Services and Markets Act 2000 for the notes to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for each class of the notes to be admitted to trading
by the London Stock Exchange plc.
THE PREVIOUS ISSUERS AND NEW ISSUERS
On March 26, 2001, the first issuer, which is a wholly-owned subsidiary of
Funding, issued series of notes and from those issue proceeds made an
intercompany loan to Funding. The second issuer and the third issuer, each of
which is also a wholly-owned subsidiary of Funding, issued separate series of
notes and from those issue proceeds each made a separate intercompany loan to
Funding on September 28, 2001 and March 20, 2002, respectively. Funding's
obligations under those previous intercompany loans are secured by the same
security that secures our intercompany loan. In addition, it is expected that in
the future, subject to satisfaction of certain conditions, Funding will
establish additional wholly-owned subsidiary companies to issue new notes to
investors. One of these conditions is that the ratings of your notes will not be
downgraded or otherwise adversely affected at the time a new issuer issues new
notes. Any new issuers will loan the proceeds of any issue of new notes to
Funding pursuant to the terms of a new intercompany loan agreement. Funding will
use the proceeds of the new intercompany loan (less any amount utilized to fund
any issuer reserve fund for any new issuer) to do one or more of the following:
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o pay to the mortgages trustee Funding's initial contribution for the
Funding share in respect of any new mortgage loans to be assigned by
the seller to the mortgages trustee (which funds the mortgages
trustee will pay to the seller in satisfaction of the initial
purchase price payable for the assignment of the new mortgage loans
and their related security to the mortgages trustee) and that
payment by Funding to the mortgages trustee will result in an
increase in the Funding share of the trust property;
o pay to the mortgages trustee a further contribution to increase the
Funding share of the trust property; or
o refinance an existing intercompany loan or intercompany loans, which
will not result in a change in the size of the Funding share of the
trust property. In this circumstance (subject to the terms of the
relevant notes permitting optional redemption), Funding will use the
proceeds of the new intercompany loan to repay an existing
intercompany loan, which the relevant issuer will use to repay the
relevant noteholders. If our intercompany loan to Funding is
refinanced, you could be repaid early.
Regardless of which of these uses of proceeds is selected, the previous
notes issued by the previous issuers and any new notes issued by a new issuer
ultimately will be secured by the same trust property (primarily consisting of
the mortgage portfolio) as the notes issued by us under this prospectus.
Funding will apply amounts it receives from the trust property to pay
amounts it owes under the intercompany loan, the previous intercompany loans and
any new intercompany loan without regard to when the Funding share of the trust
property increased or when the relevant intercompany loan was made. You should
note that payments by Funding to the previous issuers under the previous
intercompany loans and to new issuers under any new intercompany loans will rank
equally in priority with payments made by Funding to us under our intercompany
loan. In other words, interest and principal payments under our intercompany
loan will not have priority over interest and principal payments on the previous
intercompany loans or any new intercompany loans that are made at later dates.
Instead, Funding will initially allocate principal to repay each outstanding
intercompany loan in no order of priority between them but in proportion to each
relevant issuer's allocable interest in the Funding share of the trust property
(or, if provided under the relevant intercompany loan agreement, will set aside
that allocable interest in the Funding share of principal receipts for that
issuer). However, the amount and timing of payments on an intercompany loan are
determined by the amount and timing of payments on the notes issued by the
relevant issuer and by the priorities for payment applicable to those notes. The
terms of the previous notes issued by the previous issuers and of any new notes
issued by a new issuer may therefore result in those previous notes and the
related previous intercompany loans or those new notes and the related new
intercompany loan being repaid prior to the repayment of the notes issued by us
under this prospectus and our related intercompany loan regardless of the
ratings of such previous notes or new notes relative to the notes.
Ultimately, our obligations to pay interest and principal to you broadly
reflect the corresponding obligations of Funding to us under the intercompany
loan.
UNITED KINGDOM TAX STATUS
Subject to important qualifications and conditions set out under "MATERIAL
UNITED KINGDOM TAX CONSEQUENCES", including as to final documentation and
assumptions, Sidley Austin Brown & Wood, our UK tax advisers, are of the opinion
that:
o if and for so long as the offered notes are listed on a "RECOGNISED
STOCK EXCHANGE", no UK withholding tax will be required on interest
payments to any offered noteholder. If the notes cease to be so
listed at the time of the relevant interest
32
payment, UK withholding tax at the current rate of 20% will be
imposed on interest payments. US residents may be able to reclaim
this withholding tax under the double taxation treaty between the US
and the UK;
o US persons who are not and have never been either resident or
ordinarily resident in the UK and who are not carrying on a trade,
profession or vocation in the UK through a branch or agency in the
UK will not be subject to UK taxation in respect of payments of
principal and interest on the offered notes, except to the extent
that any withholding or deduction from interest payments is
required, as described in the paragraph above;
o US resident noteholders will not be liable to UK tax in respect of a
disposal of the notes provided they are not within the charge to UK
corporation tax and (i) are not resident or ordinarily resident in
the UK, or (ii) do not carry on a trade, profession or vocation in
the UK through a branch or agency in connection with which interest
is received or to which the notes are attributable;
o no UK stamp duty or stamp duty reserve tax is payable on the issue
or transfer of any offered note;
o Funding and the issuer generally will be subject to UK corporation
tax, currently at a rate of 30%, on the profit reflected in their
respective profit and loss accounts as increased by the amounts of
any non-deductible expenses or losses. Examples of non-deductible
expenses and losses include general provisions for bad debts. In
respect of Funding, the profit in the profit and loss account will
not exceed 0.01% of the Funding available revenue receipts. In
respect of the issuer, the profit in the profit and loss account
will not exceed 0.01% of the interest received under the
intercompany loan. Any liability to UK corporation tax will be paid
out of the available revenue receipts of Funding and the issuer,
respectively; and
o the mortgages trustee will have no liability to UK tax in respect of
any income, profit or gain arising under these arrangements.
Accordingly, the mortgages trustee will have no liability to UK tax
in relation to amounts which it receives on behalf of Funding or the
seller under the mortgages trust.
UNITED STATES TAX STATUS
While not free from doubt, in the opinion of Sidley Austin Brown & Wood
LLP, our US tax advisers, the series 1 notes will be treated as debt for US
federal income tax purposes. See "MATERIAL UNITED STATES TAX CONSEQUENCES".
Our US tax advisers have also provided their opinion that, assuming
compliance with the transaction documents, the mortgages trustee acting in its
capacity as trustee of the mortgages trust, Funding and the issuer will not be
subject to US federal income tax.
JERSEY (CHANNEL ISLANDS) TAX STATUS
It is the opinion of Jersey (Channel Islands) tax counsel that the
mortgages trustee is resident in Jersey for taxation purposes and will be liable
to income tax in Jersey at a rate of 20% in respect of the profits it makes from
acting as trustee of the mortgages trust. The mortgages trustee will not be
liable for any income tax in Jersey in respect of any income it receives in its
capacity as mortgages trustee on behalf of the beneficiaries of the mortgages
trust.
Subject to paying an annual exempt company charge and certain other
considerations, Funding will have "EXEMPT COMPANY" status within the meaning of
Article 123A of the Income Tax (Jersey) Law, 1961. As an "exempt company",
Funding will not be liable to Jersey income tax other than on Jersey source
income (except bank deposit interest on Jersey bank accounts). The income of
Funding will not be Jersey source income insofar as the income of Funding arises
only from the trust property and that property is either situated outside Jersey
or is interest on bank or building society deposits in Jersey. It is the opinion
of Jersey (Channel Islands) tax counsel that for so long as
33
Funding is an "exempt company", payments in respect of the intercompany loan
will not be subject to Jersey taxation and no withholding in respect of taxation
will be required on such payments to the issuer under the intercompany loan. See
"MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSEQUENCES".
ERISA CONSIDERATIONS FOR INVESTORS
The series 1 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.
FEES
The table below sets out the on-going fees to be paid by the issuer,
Funding and the mortgages trustee to transaction parties.
TYPE OF FEE AMOUNT OF FEE PRIORITY IN CASHFLOW FREQUENCY
- ----------------------------- ------------------------ ------------------------ -------------------------
Administration fee 0.12% per year of the Ahead of all revenue Each distribution date
Funding share of trust amounts payable to
property Funding by the mortgages
trustee
Funding cash management (pound)100,000 each year Ahead of all revenue Each payment date
fee amounts payable by
Funding and allocable to
an issuer
Previous issuers' cash Estimated (pound)454,500 Ahead of all interest Each payment date
management fees, corporate payments on the notes
expenses and fees payable to
the note trustee and each
previous issuer's principal
paying agent, paying agent,
transfer agent, registrar and
agent bank
Issuer cash management fee (pound) 117,500 each year Ahead of all interest Each payment date
payments on the notes
Corporate expenses of Estimated (pound)13,000 Ahead of all revenue Each payment date
mortgages trustee each year amounts payable to
Funding by the mortgages
trustee
Corporate expenses of Estimated (pound)10,500 Ahead of all revenue Each payment date
Funding eachyear amounts payable by
Funding and allocable to
an issuer
Corporate expenses of issuer Estimated (pound)6,000 Ahead of all interest Each payment date
each year payments on the notes
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TYPE OF FEE AMOUNT OF FEE PRIORITY IN CASHFLOW FREQUENCY
- ------------------------------- ---------------------- ------------------------- ------------------------
Fee payable by Funding to Estimated (pound)6,500 In respect of the security Each payment date
security trustee, by issuer to each year trustee, ahead of all
the note trustee and by issuer revenue amounts payable
to the principal paying agent, by Funding and allocable to
paying agent, transfer agent, an issuer, and in respect of
registrar and agent bank the note trustee and the
agents, ahead of all
interest payments on the
notes
Each of the above fees is inclusive of value added tax ("VAT"), which is
currently assessed at 17.5%. The VAT-exclusive amount of the fees will be
subject to adjustment if the applicable rate of VAT changes so that the actual
amount of each fee (inclusive of VAT and regardless of the VAT rate assessed)
will be the amount as set out above.
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RISK FACTORS
This section describes the principal risk factors associated with an
investment in the notes. If you are considering purchasing our notes, you should
carefully read and think about all the information contained in this document,
including the risk factors set out here, prior to making any investment
decision.
The risks and uncertainties described below are not the only ones relating
to the notes. Additional risks and uncertainties not presently known to us may
also impair your investment. In addition, this prospectus contains
forward-looking statements that involve risks and uncertainties. Actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks described below
and elsewhere in this prospectus.
YOU CANNOT RELY ON ANY PERSON OTHER THAN US TO MAKE PAYMENTS ON THE NOTES
We are the only party responsible for making payments on the notes. The
notes do not represent an obligation or the responsibility of any of Northern
Rock plc or any of its affiliates, the underwriters, Funding, the previous
issuers, the mortgages trustee, the security trustee, the note trustee, any swap
provider 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 principal and interest on the notes and to
pay our operating and administrative expenses will depend primarily on funds
being received under the intercompany loan. In addition, we will rely on the
basis rate swap to provide payments on all the notes and will rely on the dollar
currency swaps and the euro currency swaps to provide payments on the notes
denominated in US dollars and in euro, respectively.
We will not have any other significant sources of funds available to meet
our obligations under the notes and/or any other payments ranking in priority to
the notes. If the resources described above cannot provide us with sufficient
funds to enable us to make required payments on the notes, you may incur a loss
of interest and/or principal which would otherwise be due and payable on your
notes.
FUNDING IS NOT REQUIRED TO MAKE PAYMENTS ON THE INTERCOMPANY LOAN IF IT DOES NOT
HAVE ENOUGH MONEY TO DO SO, WHICH COULD ADVERSELY AFFECT PAYMENT ON THE NOTES
Funding's ability to pay amounts due on the intercompany loan will depend
upon:
o Funding receiving enough funds from the Funding share of the trust
property, including revenue receipts and principal receipts on the
mortgage loans included in the mortgages trust on or before each
payment date;
o on any payment date, Funding's entitlement to access funds standing to
the credit of the issuer reserve fund and/or the issuer liquidity
reserve fund, if any, subject to certain limitations (as described in
"CREDIT STRUCTURE - ISSUER RESERVE FUND" and "CREDIT STRUCTURE -
ISSUER LIQUIDITY RESERVE FUND"); and
o (in the case of interest due under the intercompany loan) the amount
of funds credited to the Funding reserve fund (as described in "CREDIT
STRUCTURE - FUNDING RESERVE FUND").
According to the terms of the mortgages trust deed, the mortgages trustee
is obliged to pay to Funding on each distribution date (a) that portion of
revenue receipts on the mortgage loans which is payable to Funding 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 in accordance with
the terms of the mortgages trust deed.
On each payment date, however, Funding will only be obliged to pay amounts
due to us under the intercompany loan to the extent that it has funds available
to it after making payments ranking in priority to us, such as payments of
certain fees and expenses of
36
Funding. Furthermore, Funding is obliged to make payments to the previous
issuers under the previous intercompany loans and, if Funding subsequently
enters into a new intercompany loan with a new issuer, Funding will also be
obliged to make payments due to such new issuer under such new intercompany
loan. These payments will rank equally with payments to us, all in accordance
with the relevant Funding priority of payments. If Funding does not pay amounts
to us under the intercompany loan 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 priority of
payments. Funding's failure to pay those amounts to us when due in such
circumstances will not constitute an event of default under the intercompany
loan.
If there is a shortfall between the amounts payable by Funding to us under
the intercompany loan agreement and the amounts payable by us on the notes, then
depending on the other sources of funds available to Funding referred to above,
you may not receive the full amount of interest and/or principal which would
otherwise be due and payable on the notes.
OUR RECOURSE TO FUNDING UNDER THE INTERCOMPANY LOAN IS LIMITED, WHICH COULD
ADVERSELY AFFECT PAYMENT ON THE NOTES
If, on the final repayment date of the intercompany loan, there is a
shortfall between the amount required by us to pay all outstanding interest
and/or principal on the notes and the amount available to Funding to pay amounts
due under the intercompany loan to fund repayment of such amounts, then Funding
shall not be obliged to pay that shortfall to us under the intercompany loan
agreement. Any claim that we may have against Funding in respect of that
shortfall will then be extinguished. If there is a shortfall in interest and/or
principal payments under the intercompany loan agreement, we may not have
sufficient funds to make payments on the notes and you may incur a loss on
interest and/or principal which would otherwise be due and payable on your
notes.
ENFORCEMENT OF THE ISSUER SECURITY IS THE ONLY REMEDY FOR A DEFAULT IN OUR
OBLIGATIONS, AND THE NOTE TRUSTEE WILL NOT BE ABLE TO ASSIGN ITS OR OUR RIGHTS
UNDER THE INTERCOMPANY LOAN AGREEMENT
The only remedy for recovering amounts due on the notes is through the
enforcement of the issuer security. If Funding does not pay amounts due under
the intercompany loan because it does not have sufficient funds available, those
amounts will be deemed to be not due and payable, there will not be an event of
default under the intercompany loan and we will not have recourse to the assets
of Funding in that instance. We will only have recourse to the assets of Funding
if Funding has also defaulted on its obligations under the intercompany loan and
the security trustee (on our behalf and on behalf of the other Funding secured
creditors) has enforced the Funding security.
As the note trustee will not be entitled to assign to a third party its or
our rights under the intercompany loan agreement following the service of a note
enforcement notice, the most likely consequence of the issuer security becoming
enforceable will be that monies received by the note trustee from Funding will
be applied by the note trustee (or the issuer cash manager on its behalf) to
make payments on the notes in accordance with the issuer post-enforcement
priority of payments. However, the proceeds of that enforcement may be
insufficient to pay all interest and principal due on the notes.
THERE MAY BE A CONFLICT BETWEEN THE INTERESTS OF THE HOLDERS OF THE VARIOUS
CLASSES OF NOTES, AND THE INTERESTS OF OTHER CLASSES OF NOTEHOLDERS MAY PREVAIL
OVER YOUR INTERESTS
The trust deed, the issuer deed of charge and the terms of the notes will
provide that the note trustee is to have regard to the interests of the holders
of all the classes of notes. There may be circumstances, however, where the
interests of one class of the
37
noteholders conflict with the interests of another class or classes of the
noteholders. In general, the note trustee will give priority to the interests of
the holders of the most senior class of notes such that:
o the note trustee is to have regard only to the interests of the class
A noteholders in the event of a conflict between the interests of the
class A noteholders on the one hand and the class B noteholders and/or
the class C noteholders on the other hand; and
o (if there are no class A notes outstanding) the note trustee is to
have regard only to the interests of the class B noteholders in the
event of a conflict between the interests of the class B noteholders
on the one hand and the class C noteholders on the other hand.
THERE MAY BE A CONFLICT BETWEEN THE INTERESTS OF THE HOLDERS OF NOTES OF ANY
CLASS OF THE SERIES 1 NOTES AND THE HOLDERS OF THE SAME CLASS OF THE SERIES 2
NOTES AND/OR SERIES 3 NOTES, AND THE INTERESTS OF OTHER NOTEHOLDERS MAY PREVAIL
OVER YOUR INTERESTS
There may also be circumstances where the interests of a class of
noteholders of one series of the notes conflict with the interests of the
noteholders of the same class of a different series of notes and/or, in relation
to the series 1 class A notes, the interests of the noteholders of the series 1
class A1 notes conflict with the interests of the noteholders of the series 1
class A2 notes. In general, the trust deed, the issuer deed of charge and the
terms of the notes will require a single meeting of the holders of all series of
the relevant class of notes whether or not there is a conflict of interest
between the holders of those different series of that class of notes. As there
will be no provision for separate meetings of the holders of a class of notes of
one series, a resolution may be passed by holders of notes of one series of a
relevant class which will bind the holders of each other series of that same
class.
THERE MAY BE CONFLICTS BETWEEN US, THE PREVIOUS ISSUERS AND ANY NEW ISSUERS, AND
OUR INTERESTS MAY NOT PREVAIL, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES
The security trustee will exercise its rights under the Funding deed of
charge only in accordance with directions given by the note trustee. If
resolutions of holders of the previous notes and any new notes result in
conflicting directions being given to the note trustee (and, ultimately, from
the note trustee to the security trustee), the security trustee shall have
regard only to the directions of the noteholders of the issuer, each previous
issuer or new issuers that has or have the highest ranking class of notes
outstanding at such time. However, if more than one issuer has notes outstanding
that are the highest ranking notes outstanding among all issuers, the note
trustee shall instead have regard to the resolutions of the holders of notes of
that issuer that has the greatest aggregate principal amount of notes
outstanding at such time. If there is a conflict between us and any previous
issuer and/or any new issuers and we do not have the highest ranking notes
outstanding among all issuers (or the greatest aggregate principal amount of
notes outstanding at such time), our interests may not prevail. This could
ultimately cause a reduction in the payments that you receive on your notes.
IF FUNDING ENTERS INTO NEW INTERCOMPANY LOANS, THESE NEW INTERCOMPANY LOANS AND
ACCOMPANYING NEW NOTES MAY RANK AHEAD OF THE INTERCOMPANY LOAN AND THE NOTES AS
TO PAYMENTS
It is expected that in the future, subject to satisfaction of certain
conditions, Funding will establish additional wholly-owned subsidiary companies
to issue new notes to investors. The proceeds of each new issue of new notes
will be used by the new issuer to make a new intercompany loan to Funding.
Funding will use the proceeds of the new intercompany loan (less any amount
utilized to fund any applicable reserve fund for any new issuer) to do one or
more of the following:
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o pay to the mortgages trustee Funding's initial contribution for the
Funding share in respect of any new trust property to be assigned by
the seller to the mortgages trustee;
o pay to the mortgages trustee a further contribution to increase the
Funding share of the trust property; and/or
o refinance an existing intercompany loan or intercompany loans
outstanding at that time (and if our intercompany loan to Funding is
refinanced, you could be repaid early).
Funding will apply amounts it receives from the trust property to pay
amounts it owes under the intercompany loan, the previous intercompany loans and
any new intercompany loan without regard to when the relevant intercompany loan
was made. You should note that payments by Funding to the previous issuers under
the previous intercompany loans and to new issuers under any new intercompany
loans will rank equally in priority with payments made by Funding to us under
our intercompany loan. Funding will initially allocate principal to repay each
outstanding intercompany loan in no order of priority between them but in
proportion to each relevant issuer's allocable interest in the Funding share of
the trust property (or, if provided under the relevant intercompany loan
agreement, will set aside that allocable interest in the Funding share of
principal receipts for that issuer).
The amount and timing of payments on an intercompany loan are determined by
the amount and timing of payments on the notes issued by the relevant issuer and
by the priorities for payment applicable to those notes. The terms of the
previous notes issued by the previous issuers and of any new notes issued by a
new issuer may therefore result in those previous notes and the related previous
intercompany loans or those new notes and the related new intercompany loan
being repaid prior to the repayment of the notes issued by us under this
prospectus and our related intercompany loan.
If Funding establishes new issuers to make new intercompany loans to
Funding, you will not have any right of prior review or consent with respect to
those new intercompany loans or the corresponding issuance by new issuers of new
notes. Similarly, the terms of the Funding transaction documents (including the
mortgage sale agreement, the mortgages trust deed, the Funding deed of charge,
the definitions of the trigger events 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 new notes, however, a new issuer will be required to satisfy
a number of conditions, including that the ratings of your notes will not be
downgraded or otherwise adversely affected at the time a new issuer issues new
notes.
NEW ISSUERS WILL SHARE IN THE SAME SECURITY GRANTED BY FUNDING TO US, AND THIS
MAY ULTIMATELY CAUSE A REDUCTION IN THE PAYMENTS YOU RECEIVE ON THE NOTES
A new issuer will become party to the Funding deed of charge and will be
entitled to share, on an equal ranking, in the security granted by Funding for
our benefit (and the benefit of the other Funding secured creditors) under the
Funding deed of charge. If the Funding security is enforced and there are
insufficient funds to make the payments that are due to all issuers, each issuer
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.
39
THE PREVIOUS ISSUERS AND THE OTHER FUNDING SECURED CREDITORS ALREADY SHARE IN
THE SAME SECURITY GRANTED BY FUNDING TO US, AND THIS MAY ULTIMATELY CAUSE A
REDUCTION IN THE PAYMENTS YOU RECEIVE ON THE NOTES
Funding has entered into previous intercompany loan agreements and it has
also entered into various agreements with other Funding secured creditors in
connection with the issuance of the previous intercompany loans. These Funding
secured creditors are already parties to the Funding deed of charge and are
entitled to share, on an equal ranking, in the security granted by Funding for
our benefit. If the Funding security is enforced and there are insufficient
funds to make the payments that are due to the previous issuers and to us, we
will only be entitled to our 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
CLOSING 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 closing date. In particular,
new mortgage loans may have different payment characteristics than the mortgage
loans in the mortgage portfolio as of the closing date. The ultimate effect of
this could be to delay or reduce the payments you receive on your notes or
increase the rate of repayment of the notes. However, the new mortgage loans
will be required to meet the conditions described in "ASSIGNMENT OF THE MORTGAGE
LOANS AND THEIR RELATED SECURITY".
In addition, in order to promote the retention of borrowers, the seller may
periodically contact certain borrowers in respect of the seller's total
portfolio of outstanding mortgage loans in order to encourage a borrower to
review the seller's other mortgage products and to discuss shifting that
borrower to an alternative 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. The employee of the
seller who contacts a borrower will not know whether that borrower's original
mortgage loan has been sold to the mortgages trust. However, if the relevant
original mortgage loan made to that borrower happens to have been sold to the
mortgages trust and that borrower decides to switch mortgage products or take a
further advance, the seller then has the option of repurchasing that original
mortgage loan from the mortgages trust.
Generally, the borrowers that the seller may periodically contact are those
borrowers whose mortgage loans are not in arrears and who are otherwise in good
standing. To the extent that these borrowers switch to a different Northern Rock
mortgage product or take a further advance and their original mortgage loans are
repurchased 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
the decision whether to approve a new mortgage product and/or further advance
for a particular borrower will be made without regard to whether a borrower's
mortgage loan is included in the mortgage portfolio.
THE SELLER MAY CHANGE THE LENDING CRITERIA RELATING TO MORTGAGE LOANS WHICH ARE
SUBSEQUENTLY ASSIGNED TO THE MORTGAGES TRUSTEE WHICH COULD AFFECT THE
CHARACTERISTICS OF THE TRUST PROPERTY, AND WHICH COULD LEAD TO A DELAY OR A
REDUCTION IN THE PAYMENTS RECEIVED ON YOUR NOTES OR COULD INCREASE THE RATE OF
REPAYMENT OF THE NOTES
Each of the mortgage loans was originated in accordance with the seller's
lending criteria applicable at the time of origination, which lending criteria
in the case of each mortgage loan to be included in the mortgage portfolio as of
the closing date were the same as or substantially similar to the criteria
described later in this prospectus under
40
"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 and the
security trustee that those new mortgage loans and new related security were
originated in accordance with the seller's lending criteria applicable at the
time of their origination. However, the seller retains the right to revise its
lending criteria as determined from time to time, and so the lending criteria
applicable to any new mortgage loan at the time of origination may not be the
same as those set out in the section "THE MORTGAGE LOANS - ORIGINATION OF THE
MORTGAGE LOANS - LENDING CRITERIA".
If new mortgage loans that have been originated under revised lending
criteria are assigned to the mortgages trustee, the characteristics of the trust
property could change. This could lead to a delay or a reduction in the payments
received on your notes or it could increase the rate of repayment of the notes.
IF PROPERTY VALUES DECLINE PAYMENTS ON THE NOTES COULD BE ADVERSELY AFFECTED
The security granted by Funding in respect of the intercompany loan, which
is the principal source of funding for your notes, consists, among other things,
of Funding's interest in the mortgages trust. Since the value of the mortgage
portfolio held by the mortgages trustee may increase or decrease, the value of
that security may decrease and will decrease if there is a general decline in
property values. We cannot guarantee that the value of a mortgaged property will
remain at the same level as on the date of origination of the related mortgage
loan. If the residential property market in the United Kingdom experiences an
overall decline in property values, the value of the security created by the
mortgage loans could be significantly reduced and, ultimately, may result in
losses to you if the security is required to be enforced.
THE TIMING AND AMOUNT OF PAYMENTS ON THE MORTGAGE LOANS COULD BE AFFECTED BY
GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS
To the extent that specific geographic regions have experienced or may
experience in the future weaker regional economic conditions and housing markets
than other regions, a concentration of the mortgage loans in such a region may
be expected to exacerbate all of the risks relating to the mortgage loans
described in this section. We can predict neither when and where such regional
economic declines may occur nor to what extent or for how long such conditions
may continue. See "THE MORTGAGE LOANS - THE CUT-OFF DATE MORTGAGE PORTFOLIO".
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 the ultimate payment of interest and principal. These
factors include changes in the national or international economic climate,
regional economic or housing conditions, changes in tax laws, interest rates,
inflation, the availability of financing, yields on alternative investments,
political developments and government policies. Other factors in borrowers'
personal or financial circumstances may affect 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.
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The intercompany loan is our principal source of income for repayment of
the notes. The principal source of income for repayment by Funding of the
intercompany loan is its interest in the mortgage loans held on trust by the
mortgages trustee for the benefit of Funding 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.
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
economic, social and other factors, including prevailing mortgage market
interest rates, the availability of alternative financing programs, local and
regional economic conditions and homeowner mobility. For instance, prepayments
on the mortgage loans may be due to borrowers refinancing their mortgage loans
and sales of mortgaged properties by borrowers (either voluntarily or as a
result of enforcement action taken), as well as the receipt of proceeds from
buildings insurance and life insurance policies. The rate of prepayment of
mortgage loans may also be influenced by the presence or absence of early
repayment charges. You should note that 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".
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 to us under the intercompany loan and whether a
trigger event has occurred or the security granted by us under the issuer deed
of charge has been enforced. If prepayments on the mortgage loans occur less
frequently than anticipated, then the actual yields on your notes may be lower
than you anticipate and the amortization of the notes may take much longer than
is presently anticipated.
The yield to maturity of the notes may be affected by the repurchase of
mortgage loans subject to product switches, further advances or for breaches of
representations and warranties. If the seller is required to repurchase from the
mortgages trustee a mortgage loan or mortgage loans under a mortgage account and
their related security because one of the mortgage loans does not comply with
the mortgage loan representations and warranties in the mortgage sale agreement,
then the payment received by the mortgages trustee will have the same effect as
a prepayment of such mortgage loan or mortgage loans. Because these factors are
not within our control or the control of Funding or the mortgages trustee, we
cannot give any assurances as to the level of prepayments that the mortgage
portfolio may experience.
In addition, if a mortgage loan is subject to a product switch or a further
advance, the seller may repurchase the mortgage loan or mortgage loans and their
related security from the mortgages trustee. In the case of any such repurchase,
the payment received by the mortgages trustee will have the same effect as a
prepayment of such mortgage loan or mortgage loans.
In order to promote the retention of borrowers, the seller may periodically
contact certain borrowers in respect of the seller's total portfolio of
outstanding mortgage loans in order to encourage a borrower to review the
seller's other mortgage products and to discuss shifting that borrower to an
alternative Northern Rock mortgage product. The employee of the seller who
contacts a borrower will not know whether that borrower's
42
original mortgage loan has been sold to the mortgages trust. However, if the
relevant original mortgage loan made to that borrower happens to have been sold
to the mortgages trust and that borrower decides to switch mortgage loan
products, the seller's retention policy may ultimately result in that mortgage
loan becoming the subject of a product switch which ultimately may result in a
prepayment as described in the preceding paragraph. Furthermore, the seller also
may periodically contact certain borrowers in respect of the seller's total
portfolio of outstanding mortgage loans in order to offer to a borrower the
opportunity to apply for a further advance. If the borrower decides to take a
further advance and the seller decides to repurchase the mortgage loan subject
to that further advance, the mortgage loan will be prepaid.
As the decision by the seller whether to repurchase a mortgage loan subject
to a product switch or a further advance is not within our control or the
control of Funding or the mortgages trustee, we cannot give any assurance as to
the level of effective prepayments that the mortgage portfolio may experience.
THE INCLUSION OF FLEXIBLE MORTGAGE LOANS MAY AFFECT THE YIELD TO MATURITY OF AND
THE TIMING OF PAYMENTS ON THE NOTES
60,316 mortgage loans in the cut-off date mortgage portfolio (or 42.04% of
the aggregate current balance of the mortgage loans as of the cut-off date) are
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, 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,
will reduce the principal amount outstanding on a Together Connections mortgage
loan. As a result, less of a related borrower's contractual monthly payment
(which the borrower is nevertheless obligated to continue making in full) will
be required to pay interest, and proportionately more of that contractual
monthly payment will be allocated as a repayment of principal. This reallocation
may lead to amortization of the related mortgage loan more quickly than would
otherwise be the case. For a description of Together Connections mortgage loans
and the Together Connections Benefit, see "THE MORTGAGE LOANS - CHARACTERISTICS
OF THE MORTGAGE LOANS - MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER". The
seller will not assign any Together Connections mortgage loans to the mortgages
trustee on the closing date, but currently anticipates assigning Together
Connections mortgage loans to the mortgages trustee in the future.
If the notes are not repaid on or before the step-up date, then to the
extent that borrowers under flexible mortgage loans consistently prepay
principal or to the extent that Together Connections mortgage loans amortize
more quickly than otherwise expected, the timing of payments on your notes may
be adversely affected.
43
THE OCCURRENCE OF AN ASSET TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER SECURITY
MAY ACCELERATE THE REPAYMENT OF CERTAIN NOTES AND/OR DELAY THE REPAYMENT OF
OTHER NOTES
If no trigger event has occurred and the issuer security has not been
enforced, then payments of principal on a class of notes on any payment date
will not be greater than the controlled amortization amount for that class on
that payment date. If an asset trigger event has occurred, the mortgages trustee
will distribute principal receipts on the mortgage loans to Funding and the
seller proportionally based on their percentage shares (or, in certain
circumstances, their weighted average percentage shares) of the trust property
and Funding will on each payment date apply those principal receipts to repay
the previous intercompany loans, our intercompany loan and each new intercompany
loan (if any) in proportion to the outstanding principal balance of the relevant
intercompany loan.
Following the occurrence of an asset trigger event or enforcement of the
issuer security, we will apply these principal repayments of our intercompany
loan which are available for payment to noteholders on each payment date to
repay the class A notes, in no order of priority, until their outstanding
principal balances have been reduced to zero, without regard to their controlled
amortization amounts, then the class B notes, in no order of priority, until
their outstanding principal balances have been reduced to zero, without regard
to their controlled amortization amounts and finally, the class C notes, in no
order of priority, until their outstanding principal balances have been reduced
to zero, without regard to their controlled amortization amounts.
As the priority of payment in respect of the series 1 class A1 notes, the
series 1 class A2 notes, the series 2 class A notes and the series 3 class A
notes rank equally after the occurrence of an asset trigger event or enforcement
of the issuer security, and as repayments of principal in these circumstances
will not be limited to or controlled by the respective controlled amortization
amounts for the relevant class of notes, this may result in certain noteholders
being repaid more rapidly than if an asset trigger event or enforcement of the
issuer security had not occurred, and may result in other noteholders being
repaid less rapidly than if an asset trigger event had not occurred.
THE OCCURRENCE OF A NON-ASSET TRIGGER EVENT MAY ACCELERATE THE REPAYMENT OF
CERTAIN NOTES AND/OR DELAY THE REPAYMENT OF OTHER NOTES
If a non-asset trigger event has occurred, the mortgages trustee will
distribute all principal receipts to Funding until the Funding share percentage
of the trust property is zero. Funding will on each payment date apply these
principal receipts to repay the previous intercompany loans, our intercompany
loan and each new intercompany loan (if any) equally and in proportion to the
outstanding principal balance of the relevant intercompany loan.
Following the occurrence of a non-asset trigger event, we will apply these
principal repayments of the intercompany loan which are available for payment to
noteholders on each payment date to repay the series 1 class A1 notes until the
outstanding principal balance of the series 1 class A1 notes has been reduced to
zero, without regard to their controlled amortization amounts, then the series 1
class A2 notes and the series 2 class A notes, in no order of priority, until
the outstanding principal balance of each of the series 1 class A2 notes and the
series 2 class A notes has been reduced to zero, without regard to their
controlled amortization amounts, then the series 3 class A notes until the
outstanding principal balance of the series 3 class A notes has been reduced to
zero, without regard to their controlled amortization amounts, then the class B
notes, in no order of priority, until their outstanding principal balances have
been reduced to zero, without regard to their controlled amortization amounts
and finally, the class C notes, in no order of priority, until their outstanding
principal balances have been reduced to zero, without regard to their controlled
amortization amounts.
44
As the repayments of principal in these circumstances will not be limited
to or controlled by the respective controlled amortization amounts for the
relevant class of notes, this may result in certain noteholders being repaid
more rapidly than if a non-asset trigger event or enforcement of the issuer
security had not occurred, and may result in other noteholders being repaid less
rapidly than if a non-asset trigger event had not occurred.
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 REPURCHASE FIXED RATE MORTGAGE LOANS UNDER WHICH THE
BORROWER EXERCISES HIS OR HER RE-FIX OPTION THEN WE 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 repurchase the relevant mortgage loan from the mortgages
trustee if it becomes a re-fixed mortgage loan, then this will necessitate the
entry by us into further hedging arrangements with an alternative basis rate
swap counterparty satisfactory to the rating agencies. Entering into additional
hedging arrangements may increase our obligations on any payment date which may
adversely affect payments on your notes. In addition, we cannot provide
assurance that an alternative basis rate swap counterparty will be available at
the relevant time.
TERMINATION PAYMENTS ON THE BASIS RATE SWAP MAY ADVERSELY AFFECT THE FUNDS
AVAILABLE TO MAKE PAYMENTS ON THE NOTES
The amount of revenue receipts that Funding receives will fluctuate
according to the interest rates applicable to the mortgage loans in the
mortgages trust. However, the amount of interest payable by Funding to us under
the intercompany loan will depend upon the aggregate amount payable by us to the
basis rate swap provider in exchange for payments which will depend upon the
variable interest rates at which interest accrues on the notes.
To hedge our exposure against the possible variance between the foregoing
interest rates, we will enter into the basis rate swap with the basis rate swap
provider and the note trustee on the closing date (see "THE SWAP AGREEMENTS -
THE BASIS RATE SWAP").
If the basis rate swap is terminated, we may be obliged to pay a
termination payment to the basis rate swap provider. The amount of the
termination payment will be based on the cost of entering into a replacement
basis rate swap. Under the intercompany loan agreement, Funding will be required
to pay us an amount equal to any termination payment due by us to the basis swap
provider. Funding will also be obliged to pay us any extra amounts which we may
be required to pay to enter into a replacement swap.
We cannot give you any assurance that Funding will have the funds available
to make that payment or that we will have sufficient funds available to make any
termination payment under the swap or to make subsequent payments to you in
respect of the
45
relevant series and class of notes. Nor can we give you any assurance that we
will be able to enter into a replacement swap, or if one is entered into, that
the credit rating of the replacement basis rate swap provider will be
sufficiently high to prevent a downgrading of the then current ratings of the
notes by the rating agencies.
Except where the basis rate swap provider has caused the basis rate swap to
terminate by its own default, any termination payment due by us will rank
equally with payments due on the notes. Any additional amounts required to be
paid by us following termination of the basis rate swap (including any extra
costs incurred (for example, from entering into "SPOT" interest rate swaps) if
we cannot immediately enter into a basis rate swap), will also rank equally with
payments due on the notes.
Therefore, if we are obliged to make a termination payment to the basis
rate swap provider or to pay any other additional amount as a result of the
termination of the swap, this may affect the funds which we have available to
make payments on the notes of any class and any series.
RATINGS ASSIGNED TO THE NOTES MAY BE LOWERED OR WITHDRAWN AFTER YOU PURCHASE THE
NOTES, WHICH MAY LOWER THE MARKET VALUE OF THE NOTES
The ratings assigned to each class of notes address the likelihood of full
and timely payment to you of all payments of interest on each payment date under
those classes of notes. The ratings also address the likelihood of ultimate
payment of principal on the final maturity date of each class of notes. The
expected ratings of each class of series 1 notes on the closing date are set out
in "RATINGS OF THE SERIES 1 NOTES". Any rating agency may lower its rating or
withdraw its rating if, in the sole judgement of the rating agency, the credit
quality of the notes has declined or is in question. If any rating assigned to
the notes is lowered or withdrawn, the market value of the notes may be reduced.
SUBORDINATION OF OTHER NOTE CLASSES MAY NOT PROTECT YOU FROM ALL RISK OF LOSS
Each of the class B notes of each series and the class C notes of each
series are subordinated in right of payment of interest to the class A notes of
each series. Each of the class C notes of each series are subordinated in right
of payment of interest to the class B notes of each series.
Each of the class B notes of each series and the class C notes of each
series are subordinated in right of payment of principal to the class A notes of
each series. Each of the class C notes of each series are subordinated in right
of payment of principal to the class B notes of each series.
However, the controlled amortization amount payable in respect of each
class of notes is determined by a schedule that indicates the target balance for
that class of notes on the relevant payment date, as set forth under "CASHFLOWS
- - DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF
THE ISSUER SECURITY AND/OR OCCURRENCE OF A TRIGGER EVENT". You should be aware
that not all classes of notes are scheduled to receive payments of principal on
each payment date. The controlled amortization amount payable on some classes of
notes will be zero, which means that, despite the principal priority of payments
described above, lower ranking classes of notes may nevertheless be repaid
principal before higher ranking classes of notes. Payments of principal are
expected to be made to each class of notes in scheduled amounts up to the
amounts set forth under "CASHFLOWS - DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL
RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY AND/OR OCCURRENCE OF A
TRIGGER EVENT".
There is no assurance that these subordination rules will protect the class
A noteholders from all risk of loss or the class B noteholders from all risk of
loss. If the losses allocated to the class C notes and the class B notes, as
evidenced on each of the class C and class B principal deficiency sub-ledgers,
respectively, plus any other debits to each of the class C and class B principal
deficiency sub-ledgers, as the case may be, are in an aggregate amount equal to
the aggregate outstanding principal balances of the class
46
C notes and the class B notes, then losses on the mortgage loans will thereafter
be allocated to the class A notes at which point there will be an asset trigger
event. Similarly, if the losses allocated to the class C notes as evidenced on
the class C principal deficiency sub-ledger plus any other debits to the class C
principal deficiency sub-ledger are in an aggregate amount equal to the
aggregate outstanding principal balance of the class C notes, then losses on the
mortgage loans will thereafter be allocated to the class B notes.
PRINCIPAL PAYMENTS ON THE CLASS B NOTES AND THE CLASS C NOTES WILL BE DEFERRED
IN CERTAIN CIRCUMSTANCES
On any payment date, our obligation to pay principal on the class B notes
and the class C notes will be subject to the satisfaction as of the related
determination date of the issuer arrears test, the issuer reserve requirement
and the subordinated principal test (as defined in the glossary) to the extent
that any class A notes are outstanding on that date.
If class A notes are outstanding on that date and any of the above
conditions is not satisfied on a payment date then payments of principal which
would otherwise have been made to the class B notes and/or the class C notes
will not be payable on that payment date.
YOU MAY NOT BE ABLE TO SELL THE NOTES
There currently is no secondary market for the notes. The underwriters
expect, but are not obliged, to make a market in the notes. If no secondary
market develops, you may not be able to sell the notes prior to maturity. We
cannot offer any assurance that a secondary market will develop or, if one does
develop, that it will continue.
YOU MAY BE SUBJECT TO EXCHANGE RATE AND INTEREST RATE RISKS
Repayments of principal and payments of interest on the series 1 notes will
be made in US dollars, but the intercompany loan to be made by us to Funding and
repayments of principal and payments of interest by Funding to us under the
intercompany loan will be in sterling.
To hedge our currency exchange rate exposure, including any interest rate
exposure connected with that currency exposure, on the closing date we will
enter into the dollar currency swaps for the series 1 notes with the dollar
currency swap provider (see "THE SWAP AGREEMENTS - THE DOLLAR CURRENCY SWAPS").
If we fail to make timely payments of amounts due under a dollar currency
swap, then we will have defaulted under that currency swap. The dollar currency
swap provider is obliged only to make payments under a dollar currency swap as
long as we make payments under it. If the dollar currency swap provider is not
obliged to make payments of, or if it defaults in its obligations to make
payments of, amounts in US dollars equal to the full amount to be paid to us on
the payment dates under the dollar currency swap (which are the same dates as
the payment dates), we will be exposed to changes in US dollar/sterling currency
exchange rates and in the associated interest rates on these currencies. Unless
a replacement dollar currency swap is entered into, we may have insufficient
funds to make payments due on the notes of any class and any series.
In addition, some of the mortgage loans carry variable rates of interest,
some of the mortgage loans pay interest at a fixed rate or rates of interest and
some of the flexible mortgage loans pay interest at variable rates of interest
no higher than the rate offered by a basket of UK mortgage lenders or pay
interest at a rate which tracks the Bank of England base rate. However, these
interest rates on the mortgage loans which will fund the interest payable under
the intercompany loan will not necessarily match the floating rates on the
notes. If the basis rate swap provider defaults in its obligation to make
payments under the basis rate swap, we will be exposed to the variance between
the rates of interest payable on the mortgage loans and the rate of interest
payable on the notes. Unless a replacement basis rate swap is entered into, we
may have insufficient funds to make payments due on the notes of any class and
any series.
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TERMINATION PAYMENTS ON THE DOLLAR CURRENCY SWAPS AND THE EURO CURRENCY SWAPS
MAY ADVERSELY AFFECT THE FUNDS AVAILABLE TO MAKE PAYMENTS ON THE NOTES
If any of the currency swaps terminate, we may be obliged to pay a
termination payment to the relevant currency rate swap provider. The amount of
the termination payment will be based on the cost of entering into a replacement
currency swap. Under the intercompany loan agreement, Funding will be required
to pay us an amount required by us to pay any termination payment due by us to
the relevant currency rate swap provider. Funding will also be obliged to pay us
any extra amounts which we may be required to pay to enter into a replacement
swap.
We cannot give you any assurance that Funding will have the funds available
to make that payment or that we will have sufficient funds available to make any
termination payment under any of the currency swaps or to make subsequent
payments to you in respect of the relevant series and class of notes. Nor can we
give you any assurance that we will be able to enter into a replacement currency
swap, or if one is entered into, that the credit rating of the replacement
currency rate swap provider will be sufficiently high to prevent a downgrading
of the then current ratings of the notes by the rating agencies.
Except where the relevant currency rate swap provider has caused the
relevant currency swap to terminate by its own default, any termination payment
due by us will rank equally with payments due on the notes. Any additional
amounts required to be paid by us following termination of the relevant currency
swap (including any extra costs incurred (for example, from entering into "SPOT"
currency or interest rate swaps) if we cannot immediately enter into a
replacement currency swap), will also rank equally with payments due on the
notes.
Therefore, if we are obliged to make a termination payment to the relevant
currency rate swap provider or to pay any other additional amount as a result of
the termination of the relevant currency swap, this may affect the funds which
we have available to make payments on the notes of any class and any series.
IF THE BANK OF ENGLAND BASE RATE FALLS BELOW A CERTAIN LEVEL, WE COULD SUFFER A
REVENUE SHORTFALL WHICH COULD ADVERSELY AFFECT OUR PAYMENTS ON THE NOTES
The seller guarantees that for variable rate mortgage loans that are
eligible to be charged at the seller's standard variable rate (including fixed
rate mortgages 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 of 1.99%.
If the Bank of England base rate falls to a level of 1.99% or more below
the seller's standard variable rate it is possible that there would be a
shortfall of income on the mortgage loans and that, as a result, either or both
of Funding and we would suffer a revenue shortfall.
IF BORROWERS BECOME ENTITLED TO THE LOYALTY DISCOUNT OFFERED BY THE SELLER, WE
COULD SUFFER A REVENUE SHORTFALL WHICH COULD ADVERSELY AFFECT OUR PAYMENTS ON
THE NOTES
The seller currently offers a loyalty discount on each mortgage loan (other
than a Together mortgage loan, a Together Connections mortgage loan and a CAT
standard mortgage loan) which currently provides for a reduction of 0.25%
(although the seller may in the future allow for a discount of between 0.25% and
0.75%) of the applicable interest rate on that mortgage loan once the borrower
has held that mortgage loan for at least seven years, subject to certain
conditions. If the loyalty discount becomes applicable to a significant number
of borrowers it is possible that there would be a shortfall of income on the
mortgage loans and that, as a result, either or both of Funding and we would
suffer a revenue shortfall.
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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 dollar
currency swap provider and the euro currency swap provider have agreed to
provide their respective swaps, the corporate services provider has agreed to
provide corporate services and the paying agents and the agent bank have agreed
to provide payment and calculation services in connection with the notes. In the
event that any relevant third party was to fail to perform its obligations under
the respective agreements to which it is a party, you may be adversely affected.
PAYMENTS BY FUNDING TO THIRD PARTIES IN RELATION TO THE PREVIOUS ISSUERS MAY
AFFECT PAYMENTS DUE TO US AND ACCORDINGLY OUR ABILITY TO MAKE PAYMENTS ON THE
NOTES
Under the previous intercompany loan agreements, Funding is required to
make payments to each previous issuer in respect of that previous issuer's
obligations to make payments to the security trustee and its own note trustee,
agent bank, paying agents, cash manager, corporate services provider and account
bank and to other third parties to whom that previous issuer owes money. These
payments, in addition to the payments that we are required to make to our third
party creditors, rank in priority to amounts due by Funding to us under the
intercompany loan that we may use to make payments under the notes. For further
information regarding Funding's payment obligations, see "CASHFLOWS".
Funding's obligations to make the third-party payments described above to
the previous issuers may affect Funding's ability to make payments to us under
the intercompany loan. This in turn may affect our ability to make payments on
your notes.
EXCESS REVENUE RECEIPTS MAY NOT BE SUFFICIENT TO REPLENISH PRINCIPAL THAT HAS
BEEN USED TO PAY INTEREST, WHICH MAY RESULT IN YOUR NOTES NOT BEING REPAID IN
FULL
If, on any payment date, revenue receipts available to us are insufficient
to enable us to pay interest on the notes and our other expenses ranking in
priority to interest due on notes (the "SENIOR EXPENSES"), then we may use
principal receipts from the intercompany loan to make up that revenue shortfall.
During the term of the transaction, however, it is expected that these
principal deficiencies will be recouped from subsequent excess issuer available
revenue receipts. However, if subsequent excess issuer available revenue
receipts are insufficient to recoup those principal deficiencies, then you may
receive later than anticipated, or you may not receive in full, repayment of the
principal amount outstanding on your notes.
For more information on principal deficiencies, see "CREDIT STRUCTURE -
ISSUER PRINCIPAL DEFICIENCY LEDGER."
THE SELLER SHARE OF THE TRUST PROPERTY DOES NOT PROVIDE CREDIT ENHANCEMENT FOR
THE NOTES
Subject to certain exceptions as described under "THE MORTGAGES TRUST -
ADJUSTMENTS TO TRUST PROPERTY", any losses from mortgage loans included in the
trust property will be allocated to Funding and the seller on each distribution
date in proportion to the then current Funding share percentage and the then
current seller share percentage of the trust property.
The seller share of the trust property does not provide credit enhancement
for the Funding share of the trust property. Losses on the mortgage loans in the
trust property are generally allocated proportionately between the seller and
Funding depending on their respective percentage shares (or, in certain
circumstances, their weighted average percentage shares) of the trust property.
49
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 an intercompany loan enforcement notice under the intercompany loan,
any previous intercompany loan or any new intercompany loan is given (as
described in "SECURITY FOR FUNDING'S OBLIGATIONS"), the security trustee may
sell the Funding share of the trust property. There is no assurance that a buyer
would be found or that such a sale would realize enough money to repay amounts
due and payable under the intercompany loan agreement, the previous intercompany
loan agreements and any new intercompany loan agreements.
We will not, and Funding and the mortgages trustee will not, have any
recourse to the seller of the mortgage loans, other than in respect of a breach
of warranty under the mortgage sale agreement.
We will not, and the mortgages trustee, Funding and the 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 the relevant mortgage loan is assigned to the mortgages trustee,
then, in the first instance, the seller will be required to remedy the breach
within 28 days of the seller becoming aware of the same or of receipt by it of a
notice from the mortgages trustee.
If the seller fails to remedy the breach within 28 days, then the seller
will be required to repurchase the mortgage loan or mortgage loans and their
related security 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 principal amount outstanding of those mortgage
loans together with any arrears of interest and accrued and unpaid interest and
expenses.
Other than as described here, none of the mortgages trustee, Funding, you,
the holders of the previous notes, the previous issuers or we will have any
recourse to the assets of the seller.
THERE CAN BE NO ASSURANCE THAT A BORROWER WILL REPAY PRINCIPAL AT THE END OF THE
TERM ON AN INTEREST-ONLY LOAN (WITH OR WITHOUT A CAPITAL REPAYMENT VEHICLE) OR A
COMBINATION LOAN
Each mortgage loan in the cut-off date mortgage portfolio is advanced on
one of the following bases:
o Repayment basis, with principal and interest repaid on a monthly basis
through the mortgage term; or
o An interest-only basis with or without a capital repayment vehicle; or
o A combination basis, that is, a combination of the repayment and
interest-only arrangements where only part of the principal will be
repaid by way of monthly payments.
Of the mortgage loans in the cut-off date mortgage portfolio 53,374
mortgage loans (or 39.53% of the aggregate current balance of the mortgage loans
as of the cut-off date) are interest-only basis with or without a capital
repayment vehicle and 88,299 mortgage loans (or 60.47% of the aggregate current
balance of the mortgage loans as of the cut-off date) are combination or
repayment mortgage loans. 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.
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For interest-only mortgage loans with a capital repayment vehicle or a
combination loan with a capital repayment vehicle the borrower is recommended to
put in place an investment plan or other repayment mechanism forecast to provide
sufficient funds to repay the principal due at the end of the term.
The ability of a borrower to repay the principal on an interest-only
mortgage loan or the final payment of principal on a combination mortgage loan
at maturity depends on such borrower's responsibility to ensure that sufficient
funds are available from an investment plan or another source, such as ISAs,
pension policies, personal equity plans or endowment policies, as well as the
financial condition of the borrower, tax laws and general economic conditions at
the time. However, there can be no assurance that there will be sufficient funds
from any investment plan to repay the principal or (in the case of a combination
loan) the part of the principal that it is designed to cover.
The seller does not (and in certain circumstances cannot) take security
over investment plans. Consequently, in the case of a borrower in poor financial
condition the investment plan will be an asset available to meet the claims of
other creditors. The seller also recommends the borrower to take out term life
insurance cover in relation to the mortgage loan, although the seller again does
not take security over such policies.
In the case of interest-only mortgage loans, there can be no assurance that
the borrower will have the funds required to repay the principal at the end of
the term. If a borrower cannot repay the mortgage loan and a loss occurs on the
mortgage loan, then this may affect payments on the notes if that loss cannot be
cured by the application of excess issuer available revenue receipts.
THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE MORTGAGES TRUSTEE HAS NO
LEGAL TITLE TO THE MORTGAGE LOANS AND THEIR RELATED SECURITY WHICH MAY ADVERSELY
AFFECT PAYMENTS ON THE NOTES
The assignment by the seller to the mortgages trustee of the benefit of the
mortgage loans and their related security takes effect in equity only. This
means that legal title to the mortgage loans and their related security in the
trust property remains with the seller, but the mortgages trustee has all the
other rights and benefits relating to ownership of each mortgage loan and its
related security (which rights and benefits are subject to the trust in favor of
the beneficiaries). The mortgages trustee has the right to demand the seller to
give it legal title to the mortgage loans and the related security in the
circumstances described in "ASSIGNMENT OF THE MORTGAGE LOANS AND THEIR RELATED
SECURITY - TRANSFER OF LEGAL TITLE TO THE MORTGAGES TRUSTEE" and until then the
mortgages trustee will not apply to H.M. Land Registry or the H.M. Land Charges
Registry to register or record its equitable interest in the mortgages. In
addition, except in the limited circumstances set out in "ASSIGNMENT OF THE
MORTGAGE LOANS AND RELATED SECURITY - TRANSFER OF LEGAL TITLE TO THE MORTGAGES
TRUSTEE", the seller will not give notice of the assignment of the mortgage
loans and related security to any borrower.
At any time during which the mortgages trustee does not hold the legal
title to the mortgage loans and their related security or has not notified its
interest in the mortgage loans and their related security to the borrowers,
there are risks, as follows:
o firstly, if the seller wrongly sold to another person a mortgage loan
and that mortgage loan has already been assigned to the mortgages
trustee, and that person acted in good faith and did not have notice
of the interests of the mortgages trustee or the beneficiaries in the
mortgage loan and that person notified the borrower of that sale to it
of the mortgage loan and its related security or registered its
interest in that mortgage, then she or he might obtain good title to
the mortgage loan, free from the interests of the mortgages trustee
and the beneficiaries. If this occurred then the mortgages trustee
would not have good title to the affected mortgage loan and its
related security and it would not be entitled to payments by a
borrower in respect of such a mortgage loan. This may affect our
ability to repay the notes;
51
o secondly, the rights of the mortgages trustee and the beneficiaries
may be subject to the rights of the borrowers against the seller, such
as the rights of set-off (see in particular "- THERE ARE RISKS IN
RELATION TO FLEXIBLE MORTGAGE LOANS WHICH MAY ADVERSELY AFFECT THE
FUNDS AVAILABLE TO PAY THE NOTES") which occur in relation to
transactions or deposits made between certain borrowers and the seller
and the rights of borrowers to redeem their mortgages by repaying the
mortgage loan directly to the seller. If these rights were exercised,
the mortgages trustee may receive less money than anticipated from the
mortgage loans, which may affect our ability to repay the notes; and
o finally, the mortgages trustee would not be able to enforce any
borrower's obligations under a mortgage loan or mortgage itself but
would have to join the seller as a party to any legal proceedings.
However, once notice has been given to a borrower of the transfer of the
related mortgage loan and its related security to the mortgages trustee, any
independent set-off rights which that borrower has against the seller will
crystallize, further rights of independent set-off would cease to accrue from
that date and no new rights of independent set-off could be asserted following
that notice. Set-off rights arising under transaction set-off (which are set-off
claims arising out of a transaction connected with the mortgage loan) will not
be affected by that notice.
Additionally, if a borrower exercises any set-off rights then an amount
equal to the amount set off will reduce the total amount of the seller share of
the trust property only. For more information on the risks of transaction
set-off, see "- THERE ARE RISKS IN RELATION TO FLEXIBLE MORTGAGE LOANS WHICH MAY
ADVERSELY AFFECT THE FUNDS AVAILABLE TO PAY THE NOTES".
THERE ARE RISKS IN RELATION TO FLEXIBLE MORTGAGE LOANS WHICH MAY ADVERSELY
AFFECT THE FUNDS AVAILABLE TO PAY THE NOTES
As described in "- 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
(in respect of the existing mortgage portfolio) and will make (on the closing
date in respect of the additional assigned mortgage portfolio) an equitable
assignment of 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 may occur if the seller fails to advance a cash re-draw to a
borrower under a flexible mortgage loan when the borrower is entitled to such
cash re-draw.
If the seller fails to advance the cash re-draw in accordance with the
relevant mortgage loan, then the relevant borrower may set off any damages claim
arising from the seller's breach of contract against the seller's (and, as
equitable assignee of the mortgage loans and the mortgages, the mortgages
trustee's) claim for payment of principal and/or interest under the mortgage
loan as and when it becomes due. Such set-off claims will constitute transaction
set-off as described in the immediately preceding risk factor.
The amount of the claim in respect of a cash re-draw will, in many cases,
be the cost to the borrower of finding an alternative source of funds. 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.
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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. In that case, the
administrator will be entitled to take enforcement proceedings against the
borrower although the period of non-payment by the borrower is likely to
continue until a judgement is obtained.
The exercise of set-off rights by borrowers would reduce the incoming cash
flow to the mortgages trustee during such exercise. However, the amounts set off
will be applied to reduce the seller share of the trust property only.
Further, there may be circumstances in which:
o a borrower may seek to argue that certain re-draws are unenforceable
by virtue of non-compliance with the Consumer Credit Act 1974; or
o certain re-draws may rank behind liens created by a borrower after the
date upon which the borrower entered into its mortgage with the
seller.
The minimum seller share has been sized in an amount expected to cover
these risks, although there is no assurance that it will. If the minimum seller
share is not sufficient in this respect then there is a risk that you may not
receive all amounts due on the notes or that payments may not be made when due.
IF THE ADMINISTRATOR IS REMOVED, THERE IS NO GUARANTEE THAT A SUBSTITUTE
ADMINISTRATOR WOULD BE FOUND, WHICH COULD DELAY COLLECTION OF PAYMENTS ON THE
MORTGAGE LOANS AND ULTIMATELY COULD ADVERSELY AFFECT PAYMENTS ON THE NOTES
The seller has been appointed by the mortgages trustee and the
beneficiaries as administrator to service the mortgage loans. If the
administrator breaches the terms of the administration agreement, then the
mortgages trustee, Funding and the security trustee will be entitled to
terminate the appointment of the administrator and to appoint a substitute
administrator.
There can be no assurance that a substitute administrator would be found
who would be willing and able to service the mortgage loans on the terms of the
administration agreement. In addition, as described under the third risk factor
immediately succeeding this risk factor, any substitute administrator may be
required to be authorized under The Financial Services and Markets Act 2000 once
mortgage lending becomes a regulated activity. The ability of a substitute
administrator fully to perform the required services would depend, among other
things, on the information, software and records available at the time of the
appointment. Any delay or inability to appoint a substitute administrator may
affect payments on the mortgage loans and hence our ability to make payments
when due on the notes.
You should note that the administrator has no obligation itself to advance
payments that borrowers fail to make in a timely fashion.
THE MORTGAGES TRUSTEE MAY NOT RECEIVE THE BENEFIT OF CLAIMS MADE ON THE
BUILDINGS INSURANCE WHICH COULD ADVERSELY AFFECT PAYMENTS ON THE NOTES
The practice of the seller in relation to buildings insurance is described
under "THE MORTGAGE LOANS - 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 property. This could reduce the principal receipts received by
Funding according to the Funding share and could adversely affect our ability to
make payments on the notes. You should note that buildings insurance is normally
renewed annually.
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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, subject to prior agreement with
the rating agencies and their confirmation that this will not affect the then
current ratings of the notes.
In addition, the seller is not required to maintain the same level of
coverage under mortgage indemnity insurance policies for mortgage loans that it
may originate in the future and assign to the mortgages trust. See "THE MORTGAGE
LOANS - INSURANCE POLICIES - MIG POLICIES".
POSSIBLE REGULATORY CHANGES BY THE OFFICE OF FAIR TRADING AND THE FINANCIAL
SERVICES AUTHORITY MAY HAVE AN IMPACT ON THE SELLER, THE ISSUER AND/OR THE
MORTGAGE LOANS AND MAY ADVERSELY AFFECT OUR ABILITY TO MAKE PAYMENTS WHEN DUE ON
THE NOTES
In the United Kingdom, the Office of Fair Trading (the "OFT") is
responsible for the issue of licenses under and the enforcement of the Consumer
Credit Act 1974, 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.
It is currently expected that mortgage lending in the United Kingdom will
become a regulated activity under The Financial Services and Markets Act 2000
("FSMA"). The FSMA represents a significant overhaul of the financial services
regulation in the United Kingdom and brings a wider range of financial
activities under a single regime of statutory regulation. Although the date for
implementation of a scheme to regulate mortgage related activities ("N3") had
initially been August 2002, announcements by H.M. Treasury in December 2001 that
the Financial Services Authority will also be responsible for regulation of
mortgage sales (advising and arranging) has delayed N3. Under a revised
timetable published by the FSA, N3 is now anticipated to be mid-2004.
The first draft of the Mortgage Sourcebook, which ultimately will set
specific rules for mortgage lending, was issued by the Financial Services
Authority in June 2001. The consultation period for the Mortgage Sourcebook
ended on September 14, 2001. In August 2002, the FSA published its feedback on
the Mortgage Sourcebook, which includes its "near final" rules on mortgage
lending and administration. These rules cover start of contract disclosures,
post-sale disclosures (annual statements), rules on contract changes and arrears
and repossessions. Simultaneously, the FSA published its first consultative
paper on the FSA's approach to regulating mortgage sales, which sets out for
comment key elements of the FSA's proposals for regulating mortgage sales and
variations (such as further advances). The closing date for comments on this
consultation is November 11, 2002. It is anticipated that detailed rules for
mortgage sales will be published in the first quarter of 2003. In addition, H.M.
Treasury published on February 28, 2002 a paper seeking comments upon the
implementation of the FSA regulation of mortgage sale activities. The comment
period for this paper ended on April 30, 2002. In August 2002, H.M. Treasury
published "final" versions of statutory instruments amending, inter alia, the
Financial Services and Markets Act 2000 (Regulated Activities), the Financial
Services and Markets Act 2000 (Financial Promotions) and the Financial Services
and Markets Act 2000 (Misleading Statements and Practices) Orders implementing
the new regulatory regime for mortgage sale related activities.
When mortgage lending becomes a regulated activity after N3, persons
carrying on any specified mortgage-related activity by way of business will
ordinarily need to be authorized by the Financial Services Authority under the
FSMA. The specified activities currently are (a) entering into a regulated
mortgage contract as lender, (b) administering a
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regulated mortgage contract (administrating in this context means notifying
borrowers of changes in mortgage payments and/or collecting payments due under
the mortgage loan) and (c) advising on and arranging mortgage contracts.
Agreeing to carry on any of these activities will also be a regulated activity.
If requirements as to lenders, relevant brokers, advertising and the
authorization of originators and administrators are not complied with, that
contract may be unenforceable in whole or in part against the borrower.
An unauthorized person who administers a regulated mortgage contract
entered into after N3 may commit an offense, although this will not render the
contract unenforceable against the borrower. However, an unauthorized person may
arrange for an authorized person to administer his mortgage contracts but if
that arrangement comes to an end, that unauthorized person may commit an offense
if it administers the mortgage contracts for more than one month after the
arrangement comes to an end.
The new regime under the FSMA regulating financial promotion will cover the
content and manner of promotion of regulated mortgage products, and by whom such
promotion can be issued or approved.
Authorized persons engaged in relevant specified activities relating to
regulated mortgage contracts will be obliged to comply with the final Mortgage
Sourcebook published by the Financial Services Authority. The exact form of
these is not yet certain but they are likely to include detailed requirements as
to the standardized disclosure of information to customers (before selling a
mortgage, on issue of a mortgage offer and throughout the term of a mortgage)
and the manner in which regulated mortgage contracts are promoted, originated
and administered, including the sale, transfer or securitization of mortgage
contracts. They are also likely to impose capital and/or credit rating
requirements both on administrators of regulated mortgage contracts and on any
person on whose behalf any regulated mortgage contracts are administered. In
addition, the new regulations could affect the seller's ability to contribute or
withdraw mortgage loans from the mortgage portfolio.
Currently in the United Kingdom, self-regulation of mortgage business is
under the Mortgage Code (the "CML CODE") issued by the Council of Mortgage
Lenders (the "CML"). The seller currently subscribes to the CML Code. Membership
of the CML and compliance with the CML Code are voluntary. The CML Code sets out
a minimum standard of good mortgage business practice, from marketing to lending
procedures and dealing with borrowers experiencing financial difficulties. Since
April 30, 1998, lender-subscribers to the CML Code may not accept mortgage
business introduced by intermediaries who are not registered with (before
November 1, 2000) the Mortgage Code Register of Intermediaries or (on and after
November 1, 2000) the Mortgage Code Compliance Board.
In March, 2001, the European Commission published a Recommendation to
member states urging their lenders to subscribe to the code issued by the
European Mortgage Federation. On July 26, 2001 the CML decided to subscribe to
the code collectively on behalf of its members. Lenders have until September 30,
2002 to implement the code, an important element of which is provision to
consumers of a "European Standardised Information Sheet" (an "ESIS") similar to
the pre-application illustration proposed by the FSA. Following postponement of
regulation by the FSA of mortgage business, UK lenders generally will not be in
a position to provide an ESIS to consumers by September 30, 2002. The CML has
discussed this with the European Commission and the European Mortgage
Federation. While compliance with the code is voluntary, if the code is not
effective, the European Commission is likely to see further pressure from
consumer bodies to issue a Directive on mortgages.
No assurance can be given that additional regulations from the OFT, the FSA
or any other regulatory authority will not arise with regard to the mortgage
market in the United Kingdom generally, the seller's particular sector in that
market or specifically in relation to the seller. Any such action or
developments, in particular, but not limited to, the cost of
55
compliance, may have a material adverse effect on the seller, the issuer 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 MORTGAGE LOANS
BEING UNENFORCEABLE, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES
In the United Kingdom, the Unfair Terms in Consumer Contracts Regulations
1994 apply to all of the mortgage loans that have been entered into between July
1, 1995 and October 1, 1999, and the Unfair Terms in Consumer Contracts
Regulations 1999 apply to all of the mortgage loans that have been entered into
since October 1, 1999. These regulations generally provide that:
o a borrower may challenge a term in an agreement on the basis that it
is an "unfair" term within the regulations and therefore not binding
on the borrower; and
o the Director General of Fair Trading (as head of the OFT) and any
"qualifying body" (as defined in the Regulations) may seek to prevent
a business from relying on unfair terms.
This will not generally affect "CORE TERMS" which set out the main subject
matter of the contract, such as the borrower's obligation to repay principal.
However, it may affect terms that are not considered to be core terms, such as
the right of the lender to vary the interest rate. For example, if a term
permitting a lender to vary the interest rate is found to be unfair, the
borrower will not be liable to pay the increased rate or, to the extent that she
or he has paid it, will be able, as against the lender or the mortgages trustee,
to claim repayment of the extra interest amounts paid or to set off the amount
of such claim against the amount owing by the borrower under the mortgage loan.
Any such non-recovery, claim or set-off ultimately may adversely affect our
ability to make payments on the notes such that the payments on your notes could
be reduced or delayed.
On February 24, 2000, the OFT issued a guidance note on what the OFT
considers to be fair and unfair terms for interest variation in mortgage
contracts. Where the interest variation term does not provide for precise and
immediate tracking of an external rate outside the lender's control, and if the
borrower is locked-in 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.
In August 2002 the Law Commission of 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". No assurances can be given that
changes to the UTCCR, if implemented, will not have an adverse effect on the
seller, the issuer and/or the administrator.
THE MORTGAGES TRUSTEE'S ENTITLEMENT TO BE INDEMNIFIED FOR LIABILITIES UNDERTAKEN
DURING THE ENFORCEMENT PROCESS MAY ADVERSELY AFFECT THE FUNDS AVAILABLE TO
FUNDING TO PAY AMOUNTS DUE UNDER THE INTERCOMPANY LOAN, WHICH MAY IN TURN
ADVERSELY AFFECT THE FUNDS AVAILABLE TO PAY THE NOTES
In order to enforce a power of sale in respect of a mortgaged property, the
relevant mortgagee (which may be Northern Rock, the mortgages trustee or any
receiver appointed by the security trustee) must first obtain possession of the
mortgaged property unless the property is vacant. Possession is usually obtained
by way of a court order although this can be a lengthy process and the mortgagee
must assume certain risks. Each of the mortgages trustee and the security
trustee and any receiver appointed by it is entitled to
56
be indemnified to its satisfaction against personal liabilities which it could
incur if it were to become a mortgagee in possession before it is obliged to
seek possession, provided that it is always understood that the security trustee
is never obliged to enter into possession of the mortgaged property.
PROPOSALS FOR A NEW WITHHOLDING TAX DIRECTIVE IN THE EUROPEAN UNION MAY, IF
APPROVED, PREVENT YOU FROM RECEIVING INTEREST ON THE NOTES IN FULL
On December 13, 2001, the EU Ecofin Council reached agreement on the text
of a proposed EU Savings Directive. Under the proposed EU Savings Directive,
subject to a number of important conditions being met, EU Member States are
required to provide to the tax authorities of another Member State details of
payments of interest or other similar income paid by an entity/person within its
jurisdiction to an individual resident in another Member State, subject to the
right of certain Member States to opt instead for a withholding system during a
specified transitional period. The text of the proposed EU Savings Directive is
not yet final, and may be subject to further amendment and/or clarification. If
any Member State through which a payment of interest on the notes is made or
collected opts for a withholding system, this may prevent you from receiving
interest on your notes in full.
TAX PAYABLE BY FUNDING AND THE ISSUER MAY ADVERSELY AFFECT OUR ABILITY TO MAKE
PAYMENTS ON THE NOTES
As explained in "MATERIAL UNITED KINGDOM TAX CONSEQUENCES", Funding and the
issuer will generally be subject to UK corporation tax, currently at a rate of
30%, on the profit reflected in their respective profit and loss accounts as
increased by the amount of any expenses or losses which are not deductible for
the purposes of UK corporation tax. If the tax payable by Funding or the issuer
is greater than expected because, for example, expenses or losses which are not
so deductible are greater than expected, the funds available to make payments on
your notes could be materially reduced and this could have a material adverse
effect on our ability to make payments on the notes.
IF THE UNITED KINGDOM JOINS THE EUROPEAN MONETARY UNION PRIOR TO THE MATURITY OF
THE NOTES, WE CANNOT ASSURE YOU THAT THIS WOULD NOT ADVERSELY AFFECT PAYMENTS ON
YOUR NOTES
It is possible that prior to the maturity of the notes the United Kingdom
may become a participating member state in the European economic and monetary
union and the euro may become the lawful currency of the United Kingdom. In that
event, (a) all amounts payable in respect of any notes denominated in pounds
sterling may become payable in euro; (b) applicable provisions of law may allow
or require us to re-denominate such notes into euro and take additional measures
in respect of such notes; and (c) the introduction of the euro as the lawful
currency of the United Kingdom may result in the disappearance of published or
displayed rates for deposits in pounds 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.
CHANGES OF LAW MAY ADVERSELY AFFECT YOUR INTERESTS
The structure of the issue of the notes and the ratings which are to be
assigned to them are based on English law in effect as at the date of this
prospectus. We cannot provide assurance as to the impact of any possible change
to English law or administrative practice in the United Kingdom after the date
of this prospectus. In particular, you should note that significant changes to
the English insolvency regime have recently been enacted, although not all these
provisions have yet been brought into effect.
57
In addition, on March 26, 2002 the Government published the Enterprise
Bill (the "BILL") which, among other things, contains proposals for reforming
bankruptcy and insolvency law. These proposals set out the intention to
introduce legislation the effect of which would be to restrict the right of the
holder of a floating charge to appoint an administrative receiver and instead to
give primacy to collective insolvency procedures and in particular
administration. The Government's aim is that, rather than having primary regard
to the interests of secured creditors, any insolvency official should have
regard to the interests of all creditors, both secured and unsecured. Presently,
the holder of a floating charge over the whole or substantially the whole of the
assets of a company has the ability to block the appointment of an administrator
by appointing an administrative receiver, who primarily acts in the interests of
the floating charge holder, though there are residual duties to the company.
The Bill states that the holder of a valid and enforceable floating charge
over the whole or substantially the whole of a company's property will be able
to appoint an administrator of his choice, and that (if no winding-up order had
been made or provisional liquidator appointed) such appointment can be made
without going to court. However, the administrator will be acting for the
creditors generally and not just his appointor.
Directors of companies will also be able to use the out of court route to
place the company in administration. There will be a notice period during which
the holder of the floating charge can either agree to the proposed appointment
by the directors or appoint an alternative administrator, although the
moratorium will take effect immediately after notice was given. If the floating
charge holder does not respond to the notice of intention to appoint, the
company's appointee will automatically take office after the notice period has
elapsed.
The Bill states that the purpose of administration will be to rescue the
company, or, where that is not reasonably practicable, to achieve a better
result for the company's creditors as a whole than would be likely if the
company were wound up, or, where neither of the above purposes are reasonably
practicable, to realize property in order to make a distribution to one or more
secured or preferential creditors. These purposes could conflict with the wishes
or interests of noteholders. Nevertheless, the Bill makes it clear that the
administrators' statement of proposals cannot include an action that affects the
right of a secured creditor to enforce his security.
The Bill provides that the abolition of administrative receivership will
only apply to a floating charge created on or after a date appointed by the
Secretary of State by order made by statutory instrument. This provision is
generally referred to as the "grandfathering provision". If the Bill is enacted
in its current form, it should therefore continue to be possible to appoint
administrative receivers under floating charges created before the appointed
date. Therefore, if the security granted by the issuer and Funding is created
before the appointed date, the new provisions (in their current form) should not
prevent administrative receivers being appointed under the security.
The Bill also provides that the abolition of administrative receivership
will not extend to certain capital market arrangements. Although the precise
terms of this exception may change as the Bill progresses through Parliament, as
currently drafted, in broad terms, to fall within this exemption, the
arrangement must involve a party incurring or expecting to incur a debt of at
least (pound)50 million and the issue of an investment that is rated, listed or
traded or designed to be rated, listed or traded. As currently drafted, an
arrangement is a "capital market arrangement" if (a) it involves a grant of
security to a person holding it as a trustee for a person who holds a capital
market investment issued by a party to the arrangement; or (b) at least one
party guarantees the performance of obligations of another party; or (c) at
least one party provides security in respect of the performance of obligations
of another party; or (d) the arrangement involves an investment of a kind
described in articles 83 to 85 of the Financial Services and Markets Act 2000
(Regulated Activities) Order 2001 (options, futures and contracts for
differences).
58
If the Bill is brought into force in its current form, this may affect the
ability of the security trustee to enforce, and the remedies available to the
security trustee in enforcing, the security granted by each issuer and Funding.
However, if the Bill is enacted in its present form, it is likely that the
security (insofar as it comprises floating charges over the whole or
substantially the whole of a company's property) will be excepted from the
proposals either under the grandfathering provision or under the exception
dealing with capital markets arrangements.
It should be noted that the Bill does not yet have legal effect and there
is nothing to prevent amendments being made before it is enacted.
As it is not possible to determine whether such proposed changes to the
English insolvency regime will be enacted, or if they are enacted what form they
will take, no assurance can be given as to whether they would have a detrimental
effect on the transactions described in this prospectus or on the interests of
noteholders.
YOUR INTERESTS MAY BE ADVERSELY AFFECTED BY A CHANGE OF LAW IN RELATION TO UK
WITHHOLDING TAX
In the event that amounts due under the notes are subject to withholding
tax, we will not be obliged to pay additional amounts in relation thereto. The
applicability of any UK withholding tax under current English law is discussed
under "MATERIAL UNITED KINGDOM TAX CONSEQUENCES".
PROPOSED CHANGES TO THE BASEL CAPITAL ACCORD AND THE RISK WEIGHTED ASSET
FRAMEWORK MAY RESULT IN CHANGES TO THE RISK-WEIGHTING OF YOUR NOTES
The Basel Committee on Banking Supervision has issued proposals for reform
of the 1988 Capital Accord and has proposed a framework which places enhanced
emphasis on market discipline. The consultation period on the initial proposals
ended in March 2000 and the Committee published its second consultation
document, the "NEW BASEL CAPITAL ACCORD", on January 16, 2001. The consultation
period on the further proposals contained in the New Basel Capital Accord ended
on May 31, 2001. Although the Basel Committee had announced previously that it
would release a revised proposal in early 2002, this has now been delayed
pending the completion of a review assessing the overall impact of the proposals
on banks and the banking system. It is anticipated that the revised proposals
will be issued for public comment in the second quarter of 2003. The Committee
intends to finalize the new Basel Capital Accord in the fourth quarter of 2003,
allowing for implementation of the new framework in each country at year end
2006. If adopted in their current form, the proposals could affect risk
weighting of the notes in respect of certain investors if those investors are
regulated in a manner which will be affected by the proposals. Consequently, you
should consult your own advisers as to the consequences to and effect on you of
the potential application of the New Basel Capital Accord proposals. We cannot
predict the precise effects of potential changes which might result if the
proposals were adopted in their current form.
YOU WILL NOT RECEIVE PHYSICAL NOTES, WHICH MAY CAUSE DELAYS IN DISTRIBUTIONS AND
HAMPER YOUR ABILITY TO PLEDGE OR RESELL THE NOTES
Unless the global note certificates are exchanged for individual note
certificates, which will only occur under a limited set of circumstances, your
beneficial ownership of the notes will only be registered in book-entry form
with DTC, Euroclear or Clearstream, Luxembourg. The lack of physical notes
could, among other things:
o result in payment delays on the notes because we will be sending
distributions on the notes to DTC instead of directly to you;
o make it difficult for you to pledge or otherwise grant security over
the notes if physical notes are required by the party demanding the
pledge or other security; and
o hinder your ability to resell the notes because some investors may be
unwilling to buy notes that are not in physical form.
59
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.
60
DEFINED TERMS
We have provided an index of defined terms at the end of this prospectus
under "GLOSSARY". Terms used in this prospectus have the meaning set out in the
glossary unless they are defined where they first appear in this prospectus. For
purposes of this prospectus, the term "BORROWER" has the meaning set out in the
glossary, but generally means a person or persons who have borrowed money under
a mortgage loan.
Because this transaction is related, by virtue of its master trust
structure, to previous transactions and because it may be related to future
transactions, it is necessary in this prospectus to refer to any or all of these
transactions. In respect of notes, intercompany loans, issuers and terms derived
from or relating to these terms, we use the word "PREVIOUS" when referring to
the Granite Mortgages 01-1 plc transaction that closed on March 26, 2001, the
Granite Mortgages 01-2 plc transaction that closed on September 28, 2001 and the
Granite Mortgages 02-1 plc transaction that closed on March 20, 2002 and persons
and matters connected to those transactions, and "NEW" when referring to future
potential transactions. References to "THE ISSUER", "WE" or "US" refer to
Granite Mortgages 02-2 plc, and references to "THE NOTES" and "THE INTERCOMPANY
LOAN" refer to the notes that we are issuing under this prospectus and the
intercompany loan that we will enter into with Funding on the closing date.
US DOLLAR PRESENTATION
Translations of pounds sterling into US dollars, unless otherwise stated in
this prospectus, have been made at the rate of (pound)0.6505 = $1.00, which
reflects the noon buying rate in the City of New York for cable transfers in
sterling per US$1.00 as certified for customs purposes by the Federal Reserve
Bank on August 16, 2002. Use of this rate does not mean that pound sterling
amounts actually represent those US dollar amounts or could be converted into US
dollars at that rate at any particular time.
References throughout this prospectus to "(POUND)", "POUNDS" or "STERLING"
are to the lawful currency for the time being of the United Kingdom of Great
Britain and Northern Ireland.
References in this prospectus to "US$", "USD" "$", "US DOLLARS" or
"DOLLARS" are to the lawful currency of the United States of America.
References in this prospectus 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.
STERLING/US DOLLAR EXCHANGE RATE HISTORY
YEARS ENDED DECEMBER 31
---------- ----------------------------------------------
EIGHT
MONTHS
ENDED
AUGUST 16,
2002 2001 2000 1999 1998 1997
----------- ------ ------ ------ ------ ------
Last(1) 1.5392 1.4546 1.4930 1.6182 1.6600 1.6451
Average(2) 1.4677 1.4407 1.5160 1.6177 1.6575 1.6395
High 1.5844 1.5038 1.6537 1.6746 1.7115 1.7115
Low 1.4082 1.3727 1.3977 1.5485 1.6128 1.5797
- -------------
Notes
(1) Last is the closing exchange rate on the last operating business day of
each of the years indicated, years commencing from January 1 or the next
operating business day.
(2) Average is the average daily exchange rate during the period.
61
THROUGH
AUGUST 16,
2002 JULY 2002 JUNE 2002 MAY 2002 APRIL 2002 MARCH 2002 FEBRUARY 2002
---------- --------- --------- -------- ---------- ---------- -------------
High 1.5700 1.5844 1.5335 1.4690 1.4590 1.4285 1.4327
Low 1.5246 1.5222 1.4583 1.4503 1.4308 1.4151 1.4124
* Source: Bloomberg
62
THE ISSUER
INTRODUCTION
The issuer was incorporated in England and Wales as a public company
limited by shares under the Companies Act 1985 on July 11, 2002 with registered
number 4482804. The registered office of the issuer is at Fifth Floor, 100 Wood
Street, London EC2V 7EX. The issuer's authorized share capital as at September
9, 2002 comprised 50,000 ordinary shares of (pound)1 each. The issuer's issued
share capital as at September 9, 2002 and as at the date of this prospectus
comprised 50,000 ordinary shares of (pound)1 each (of which (pound)12,500 is
paid up), all of which are beneficially owned by Funding (see "FUNDING").
The issuer is organized as a special purpose company and will be mostly
passive. The issuer has no subsidiaries. The seller does not own directly or
indirectly any of the share capital of Funding or the issuer.
The principal objects of the issuer are set out in its memorandum of
association and permit the issuer, among other things, to lend money and give
credit, secured or unsecured, to borrow or raise money and to grant security
over its property for the performance of its obligations or the payment of
money.
The issuer was established to raise capital by the issue of notes and to
use the net proceeds of such issuance to make the intercompany loan to Funding
in accordance with the intercompany loan agreement to be entered into between
Funding and the issuer.
Since its incorporation, the issuer has not engaged in any material
activities other than those incidental to its registration as a public company
under the Companies Act 1985, the authorization and issue of the notes, the
matters contemplated in this prospectus, the authorization of the other
transaction documents referred to in this prospectus or in connection with the
issue of the notes and other matters which are incidental or ancillary to those
activities. The issuer has no employees.
There is no intention to accumulate surplus cash in the issuer except in
the circumstances set out in "SECURITY FOR THE ISSUER'S OBLIGATIONS". The
current financial period of the issuer will end on December 31, 2003.
DIRECTORS AND SECRETARY
The directors of the issuer and their respective business addresses and
principal activities or business occupations are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ----------------------------- -------------------- -----------------------------
Keith McCallum Currie Northern Rock House Treasury Director of Northern
Gosforth Rock plc
Newcastle upon Tyne
NE3 4PL
L.D.C. Securitisation Director Fifth Floor Acting as corporate directors
No. 1 Limited 100 Wood Street of special purpose companies
London
EC2V 7EX
L.D.C. Securitisation Director Fifth Floor Acting as corporate directors
No. 2 Limited 100 Wood Street of special purpose companies
London
EC2V 7EX
Keith McCallum Currie is an employee of the seller.
The company secretary of the issuer is:
NAME BUSINESS ADDRESS
- ----------------------- ---------------------------------------------
Law Debenture Corporate Fifth Floor, 100 Wood Street, London EC2V 7EX
Services Limited
63
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 Securitisation Fifth Floor, 100 Wood Street, Provision of directors for
Services Limited London EC2V 7EX special purpose vehicles
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, Denyse Monique Anderson, Julian Robert
Mason-Jebb, David Frank Norris and Robert James Williams each of whose business
address is at Fifth Floor, 100 Wood Street, London EC2V 7EX and (other than
Robert James Williams) each of whose principal activities are as director of The
Law Debenture Trust Corporation p.l.c. The principal activity of Robert James
Williams is director of The Law Debenture Corporation p.l.c.
In accordance with the corporate services agreement, the seller and the
corporate services provider will each provide directors and other corporate
services for the issuer in consideration for the payment of an annual fee to the
corporate services provider.
The issuer's activities will principally comprise the issue of the notes,
the making of the intercompany loan to Funding pursuant to the intercompany loan
agreement, the entering into of all documents relating to such issue and such
intercompany loan to which it is expressed to be a party and the exercise of
related rights and powers and other activities referred to in this prospectus or
reasonably incidental to those activities.
CAPITALIZATION AND BORROWINGS
The following table shows the unaudited capitalization and borrowings of
the issuer as at September 9, 2002 and as adjusted for the issuance of the notes
(assuming all of the notes are issued on the closing date):
AT AS ADJUSTED
SEPTEMBER 9, FOR ISSUANCE
2002 OF NOTES
(POUND) (POUND)
--------------- -------------
SHARE CAPITAL
Total paid-up share capital (ordinary shares of (pound)1 each) 50,000 50,000
------ -------------
Total issued share capital (50,000 ordinary shares of (pound)1 each,
partly paid up to 25%) 12,500 12,500
====== =============
BORROWINGS
Series 1 notes 0 1,264,935,065
Series 2 notes 0 760,509,554
Series 3 notes 0 723,000,000
------ -------------
0 2,748,444,619
The issuer's audited balance sheet is set out in Appendix B to this
prospectus. As of September 9, 2002, the issuer had no contingent liabilities
and no outstanding guarantees. There has been no material change to the
capitalization, borrowings or contingent liabilities of the issuer from
September 9, 2002 to the date of this prospectus. The notes issued by this
prospectus will not be guaranteed by the issuer or any other party.
64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF THE ISSUER
SOURCES OF CAPITAL AND LIQUIDITY
The issuer's source of capital will be the net proceeds of the offering of
the notes. The issuer's primary source of liquidity will be payments of interest
and principal on the intercompany loan.
RESULTS OF OPERATIONS
The issuer does not have an operating history as of the date of this
prospectus. Accordingly, this prospectus does not include any historical or pro
forma ratio of earnings to fixed charges. The earnings on the intercompany loan,
the interest costs of the notes and the related operating expenses will
determine the issuer's results of operations in the future. The fee payable by
Funding under the intercompany loan agreement will cover the fees and expenses
of the issuer in connection with the issuance of the notes. The income generated
on the intercompany loan will be used to pay principal and interest on the
notes.
65
USE OF PROCEEDS
The gross proceeds from the issuance of the offered notes will equal
approximately $1,948,000,000 and will be applied (after exchanging the gross US
dollar proceeds of the series 1 notes for sterling proceeds calculated by
reference to the dollar currency swap rates, after exchanging the gross euro
proceeds of the series 2 notes for sterling proceeds calculated by reference to
the euro currency swap rates and after including the gross proceeds from the
issuance of the series 3 notes), in accordance with the intercompany loan
agreement, to make the intercompany loan to Funding. Our fees and expenses in
connection with the issuance of the notes are expected to be approximately
(pound)6,200,000 (or $9,531,130. These fees and expenses will be paid by us, but
will be funded by an amount paid to us by Funding as a fee under the
intercompany loan agreement.
66
THE NORTHERN ROCK GROUP
THE SELLER
The seller was incorporated as a public limited liability company in
England and Wales on October 30, 1996 with registered number 03273685. The
seller is regulated by the Financial Services Authority. The seller was
originally a building society prior to its conversion, effective October 1,
1997, from a mutual form UK building society to a stock form UK bank listed on
the London Stock Exchange plc and authorized under the UK Banking Act.
The registered office of the seller is at Northern Rock House, Gosforth,
Newcastle upon Tyne NE3 4PL. Its telephone number is + 44 191 285 7191.
At June 30, 2002, the seller was the ninth largest UK quoted bank by
market capitalization. It is a specialized mortgage lender whose core business
is the provision of residential mortgages funded in both the retail and
wholesale markets. It also provides a range of other services, mainly related to
its core activities.
At June 30, 2002, the seller and its principal subsidiaries (the "GROUP")
had total assets under management of approximately (pound)36 billion and
employed approximately 3,648 employees. At the date of this prospectus, Northern
Rock has a long-term rating of "A" by Standard & Poor's, "A2" by Moody's and
"A+" by Fitch. The seller's ordinary shares are listed on the London Stock
Exchange plc.
MORTGAGE BUSINESS
The seller is one of the major mortgage lenders in the UK in terms of
mortgage loans outstanding. In the UK mortgage market, the seller's net
residential mortgage lending during 2000, 2001 and for the first half of 2002 at
June 30, 2002 (i.e., new residential mortgage lending during the year net of
capital repayments) was (pound)2.7 billion, (pound)3.8 billion and (pound)2.9
billion, respectively, and gross residential mortgage lending during 2000, 2001
and for the first half of 2002 at June 30, 2002 (i.e., solely on the basis of
new residential mortgage lending during the year) was (pound)5.1 billion,
(pound)6.9 billion and (pound)4.8 billion, respectively.
SUBSIDIARIES OF THE SELLER
The seller currently has the following two principal subsidiaries:
o NORTHERN ROCK MORTGAGE INDEMNITY COMPANY LIMITED
Northern Rock Mortgage Indemnity Company Limited, or NORMIC, is a limited
liability company incorporated in Guernsey on July 15, 1994 with registered
number 28379. NORMIC's core business is the provision of mortgage indemnity
insurance. NORMIC provides mortgage indemnity insurance to the seller.
o NORTHERN ROCK (GUERNSEY) LIMITED
Northern Rock (Guernsey) Limited, or NRG, is a limited liability company
incorporated in Guernsey on November 17, 1995 with registered number 30224. NRG
is a wholly owned subsidiary of the seller and engages in retail deposit taking.
The source of the financial information which appears in this section is
the Northern Rock Group's annual results for the years ended December 31, 2000
and 2001.
The issuer believes that additional information relating to Northern Rock,
in its capacity as basis rate swap provider, is not material to an investor's
decision to purchase the notes.
67
FUNDING
INTRODUCTION
Funding was incorporated as a private limited company in Jersey, Channel
Islands on February 14, 2001 with registered number 79308. The registered office
of Funding is at 22 Grenville Street, St. Helier, Jersey JE4 8PX, Channel
Islands. Funding has been registered, under Schedule 21A to the Companies Act
1985, as having established a branch in England and Wales on February 19, 2001.
Its registered overseas company number is FC022999 and branch number is
BR005916. The branch address is at 4th Floor, 35 New Bridge Street, Blackfriars,
London EC4V 6BW. The authorized share capital of Funding as at June 30, 2002
comprised 100,000 ordinary shares of (pound)1 each. The issued share capital of
Funding as at June 30, 2002 comprised 37,500 ordinary shares of (pound)1 each,
all of which are beneficially owned by Holdings (see "HOLDINGS"), and the issued
share capital of Funding as at the date of this prospectus is comprised of
50,000 ordinary shares of (pound)1 each, all of which will continue to be
beneficially owned by Holdings.
Funding is organized as a special purpose company and is mostly passive.
Funding has no subsidiaries other than the previous issuers and the issuer,
although it is expected that, subject to certain conditions, Funding will
establish new issuers from time to time to issue new notes. Each new issuer will
be a subsidiary of Funding.
Since its incorporation, Funding has not engaged in any material
activities other than those relating to the issue of the previous notes by the
previous issuers and those activities incidental to establishing the issuer,
authorizing the transaction documents referred to in this prospectus, obtaining
a standard license under the Consumer Credit Act 1974, filing a notification
under the Data Protection Act 1998 and other matters which are incidental or
ancillary to those activities. The current financial period of Funding will end
on December 31, 2002.
DIRECTORS AND SECRETARY
The directors of Funding and their respective business addresses and
principal activities or business occupations are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ---- ---------------- ---------------------
Keith McCallum Currie Northern Rock House Treasury Director of Northern
Gosforth Rock plc
Newcastle upon Tyne
NE3 4PL
Nigel Charles Bradley Fourth Floor Director
35 New Bridge Street
Blackfriars
London EC4V 6BW
Jonathan Clemson Walker Fourth Floor Solicitor
35 New Bridge Street
Blackfriars
London EC4V 6BW
Keith McCallum Currie is an employee of the seller.
The company secretary of Funding is:
NAME BUSINESS ADDRESS
- ---- ----------------
Mourant & Co. Capital Secretaries Limited Fourth Floor,
35 New Bridge Street
Blackfriars,
London EC4V 6BW
68
Jonathan Walker is a partner of Mourant du Feu & Jeune, the legal adviser
to Funding as to matters of Jersey law and a partner of the Mourant Group, which
is the ultimate owner of Mourant & Co. Capital (SPV) Limited, to which fees are
payable for providing corporate administration services to Funding, including
the provision of a secretary through its subsidiary company, Mourant & Co.
Capital Secretaries Limited. Jonathan Walker also is a director of Mourant & Co.
Capital (SPV) Limited and Mourant & Co. Capital Secretaries Limited. Nigel
Bradley is an employee of the Mourant Group and a director of Mourant & Co.
Capital (SPV) Limited and Mourant & Co. Capital Secretaries Limited.
CAPITALIZATION AND BORROWINGS
The following table shows the unaudited capitalization and borrowings of
Funding as at June 30, 2002 and as adjusted for the drawing of the intercompany
loan and the start-up loan (assuming that the intercompany loan and the start-up
loan are drawn on the closing date):
AS ADJUSTED FOR
DRAWING OF
INTERCOMPANY
LOAN AND START-
JUNE 30, 2002 UP LOAN
(POUND) (POUND)
------------- ---------------
SHARE CAPITAL
Total authorized share capital (ordinary shares of (pound)1 each) 100,000 100,000
Total issued share capital (ordinary shares of (pound)1 each
allotted and fully paid) 37,500 50,000
------------- -------------
LOAN CAPITAL OR BORROWINGS
Secured intercompany loan (Granite Mortgages 01-1 plc) 1,272,879,444 1,219,648,063(1)
Start-up loan for Granite Mortgages 01-1 plc 4,717,500 4,447,095(1)
------------- -------------
Secured intercompany loan (Granite Mortgages 01-2 plc) 1,392,961,538 1,337,884,615(1)
Start-up loan for Granite Mortgages 01-2 plc 8,900,000 8,517,720(1)
------------- -------------
Secured intercompany loan (Granite Mortgages 02-1 plc) 2,431,265,845 2,334,875,186(1)
Start-up loan for Granite Mortgages 02-1 plc 25,100,000 25,100,000
------------- -------------
Secured intercompany loan (Granite Mortgages 02-2 plc) 0 2,748,444,619
Start-up loan for Granite Mortgages 02-2 plc 0 24,000,000
------------- -------------
Total Loan Capital or Borrowings 5,135,824,327 7,702,917,298
============= =============
- ----------
(1) As adjusted for principal repaid by Funding to the relevant issuer under
the relevant intercompany loan and payments made by Funding to the start-up
loan provider under the relevant start-up loan on the July 22, 2000
distribution date.
Funding's audited balance sheets, related statements of income, statements
of changes in shareholders' equity and statements of cash flows are set out in
Appendices E through N to this prospectus. As of June 30, 2002, Funding had no
contingent liabilities or any outstanding guarantees. Except as disclosed in
this prospectus in relation to the issuance of the notes, there has been no
material change to the capitalization, borrowings, contingent liabilities or
outstanding guarantees of Funding from June 30, 2002 to the date of this
prospectus, other than with respect to principal repaid by Funding under the
intercompany loans on the July 22, 2002 distribution date, as set forth in the
table above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
SOURCES OF CAPITAL AND LIQUIDITY
Funding's principal sources of capital are the previous intercompany loans
made to it by the previous issuers and the intercompany loan made to it by the
issuer.
69
Funding's primary source of liquidity is the earnings on Funding's
interest in the trust property and the Funding reserve fund and (in specified
circumstances and for specified purposes) each previous issuer's reserve fund
and each previous issuer's liquidity reserve fund, if any, and will include
after the closing date (in specified circumstances and for specified purposes)
earnings on Funding's interest in the issuer reserve fund and the issuer
liquidity reserve fund, if any.
RESULTS OF OPERATIONS
Funding has had a limited operating history as of the date of this
prospectus. Accordingly this prospectus does not include any historical or pro
forma ratio of earnings to fixed charges. The earnings on Funding's interest in
the trust property, the Funding reserve fund, each previous issuer's and our
reserve fund, each previous issuer's and our liquidity reserve fund, if any,
each start-up loan and the related operating expenses will determine Funding's
results of operations in the future. The income generated on its interest in the
trust property will be used to pay principal and interest on the intercompany
loan to the issuer, to pay principal and interest on the previous intercompany
loans to the previous issuers and to pay principal and interest on any new
intercompany loan to any new issuer.
70
THE MORTGAGES TRUSTEE
INTRODUCTION
The mortgages trustee was incorporated as a private limited company in
Jersey, Channel Islands on February 14, 2001 with registered number 79309. The
registered office of the mortgages trustee is at 22 Grenville Street, St.
Helier, Jersey JE4 8PX, Channel Islands. The authorized share capital of the
mortgages trustee as at December 31, 2001 comprised 10,000 ordinary shares of
(pound)1 each. The issued share capital of the mortgages trustee as at December
31, 2001 and as of the date of this prospectus comprised 10 ordinary shares of
(pound)1 each, all of which were beneficially owned by Holdings (see
"HOLDINGS"). As at the date of this prospectus, the mortgages trustee does not
have any borrowings or contingent liabilities. 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 the previous notes
of the previous issuers, the authorization of the transaction documents referred
to in this prospectus to which it is or will be a party, obtaining a standard
license under the Consumer Credit Act 1974, filing a notification under the Data
Protection Act 1998 and other matters which are incidental or ancillary to those
activities. The current financial period of the mortgages trustee will end on
December 31, 2002.
DIRECTORS AND SECRETARY
The directors of the mortgages trustee and their respective business
addresses and principal activities or business occupations are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ---- ---------------- ---------------------
Nicola Claire Davies 22 Grenville Street Advocate
St. Helier
Jersey
JE4 8PX
Channel Islands
Julia Anne Jennifer Chapman 22 Grenville Street Solicitor
St. Helier
Jersey JE4 8PX
Channel Islands
Richard Gough 22 Grenville Street Corporate Services Manager
St. Helier
Jersey JE4 8PX
Channel Islands
Gareth Paul Essex-Cater 22 Grenville Street Corporate Services Manager
St. Helier
Jersey JE4 8PX
Channel Islands
71
The company secretary of the mortgages trustee is:
NAME BUSINESS ADDRESS
- ---- ----------------
Mourant & Co. Secretaries Limited 22 Grenville Street
St. Helier
Jersey JE4 8PX
Channel Islands
Each of Nicola Davies and Julia Chapman is a partner of Mourant du Feu &
Jeune, the legal adviser to the mortgages trustee as to matters of Jersey law,
and each is a partner of the Mourant Group, the ultimate owner of Mourant & Co.
Limited, to which fees are payable for providing corporate administration
services to the mortgages trustee, including the provision of a secretary
through its subsidiary company, Mourant & Co. Secretaries Limited. Each of
Nicola Davies and Julia Chapman is a director of Mourant & Co. Limited and
Mourant & Co. Secretaries Limited. Each of Richard Gough and Gareth Essex-Cater
is an employee of the Mourant Group and an associate director of Mourant & Co.
Limited, the parent company of Mourant & Co. Secretaries Limited.
72
HOLDINGS
INTRODUCTION
Holdings was incorporated as a private limited company in England and
Wales on December 14, 2000 with registered number 4127787. The registered office
of Holdings is at Fifth Floor, 100 Wood Street, London EC2V 7EX.
The authorized share capital of Holdings as at December 31, 2001 comprised
100,000 ordinary shares of (pound)1 each. The issued share capital of Holdings
as at December 31, 2001 was comprised of 37,518 ordinary shares of (pound)1
each, all of which were held by The Law Debenture Intermediary Corporation
p.l.c. under the terms of a trust for the benefit of charitable institutions,
and the issued share capital of Holdings as at the date of this prospectus is
comprised of 50,018 ordinary shares of (pound)1 each, all of which will continue
to be held by The Law Debenture Intermediary Corporation p.l.c. under the terms
of a trust for the benefit of charitable institutions. Holdings is organized as
a special purpose company and is mostly passive.
The principal objects of Holdings are as set out in its memorandum of
association and are, among other things, to acquire and hold, by way of
investments or otherwise and to deal in or exploit in such manner as may from
time to time be considered expedient, all or any of the shares, stocks,
debenture stocks, debentures or other interests of or in any company (including
the mortgages trustee, Funding and the post-enforcement call option holder).
Since its incorporation, other than subscribing for or otherwise acquiring
the issued share capital of the mortgages trustee, Funding and GPCH Limited,
Holdings has not engaged in any other activities. Holdings has no employees. The
current financial period of Holdings will end on December 31, 2002.
DIRECTORS AND SECRETARY
The directors of Holdings and their respective business addresses and
principal activities or business occupations are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ---- ---------------- ---------------------
Keith McCallum Currie Northern Rock House Treasury Director of Northern
Gosforth Rock plc
Newcastle upon Tyne
NE3 4PL
L.D.C. Securitisation Fifth Floor Acting as corporate directors
Director No. 1 Limited 100 Wood Street of special purpose companies
London
EC2V 7EX
L.D.C. Securitisation Fifth Floor Acting as corporate directors
Director No. 2 Limited 100 Wood Street of special purpose companies
London
EC2V 7EX
Keith McCallum Currie is an employee of the seller.
The Company Secretary of Holdings is:
NAME BUSINESS ADDRESS
- ---- ----------------
Law Debenture Corporate Services Limited Fifth Floor
100 Wood Street
London
EC2V 7EX
The directors of L.D.C. Securitisation Director No. 1 Limited and L.D.C.
Securitisation Director No. 2 Limited are set out on page 64 of this prospectus.
73
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 authorized share capital of the post-enforcement call option holder as
at December 31, 2001 comprised 100 ordinary shares of (pound)1 each. The issued
share capital of the post-enforcement call option holder as at December 31, 2001
and as at the date of this prospectus comprised 2 ordinary shares of (pound)1
each, both of which were beneficially owned by Holdings.
The post-enforcement call option holder is organized as a special purpose
company and is mostly passive. The post-enforcement call option holder has no
subsidiaries. The seller does not own directly or indirectly any of the share
capital of Holdings or the post-enforcement call option holder.
The principal objects of the post-enforcement call option holder are as
set out in its memorandum of association and are, among other things, to hold
bonds, notes, obligations and securities issued or guaranteed by any company and
any options or rights in respect of them.
Since its incorporation, the post-enforcement call option holder has not
engaged in any material activities other than those activities incidental or
relating to the issue of the previous notes by the previous issuers and the
authorizing of the transaction documents referred to in this prospectus and
other matters which are incidental to those activities. The post-enforcement
call option holder has no employees.
The current financial period of the post-enforcement call option holder
will end on December 31, 2002.
DIRECTORS AND SECRETARY
The directors of the post-enforcement call option holder and their
respective business addresses and principal activities or business occupations
are:
PRINCIPAL ACTIVITIES/
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ---- ---------------- ---------------------
Keith McCallum Currie Northern Rock House Treasury Director of Northern
Gosforth Rock plc
Newcastle upon Tyne
NE3 4PL
L.D.C. Securitisation Fifth Floor Acting as corporate directors
Director No. 1 Limited 100 Wood Street of special purpose companies
London
EC2V 7EX
L.D.C. Securitisation Fifth Floor Acting as corporate directors
Director No. 2 Limited 100 Wood Street of special purpose companies
London
EC2V 7EX
Keith McCallum Currie is an employee of the seller.
74
The company secretary of the post-enforcement call option holder is:
NAME BUSINESS ADDRESS
- ---- ----------------
Law Debenture Corporate Services Limited Fifth Floor
100 Wood Street
London
EC2V 7EX
The Directors of L.D.C. Securitisation Director No. 1 Limited and L.D.C.
Securitisation Director No. 2 Limited are set out on page 64 of this prospectus.
75
THE CURRENCY SWAP PROVIDER
CDC IXIS Capital Markets ("CDC ICM") is the dollar currency swap provider
in respect of the series 1 notes and the euro currency swap provider in respect
of the series 2 notes. CDC ICM is a limited liability company (societe anonyme a
Directoire et Conseil de Surveillance), which was incorporated on March 31, 1987
and is regulated by Articles L. 210-1 et seq, of the French Commercial Code. Its
registered office is located at 51 rue de Lille 75356 Paris Cedex 7, France.
Initially named CDC International, CDC ICM changed its name to CDC Marches. The
name of the dollar currency swap counterparty and euro currency swap provider
was later changed from CDC Marches to CDC IXIS Capital Markets, with effect from
January 12, 2001. CDC ICM is acting through its London Branch, established in
accordance with the 2nd European Directive, registered in England as a branch
under No. BROO4413 and regulated by the Financial Services Authority (the "FSA")
for investment business conducted in the United Kingdom.
CDC ICM was licensed as a finance company (societe fnanciere), a type of
credit institution, on May 31, 1996 by the Comite des etablissements de credit
et des entreprises d'investissement. Consequently, CDC ICM is subject to French
and European laws and regulations applicable to credit institutions (such as
capital adequacy, insolvency and prudential ratios) and is regulated by Livre V
of the Code monetaire et financier (the French Monetary and Financial Code). As
a provider of investment services, CDC ICM is also subject to the supervision
and regulation of the Conseil des marches financiers which grants licenses to
providers of investment services and regulates and controls their financial
activities.
The long term, unsecured, unsubordinated and unguaranteed debt obligations
of CDC ICM are currently rated "AAA" by S&P, "Aaa" by Moody's and "AAA" by
Fitch. The short term, unsecured, unsubordinated and unguaranteed debt
obligations of CDC ICM are currently rated "P-1" by Moody's, "A-1+" by S&P and
"F-1+" by Fitch.
The information in the preceding three paragraphs has been provided solely
by CDC ICM for use in this prospectus and CDC ICM is solely responsible for the
accuracy of the preceding three paragraphs. Except for the foregoing three
paragraphs, CDC ICM (in its capacity as dollar currency swap provider and euro
currency swap provider) and its affiliates have not been involved in the
preparation of, and do not accept responsibility for, this prospectus.
The issuer believes that additional information relating to CDC ICM, in its
capacity as dollar currency swap provider and as euro currency swap provider, is
not material to an investor's decision to purchase the notes.
76
DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS
FIRST ISSUER
The first issuer, Granite Mortgages 01-1 plc, was incorporated in England
and Wales as a public company limited by shares under the Companies Act 1985 on
December 18, 2000 with registered number 4129652. The registered office of the
first issuer is at Fifth Floor, 100 Wood Street, London EC2V 7EX. The first
issuer was organized as a special purpose company whose purpose was to issue the
first issuer notes that represent its asset-backed obligations and to lend an
amount equal to the proceeds of the issue of such notes to Funding under the
first issuer intercompany loan. The first issuer does not engage in any
activities that are unrelated to these activities.
The following table summarizes the principal features of the first issuer
notes:
CLASS OF FIRST ISSUER NOTES
--------------------------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2 SERIES 2
CLASS A1 CLASS A2 CLASS B CLASS C CLASS A CLASS B CLASS C
------------ ------------ ----------- ----------- ----------- ---------- ----------
(pound) (pound) (pound)
Principal $760,000,000 $735,000,000 $50,000,000 $67,500,000 350,000,000 10,000,000 15,000,000
Amount as at
March 26, 2001:
Credit Subordination Subordination Subordination The first Subordination Subordination The first
enhancement: of the Class of the of the Class issuer of the Class of the class issuer
B first Class B C first reserve fund B first C first reserve fund
issuer notes first issuer notes issuer notes issuer notes
and the issuer and the and the and the
Class C notes and first issuer Class C first issuer
first issuer the Class C reserve fund first issuer reserve fund
notes and first notes and
the first issuer the first
issuer notes and issuer
reserve fund the first reserve fund
issuer
reserve fund
Interest rate: Three-month Three-month Three-month Three-month Three month Three month Three month
USD LIBOR + USD LIBOR + USD LIBOR + USD LIBOR + sterling sterling sterling
margin margin margin margin LIBOR + LIBOR + LIBOR +
margin margin margin
Margin until 0.12% p.a. 0.21% p.a. 0.40% p.a. 1.40% p.a. 0.24% p.a. 0.40% p.a. 1.40% p.a.
payment date
falling in
January 2008:
Margin after 0.24% p.a. 0.42% p.a. 0.80% 2.40% p.a. 0.48% p.a. 0.80% p.a. 2.40% p.a.
payment date
falling in
January 2008:
Expected final January 20, N/A N/A N/A N/A N/A N/A
payment date: 2004
Interest Actual/360 Actual/360 Actual/360 Actual/360 Actual/365 Actual/365 Actual/365
accrual method:
Payment dates: Quarterly in arrears on the payment dates falling in July, October, January and April of each year
First payment July, 2001 July, 2001 July, 2001 July, 2001 July, 2001 July, 2001 July, 2001
date:
Final maturity January 2011 January 2026 January 2041 January 2041 January 2041 January 2041 January 2041
date:
Stock Exchange London London London London London London London
Listing:
ISIN: US387413 AA59 US387413 AB33 US387413 AC16 US387413 AD98 XS0126890390 XS0126890473 XS0126890556
Common Code: 012691998 012692005 012692021 012692030 012689039 012689047 012689055
CUSIP Number: 387413 AA5 387413 AB3 387413 AC1 387413 AD9 N/A N/A N/A
Rating as at Aaa/AAA/AAA Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB
March 26, 2001
(Moody's/S&P/
Fitch):
77
SECOND ISSUER
The second issuer, Granite Mortgages 01-2 plc, was incorporated in England
and Wales as a public company limited by shares under the Companies Act 1985 on
August 14, 2001 with registered number 4270015. The registered office of the
second issuer is at Fifth Floor, 100 Wood Street, London EC2V 7EX. The second
issuer was organized as a special purpose company whose purpose was to issue the
second issuer notes that represent its asset-backed obligations and to lend an
amount equal to the proceeds of such notes to Funding under the second issuer
intercompany loan. The second issuer does not engage in any activities that are
unrelated to these activities.
The following table summarizes the principal features of the second issuer
notes:
CLASS OF SECOND ISSUER NOTES
------------------------------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2 SERIES 2 SERIES 2
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS D
-------------- ----------- ----------- ----------- ---------- ---------- ----------
(pound) (pound) (pound) (pound)
Principal $1,300,000,000 $43,500,000 $58,000,000 500,000,000 15,000,000 20,000,000 10,000,000
Amount as at
September 28,
2001:
Credit Subordination Subordination Subordination Subordination Subordination Subordination N/A
enhancement: of the of the of the of the of the of the
second second second second second second
issuer class issuer issuer issuer issuer class issuer
B notes, the class C reserve fund class B C notes and reserve fund
second notes and notes, the the second
issuer class the second second issuer
C notes and issuer issuer reserve fund
the second reserve fund class C
issuer notes and
reserve fund the second
issuer
reserve fund
Interest rate: Three-month Three-month Three-month Three-month Three-month Three-month Three-month
USD LIBOR + USD LIBOR + USD LIBOR + sterling sterling sterling sterling
margin margin margin LIBOR + LIBOR + LIBOR + LIBOR +
margin margin margin margin
Margin until 0.230% p.a. 0.400% p.a 1.375% p.a 0.250% p.a 0.420% p.a 1.400% p.a 4.600% p.a
payment date
falling in
October 2006:
Margin after 0.460% p.a 0.800% p.a 2.375% p.a 0.500% p.a 0.840% p.a 2.400% p.a 5.600% p.a
payment date
falling in
October 2006:
Interest Actual/360 Actual/360 Actual/360 Actual/365 Actual/365 Actual/365 Actual/365
accrual method:
Payment dates: Quarterly in arrears on the payment dates falling in January, April, July and October of each year
First payment January 2002 January 2002 January 2002 January 2002 January 2002 January 2002 January 2002
date:
Final maturity October 2021 October 2041 October 2041 October 2041 October 2041 October 2041 October 2041
date:
Stock Exchange London London London London London London London
Listing:
ISIN: US38741PAA66 US38741PAB40 US38741PAC23 XS0134454510 XS0134454866 XS0134455590 XS0134456218
Common Code: 013632251 013632413 013632448 013445451 013445486 013445559 013445621
CUSIP Number: 38741PAA6 38741PAB4 38741PAC2 N/A N/A N/A N/A
Rating as at Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB Ba2/BB+/BB+
September 28,
2001
(Moody's/S&P/
Fitch):
78
THIRD ISSUER
The third issuer, Granite Mortgages 02-1 plc, was incorporated in England
and Wales as a public company limited by shares under the Companies Act 1985 on
December 14, 2001 with registered number 4340767. The registered office of the
third issuer is at Fifth Floor, 100 Wood Street, London EC2V 7EX. The third
issuer was organized as a special purpose company whose purpose was to issue the
third issuer notes that represent its asset-backed obligations and to lend an
amount equal to the proceeds of such notes to Funding under the third issuer
intercompany loan. The third issuer does not engage in any activities that are
unrelated to these activities.
The following table summarizes the principal features of the third issuer notes:
CLASS OF NOTES
------------------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2
CLASS A1 CLASS A2 CLASS B CLASS C CLASS A CLASS B
------------ -------------- ----------- ----------- ----------- ----------
(pound) (pound)
Principal Amount $704,200,000 $1,274,400,000 $69,700,000 $96,500,000 460,000,000 16,200,000
as at March 20,
2002:
Credit Subordination Subordination Subordination The third Subordination Subordination
enhancement: of the third of the third of the third issuer reserve of the third of the third
issuer class B issuer class B issuer class C fund issuer class issuer class
notes, the notes, the notes and the B notes, the C notes and
third issuer third issuer third issuer third issuer the third
class C notes class C notes reserve fund class C issuer
and the third and the third notes and reserve fund
issuer reserve issuer reserve the third
fund fund issuer
reserve fund
Interest rate: Three-month Three-month Three-month Three-month Three-month Three-month
USD LIBOR + USD LIBOR + USD LIBOR + USD LIBOR + sterling sterling
margin margin margin margin LIBOR + LIBOR +
margin margin
Margin until 0.10% p.a. 0.16% p.a. 0.33% p.a 1.30% p.a 0.20% p.a 0.35% p.a
payment date
falling in April
2007:
Margin after 0.20% p.a 0.32% p.a. 0.66% p.a 2.30% p.a 0.40% p.a 0.70% p.a
payment date
falling in April
2007:
Interest accrual Actual/360 Actual/360 Actual/360 Actual/360 Actual/365 Actual/365
method:
Payment dates: For all of the third issuer notes (other than the
series 3 class A notes), interest and principal is payable
quarterly in arrears on the payment dates falling in July,
October, January and April of each year, beginning in July
2002. For the third issuer series 3 class A notes, until
(and including) the payment date in April 2007, interest
and principal is payable annually in arrears on the 20th
day in April of each year, beginning in April 2003 or the
next succeeding business day if the 20th of April is not a
business day. If a trigger event occurs or the issuer
security is enforced prior to the payment date falling in
April 2007, interest and principal due and payable on the
third issuer series 3 class A notes will be payable
quarterly in arrears on the payment dates falling in
January, April, July and October of each year. After the
payment date falling in April 2007, interest and principal
due and payable on the third issuer series 3 class A notes
will be payable quarterly in arrears on the payment dates
falling in January, April, July and October of each year.
First payment date July 2002 July 2002 July 2002 July 2002 July 2002 July 2002
(payment date
occurring in):
Final maturity October 2016 July 2019 April 2042 April 2042 April 2042 April 2042
date:
Stock Exchange London London London London London London
Listing:
ISIN: US38741NAA19 US38741NAB91 US38741NAC74 US38741NAD57 XS0144804712 XS0144805958
Common Code: 014465952 014466045 014466053 014466088 014480471 014480595
CUSIP Number: 38741NAA1 38741NAB9 38741NAC7 38741NAD5 N/A N/A
Rating as at March Aaa/AAA/AAA Aaa/AAA/AAA Aa3/AA/AA Baa2/BBB/BBB Aaa/AAA/AAA Aa3/AA/AA
20, 2002
(Moody's/S&P/
Fitch):
- ----------------------
CLASS OF NOTES
----------------------------------------------------------------------------------
SERIES 2 SERIES 2 SERIES 3 SERIES 3 SERIES 3
CLASS C CLASS D CLASS A CLASS B CLASS C
---------- ---------- ----------- ---------- ----------
(pound) (pound) (euro) (euro) (euro)
Principal Amount 22,500,000 15,000,000 600,000,000 21,100,000 29,300,000
as at March 20,
2002:
Credit The third N/A Subordination Subordination Subordination
enhancement: issuer reserve of the third of the third of the third
fund issuer class issuer class issuer
B notes, the C notes and reserve fund
third issuer the third
class C notes issuer
and the third reserve fund
issuer
reserve fund
Interest rate: Three-month Three-month 5.15% Three-month Three-month
sterling LIBOR sterling annually, EURIBOR + EURIBOR +
+ margin LIBOR + until the margin margin
margin payment date
in April
2007, and
then
three-month
EURIBOR +
margin
Margin until 1.30% p.a 4.50% p.a N/A 0.35% p.a 1.30% p.a
payment date
falling in April
2007:
Margin after 2.30% p.a 5.50% p.a 0.42% p.a 0.70% p.a 2.30% p.a
payment date
falling in April
2007:
Interest accrual Actual/365 Actual/365 Actual/Actual Actual/365 Actual/365
method: (ISMA) until
the payment
date in April
2007 and then
Actual/360
Payment dates: For all of the third issuer notes (other than the
series 3 class A notes), interest and principal is payable
quarterly in arrears on the payment dates falling in July,
October, January and April of each year, beginning in July
2002. For the third issuer series 3 class A notes, until
(and including) the payment date in April 2007, interest
and principal is payable annually in arrears on the 20th
day in April of each year, beginning in April 2003 or the
next succeeding business day if the 20th of April is not a
business day. If a trigger event occurs or the issuer
security is enforced prior to the payment date falling in
April 2007, interest and principal due and payable on the
third issuer series 3 class A notes will be payable
quarterly in arrears on the payment dates falling in
January, April, July and October of each year. After the
payment date falling in April 2007, interest and principal
due and payable on the third issuer series 3 class A notes
will be payable quarterly in arrears on the payment dates
falling in January, April, July and October of each year.
First payment date July 2002 July 2002 April 2003 July 2002 July 2002
(payment date
occurring in):
Final maturity April 2042 April 2042 April 2042 April 2042 April 2042
date:
Stock Exchange London London London London London
Listing:
ISIN: XS0144806253 XS0144806501 XS0144807491 XS0144807657 XS0144807814
Common Code: 014480625 014480650 014480749 014480765 014480781
CUSIP Number: N/A N/A N/A N/A N/A
Rating as at March Baa2/BBB/BBB Ba2/BB+/BB+ Aaa/AAA/AAA Aa3/AA/AA Ba2/BB+/BB+
20, 2002
(Moody's/S&P/
Fitch):
PREVIOUS ISSUERS -- GENERAL
Each previous issuer's obligations to pay principal and interest on the
previous notes issued by such previous issuer are funded primarily from payments
of principal and interest received by it from Funding under the related previous
intercompany loan. Each previous issuer's primary asset is the related previous
intercompany loan. None of the previous issuers nor the previous noteholders
have any direct interest in the trust property, although each previous issuer
shares with us the security interest under the Funding deed of charge in
Funding's share of the trust property.
Funding used the proceeds of the previous intercompany loans from the
previous issuers (less an amount used to fund each previous issuer's reserve
fund) to pay the mortgages trustee for Funding's initial contributions to the
mortgages trustee for the
79
Funding share of the relevant trust property that the seller assigned to the
mortgages trustee pursuant to the mortgages trust deed. Upon receipt of
Funding's initial contribution, the mortgages trustee paid those funds to the
seller in satisfaction of the mortgages trustee's obligation to pay to the
seller the initial purchase price for the assignment to the mortgages trustee of
each mortgage portfolio pursuant to the mortgage sale agreement. Funding uses a
portion of the amounts received from the Funding share of the trust property to
meet its obligations to pay interest and principal due to each previous issuer
under each related previous intercompany loan. As mentioned above, Funding's
obligations to the previous issuers under the previous intercompany loans will
be secured under the Funding deed of charge by, among other things, the Funding
share of the trust property. A default by Funding under either previous
intercompany loan will cause a default under our intercompany loan.
80
THE MORTGAGE LOANS
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. At December 31, 2001, mortgage loans
outstanding in the UK amounted to approximately (pound)591 billion. Outstanding
mortgage debt grew at an annual average rate of 6.3% between 1992 and 2001. At
the end of 2001, banks held 71% of outstanding mortgage debt while building
societies held 19% of outstanding mortgage debt.
In describing the characteristics of the mortgage loans, references in this
prospectus to the "INITIAL MORTGAGE PORTFOLIO" mean the portfolio of mortgage
loans, their related security, accrued interest and other amounts derived from
such mortgage loans that the seller assigned to the mortgages trustee on March
26, 2001. References in this prospectus to the "FURTHER MORTGAGE PORTFOLIOS"
mean the portfolios of further mortgage loans, their related security, accrued
interest and other amounts derived from such further mortgage loans that the
seller assigned to the mortgages trustee on September 28, 2001 and on March 20,
2002. References in this prospectus to the "EXISTING MORTGAGE PORTFOLIO" mean
the initial mortgage portfolio and the further mortgage portfolios as it is
constituted as of any date of determination prior to the closing date, taking
account of, among other things, amortization of mortgage loans in that portfolio
and the addition and/or removal of any mortgage loans from that portfolio since
March 26, 2001. References in this prospectus to the "ADDITIONAL MORTGAGE
PORTFOLIO" mean the portfolio of additional mortgage loans that the seller
anticipates assigning to the mortgages trustee on the closing date. References
in this prospectus to the "ADDITIONAL ASSIGNED MORTGAGE PORTFOLIO" mean the
portfolio of additional assigned mortgage loans, their related security, accrued
interest and other amounts derived from such additional assigned mortgage loans
that the seller will assign to the mortgages trustee on the closing date.
References in this prospectus to the "CUT-OFF DATE MORTGAGE PORTFOLIO" mean, as
of the cut-off date, the existing mortgage portfolio combined with the
additional mortgage portfolio. References in this prospectus to the "MORTGAGE
PORTFOLIO" mean the combined existing mortgage portfolio and additional assigned
mortgage portfolio following the assignment of the additional assigned mortgage
loans to the mortgages trustee on the closing date, as it is constituted as of
any date of determination following the closing date, 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 closing
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 cut-off date
mortgage portfolio may incorporate one or more of the features referred to in
this section. The seller will not assign to the mortgages trust any mortgage
loan that was in arrears at any time during the 12 months prior to the
assignment date, and will not assign to the mortgages trust any mortgage loan
that is a non-performing mortgage loan.
Each borrower may have more than one mortgage loan incorporating different
features, but all mortgage loans secured on the same mortgaged property will be
incorporated in a single account with the seller which is called the mortgage
account. Each mortgage loan is secured by a first legal charge over a
residential property in England or Wales, and all of the mortgage loans are
subject to the laws of England and Wales. 117,727 of the mortgages securing the
mortgage loans in the cut-off date mortgage portfolio (or 83.73% of the
aggregate current balance of the mortgage loans as of the cut-off date) are on
freehold properties and 23,946 of the mortgages securing the mortgage loans in
the cut-off date mortgage portfolio (or 16.27% of the aggregate current balance
of the mortgage loans as of the cut-off date) are on leasehold properties.
81
The seller will select randomly which mortgage loans from the additional
mortgage portfolio (and any subsequent mortgage portfolio) will be assigned to
the mortgages trustee. In making its selection, the seller will exclude from the
additional mortgage portfolio those mortgage loans that have been repaid in full
or that do not comply with the terms of the mortgage sale agreement on the
closing date (or in the case of mortgage loans assigned subsequently, the
relevant 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 included in the additional
assigned mortgage portfolio once a determination has been made as to the
principal balances of the notes to be issued and the corresponding size of the
trust that is required ultimately to support payments on the notes.
We do not expect the characteristics of the mortgage portfolio as of the
closing date to differ materially from the characteristics of the cut-off date
mortgage portfolio. Unless we indicate otherwise, the following description
relates to types of mortgage loans that could be included in the mortgage
portfolio as of the closing date or on any subsequent date.
The cut-off date mortgage portfolio was drawn up as at July 31, 2002 and
comprised 141,673 mortgage loans having an aggregate current balance of
(pound)9,212,522,929.37 as at that date. The seller originated the mortgage
loans in the cut-off date mortgage portfolio between July 1, 1995 and March 31,
2002. None of the mortgage loans in the additional mortgage portfolio has an
aggregate monthly payment that is overdue by one or more months.
The seller may assign new mortgage loans and their related security to the
mortgages trustee after the closing date. The seller reserves the right to amend
its lending criteria and to assign to the mortgages trustee new mortgage loans
which are based upon mortgage conditions (as defined in the glossary) different
from those upon which mortgage loans forming the cut-off date mortgage portfolio
are based. Those new mortgage loans may include mortgage loans which are
currently being offered to borrowers and have some of the characteristics
described here, but may also include mortgage loans with other characteristics
that the seller currently is not offering to borrowers or that the seller has
not yet developed. The terms of the mortgage sale agreement require that all new
mortgage loans comply with the warranties set out in the mortgage sale
agreement. We describe all of the material warranties in the mortgage sale
agreement in this prospectus. See "ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED
SECURITY".
CHARACTERISTICS OF THE MORTGAGE LOANS
MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER
The seller offers a variety of fixed rate, variable rate and hybrid
mortgage loan products to borrowers. The seller may assign to the mortgages
trustee any of the following of its mortgage loan products, which in each case
may comprise one or more of the following:
o "FIXED RATE MORTGAGE LOANS": are subject to a fixed interest rate for
a specified period of time and at the expiration of that period are
generally subject to the seller's standard variable rate;
o "STANDARD VARIABLE RATE MORTGAGE LOANS": are subject to the seller's
standard variable rate for the life of the mortgage loan;
o "TOGETHER MORTGAGE LOANS": a flexible mortgage loan, which is offered
in four product types: Together flexible, Together variable, Together
fixed and Together fixed for life. These products allow the borrower
to obtain a mortgage loan, an unsecured loan and, in some cases, a
credit card, each with a variable or a fixed interest rate, depending
on the product type, and which in certain circumstances
82
permit the borrower to make authorized underpayments and take payment
holidays (collectively referred to in this prospectus as "NON-CASH
RE-DRAWS"), receive cash re-draws and make overpayments;
o "TOGETHER CONNECTIONS MORTGAGE LOANS": a flexible mortgage loan, which
is 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 one or more deposit 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
mortgage loan and any related unsecured loan made to the borrower (the
"COMBINED DEBIT BALANCE") and the average cleared credit balance in
that borrower's linked deposit account or accounts (the "COMBINED
CREDIT BALANCE") in respect of each month or any part of a month.
Despite the foregoing, the borrower is nevertheless obligated to make
their contractual monthly payment of principal (if any) and interest
in full. The "TOGETHER CONNECTIONS BENEFIT" is the difference between
(1) the contractual monthly payment due on the combined debit balance
and (2) the proportion of the payment made on the excess 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 combined credit balance. Unless the borrower
specifies otherwise, the Together Connections Benefit will be
apportioned pro rata between the mortgage loan and the unsecured loan
in accordance with their respective contractual monthly payments. Any
Together Connections Benefit is used to reduce the principal amount
outstanding on the mortgage loan and related unsecured loan as
described above. The application of the Together Connections Benefit
may lead to amortization of the related mortgage loan more quickly
than would otherwise be the case, as a higher proportion of the
contractual monthly payment could be allocated towards the repayment
of principal of the mortgage loan. See "RISK FACTORS - THE INCLUSION
OF FLEXIBLE MORTGAGE LOANS MAY AFFECT THE YIELD TO MATURITY OF AND THE
TIMING OF PAYMENTS ON THE NOTES". The borrower is not permitted to
make a cash redraw of the principal amounts that have been repaid as a
result of the application of the Together Connections Benefit.
Alternatively, customers that have linked their mortgage loan to one
or more deposit accounts may simply opt to be paid interest
periodically on deposits held in their linked accounts at the same
interest rate that is used to calculate interest on their mortgage
loan. This option is referred to as "TOGETHER CONNECTIONS INTEREST".
The connection between a borrower's mortgage loan and unsecured loan
and any linked account or account of the borrower may be ended (1) by
the seller giving the borrower three months notice in writing at any
time or (2) immediately by the seller giving the borrower notice in
writing at any time where there are serious grounds for ending the
connection with immediate effect. The connection between a borrower's
mortgage loan and unsecured loan and any linked account or account of
the borrower will be ended automatically where the average combined
cleared credit balance for the month exceeds the combined debit
balance in any month.
The seller began originating Together Connections variable mortgage
loans on May 3, 2001 and Together Connections fixed mortgage loans on
August 6, 2002. The seller will not assign any Together Connections
mortgage loans to the mortgages trustee on the closing date, but
currently anticipates assigning Together Connections mortgage loans to
the mortgages trustee in the future;
83
o "CAT STANDARD MORTGAGE LOANS": a flexible mortgage loan, 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 permits the borrower to make non-cash re-draws
and receive cash re-draws;
o "CAPPED RATE MORTGAGE LOANS": are subject to a maximum rate of
interest and charge interest at the lesser of the seller's standard
variable rate or the specified capped rate;
o "FLEXIBLE CAPPED RATE MORTGAGE LOANS": are flexible mortgage loans
with the same basic features as a Together mortgage loan (other than
allowing the borrower to obtain a credit card) which are subject to a
maximum rate of interest for a specified period of time, and at the
expiration of that period are generally subject to the seller's
standard variable rate;
o "FLEXIBLE FIXED RATE MORTGAGE LOANS": are flexible mortgage loans with
the same basic features as a Together mortgage loan (other than
allowing the borrower to obtain a credit card) which are subject to a
fixed rate of interest for a specified period of time, and at the
expiration of that period are generally subject to the seller's
standard variable rate;
o "DISCOUNT RATE MORTGAGE LOANS": allow the borrower to pay interest at
a specified discount to the seller's standard variable rate for a
specified period of time or for the life of the loan;
o "TRACKER RATE MORTGAGE LOANS": are subject to a variable rate of
interest that is linked to the Bank of England base rate plus an
additional fixed percentage; and
o "CASHBACK MORTGAGE LOANS": provide a specified lump sum payment to the
borrower at the time that the mortgage loan is advanced to the
borrower. The cashback mortgage loan product is sometimes combined
with another product (although the seller currently does not combine
the cashback feature with Together mortgage loans, Together
Connections mortgage loans and CAT standard mortgage loans). For
example, a borrower may have a fixed rate and cashback mortgage loan,
or a discounted and cashback mortgage loan.
For a description of the mortgage loan products currently included in the
cut-off date mortgage portfolio, see the table entitled "MORTGAGE LOAN
PRODUCTS".
REPAYMENT TERMS
Borrowers typically make payments of interest and repay principal on their
mortgage loans using one of the following methods:
o "REPAYMENT": the borrower makes monthly payments of both interest and
principal so that, when the mortgage loan matures, the borrower will
have repaid the full amount of the principal of the mortgage loan.
o "INTEREST-ONLY" (WITH A REPAYMENT VEHICLE): the borrower makes monthly
payments of interest but not of principal; when the mortgage loan
matures, the entire principal amount of the mortgage loan is still
outstanding and the borrower must repay that amount in one lump sum.
The borrower arranges a separate investment plan which will be
administered by a separate organization, which plan provides a lump
sum payment to coincide with the end of the mortgage term. Although
these investment plans are forecast to provide sufficient sums to
repay the principal balance of the mortgage loan upon its maturity, to
the extent that the lump sum payment is insufficient to pay the
principal amount owing, the borrower will be liable for making up any
shortfall. These types of plans include:
84
o "ENDOWMENT": the borrower makes regular payments to a life
assurance company which invests the premiums; the endowment
policy is intended to repay the mortgage loan at maturity;
o "PENSION POLICY": the borrower makes regular payments to a
personal pension plan; upon retirement, or plan maturity, the
borrower will receive a tax-free lump sum which is intended to
repay the mortgage loan;
o "INDIVIDUAL SAVINGS ACCOUNTS" or "ISAs": the borrower makes
contributions to a tax-free ISA account; once the value of the
ISA equals or exceeds the outstanding mortgage debt, the borrower
may use those amounts to repay the mortgage loan at any time
thereafter or may wait to repay the mortgage loan upon its
maturity;
o "PERSONAL EQUITY PLANS" or "PEPS": similarly to ISAs, the
borrower makes contributions to a tax-free PEP account and uses
these amounts to repay the mortgage loan. Although PEPs have been
discontinued in the United Kingdom, some mortgage loans with PEP
repayment vehicles may be included in the mortgage portfolio; and
o "UNIT TRUSTS": the borrower makes regular payments to a unit
trust, and the accumulated unit trust is used to repay the
mortgage loan by the end of its term.
o "INTEREST-ONLY" (WITHOUT A REPAYMENT VEHICLE): similar to the
interest-only mortgage loans described above, where the borrower makes
monthly payments of interest but not of principal and when the
mortgage loan matures, the entire principal amount of the mortgage
loan is due. However, the borrower has no formal repayment vehicle in
place to repay the mortgage loan in full.
o COMBINATION REPAYMENT AND INTEREST-ONLY: 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 value with a repayment mortgage.
The required monthly payment in connection with repayment mortgage loans or
interest-only mortgage loans may vary from month to month for various reasons,
including changes in interest rates. See "- ORIGINATION OF THE MORTGAGE LOANS -
MAXIMUM LTV RATIO" for the maximum LTV ratio for the mortgage loans described
above.
The borrowers in respect of 131,115 of the mortgage loans in the cut-off
date mortgage portfolio (or 93.02% 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.
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
(pound)200 or more than the amount due for that month, and the borrower notifies
the seller that the overpayment is intended to reduce the capital balance of the
related mortgage loan (a "CAPITAL PAYMENT"), then the current balance of the
mortgage loan will be immediately reduced, and the capital balance of the
mortgage loan will be reduced from the last day of the
85
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 in " - 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 (pound)200, that overpayment
initially will only reduce the current balance of the related mortgage loan. 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) 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 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.
86
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 will 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 (currently 15%) 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, Together fixed mortgage loan or Together
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, 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 mortgages 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. 45,393
mortgage loans in the cut-off date mortgage portfolio (or 28.43% of the
aggregate current balance of the mortgage loans as of the cut-off date) are
Together mortgage loans (other than Together fixed mortgage loans) and therefore
are not subject to early repayment charges. There will be no Together fixed,
Together Connections or CAT standard mortgage loans in the mortgage portfolio as
of the closing date.
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 the right to receive early repayment charges
and also retains absolute discretion to waive or enforce early repayment charges
in accordance with the seller's policy from time to time. The mortgages trustee
has agreed to re-assign to the seller the benefit of any early repayment
charges, so that any early repayment charges that the administrator receives are
paid to the seller and not to the beneficiaries of the mortgages trust.
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 in "-
PRODUCT SWITCHES") in either case before a date specified in the offer of
advance, then the borrower must repay to the seller some or all of the cash
payment made by the seller.
All of the seller's mortgage loan products allow for the borrower to avoid
early repayment charges and, if applicable, avoid repaying to the seller any of
the cash payment described above, by "PORTING" the existing mortgage loan to a
new mortgaged property, provided that (1) the new mortgage loan is equal to or
greater than the existing mortgage loan and (2) the borrower receives from the
seller substantially the same mortgage loan product. The new mortgage loan
preserves the borrower's status in that mortgage loan product.
A prepayment of the entire outstanding balance of a mortgage loan
discharges the related mortgage. Any prepayment in full must be made together
with all accrued interest, arrears of interest, any unpaid charges and any early
repayment charges.
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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, the borrower may exercise a one-time option
within three months of the end of the initial fixed rate period to "RE-FIX" the
interest rate for a further specified period of time at a new fixed rate that
the seller is offering to existing borrowers at that time. Any exercise of an
option to "RE-FIX" shall constitute a product switch and shall be dealt with as
described in " - 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. At August 1, 2002, the seller's
standard variable rate for existing and/or new borrowers was 5.85% per annum.
The seller's "BASE RATE PLEDGE" guarantees that for variable rate mortgage
loans, and for fixed rate mortgage loans upon conversion from a fixed rate to
the seller's standard variable rate, the actual gross interest rate that the
seller charges will be the lower of:
o the seller's standard variable rate; or
o the Bank of England base rate plus a margin of 1.99%.
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 in "-
EARLY REPAYMENT CHARGES".
If the Bank of England's base rate falls to a level of 1.99% or more below
the seller's standard variable rate it is possible that a revenue shortfall
would occur. See "RISK FACTORS - IF THE BANK OF ENGLAND BASE RATE FALLS BELOW A
CERTAIN LEVEL, WE COULD SUFFER A REVENUE SHORTFALL".
Mortgage loans may combine one or more of the features listed in this
section. For mortgage loans with an interest rate that lasts for a limited
period of time specified in the offer of advance, after the expiration of that
period the interest rate adjusts to some other interest rate type or else it
reverts to, or remains at, the seller's standard variable rate. The features
that may apply to a particular mortgage loan are specified in the offer of
advance (and as the seller may vary from time to time).
45,147 mortgage loans in the cut-off date mortgage portfolio (or 37.53% of
the aggregate current balance of the mortgage loans as of the cut-off date) were
fixed rate mortgage loans. The remaining 96,526 of the mortgage loans in the
cut-off date mortgage portfolio (or 62.47% 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 or "Together" mortgage loans, as
described below. Each mortgage loan (other than a Together mortgage loan, a
Together Connections mortgage loan and a CAT standard mortgage loan) currently
provides for a loyalty discount reduction of 0.25% (although the seller may in
the future allow for a discount of between 0.25% and 0.75%) of the applicable
interest rate once the borrower has held the mortgage loan for at least seven
years, subject to certain conditions.
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Except in limited circumstances as set out in "THE ADMINISTRATOR AND THE
ADMINISTRATION AGREEMENT - THE ADMINISTRATION AGREEMENT - UNDERTAKINGS BY THE
ADMINISTRATOR", the administrator on behalf of the mortgages trustee, Funding
and the security trustee is responsible for setting the standard variable 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 standard variable rate mortgage loans provide that the
seller and its successors may vary the standard variable rate only for certain
reasons which are specified in the mortgage conditions. These reasons may
include:
o where there has been, or the lender reasonably expects there to be in
the near future, a general trend to increase rates on mortgages;
o where the lender for good commercial reasons needs to fund an increase
in the interest rate or rates payable to depositors;
o where the lender wishes to adjust its interest rate structure to
maintain a prudent level of profitability;
o where there has been, or the lender reasonably expects there to be in
the near future, a general increase in the risk of shortfalls on the
accounts of mortgage borrowers; and
o where the lender's administrative costs have increased or are likely
to increase in the near future.
The term "LENDER" in the above five bullet points means the seller and its
successors.
The rate that the borrower is required to pay under the variable rate
mortgage loans must not be greater than either the seller's standard variable
rate or a set margin above or below the seller's standard variable rate. The
seller has given the mortgages trustee, Funding, the administrator and the
security trustee the power to set the seller's standard variable rate, but that
power may only be exercised in limited circumstances.
In maintaining, determining or setting the standard variable rate for
mortgage loans within the mortgages trust, the administrator will apply the
factors set out here and has undertaken to maintain, determine or set this
standard variable rate at a rate which is not higher than the seller's standard
variable rate from time to time.
FLEXIBLE MORTGAGE LOANS
The "TOGETHER" mortgage loans, the "TOGETHER CONNECTIONS" mortgage loans,
the flexible capped rate mortgage loans, the flexible fixed 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. 60,316 of the mortgage loans in the cut-off date mortgage portfolio (or
42.04% of the aggregate current balance of the mortgage loans as of the cut-off
date) are flexible mortgage loans, 45,393 mortgage loans (or 28.43% of the
aggregate current balance of the mortgage loans as of the cut-of-date) of which
are Together mortgage loans. The seller anticipates that an increasing
percentage of the mortgage loans that it originates will offer the flexible
features described below. As a result, mortgage loans assigned to the mortgages
trustee in the future may contain a higher proportion of flexible mortgage loans
than are in the cut-off date mortgage portfolio. In addition to the flexible
mortgage loans that the seller currently offers, the seller in the future may
offer flexible mortgage loans that the seller also may assign to the mortgages
trustee that have different features than those described below.
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Unlike non-flexible mortgage loans for which separate current balances and
capital balances are only reconciled annually (see "- CAPITAL PAYMENTS,
OVERPAYMENTS AND UNDERPAYMENTS ON NON-FLEXIBLE MORTGAGE LOANS"), the flexible
mortgage loans that the seller currently offers have separate current balances
and capital balances which are reconciled on a daily basis.
The following options currently are available to a borrower following the
issue of a flexible mortgage loan:
o Overpayments. A borrower may make overpayments or may repay the entire
current balance under its Together, Together Connections 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,
Together fixed mortgage loan or Together 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 or capped rate, as the
case may be, on the mortgage loan applies, to the extent that the
borrower repays the entire current balance under that mortgage loan.
Any overpayments immediately reduce the current balance of the
flexible mortgage loan from the day the seller receives payment. Any
overpayment on a flexible mortgage loan will result in the immediate
reduction in the amount of interest payable by the relevant borrower.
o Authorized Underpayments. A borrower may use certain amounts that it
has previously overpaid to the seller to fund future underpayments
under its mortgage loan (an "AUTHORIZED UNDERPAYMENT"). If a borrower
makes an authorized underpayment under its mortgage loan, the current
balance of that mortgage loan will be increased at the end of the
month in which the authorized underpayment has been made and there
will be an immediate effect on the amount of interest payable by the
borrower. An authorized underpayment is also called a "NON-CASH
RE-DRAW" for the purposes of this prospectus. A borrower under a
flexible mortgage loan may offset authorized underpayments up to the
aggregate amount of any overpayments previously made (but not yet used
to fund an authorized underpayment or redrawn in cash by the borrower)
during the lifetime of the mortgage loan. Any authorized underpayment
will be funded solely by the seller in an amount equal to the unpaid
interest associated with that authorized underpayment. However, any
such amounts funded by the seller in connection with an authorized
underpayment will form part of the mortgage portfolio and thereby
increase the seller share of the trust property.
o Unauthorized Underpayments. Any underpayment made by a borrower (a)
which cannot be funded by prior overpayments and (b) where the
borrower is not entitled to a payment holiday (an "UNAUTHORIZED
UNDERPAYMENT"), if any, will be treated by the seller as arrears.
o Payment Holidays. A borrower that has made nine consecutive scheduled
monthly payments on its flexible mortgage loan may apply for a one
month payment holiday even if that borrower has not made prior
overpayments. A borrower may apply for this payment holiday facility
once in each rolling twelve-month period and may accumulate the right
to take up to a maximum of three monthly payment holidays in any one
calendar year if the borrower has not used the payment holiday
facility in a given three- year period. In addition, a flexible
mortgage loan borrower may apply for up to a six- month payment
holiday in certain limited cases (generally, where the borrower can
demonstrate an extenuating circumstance). The mortgage loan will
continue to accrue interest and other charges during any payment
holiday and accrued interest will be added to the current balance of
the related mortgage loans which will increase the amount of interest
payable by the borrower. Any payment holiday will be funded solely by
the seller in an amount equal to the unpaid interest associated with
that payment holiday. However, any such amounts funded by the
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seller in connection with a payment holiday will form part of the
mortgage portfolio and thereby increase the seller share of the trust
property. A payment holiday is also called a "NON-CASH RE-DRAW" for
the purposes of this prospectus.
o Cash re-draws. A borrower may request a cash re-draw of overpayments
that the borrower has made on its flexible mortgage loan by requesting
that the seller refund some or all of such overpayments in cash,
provided that the aggregate amount of all overpayments not yet used to
fund an authorized underpayment or otherwise re-drawn in cash by the
borrower from the period commencing at the beginning of the previous
calendar year to the date of the cash re-draw is equal to or greater
than (pound)1,000, and that the amount of such cash re-draw is equal
to or greater than (pound)1,000. If the aggregate amount of all
overpayments for such period is less than (pound)1,000, 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 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. 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 re-draw or to provide a further
advance (as described in "- 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" under the UK Law of Property Act 1925.
For a description of the treatment of overpayments and underpayments in
respect of the seller's current non-flexible loan products, see "- CAPITAL
PAYMENTS, OVERPAYMENTS AND UNDERPAYMENTS ON NON-FLEXIBLE MORTGAGE LOANS".
In addition to the features described above, the flexible mortgage loans
that the seller currently offers under the Together and Together Connections
programs may be linked to an unsecured credit facility and a credit card which
are made available to a borrower. In May 2002, the seller also began offering a
linked unsecured credit facility to borrowers under the flexible capped rate
mortgage loan and flexible fixed rate mortgage loan products. 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.
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The amount of a flexible mortgage loan is agreed at origination. Amounts
available under the unsecured credit facility (currently a maximum of
(pound)30,000 for Together and Together Connections mortgage loans and
(pound)10,000 for flexible capped rate and flexible fixed rate mortgage loans)
and any credit card (in respect of Together and Together Connections mortgage
loans) are not secured by the mortgaged property, and the seller will not assign
to the mortgages trustee amounts due under the unsecured credit facility or any
credit card. This means that only the secured mortgage loan is assigned to the
mortgages trustee.
The seller has originated four 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
of 1.99% 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 of
1.99% or (ii) the seller's then current standard variable rate.
The seller also began originating Together Connections variable mortgage
loans (referred to in this prospectus as "TOGETHER CONNECTIONS VARIABLE"
mortgage loans) on May 3, 2001 and Together Connections fixed mortgage loans
(referred to in this prospectus as "TOGETHER CONNECTIONS FIXED" mortgage loans)
on August 6, 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. As noted above under "- MORTGAGE LOAN PRODUCTS OFFERED BY THE
SELLER", the seller will not assign any Together Connections mortgage loans to
the mortgages trustee on the closing date, but currently anticipates assigning
Together Connections mortgage loans to the mortgages trustee in the future.
Generally, a prospective borrower applying for a currently offered flexible
mortgage loan may borrow up to a maximum of 95% of the lower of the original
property value or the purchase price of the mortgaged property. The seller
requires a lower LTV ratio where the valuation or purchase price is over
(pound)250,000. In the case of a remortgage, the seller calculates the maximum
amount of the loan available by using the then current valuation of the
mortgaged property. A borrower may repay amounts owed under a currently offered
flexible mortgage loan under any of the repayment terms described above under
"- REPAYMENT TERMS". The current term over which a borrower may repay its
flexible
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mortgage loan (other than a Together mortgage loan or a Together Connections
mortgage loan) is up to 35 years, and the current term over which a borrower may
repay its Together mortgage loan or Together Connections mortgage loan is up to
25 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.
ARREARS CAPITALIZATION
From time to time, where a borrower has demonstrated a regular payment
history following previous unpaid arrears, the seller may agree with that
borrower to capitalize any outstanding amounts in arrears. In those
circumstances, the seller will set the arrears tracking balance to zero,
reschedule the borrower's monthly payments, and the related mortgage loan will
no longer be considered to be in arrears. See "THE ADMINISTRATOR AND THE
ADMINISTRATION AGREEMENT - ARREARS AND DEFAULT PROCEDURES".
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 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 (a "FURTHER ADVANCE"). 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. If the new LTV ratio is determined to be equal to or greater
than 75% based on the Halifax House Price Index, the seller will re-value the
property by (a) sending a professional valuer to the property if the further
advance amount requested is equal to or greater than (pound)30,000 or (b)
performing a desktop re-valuation if the further advance amount requested is
less than (pound)30,000. If the new LTV ratio is determined to be less than 75%
based on the Halifax House Price Index, the seller generally will not re-value
the property. However, 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 the cut-off date mortgage portfolio obliges
the seller to make further advances. However, the seller may have made further
advances on some mortgage loans in the additional mortgage portfolio prior to
their assignment to the mortgages trustee. The administrator is required under
the administration agreement not to issue an offer for a further advance to any
borrower in respect of a mortgage loan which has been assigned to the mortgages
trustee unless the seller has elected to repurchase that mortgage loan in
accordance with the terms of the mortgage sale agreement, although this
requirement may change if the seller decides at a later date to retain those
mortgage loans within the trust property and to assign such further advances to
the mortgages trustee. See "RISK FACTORS - THE YIELD TO MATURITY OF THE NOTES
MAY BE
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ADVERSELY AFFECTED BY PREPAYMENT OR REDEMPTIONS ON THE MORTGAGE OR REPURCHASES
OF MORTGAGE LOANS BY THE SELLER" and "ASSIGNMENT OF THE MORTGAGE LOANS AND
RELATED SECURITY".
PRODUCT SWITCHES
From time to time borrowers may request or the seller may offer, in limited
circumstances, a variation in the mortgage conditions applicable to the
borrower's mortgage loan. In addition, in order to promote the retention of
borrowers, the seller may periodically contact certain borrowers in respect of
the seller's total portfolio of outstanding mortgage loans in order to encourage
a borrower to review the seller's other mortgage products and to discuss
shifting that borrower to an alternative mortgage product. Any such variation,
including a change in product type (other than a variation described as a
permitted product switch), is called a "PRODUCT SWITCH". The administrator is
required under the administration agreement not to issue an offer for a product
switch to any borrower in respect of a mortgage loan which has been assigned to
the mortgages trustee unless the seller has elected to repurchase that mortgage
loan in accordance with the terms of the mortgage sale agreement. However, some
fixed rate mortgage loans permit the borrower to exercise a one- time option
within three months of the end of the initial fixed rate period to "RE-FIX" the
interest rate at a new fixed rate that the seller is offering existing borrowers
at that time. Although this re-fixing of the borrower's fixed rate mortgage loan
is considered by the seller as a product switch, these mortgage loans may or may
not be repurchased by the seller from the mortgages trustee. See "RISK FACTORS -
THE YIELD TO MATURITY OF THE NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENT OR
REDEMPTIONS ON THE MORTGAGE OR REPURCHASES OF MORTGAGE LOANS BY THE SELLER" and
"ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY".
ORIGINATION OF THE MORTGAGE LOANS
The seller currently derives its mortgage-lending business from the
following sources:
o intermediaries that range from large UK insurance companies to small
independent mortgage advisors;
o its branch network throughout the United Kingdom;
o its website; and
o Northern Rock Direct, a centralized telephone-based lending operation.
In each case, the seller performs all the evaluations of the borrower and
determines whether a mortgage loan will be offered. The seller has adopted the
Council of Mortgage Lenders' Code of Mortgage Lending Practice, which is a
voluntary code observed by most banks, building societies and other residential
mortgage lenders in the UK. The Code 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. The Code
also mandates that the lender, among other things, act fairly and reasonably
with its borrowers and assist borrowers in choosing a mortgage that fits the
needs of the relevant borrower.
UNDERWRITING
The decision to offer a mortgage loan to a potential borrower is made by
one of the seller's underwriters and/or mandate holders located in its mortgage
service centers or head office in Gosforth, who may liaise with the
intermediaries. Each underwriter and/or mandate holder must pass the seller's
formal training program to gain the authority to approve mortgage loans. The
seller has established various levels of authority for its underwriters who
approve mortgage loan applications. The levels are differentiated by, among
other things, degree of risk, value of the property and LTV ratio in the
relevant
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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 to be included in the mortgage
portfolio as of the closing 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 judgements and details
of any bankruptcy. Some of the factors currently used in making a lending
decision are as follows:
(1) Employment details
The seller operates the following policy in respect of the verification of
a prospective borrower's income details. Under this policy, the seller
categorizes prospective borrowers as either "EMPLOYED" or "SELF-EMPLOYED". Proof
of income for employed prospective borrowers applying for mortgage loans in an
amount less than (pound)300,000 may be established by:
o three monthly payslips from the six month period prior to the date of
the loan application; and
o a form P60 or accountants' certificate certifying the borrower's
income.
Proof of income for self-employed prospective borrowers may be
established by:
o a letter from the prospective borrower's accountant in acceptable
form; or
o acceptable confirmation of self-employment which might include any of
a tax return, accountant's letter or a trade invoice, together with a
certificate from the prospective borrower as to income.
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For some mortgage loan products, particularly those that may involve larger
maximum loan amounts, the seller generally will require a prospective borrower
employed by a third party to provide a statement showing that prospective
borrower's net worth. The seller generally will require a self-employed
prospective borrower to provide an acceptable accountant's letter, a statement
showing the prospective borrower's net worth and/or audited accounts of the
prospective borrower in connection with certain mortgage loan products that may
involve larger maximum amounts or higher LTV ratios.
In May 2001 the seller introduced self-certification of the income of the
prospective borrower for certain mortgage loan products. In order to qualify,
the prospective borrower must have attained a specified minimum credit score on
the seller's initial credit review. From May 2001 through January 2002, a
prospective borrower eligible for income self-certification must have had a
property value of at least (pound)150,000, applied for a mortgage loan with an
LTV ratio no greater than 60% and must have had a valuation made on the
mortgaged property. Since January 2002, a prospective borrower eligible for
income self-certification must have a property value of at least
(pound)100,000, be applying for a mortgage loan with an LTV ratio no greater
than 75% (although the seller anticipates increasing the LTV ratio allowed for
income self-certification to no greater than 80% in the near future) and must
have a valuation made on the mortgaged property. An existing borrower may also
be eligible for income self-certification if the borrower is moving from one
property (for which the seller is the mortgagee) to another property and either
(a) the borrower has had a mortgage loan with the seller for at least two years
prior to the date on which the borrower applies for the new mortgage loan and
the LTV ratio for the new mortgage loan is no greater than 75% (although the
seller anticipates increasing the LTV ratio allowed for income
self-certification to no greater than 80% in the near future), or (b) the amount
of the new mortgage loan is equal to or less than the amount of the original
mortgage loan, and the borrower's personal circumstances (for example, income
and employment) have not changed since the date of the original mortgage loan.
Together mortgage loans and Together Connections mortgage loans are excluded
from the self-certification procedure. If a mortgage loan is judged appropriate
for self-certification, income is accepted as stated by the prospective borrower
without further proof once positive identification of the borrower is provided.
(2) Income capacity
The maximum amount of money that the seller will lend to a prospective
borrower is determined by a number of factors, including the applicant's income.
The seller generally applies the following income multiples in determining the
amount of the mortgage loan:
o SINGLE APPLICANT: 3.50 times gross income for all mortgage loans other
than Together mortgage loans and Together Connections mortgage loans;
3.80 times gross income for Together mortgage loans and Together
Connections mortgage loans.
o JOINT APPLICANTS: a sum equal to the higher of (1) 2.75 times the
joint gross income of the applicants (3.00 times joint gross income
for Together mortgage loans and Together Connections mortgage loans),
or (2) 3.50 times the highest earning applicant's gross income (3.80
times the highest gross income for Together mortgage loans and
Together Connections mortgage loans) plus the gross income of the
other applicant.
(3) 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
96
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".
(4) Property types
The seller applies the criteria set out below in determining the
eligibility of properties to serve as security for mortgage loans. Under these
criteria, eligible property types include freehold and leasehold houses,
leasehold flats, and mixed commercial and residential use properties where there
is a separate entrance for the residential part of the property. In the case of
a mortgage loan secured by a leasehold property, the seller requires that the
unexpired term of the lease be at least 30 years from the end of the agreed
mortgage loan term.
The seller may consider some property types that do not meet its usual
lending criteria on a case-by-case basis. However, some property types will not
be considered for the purposes of providing security for a mortgage loan. The
types of property falling within this category comprise freehold flats, shared
ownership or shared equity schemes and properties of non-standard construction
of a type considered to be defective.
(5) Loan amount
Generally, the maximum loan amount is (pound)500,000, but this may vary
according to the application in question. The amount borrowed may exceed this
limit in exceptional cases.
(6) Term
Each mortgage loan must have an initial term of between 7 and 25 years (in
the case of a Together mortgage loan and a Together Connections mortgage loan)
or between 7 and 35 years in the case of all other mortgage loans.
(7) 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.
SELLER'S DISCRETION TO LEND OUTSIDE OF ITS LENDING CRITERIA
On a case-by-case basis, and within approved limits as detailed in the
seller's lending criteria, the seller may have determined that, based upon
compensating factors, a prospective borrower that did not strictly qualify under
its lending criteria at that time warranted an underwriting exception. The
seller may take into account compensating factors including, but not limited to,
a low LTV ratio, stable employment and time in residence at the applicant's
current residence. New mortgage loans and further advances (made prior to their
assignment to the mortgages trustee or if the seller decides at a later date to
retain such mortgage loans subject to further advances within the mortgages
trust, after their assignment to the mortgages trustee) that the seller has
originated under lending criteria that are different than the lending criteria
set out here may be assigned to the mortgages trustee.
MAXIMUM LTV RATIO
The maximum LTV ratio permitted for prospective borrowers applying for
mortgage loans secured by mortgaged properties valued up to (pound)250,000 is
95% of the lower of the purchase price or valuation of the mortgaged property
determined by the relevant valuation. The maximum LTV ratio permitted for
prospective borrowers applying for mortgage loans secured by mortgaged
properties valued up to (pound)400,000 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 (pound)400,000 is 85% of the
lower of the purchase price or valuation of the mortgaged property determined by
the
97
relevant valuation. The maximum LTV ratio for prospective borrowers applying for
mortgage loans secured by the seller's currently offered flexible mortgage loans
is as described under "- CHARACTERISTICS OF THE MORTGAGE LOANS - FLEXIBLE
MORTGAGE LOANS".
In the case of a purchase of a mortgaged property, the seller will
determine the current market value of that mortgaged property (which will be
used to determine the maximum amount of the mortgage loan permitted to be made
by the seller) to be the lower of:
o the valuation made by an independent valuer from the panel of valuers
appointed by the seller or an employee valuer of the seller; or
o the purchase price for the mortgaged property paid by the prospective
borrower.
If a borrower or a prospective borrower has applied to remortgage its
current mortgaged property, the seller will determine the current market value
of the mortgaged property (for the purpose of determining the maximum amount of
the loan available) by using the then current valuation of the mortgaged
property as determined using the process described under "- LENDING CRITERIA -
(3) VALUATION".
If the borrower has applied for a further advance, 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 -
(3) 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 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
(pound)50,000 deductible in the aggregate in any one period of insurance.
SELLER ARRANGED BUILDINGS INSURANCE POLICIES
The solicitor or licensed conveyancer acting for the seller is required to
ensure that buildings insurance cover is taken out by the relevant borrower
prior to the completion of each mortgage loan. If a borrower asks the seller to
arrange insurance on its behalf, a policy will be issued by a seller arranged
insurer, which currently is AXA General Insurance Ltd., a member of the AXA
Group of Companies ("AXA"). AXA's registered number is 141 885 and its address
is 107 Cheapside, London EC2V 6DU. The policy will provide the borrower with
rebuilding insurance up to an amount equal to the actual rebuilding cost.
Standard policy conditions apply, which are renegotiated periodically by the
seller with the seller arranged insurer. Under seller arranged insurance
policies, the seller will assign its rights under those policies to the
mortgages trustee. Amounts paid under the insurance policy are generally
utilized to fund the reinstatement of the property or are otherwise paid to the
seller to reduce the amount of the mortgage loan(s).
In the administration agreement, the seller, acting in its capacity as
administrator, has agreed to deal with claims under the seller arranged
insurance policies in accordance with its normal procedures and also has agreed
to make and enforce claims and to hold the proceeds of claims on trust for the
mortgages trustee or as the mortgages trustee may direct.
98
BORROWER OR LANDLORD-ARRANGED BUILDINGS INSURANCE POLICIES AND THE CONTINGENCY
INSURANCE POLICY
If a borrower elects not to take up a seller arranged insurance policy, or
if a borrower who originally had a seller arranged insurance policy confirms
that he or she no longer requires such insurance, that borrower is sent an
"ALTERNATIVE INSURANCE REQUIREMENTS" form. The borrower is required to
acknowledge that it is responsible for arranging an alternative insurance policy
which covers the rebuilding cost of the property and to request joint insured
status for the seller.
Once an alternative insurance requirements form has been dispatched, it is
assumed that the borrower is making arrangements in accordance with those
requirements. If it transpires that the borrower has not complied with those
requirements and if the property is damaged while uninsured or partially insured
because of under insurance, the seller is entitled to make a claim under the
contingency insurance policy provided the seller has no prior knowledge of the
deficiency. The contingency insurance policy is an insurance policy currently
provided to the seller by AXA that insures the seller against loss relating to
mortgaged properties where borrowers have failed to make their own property
insurance arrangements. The contingency insurance policy provides cover for the
mortgages trustee. The administrator will make claims in accordance with the
contingency insurance policy and hold the proceeds of claims on trust for the
mortgages trustee or as the mortgages trustee may direct.
In the case of leasehold properties where the lease requires the landlord
to insure the property, provision is made to deal with the insurance in the
mortgage conditions or the "GENERAL INSTRUCTIONS TO SOLICITORS" or other
comparable or successor instructions or guidelines. Again, if it transpires that
the property is not insured and is damaged, the seller can claim under the
contingency insurance policy.
If a borrower who originally had seller arranged insurance fails to pay a
premium, but does not notify the seller that it wishes to make alternative
arrangements, it is assumed that the borrower requires seller arranged insurance
to continue and no alternative insurance requirements form is sent to that
borrower. The unpaid premium is added to the balance of the relevant mortgage
loan.
The seller may not be insured under any insurance policy which is not
arranged by the seller, and it may not have the benefit of any security over
such policies. The mortgages trustee therefore may not have an interest in
policies that were not arranged through the seller. See "RISK FACTORS - THE
MORTGAGES TRUSTEE MAY NOT RECEIVE THE BENEFIT OF CLAIMS MADE ON THE BUILDINGS
INSURANCE".
PROPERTIES IN POSSESSION POLICY
If the seller takes possession of a property from a borrower in default,
the seller has coverage through a properties in possession policy from AXA. The
policy provides the seller with rebuilding insurance up to an amount equal to
the actual rebuilding cost. The seller will assign its rights under this policy
to the mortgages trustee for any mortgage loan which is in a mortgage portfolio
and is a property in possession. Amounts paid under the properties in possession
policy are generally utilized to fund the reinstatement of the property or are
otherwise paid to the seller to reduce the amount of the mortgage loan. This
policy is subject to a (pound)50,000 deductible in the aggregate in any one
period of insurance.
MIG POLICIES
A mortgage indemnity guarantee policy, or MIG policy, is an agreement
between a lender and an insurance company to underwrite the amount of each
relevant mortgage loan which exceeds a specified LTV ratio. It is currently a
condition of each mortgage loan having an LTV ratio in excess of 75% that the
seller take out mortgage indemnity insurance with Northern Rock Mortgage
Indemnity Company Limited ("NORMIC").
99
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. The
seller pays the premium on each MIG policy.
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
the mortgage loans included in the mortgage portfolio. The MIG policy will not
cover all losses suffered in relation to the mortgage loans and each mortgage
loan is only covered for a ten year period following completion of the mortgage
loan or further advance. In addition, the mortgages trustee is not required to
maintain a mortgage indemnity policy with the current insurer, and the seller is
not required to maintain the same level of coverage under the mortgage indemnity
insurance policies for mortgage loans that it may originate in the future and
assign to the mortgages trust. See "RISK FACTORS - THE MORTGAGES TRUSTEE IS NOT
REQUIRED TO MAINTAIN MORTGAGE INDEMNITY INSURANCE WITH THE CURRENT INSURER, AND
THE SELLER IS NOT REQUIRED TO MAINTAIN THE SAME LEVEL OF MORTGAGE INDEMNITY
INSURANCE COVERAGE FOR NEW MORTGAGE LOANS THAT IT ORIGINATES IN THE FUTURE,
WHICH MAY ADVERSELY AFFECT THE FUNDS AVAILABLE TO PAY THE NOTES".
The insured under each MIG policy is the seller and/or its relevant
subsidiary. The related borrower has no interest in this policy. The seller will
formally assign its interest in each MIG policy to the mortgages trustee to the
extent that it relates to the mortgage loans from time to time comprised in the
mortgage portfolio. Practically speaking, this will have little effect on the
way in which claims are made and paid under the policies as they will continue
to be administered by the seller acting in its capacity as administrator. To the
extent that claims relate to mortgage loans in the mortgage portfolio, their
proceeds will be paid by the seller into the mortgages trustee transaction
account and all other claims will be paid into the seller's account.
NORMIC is a Guernsey limited liability company and a wholly-owned insurance
subsidiary of the seller. NORMIC does not have a public credit rating by any of
Moody's, Standard & Poor's or Fitch. The seller does not guarantee the
liabilities of NORMIC and is under no legal obligation to support NORMIC in the
discharge of those liabilities. The seller 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 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.
100
THE CUT-OFF DATE MORTGAGE PORTFOLIO
The statistical and other information contained in this prospectus has been
compiled by reference to the mortgage loans in the cut-off date mortgage
portfolio. Columns stating percentage amounts may not add up to 100% due to
rounding. A mortgage loan will be removed from the additional mortgage portfolio
(which comprises a portion of the cut-off date portfolio) if in the period up to
(and including) the closing date the mortgage loan is repaid in full or if the
mortgage loan does not comply with the terms of the mortgage sale agreement on
the closing 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 included in the additional assigned
mortgage portfolio once a determination has been made as to the principal
balances of the notes to be issued and the corresponding size of the trust that
is required ultimately to support payments on the notes. We do not expect the
characteristics of the mortgage portfolio as of the closing date to differ
materially from the characteristics of the cut-off date mortgage portfolio. The
US dollar numbers in the following tables have been calculated based on the
currency exchange rate set forth on page 61 under "US DOLLAR PRESENTATION".
TYPES OF PROPERTY
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
TYPE OF PROPERTY (POUND) (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ---------------- ----------------- ---------- --------- ----------
Detached Bungalow .... 258,341,845.47 397,143,498.03 2.80 3,672 2.59
Detached House ....... 2,539,356,254.26 3,903,699,084.18 27.56 28,353 20.01
Flat ................. 792,450,561.50 1,218,217,619.52 8.60 11,415 8.06
Maisonette ........... 126,129,274.23 193,895,886.59 1.37 1,708 1.21
Other Use ............ 19,617,439.67 30,157,478.36 0.21 322 0.23
Purpose Built Flat ... 98,490,923.63 151,408,030.18 1.07 1,828 1.29
Semi Detached Bungalow 110,434,778.02 169,769,066.90 1.20 2,046 1.44
Semi Detached House .. 2,587,292,967.66 3,977,391,187.79 28.08 43,181 30.48
Terraced House ....... 2,649,802,954.34 4,073,486,478.62 28.76 48,747 34.41
Not Known ............ 29,234,104.32 44,940,975.13 0.32 387 0.27
New Property ......... 1,371,826.27 2,108,879.74 0.01 14 0.01
---------------- ----------------- ---------- --------- ----------
Totals ............... 9,212,522,929.37 14,162,218,185.04 100.00 141,673 100.00
================ ================= ========== ========= ==========
101
EXPECTED SEASONING OF MORTGAGES AT CLOSING
The following table shows length of time since the mortgage loans were
originated as of the closing date.
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
AGE OF MORTGAGE LOANS (MONTHS) (POUND) (US$) % OF TOTAL LOANS % OF TOTAL
- ------------------------------ ---------------- ----------------- ---------- --------- ----------
0 to 6 ....................... 160,895,101.87 247,340,663.90 1.75 1,978 1.40
6 to 12 ...................... 1,945,206,497.37 2,990,325,130.47 21.11 26,947 19.02
12 to 18 ..................... 1,762,011,819.25 2,708,703,795.93 19.13 26,749 18.88
18 to 24 ..................... 1,352,472,026.81 2,079,126,866.73 14.68 20,980 14.81
24 to 30 ..................... 952,220,450.20 1,463,828,516.83 10.34 15,176 10.71
30 to 36 ..................... 655,985,273.13 1,008,432,395.28 7.12 10,396 7.34
36 to 42 ..................... 527,903,829.48 811,535,479.60 5.73 8,411 5.94
42 to 48 ..................... 305,204,647.27 469,184,699.88 3.31 4,814 3.40
48 to 54 ..................... 485,971,184.49 747,073,304.37 5.28 7,013 4.95
54 to 60 ..................... 306,163,537.19 470,658,781.23 3.32 4,753 3.35
60 to 66 ..................... 249,881,059.62 384,136,909.49 2.71 4,176 2.95
66 to 72 ..................... 173,795,002.43 267,171,410.35 1.89 3,361 2.37
72 to 78 ..................... 206,312,624.33 317,160,068.15 2.24 4,039 2.85
78 to 84 ..................... 80,650,239.58 123,981,920.95 0.88 1,795 1.27
84 to 90 ..................... 47,849,636.35 73,558,241.89 0.52 1,085 0.77
---------------- ----------------- ---------- --------- ----------
Total ........................ 9,212,522,929.37 14,162,218,185.04 100.00 141,673 100.00
================ ================= ========== ========= ==========
The weighted average seasoning of mortgage loans as of the closing date is
expected to be 27.14 months and the maximum seasoning of mortgage loans as of
the closing date is expected to be 86.8 months. The minimum seasoning of the
mortgage loans as of the closing date is expected to be 5.9 months.
YEARS TO MATURITY AT CLOSING
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
YEARS TO MATURITY (POUND) (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ---------------- ----------------- ---------- --------- ----------
0 to 5 ............... 45,569,872.35 70,053,608.53 0.49 997 0.70
5 to 10 .............. 454,057,093.97 698,012,442.69 4.93 8,496 6.00
10 to 15 ............. 1,318,626,693.25 2,027,097,145.66 14.31 20,595 14.54
15 to 20 ............. 2,051,679,529.57 3,154,003,888.65 22.27 31,310 22.10
20 to 25 ............. 5,243,953,155.05 8,061,419,146.89 56.92 79,067 55.81
25 to 30 ............. 77,215,538.86 118,701,827.61 0.84 951 0.67
30 to 35 ............. 21,421,046.32 32,930,125.01 0.23 257 0.18
---------------- ----------------- ---------- --------- ----------
Total ................ 9,212,522,929.37 14,162,218,185.04 100.00 141,673 100.00
================ ================= ========== ========= ==========
The weighted average remaining term of the mortgage loans as of the closing
date is expected to be 19.65 years and the maximum remaining term as of the
closing date is expected to be 34.5 years. The minimum remaining term as of the
closing date is expected to be less than one month.
102
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
The following table shows the spread of mortgaged properties securing the
mortgage loans throughout England and Wales as of the cut-off date. No
properties are situated outside England and Wales. The geographical location of
a property has no impact upon the seller's lending criteria and credit scoring
tests.
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
REGION (POUND) (US$) % OF TOTAL LOANS % OF TOTAL
- ----------------------------- ---------------- ----------------- ---------- --------- ----------
East Anglia ................. 250,283,828.15 384,756,077.09 2.72 3,868 2.73
East Midlands ............... 731,005,441.26 1,123,759,325.53 7.93 12,836 9.06
Greater London .............. 1,623,574,132.33 2,495,886,444.78 17.62 16,702 11.79
North ....................... 1,023,315,162.26 1,573,120,925.84 11.11 21,859 15.43
North West .................. 1,074,307,126.87 1,651,509,803.03 11.66 19,750 13.94
South East (excluding London) 1,933,990,529.03 2,973,083,057.69 20.99 22,718 16.04
South West .................. 729,034,608.82 1,120,729,606.18 7.91 10,662 7.53
Wales ....................... 334,392,968.00 514,055,292.85 3.63 6,260 4.42
West Midlands ............... 628,471,504.43 966,136,056.00 6.82 10,241 7.23
Yorkshire ................... 884,147,628.22 1,359,181,596.03 9.60 16,777 11.84
---------------- ----------------- ---------- --------- ----------
Totals ...................... 9,212,522,929.37 14,162,218,185.04 100.00 141,673 100.00
================ ================= ========== ========= ==========
CURRENT LOAN-TO-VALUE RATIOS
The following table shows the range of current loan-to-value, or LTV,
ratios, which express the outstanding balance of a mortgage loan as at the
cut-off date divided by the value of the mortgaged property securing that
mortgage loan at the same date. The seller has not revalued any of the mortgaged
properties since the date of the origination of the related mortgage loan, other
than in respect of a mortgaged property of a related borrower that has
remortgaged its property or to which the seller has made a further advance, as
described in "- MAXIMUM LTV RATIO".
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
CURRENT LTV (POUND) (US$) % OF TOTAL LOANS % OF TOTAL
- --------------------- ---------------- ----------------- ---------- --------- ----------
0% - 25% ............... 111,166,408.44 170,893,786.99 1.21 2,874 2.03
25.01% - 50% ........... 847,256,407.60 1,302,469,496.69 9.20 13,488 9.52
50.01% - 55% ........... 318,528,683.79 489,667,461.63 3.46 4,440 3.13
55.01% - 60% ........... 379,228,633.60 582,980,220.75 4.12 5,002 3.53
60.01% - 65% ........... 435,657,034.30 669,726,417.06 4.73 5,615 3.96
65.01% - 70% ........... 493,496,469.71 758,641,767.43 5.36 6,449 4.55
70.01% - 75% ........... 726,180,397.19 1,116,341,886.53 7.88 10,090 7.12
75.01% - 80% ........... 654,074,061.35 1,005,494,329.52 7.10 9,201 6.49
80.01% - 85% ........... 691,181,271.69 1,062,538,465.32 7.50 9,725 6.86
85.01% - 90% ........... 1,685,282,202.60 2,590,748,966.33 18.29 25,710 18.15
90.01% - 95% ........... 2,080,095,029.37 3,197,686,440.23 22.58 34,183 24.13
95.01% - 100% .......... 789,504,825.10 1,213,689,200.77 8.57 14,881 10.50
>100% .................. 871,504.63 1,339,745.78 0.01 15 0.01
---------------- ----------------- ---------- --------- ----------
Totals ................. 9,212,522,929.37 14,162,218,185.04 100.00 141,673 100.00
================ ================= ========== ========= ==========
The weighted average current loan-to-value ratio of the mortgage loans at
the cut-off date was 77.76%.
103
OUTSTANDING CURRENT BALANCES
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
RANGE OF CURRENT PRINCIPAL (POUND) (US$) % OF TOTAL LOANS % OF TOTAL
- ----------------------------------- ---------------- ----------------- ---------- --------- ----------
(pound)0 -(pound)15,000 ................. 3,379,089.07 5,194,602.72 0.04 340 0.24
(pound)15,001 -(pound)30,000 ............ 370,543,795.68 569,629,201.66 4.02 15,140 10.69
(pound)30,001 -(pound)40,000 ............ 736,972,560.23 1,132,932,452.31 8.00 21,013 14.83
(pound)40,001 -(pound)50,000 ............ 1,003,342,110.15 1,542,416,771.94 10.89 22,339 15.77
(pound)50,001 -(pound)75,000 ............ 2,661,803,816.89 4,091,935,152.79 28.89 43,545 30.74
(pound)75,001 -(pound)100,000 ........... 1,705,906,428.43 2,622,454,155.93 18.52 19,964 14.09
(pound)100,001 -(pound)125,000 .......... 1,032,640,086.59 1,587,455,936.34 11.21 9,296 6.56
(pound)125,001 -(pound)150,000 .......... 606,898,680.74 932,972,606.83 6.59 4,461 3.15
(pound)150,001 -(pound)175,000 .......... 379,697,592.62 583,701,141.61 4.12 2,358 1.66
(pound)175,001 -(pound)200,000 .......... 232,525,648.27 357,456,799.80 2.52 1,250 0.88
(pound)200,001 -(pound)225,000 .......... 163,752,911.00 251,733,913.91 1.78 778 0.55
(pound)225,001 -(pound)250,000 .......... 111,928,534.18 172,065,386.90 1.21 474 0.33
(pound)250,001 -(pound)275,000 .......... 81,677,039.09 125,560,398.29 0.89 314 0.22
(pound)275,001 -(pound)300,000 .......... 57,055,969.52 87,710,944.69 0.62 198 0.14
(pound)300,001 -(pound)325,000 .......... 42,292,128.79 65,014,802.14 0.46 137 0.10
(pound)325,001 -(pound)350,000 .......... 22,106,538.12 33,983,917.17 0.24 66 0.05
---------------- ----------------- ---------- --------- ----------
Totals .................................. 9,212,522,929.37 14,162,218,185.04 100.00 141,673 100.00
================ ================= ========== ========= ==========
The largest mortgage loan had a current balance as of the cut-off date
of (pound)346,078.73 or $532,019.91 and the smallest mortgage loan had a current
balance as of the cut-off date of (pound)0. The average current balance as of
the cut-off date was approximately (pound)65,026.67 or $99,964.20.
MORTGAGE LOAN PRODUCTS
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
MORTGAGE LOAN PRODUCTS (POUND) (US$) % OF TOTAL LOANS % OF TOTAL
- ----------------------------------- ---------------- ----------------- ---------- --------- ----------
Standard variable rate ................. 3,032,943,989.65 4,662,481,152.42 32.92 49,577 34.99
Discounted ............................. 97,323,654.83 149,613,612.34 1.06 1,478 1.04
Fixed .................................. 3,457,782,537.05 5,315,576,536.59 37.53 45,147 31.87
Together ............................... 2,618,957,040.92 4,026,067,703.18 28.43 45,393 32.04
Other .................................. 5,515,706.92 8,479,180.51 0.06 78 0.06
---------------- ----------------- ---------- --------- ----------
Totals ................................. 9,212,522,929.37 14,162,218,185.04 100.00 141,673 100.00
================ ================= ========== ========= ==========
EMPLOYMENT STATUS
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
EMPLOYMENT STATUS (POUND) (US$) % OF TOTAL LOANS % OF TOTAL
- ----------------------------------- ---------------- ----------------- ---------- --------- ----------
Full Time Employment 8,307,372,186.74 12,770,748,941.95 90.17 129,646 91.51
Part Time Employment 82,727,065.53 127,174,581.91 0.90 1,584 1.12
Retired 18,531,136.30 28,487,526.98 0.20 558 0.39
Self Employed 747,017,674.60 1,148,374,595.85 8.11 8,620 6.08
Other 56,874,866.20 87,432,538.36 0.62 1,265 0.89
---------------- ----------------- ---------- --------- ----------
Totals 9,212,522,929.37 14,162,218,185.04 100.00 141,673 100.00
================ ================= ========== ========= ==========
104
DISTRIBUTION OF FIXED RATE MORTGAGE LOANS
Fixed rate mortgage loans remain at the relevant fixed rate for a period of
time as specified in the offer of advance, after which they move to the seller's
standard variable rate or some other rate as specified in the offer of advance.
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
FIXED RATE % (POUND) (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------- ---------------- ----------------- ---------- --------- ----------
0.00 - 2.99 .......... 300,845,484 462,483,449.10 8.70 3,527 7.81
3.00 - 3.99 .......... 555,585,737 854,090,294.79 16.07 6,231 13.80
4.00 - 4.99 .......... 398,094,686 611,982,606.56 11.51 5,964 13.21
5.00 - 5.99 .......... 1,691,821,881 2,600,802,276.40 48.93 21,693 48.05
6.00 - 6.99 .......... 412,521,713 634,160,973.73 11.93 6,204 13.74
7.00 - 7.99 .......... 93,340,526 143,490,431.81 2.70 1,434 3.18
8.00 - 8.99 .......... 5,572,511 8,566,504.20 0.16 94 0.21
---------------- ----------------- ---------- --------- ----------
3,457,782,537 5,315,576,536.59 100.00 45,147 100.00
================ ================= ========== ========= ==========
MONTH/YEAR IN WHICH FIXED RATE PERIOD ENDS
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
MONTH/YEAR IN WHICH FIXED RATE PERIOD ENDS (POUND) (US$) % OF TOTAL LOANS
---------------- ----------------- ---------- ---------
September-02 ............................. 207,364,548.50 318,777,169 6.00 2,826
October-02 ............................... 98,451,457.26 151,347,359 2.85 1,455
November-02 .............................. 19,328,299.11 29,712,989 0.56 248
December-02 .............................. 333,408.17 512,541 0.01 7
January-03 ............................... 455,651,209.10 700,463,042 13.18 5,904
February-03 .............................. 215,846,096.90 331,815,676 6.24 2,942
March-03 ................................. 3,028,491.75 4,655,637 0.09 40
April-03 ................................. 46,918,920.44 72,127,472 1.36 534
May-03 ................................... 341,229,842.90 524,565,477 9.87 4,907
June-03 .................................. 1,285,707.41 1,976,491 0.04 20
July-03 .................................. 79,224,519.15 121,790,191 2.29 1,103
August-03 ................................ 103,979,661.30 159,845,751 3.01 1,219
September-03 ............................. 184,481,796.60 283,599,995 5.34 2,239
October-03 ............................... 44,552,593.18 68,489,767 1.29 701
November-03 .............................. 289,748,851.30 445,424,829 8.38 4,019
January-04 ............................... 91,677,560.33 140,933,990 2.65 1,131
February-04 .............................. 243,477,397.30 374,292,694 7.04 3,255
March-04 ................................. 67,368.50 103,564 0.00 1
April-04 ................................. 404,372,207.20 621,632,909 11.69 4,179
May-04 ................................... 161,821.29 248,764 0.00 3
June-04 .................................. 7,298,619.33 11,220,014 0.21 97
July-04 .................................. 12,153,592.29 18,683,462 0.35 173
August-04 ................................ 27,818,671.52 42,765,060 0.80 350
September-04 ............................. 33,698,986.83 51,804,745 0.97 432
October-04 ............................... 663,208.69 1,019,537 0.02 11
November-04 .............................. 7,740,101.94 11,898,696 0.22 101
December-04 .............................. 103,712.33 159,435 0.00 1
January-05 ............................... 16,625,363.45 25,557,822 0.48 226
February-05 .............................. 18,761,939.26 28,842,336 0.54 230
March-05 ................................. 179,425.12 275,826 0.01 3
April-05 ................................. 24,610,582.64 37,833,332 0.71 317
May-05 ................................... 243,392.14 374,162 0.01 4
June-05 .................................. 371,954.17 571,797 0.01 5
July-05 .................................. 31,079.12 47,777 0.00 1
August-05 ................................ 480,691.23 738,957 0.01 9
January-06 ............................... 173,997.48 267,483 0.01 4
April-06 ................................. 56,772,240.75 87,274,774 1.64 843
May-06 ................................... 1,209,185.78 1,858,856 0.03 21
June-06 .................................. 121,806.96 187,251 0.00 2
July-06 .................................. 5,979,233.40 9,191,750 0.17 92
August-06 ................................ 77,534,214.08 119,191,720 2.24 930
105
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
MONTH/YEAR IN WHICH FIXED RATE PERIOD ENDS (POUND) (US$) % OF TOTAL LOANS
---------------- ----------------- ---------- ---------
September-06 ............................... 52,339,409.89 80,460,277 1.51 702
October-06 ................................. 846,861.91 1,301,863 0.02 17
November-06 ................................ 10,677,567.17 16,414,400 0.31 147
January-07 ................................. 13,147,252.35 20,210,995 0.38 180
February-07 ................................ 14,147,975.68 21,749,386 0.41 186
March-07 ................................... 568,107.18 873,339 0.02 13
April-07 ................................... 30,299,409.24 46,578,646 0.88 378
May-07 ..................................... 4,877,734.23 7,498,438 0.14 65
June-07 .................................... 20,389,031.14 31,343,630 0.59 352
July-07 .................................... 129,506.05 199,087 0.00 4
August-07 .................................. 1,333,498.47 2,049,959 0.04 21
May-08 ..................................... 13,701,637.10 21,063,239 0.40 216
July-08 .................................... 4,232,963.31 6,507,246 0.12 65
August-08 .................................. 65,735,643.31 101,054,025 1.90 848
September-08 ............................... 37,505,389.01 57,656,248 1.08 537
November-08 ................................ 13,072,694.04 20,096,378 0.38 172
January-09 ................................. 15,563,287.83 23,925,116 0.45 212
February-09 ................................ 16,043,963.41 24,664,048 0.46 205
April-09 ................................... 19,416,849.60 29,849,115 0.56 242
---------------- ----------------- ---------- ---------
3,457,782,537 5,315,576,537 100.00 45,147
================ ================= ========== =========
REPAYMENT TERMS
AGGREGATE AGGREGATE
CURRENT CURRENT NUMBER OF
BALANCE BALANCE MORTGAGE
TYPE OF REPAYMENT PLAN (POUND) (US$) % OF TOTAL LOANS % OF TOTAL
- ---------------------- ---------------- ----------------- ---------- --------- ----------
Interest Only ...... 526,696,828.98 809,679,983.06 5.72 6,033 4.26
Repayment .......... 5,571,071,951.71 8,564,292,008.78 60.47 88,299 62.33
Endowment .......... 2,888,254,504.52 4,440,053,043.07 31.35 44,402 31.34
Personal Equity Plan 143,848,346.11 221,135,043.98 1.56 2,081 1.47
Pension Policy ..... 82,651,298.05 127,058,106.15 0.90 858 0.61
---------------- ----------------- ---------- --------- ----------
Total .............. 9,212,522,929.37 14,162,218,185.04 100.00 141,673 100.00
================ ================= ========== ========= ==========
106
CHARACTERISTICS OF UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET
The housing market in the UK is primarily one of owner-occupied housing.
The remaining occupants are in some form of public/social ownership.
At December 31, 2001, mortgage loans outstanding in the UK amounted to
approximately (pound)591 billion, with banks and building societies holding 71%
and 19% of the total respectively, according to the Council of Mortgage Lenders.
In 2001, outstanding mortgage debt grew by 10.5%, well above the long term
average of 6.3% during 1992-2001.
Set out in the following tables are certain 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
mortgages in a quarter by the quarterly balance of mortgages outstanding for
building societies in the UK. These quarterly scheduled and unscheduled
repayment rates were then annualized using standard methodology. You should note
that the CPR data presented below for the UK residential mortgage market
understates the seller's historical CPR data for mortgage loans originated by
the seller (and therefore the expected CPR for mortgage loans included in the
mortgages trust) as the data presented below is based upon a percentage of the
total UK residential mortgage market which has been increasing over time, and as
the seller's CPR data (which calculates the amount of scheduled and unscheduled
repayments on a monthly basis) includes the effect of product switches, which
results in a higher CPR.
The following table shows the actual annualized CPR experience of the
mortgage loans that have been assigned to the mortgages trust since March 26,
2001. You should note that the table covers a relatively short period of time
and that the actual annualized CPR experience of the seller may differ over time
from the data presented below. Since the seller may assign new mortgage loans
and their related security to the mortgages trustee after the closing date, you
should note that the actual annualized CPR experience of any new mortgage loans
assigned to the mortgages trustee after the closing date may also differ from
the data presented below. Month Annualized CPR Month Annualized CPR
MONTH ANNUALIZED CPR MONTH ANNUALIZED CPR
- ---- -------------- ----- --------------
April 2001 25.94% January 2002 31.34%
May 2001 27.72% February 2002 33.33%
June 2001 28.23% March 2002 27.52%
July 2001 32.05% April 2002 41.78%
August 2001 31.87% May 2002 41.90%
September 2001 28.84% June 2002 33.57%
October 2001 29.28% July 2002 44.13%
November 2001 28.40%
December 2001 27.76%
Over the past 39 years, quarterly CPR experienced in respect of
residential mortgage loans made by building societies have been between 9.5% and
14.0% for approximately 80% of that time.
107
AGGREGATE AGGREGATE AGGREGATE AGGREGATE
QUARTERS OVER QUARTERS OVER QUARTERS OVER QUARTERS OVER
CPR (%) 39 YEARS CPR (%) 39 YEARS CPR (%) 39 YEARS CPR (%) 39 YEARS
- ------- ------------- ------- ------------- ------- ------------- ------- --------------
7.0 0 10.5 18 14.0 6 17.5 1
7.5 0 11.0 18 14.5 2 18.0 1
8.0 4 11.5 16 15.0 3 18.5 1
8.5 1 12.0 20 15.5 2 19.0 1
9.0 6 12.5 13 16.0 4 19.5 2
9.5 9 13.0 11 16.5 2 20.0 1
10.0 10 13.5 5 17.0 1
Source of repayment and outstanding mortgage information: Council of
Mortgage Lenders
Over the past 39 years, the highest single quarter CPR experienced in
respect of residential mortgage loans made by building societies was recorded in
June 2002 at a level of 19.91%. The lowest level was 7.94% in June and March of
1974. The highest 12 month rolling average CPR over the same 39 year period was
19.20%. The lowest was 8.84%.
CPR RATE FOR 12 MONTH CPR RATE FOR 12 MONTH
THE QUARTER ROLLING THE ROLLING
DATE (%) AVERAGE (%) DATE QUARTER (%) AVERAGE (%)
- ----- ------------- ----------- ----- ------------ -----------
March 1963 10.40 N/A June 1963 11.75 N/A
September 1963 12.70 N/A December 1963 13.36 12.05
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
108
CPR RATE FOR 12 MONTH CPR RATE FOR 12 MONTH
THE QUARTER ROLLING THE ROLLING
DATE (%) AVERAGE (%) DATE QUARTER (%) AVERAGE (%)
- ----- ------------- ----------- ----- ------------ -----------
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
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 15.57 14.54
March 2001 15.48 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 19.20
- -----------
*Source of repayment and outstanding mortgage information: Council of Mortgage
Lenders
You should also note that the prior two CPR tables present the historical
CPR experience only of building societies in the UK. During the late 1990's, a
number of former building societies (including Northern Rock) converted to stock
form UK banks, and the CPR experience of these banks is therefore not included
in the foregoing building society CPR data. According to the Council of Mortgage
Lenders, the 12 month rolling average CPR experience of banks during 1998 was
14.85%, during 1999 was 16.08%, during 2000 was 15.34% and during 2001 was
18.69%.
109
REPOSSESSION RATE
The repossession rate of residential mortgaged properties in the UK has
steadily declined since 1991:
YEAR REPOSSESSIONS (%) YEAR REPOSSESSIONS (%) YEAR REPOSSESSIONS (%)
- ---- ----------------- ----- ----------------- ----- ----------------
1982 0.11 1989 0.17 1996 0.40
1983 0.12 1990 0.47 1997 0.31
1984 0.17 1991 0.77 1998 0.31
1985 0.25 1992 0.69 1999 0.27
1986 0.30 1993 0.58 2000 0.21
1987 0.32 1994 0.47 2001 0.16
1988 0.22 1995 0.47
- -----------
Source: Council of Mortgage Lenders
In June 2002, the Council of Mortgage Lenders published arrears figures
for the first six months of 2002, which showed that repossessions in the United
Kingdom had fallen to a 20-year low. No assurance can be given as to whether, or
for how long, this downward trend will continue.
ARREARS INFORMATION
The percentage of mortgage loans in arrears in the UK has steadily
declined since 1993:
ARREARS 6-12 ARREARS 12 ARREARS 6-12 ARREARS 12
YEAR MONTHS (%) MONTHS + (%) YEAR MONTHS (%) MONTHS + (%)
- ---- ------------ ------------ ---- ------------ ------------
1985 0.74 0.17 1994 1.28 1.12
1986 0.64 0.16 1995 1.20 0.81
1987 0.67 0.18 1996 0.95 0.63
1988 0.50 0.12 1997 0.69 0.42
1989 0.73 0.15 1998 0.68 0.32
1990 1.31 0.38 1999 0.52 0.27
1991 1.87 0.93 2000 0.43 0.19
1992 2.07 1.48 2001 0.38 0.17
1993 1.62 1.50
- -----------
Source: Council of Mortgage Lenders
The arrears table above shows the number of mortgage loans in arrears at
the end of the period as a percentage of the total number of mortgage loans
outstanding at the end of the period.
HOUSE PRICE TO EARNINGS RATIO
The following table shows the ratio for any one year of the average annual
value of houses (sourced prior to and including 1993 from the DETR/BSA 5% Sample
Survey of Building Society Mortgage Completions and sourced from and including
1994 from the DETR/CML Survey of Mortgage Lenders) compared to the average
annual salary in the UK as calculated from the weekly earnings in April of the
same year of male employees whose earnings were not affected by their absence
from work (as recorded by the Department for Education and Employment). While
this is a good indication of house affordability, it does not take in to account
the fact that the majority of households have more than one income to support a
mortgage loan.
110
YEAR HOUSE PRICE TO EARNINGS RATIO YEAR HOUSE PRICE TO EARNINGS RATIO
- ---- ----------------------------- ---- -----------------------------
1988 4.56 1995 3.47
1989 5.05 1996 3.47
1990 4.54 1997 3.62
1991 4.17 1998 3.84
1992 3.79 1999 4.09
1993 3.58 2000 4.47
1994 3.57 2001 4.60
- -------------
Source: Council of Mortgage Lenders, February 2002
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. The
greatest 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. However, according to the
Nationwide House Price Index, house price growth has slowed from a high of
approximately 15% per annum in mid-year 2000 to approximately 8% per annum in
mid-year 2001, although this trend was reversed during the third and fourth
quarter of 2001.
NATIONWIDE HOUSE PRICE
UK RETAIL PRICE INDEX INDEX HALIFAX HOUSE PRICE INDEX
--------------------- ---------------------- --------------------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE(1) INDEX CHANGE(1) INDEX CHANGE(1)
- ---------------- ------- --------- -------- -------- -------- ---------
1973 Q4 N/A N/A 19.5 N/A N/A N/A
1974 Q1 N/A N/A 19.8 N/A N/A N/A
1974 Q2 N/A N/A 20.0 N/A N/A N/A
1974 Q3 N/A N/A 20.2 N/A N/A N/A
1974 Q4 N/A N/A 20.4 4.4 N/A N/A
1975 Q1 31.5 N/A 20.7 4.5 N/A N/A
1975 Q2 34.8 N/A 21.4 6.8 N/A N/A
1975 Q3 35.6 N/A 21.9 7.9 N/A N/A
1975 Q4 37.0 N/A 22.5 10.1 N/A N/A
1976 Q1 38.2 19.3 23.0 10.3 N/A N/A
1976 Q2 39.5 12.7 23.4 9.0 N/A N/A
1976 Q3 40.7 13.4 23.9 8.9 N/A N/A
1976 Q4 42.6 14.1 24.4 7.8 N/A N/A
1977 Q1 44.6 15.5 24.8 7.4 N/A N/A
1977 Q2 46.5 16.3 25.3 7.8 N/A N/A
1977 Q3 47.1 14.6 25.9 7.8 N/A N/A
1977 Q4 47.8 11.5 26.2 7.4 N/A N/A
1978 Q1 48.6 8.6 27.6 10.8 N/A N/A
1978 Q2 50.0 7.3 28.9 13.3 N/A N/A
1978 Q3 50.8 7.6 31.7 20.4 N/A N/A
1978 Q4 51.8 8.0 33.6 24.6 N/A N/A
1979 Q1 53.4 9.4 35.5 25.3 N/A N/A
1979 Q2 55.7 10.8 38.1 27.5 N/A N/A
1979 Q3 59.1 15.1 40.9 25.3 N/A N/A
1979 Q4 60.7 15.9 43.8 26.7 N/A N/A
1980 Q1 63.9 18.0 45.2 24.3 N/A N/A
111
NATIONWIDE HOUSE PRICE
UK RETAIL PRICE INDEX INDEX HALIFAX HOUSE PRICE INDEX
--------------------- ---------------------- --------------------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE(1) INDEX CHANGE(1) INDEX CHANGE(1)
- ---------------- ------- --------- -------- -------- -------- ---------
1980 Q2 67.4 19.1 46.6 20.2 N/A N/A
1980 Q3 68.5 14.8 47.1 14.3 N/A N/A
1980 Q4 69.9 14.1 46.9 6.7 N/A N/A
1981 Q1 72.0 11.9 47.3 4.5 N/A N/A
1981 Q2 75.0 10.7 48.1 3.2 N/A N/A
1981 Q3 76.3 10.8 48.3 2.3 N/A N/A
1981 Q4 78.3 11.3 47.5 1.3 N/A N/A
1982 Q1 79.4 9.8 48.2 1.9 N/A N/A
1982 Q2 81.9 8.8 49.2 2.4 N/A N/A
1982 Q3 81.9 7.1 49.8 3.2 N/A N/A
1982 Q4 82.5 5.2 51.0 7.2 N/A N/A
1983 Q1 83.1 4.6 52.5 8.4 97.1 N/A
1983 Q2 84.8 3.5 54.6 10.4 99.4 N/A
1983 Q3 86.1 5.0 56.2 12.1 101.5 N/A
1983 Q4 86.9 5.2 57.1 11.2 102.3 N/A
1984 Q1 87.5 5.2 59.2 12.0 104.1 7.0
1984 Q2 89.2 5.1 61.5 11.9 106.0 6.4
1984 Q3 90.1 4.5 62.3 10.4 108.4 6.6
1984 Q4 90.9 4.5 64.9 12.8 111.0 8.2
1985 Q1 92.8 5.9 66.2 11.2 113.5 8.6
1985 Q2 95.4 6.7 68.2 10.3 115.4 8.5
1985 Q3 95.4 5.7 69.2 10.5 116.8 7.5
1985 Q4 96.1 5.6 70.7 8.5 120.6 8.3
1986 Q1 96.7 4.1 71.1 7.1 124.0 8.8
1986 Q2 97.8 2.5 73.8 8.0 128.1 10.4
1986 Q3 98.3 3.0 76.3 9.7 132.2 12.4
1986 Q4 99.6 3.6 79.0 11.1 136.8 12.6
1987 Q1 100.6 4.0 81.6 13.7 142.3 13.8
1987 Q2 101.9 4.1 85.8 15.0 146.7 13.6
1987 Q3 102.4 4.1 88.6 15.0 151.5 13.6
1987 Q4 103.3 3.6 88.5 11.4 158.0 14.4
1988 Q1 104.1 3.4 90.0 9.8 167.0 16.0
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
112
NATIONWIDE HOUSE PRICE
UK RETAIL PRICE INDEX INDEX HALIFAX HOUSE PRICE INDEX
--------------------- ---------------------- --------------------------
% ANNUAL % ANNUAL % ANNUAL
TIME IN QUARTERS INDEX CHANGE(1) INDEX CHANGE(1) INDEX CHANGE(1)
- ---------------- ------- --------- -------- -------- -------- ---------
1993 Q1 139.3 1.9 100.0 -4.0 199.6 -6.6
1993 Q2 141.0 1.2 103.6 -1.4 201.7 -3.5
1993 Q3 141.9 1.8 103.2 -1.0 202.6 -2.1
1993 Q4 141.9 1.9 101.8 1.7 203.5 2.0
1994 Q1 142.5 2.3 102.4 2.4 204.6 2.5
1994 Q2 144.7 2.6 102.5 -1.1 202.9 0.6
1994 Q3 145.0 2.2 103.2 0.0 202.7 0.0
1994 Q4 146.0 2.8 104.0 2.1 201.9 -0.8
1995 Q1 147.5 3.4 101.9 -0.5 201.8 -1.4
1995 Q2 149.8 3.5 103.0 0.5 199.3 -1.8
1995 Q3 150.6 3.8 102.4 -0.8 197.8 -2.4
1995 Q4 150.7 3.2 101.6 -2.3 199.2 -1.3
1996 Q1 151.5 2.7 102.5 0.6 202.1 0.1
1996 Q2 153.0 2.1 105.8 2.7 206.7 3.6
1996 Q3 153.8 2.1 107.7 5.1 208.8 5.4
1996 Q4 154.4 2.4 110.1 8.0 213.9 7.1
1997 Q1 155.4 2.5 111.3 8.3 216.7 7.0
1997 Q2 157.5 2.9 116.5 9.6 220.2 6.3
1997 Q3 159.3 3.5 121.2 11.8 222.6 6.4
1997 Q4 160.0 3.6 123.3 11.4 225.4 5.2
1998 Q1 160.8 3.4 125.5 12.0 228.4 5.3
1998 Q2 163.4 3.7 130.1 11.0 232.1 5.3
1998 Q3 164.4 3.2 132.4 8.8 234.8 5.3
1998 Q4 164.4 2.7 132.3 7.0 237.2 5.1
1999 Q1 164.1 2.0 134.6 7.0 238.6 4.4
1999 Q2 165.6 1.3 139.7 7.1 245.5 5.6
1999 Q3 166.2 1.1 144.4 8.6 255.5 8.4
1999 Q4 167.3 1.7 148.9 11.8 264.1 10.7
2000 Q1 168.4 2.6 155.0 14.1 273.1 13.5
2000 Q2 171.1 3.3 162.0 14.8 272.8 10.5
2000 Q3 171.7 3.3 161.5 11.2 275.9 7.7
2000 Q4 172.2 2.9 162.8 8.9 278.6 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 11.7 303.2 9.4
2001 Q4 173.4 0.7 184.6 12.6 312.1 11.4
2002 Q1 174.5 1.3 190.2 12.7 329.1 15.6
2002 Q2 176.2 1.0 206.5 16.7 342.0 15.4
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.
113
THE ADMINISTRATOR AND THE ADMINISTRATION AGREEMENT
THE ADMINISTRATOR
The mortgages trustee, the seller and Funding have appointed Northern Rock
plc under the terms of the administration agreement as the initial administrator
of the mortgage loans. The administrator performs the day-to-day servicing of
the mortgage loans through its retail branches, mortgage service centers and
telephone banking and operations centers. The administrator will continue to
administer other mortgage loans in addition to those mortgage loans included in
the mortgage portfolio. The administrator currently does not administer mortgage
loans that have been originated by parties other than the seller. The
administrator's registered office is Northern Rock House, Gosforth, Newcastle
upon Tyne NE3 4PL, United Kingdom.
This section describes the administrator's procedures in relation to
mortgage loans generally. A description of the administrator's obligations under
the administration agreement follows in the next section. The administrator is
continually reviewing the way in which it conducts its mortgage loan
administration business in order to ensure that it remains up-to-date and cost
effective in a competitive market, and the administrator may therefore change
its administration processes from time to time.
ADMINISTRATION OF MORTGAGE LOANS
Administration procedures include monitoring compliance with and
administering the mortgage loan features and facilities applicable to the
mortgage loans, responding to customer inquiries and management of mortgage
loans in arrears. See "- THE ADMINISTRATION AGREEMENT".
Under the terms and conditions of the mortgage loans, borrowers generally
must pay the monthly payment required under the terms and conditions of the
mortgage loans on each monthly payment due date. Interest accrues in accordance
with the terms and conditions of each mortgage loan and is collected from
borrowers monthly.
In the case of variable rate mortgage loans, the administrator determines
the standard variable rate from time to time. In the case of variable rate
mortgage loans which are assigned to the mortgages trustee, except in certain
limited circumstances, the administrator will continue to determine the standard
variable rate applicable to such mortgage loans on behalf of the mortgages
trustee, Funding and/or the security trustee. The administrator will take all
necessary steps under the mortgage loans to notify borrowers of any change in
the interest rates applicable to the mortgage loans (whether or not due to a
change in the standard variable rate) and will continue to notify borrowers of
any such change under the terms of the administration agreement.
Payments of interest and, in the case of repayment mortgage loans,
principal, are payable monthly in advance. Where a borrower defaults in the
payment of interest and/or principal under a mortgage loan, the administrator
will follow the usual arrears procedures described in "- ARREARS AND DEFAULT
PROCEDURES" below.
ARREARS AND DEFAULT PROCEDURES
The administrator collects all payments due under or in connection with
mortgage loans in accordance with its administration procedures in force from
time to time, but having regard to the circumstances of the relevant borrower in
each case. In accordance with standard market practice in the UK mortgage loan
servicing business, the administrator identifies a mortgage loan as being "IN
ARREARS" when, on any due date, the overdue amounts which were due on previous
due dates equal, in the aggregate, one or more full monthly payments. In making
an arrears determination, the administrator calculates as of the date of
determination the difference between:
114
o the sum of all monthly payments that were due and payable by a
borrower on any due date up to that date of determination (less the
aggregate amount of all authorized underpayments made by such borrower
up to such date of determination); and
o the sum of all payments actually made by that borrower up to that date
of determination.
The administrator will determine that a mortgage loan is in arrears if the
result arrived at by dividing that difference (if any) by the amount of the
required monthly payment equals or exceeds 1. A mortgage loan will continue to
be in arrears for each calendar month in which the result of the foregoing
arrears calculation equals or exceeds 1, which result means that the borrower
has missed payments that in the aggregate equal or exceed one monthly payment,
and subsequent payments by that borrower (if any) have not reduced the amount of
missed payments to less than one monthly payment. As the administrator
determines its arrears classification based upon the number of full monthly
payments that have been missed by a borrower, a borrower that has missed
payments that in the aggregate equal or exceed 2 monthly payments (but for which
the aggregate of missed payments is less than 3 monthly payments) would be
classified by the administrator as being between 2-3 months in arrears, and so
on. For example, suppose a borrower has made four monthly payments (either in
consecutive months or throughout any period of time) each in an amount less than
the required monthly amount, and the difference, for the purposes of arrears
calculation, between the sum of the payments due and payable by that borrower
and the sum of the payments actually made by that borrower (that difference then
divided by that borrower's required monthly payment) is less than 1. The
administrator would not classify that borrower as being in arrears. However, if
that borrower makes another payment (for the purposes of our example, on the
payment date in October 2002) 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 equaling or exceeding 1,
that borrower will be classified as being one month in arrears as of November 1,
2002. Furthermore, if the result of the foregoing arrears calculation continues
to equal or exceed 1 (but remains less than 2) until December 2002, that
borrower will continue to be classified as being one month in arrears during
that time period. The administrator will not classify the borrower as being two
months in arrears until the beginning of the month following the monthly payment
date in which the result of the arrears calculation equals or exceeds 2.
This formula that the administrator uses to determine arrears means that
there may be mortgage loans in the mortgage portfolio on which borrowers have
paid less than the monthly payment due, but which have not been classified as
being in arrears, as the aggregate of the amount of deficient payments does not
equal or exceed one monthly payment. This also means that there may be a
significant period of time between the due date on which a borrower pays less
than the monthly payment due on that due date and the date that the aggregate
amount of those deficient payments equals or exceeds one monthly payment, at
which time the administrator will classify that mortgage loan as being in
arrears. In addition, there may be a significant period of time between the
classification of a borrower as being, for example, one month in arrears, and
(assuming the borrower continues to make deficient monthly payments) the time at
which those deficient payments in the aggregate result in the administrator
classifying the borrower as being two months in arrears.
The arrears are reported at each calendar month end. After the arrears are
first reported the borrower is contacted and asked for payment of the arrears.
The administrator will continue to contact the borrower asking for payment of
the arrears. The administrator classifies a mortgage loan that is in arrears as
"non-performing" if the related borrower has not made any payment within any of
the three consecutive calendar months prior to the date of determination.
115
In the case of any 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 the case of any flexible mortgage loan and
subject to the terms and conditions of the mortgage loan, arrears are generally
capitalized from the date of the unauthorized underpayment.
In seeking to control and manage arrears, the administrator from time to
time enters into arrangements with borrowers regarding the arrears, including:
o arrangements to make each monthly payment as it falls due plus an
additional amount to pay the arrears over a period of time;
o arrangements to pay only a portion of each monthly payment as it falls
due; and
o a deferment for a period of time of all payments, including interest
and principal or parts of any of them.
The administrator may vary any of these arrangements from time to time at
its discretion, the primary aim being to rehabilitate the borrower and recover
the arrears.
Legal proceedings do not usually commence until the arrears are equal to
at least three times the monthly payment then due. However, in many cases legal
proceedings may commence later than this. Once legal proceedings have commenced,
the administrator may send further letters to the borrower encouraging the
borrower to enter into discussions to pay the arrears. The administrator may
still enter into an arrangement with a borrower at any time prior to a court
hearing, or it may adjourn a court hearing. If the administrator applies to the
court for an order for possession following a default of the borrower, the court
has discretion as to whether it will grant the order requiring the borrower to
vacate the mortgaged property, and discretion as to the terms upon which the
order is granted. If after the possession order has been granted the borrower
does not voluntarily vacate the property, then the administrator will be
required to request a warrant for execution by a court officer of the possession
order. On average, the equivalent of 12 monthly payments may have been missed
prior to the administrator obtaining possession, assuming no prior mortgage or
the imposition of defenses. Where a court order for possession is deferred to
allow time for payment and the borrower subsequently defaults in making the
payment, the administrator may take any action it considers appropriate,
including entering into an arrangement with the borrower. In all cases, the
administrator has a duty of care to the borrower to act reasonably.
The administrator has discretion to deviate from these arrears procedures.
In particular, the administrator may deviate from these procedures where a
borrower suffers from a mental or physical infirmity, is deceased or where the
borrower is otherwise prevented from making payment due to causes beyond the
borrower's control. This is the case for both sole and joint borrowers.
After the administrator has been granted possession, the administrator may
take any action it considers appropriate, subject to any fiduciary duties which
the administrator may owe to the borrower, including but not limited to:
o securing, maintaining or protecting the property and putting it into a
suitable condition for sale;
o creating any estate or interest on the property, including a
leasehold;
o disposing of the property (in whole or in parts) or of any interest in
the property, by auction, private sale or otherwise, for a price it
considers appropriate; and
o letting the property for any period of time.
Subject as provided above, the administrator has discretion as to the
timing of any of these actions, including whether to postpone the action for any
period of time. The administrator may also carry out works on the property as it
considers appropriate, including the demolition of the whole or any part of it.
116
The period between the administrator obtaining possession and sale of a
mortgaged property is generally between three and nine months. However, you
should note that the administrator's ability to exercise its power of sale in
respect of a mortgaged property is dependent upon mandatory legal restrictions
as to notice requirements. In addition, there may be factors outside the
administrator's control, such as whether the borrower contests the sale and the
market conditions at the time of sale, that may affect the length of time
between the administrator's decision to exercise its power of sale and final
completion of the sale.
The administrator will apply the net proceeds of sale of the mortgaged
property against the sums owed by the borrower to the extent necessary to
discharge the mortgage including any accumulated fees and interest. Where those
proceeds are insufficient to cover all amounts owing under the mortgage loan,
the administrator will make a claim under the MIG policy, if appropriate. Where
the funds arising from application of these procedures are insufficient to pay
all amounts owing in respect of a mortgage loan, the funds are applied first in
paying principal, and secondly in paying interest and costs.
At this point the administrator will close the borrower's account.
However, the borrower remains liable for any deficit remaining after the
mortgaged property is sold but before the proceeds of any MIG insurance are
applied. The administrator may pursue the borrower to the extent of any
deficiency resulting from the sale if the administrator deems it appropriate to
do so.
These arrears and security enforcement procedures may change over time as
a result of a change in the administrator's business practices, legislative or
regulatory changes or business codes of practice.
ARREARS EXPERIENCE
The following table summarizes, in respect of Northern Rock's overall
mortgage portfolio, Northern Rock's experience administering mortgage loans in
arrears and its repossession experience for residential mortgage loans that were
originated by the seller. The information set forth below includes information
in respect of Northern Rock's experience in administering mortgage loans secured
by mortgaged properties located in England, Wales and Scotland, whereas the
mortgage portfolio only includes mortgage loans secured by mortgaged properties
located in England and Wales. However, Northern Rock has not experienced any
significant variation in its arrears and repossession experience in respect of
mortgage loans secured by mortgaged properties located in Scotland compared with
mortgage loans secured by mortgaged properties located in England and Wales.
117
The mortgage loans used for statistical purposes in the table below are
administered in accordance with Northern Rock's administration policies. You
should note the method by which Northern Rock classifies mortgage loans as being
in arrears, which is described under "- ARREARS AND DEFAULT PROCEDURES", and
which is important in helping you to understand Northern Rock's arrears and
repossession experience as set forth in the following table.
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------------- ------------------------------ ---------------------------
US$ US$ US$
(POUND)(MLS) (MLS) % (POUND)(MLS) (MLS) % (POUND)(MLS) (MLS) %
----------- ------- ---- ----------- ------- ------- ----------- ------- ----
Current balance 10,515 16,164 n/a 12,119 18,630 n/a 13,720 21,091 n/a
Number of mortgage loans
outstanding 292,222 292,222 n/a 315,184 315,184 n/a 327,088 327,088 n/a
Current balance of loans in
arrears
1 to 2 months 231.3 355.6 2.20 283.4 435.7 2.34 244.4 375.7 1.78
2 to 3 months 82.0 126.1 0.78 71.2 109.5 0.59 101.8 156.5 0.74
3 to 6 months 93.5 143.7 0.89 78.1 120.1 0.64 93.7 144.0 0.68
6 to 12 months 83.5 128.4 0.79 56.3 86.6 0.46 51.2 78.7 0.37
Over 12 months 96.9 149.0 0.92 45.1 69.3 0.37 37.5 57.7 0.27
Total current balance of mortgage
loans in arrears 587.2 902.7 5.58 534.1 821.1 4.41 528.6 812.6 3.85
Number of mortgage loans
outstanding in arrears
1 to 2 months 6,136 6,136 2.10 6,922 6,922 2.20 6,040 6,040 1.85
2 to 3 months 2,247 2,247 0.77 1,793 1,793 0.57 2,579 2,579 0.79
3 to 6 months 2,485 2,485 0.85 1,911 1,911 0.61 2,269 2,269 0.69
6 to 12 months 2,005 2,005 0.69 1,322 1,322 0.42 1,174 1,174 0.36
Over 12 months 2,104 2,104 0.72 940 940 0.30 756 756 0.23
Total number of mortgage loans
outstanding in arrears 14,977 14,977 5.13 12,888 12,888 4.09 12,818 12,818 3.92
Repossessions 1,133 1,133 0.39 956 956 0.30 875 875 0.27
Amount of mortgage loan losses(1) 14 21.5 n/a 14 21.5 n/a 10.8 16.6 n/a
Mortgage loan losses as % of total
current balance(1) 0.13% 0.13% n/a 0.12% 0.12% n/a 0.08% 0.08% n/a
DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 2001
--------------------------- ------------------------------ ---------------------------
US$ US$ US$
(POUND)(MLS) (MLS) % (POUND)(MLS) (MLS) % (POUND)(MLS) (MLS) %
----------- ------- ---- ----------- ------- ------- ----------- ------- ----
Current balance 15.524 23,865 n/a 17,858 27,453 n/a 21,639 33,265 n/a
Number of mortgage loans
outstanding 338,149 338,149 n/a 367,963 367,963 n/a 414,023 414,023 n/a
Current balance of loans in
arrears
1 to 2 months 247.5 380.5 1.59 218.2 335.4 1.22 232.0 356.6 1.07
2 to 3 months 62.5 96.1 0.40 77.1 118.5 0.43 78.1 120.0 0.36
3 to 6 months 71.7 110.2 0.46 69.3 106.5 0.39 74.1 113.9 0.34
6 to 12 months 36.0 55.3 0.23 34.8 53.5 0.19 36.2 55.6 0.17
Over 12 months 21.3 32.7 0.14 13.2 20.3 0.07 9.3 14.3 0.04
Total current balance of
mortgage loans in
arrears 439.0 674.9 2.83 412.6 634.3 2.31 429.6 660.4 1.99
Number of mortgage loans
outstanding in arrears
1 to 2 months 5,428 5,428 1.61 5,104 5,104 1.39 4,861 4,861 1.17
2 to 3 months 1,470 1,470 0.43 1,896 1,896 0.52 1,694 1,694 0.41
3 to 6 months 1,749 1,749 0.52 1,601 1,601 0.44 1,598 1,598 0.39
6 to 12 months 870 870 0.26 800 800 0.22 736 736 0.18
Over 12 months 447 447 0.13 290 290 0.08 191 191 0.05
Total number of mortgage
loans outstanding in
arrears 9,964 9,964 2.95 9,691 9,691 2.63 9,080 9,080 2.19
Repossessions 763 763 0.23 620 620 0.17 658 658 0.16
Amount of mortgage loan
losses(1) 8.5 13.1 n/a 7 10.8 n/a 5.6 8.6 n/a
Mortgage loan losses as %
of total current
balance(1) 0.05% 0.05% n/a 0.04% 0.04% n/a 0.03% 0.03% n/a
JUNE 30, 2002
---------------------------
US$
(POUND)(MLS) (MLS) %
----------- ------- ----
Current balance 24,631 37,865 n/a
Number of mortgage loans
outstanding 445,342 445,342 n/a
Current balance of loans in
arrears
1 to 2 months 227.2 349.2 0.92
2 to 3 months 93.8 144.2 0.38
3 to 6 months 76.8 121.2 0.32
6 to 12 months 29.9 45.9 0.12
Over 12 months 8.8 13.5 0.04
Total current balance of
mortgage loans in
arrears 436.5 671.1 1.77
Number of mortgage loans
outstanding in arrears
1 to 2 months 4,446 4,446 1.00
2 to 3 months 1,914 1,914 0.43
3 to 6 months 1,622 1,622 0.36
6 to 12 months 605 605 0.14
Over 12 months 162 162 0.04
Total number of mortgage
loans outstanding in
arrears 8,749 8,749 1.96
Repossessions 307 307 0.07
Amount of mortgage loan
losses(1) 2.5 3.8 n/a
Mortgage loan losses as %
of total current
balance(1) 0.01% 0.01% n/a
- ------------
* Provided by Northern Rock plc
(1) Year ended December 31 or six months ended June 30, as applicable.
118
Repossessions expresses the number of mortgaged properties that the
administrator has taken into possession during the period, as a percentage of
the number of mortgage loans outstanding at the end of the period.
There can be no assurance that the arrears and repossession experience
with respect to the mortgage loans comprising the trust property will correspond
to the experience of the administrator's overall mortgage portfolio as set forth
in the foregoing table. The statistics in the preceding table represent only the
arrears and repossession experience for the years and interim period presented,
whereas the arrears and repossession experience on the mortgage loans in the
trust property will depend on results obtained over the life of the mortgage
loans in the trust property. The foregoing statistics include mortgage loans
with a variety of payment type, product type and other characteristics that may
not correspond to those of the mortgage loans in the trust property. Moreover,
if the property market experiences an overall decline in property values so that
the value of the properties in the trust falls below the current balances of the
mortgage loans comprising the overall pool, the actual rates of arrears and
repossessions could be significantly higher than those previously experienced by
the administrator. In addition, other adverse economic conditions, whether or
not they affect property values, may nonetheless affect the timely payment by
borrowers of principal and interest and, accordingly, the rates of arrears,
repossessions and losses with respect to the mortgage loans in the trust
property. You should note that the United Kingdom experienced relatively low and
stable interest rates during the periods covered in the preceding tables. If
interest rates were to rise, it is likely that the rate of arrears and
repossessions likewise would rise.
Northern Rock's level of mortgage arrears has been on a downward trend
since the recession in the UK in the early 1990s. Between June 1996 and December
2000, interest rate increases, and the reduction (and ultimate elimination) of
benefits offered by the Mortgage Interest Relief At Source scheme, have
contributed to slowing that downward trend.
House price inflation has indirectly contributed to the improved arrears
situation by enabling borrowers to sell at a profit if they encounter financial
hardship. Recently, house price inflation has broken through its historical
upward trend line and is expected to moderate. If it does not, then there is
potential for a boom-bust situation similar to that which occurred in the period
from 1988 to 1990, where housing prices rose substantially faster than inflation
as housing turnover increased to record levels. At that time, the UK economy
grew rapidly, which led to falling unemployment and relatively high rates of
real income growth. These fed into higher demand for housing and house prices
rose rapidly. Demand was further increased by changes in taxation legislation
with regard to tax relief on mortgage payments in 1988. When monetary policy was
tightened subsequently (in terms of both "LOCKING IN" sterling to the European
Exchange Rate Mechanism and higher interest rates), the pace of economic
activity first slowed and then turned into recession. Rising unemployment
combined with high interest rates led to a fall in housing demand and increased
default rates and repossessions. The ability of borrowers to refinance was
limited as house prices began to fall and many were in a position of negative
equity (borrowings greater than the resale value of the property) in relation to
their mortgage.
In June 2002, the Council of Mortgage Lenders published arrears figures
for the first six months of 2002, which showed that repossessions in the United
Kingdom had fallen to a 20-year low. No assurance can be given as to whether, or
for how long, this downward trend will continue. See "RISK FACTORS - THE TIMING
AND AMOUNT OF PAYMENTS ON THE MORTGAGE LOANS COULD BE AFFECTED BY VARIOUS
FACTORS WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES".
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
119
of mortgage arrears and to improve collection performance, Northern Rock
currently is developing behavioral scoring systems to target differing groups of
customers in arrears according to risk.
THE ADMINISTRATION AGREEMENT
The following section describes, in summary, the material terms of the
administration agreement. The description does not purport to be complete and is
subject to the provisions of the administration agreement, a form of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
APPOINTMENT
On March 26, 2001, each of the mortgages trustee, Funding and the seller
appointed Northern Rock under the administration agreement to be their agent to
exercise their respective rights, powers and discretions in relation to the
mortgage loans and their related security and to perform their respective duties
in relation to the mortgage loans and their related security. The security
trustee is a party to the administration agreement and has consented to the
appointment. The administrator will continue to administer mortgage loans which
have not been assigned to the mortgages trustee. The administrator has agreed to
administer the mortgage loans assigned to the mortgages trustee in the same
manner as it administers mortgage loans which have not been assigned to the
mortgages trustee but remain on the books of the seller.
Subject to the provisions of the administration agreement, the mortgage
loans, the mortgages and the transaction documents, the administrator has the
power to do or cause to be done any and all things which it reasonably considers
necessary, convenient or incidental to the administration of the mortgage loans
and their related security or the exercise of such rights, powers and
discretions.
The administrator has agreed to comply with any reasonable directions,
orders and instructions which any of the mortgages trustee, Funding or the
seller may from time to time give to it in accordance with the provisions of the
administration agreement (and, in the event of any conflict, those of the
mortgages trustee shall prevail).
The administrator has agreed to administer and service the mortgage loans
and their related security in accordance with:
o the terms and conditions of the mortgage loans and the mortgages;
o the administrator's administration procedures. The administrator's
administration procedures are the administration, arrears and
enforcement policies and procedures from time to time pursuant to
which the administrator administers and enforces mortgage loans and
their related security which are beneficially owned by the seller; and
o the terms and provisions of the administration agreement.
UNDERTAKINGS BY THE ADMINISTRATOR
Under the administration agreement, the administrator has undertaken,
among other things:
(A) to determine and set the interest rates applicable to the mortgage loans
which have been assigned to the mortgages trustee including the standard
variable rate, except in the limited circumstances set out in the
administration agreement when the mortgages trustee, Funding and/or the
security trustee will be entitled to do so. The administrator may not at
any time, without the prior consent of the mortgages trustee, Funding and
the security trustee, set or maintain the standard variable rate for
mortgage loans which form part of the mortgages trust at a rate which is
higher than the then prevailing standard variable rate for mortgage loans
which are beneficially owned by the seller outside the mortgages trust;
(B) to determine on each payment date, having regard to the aggregate of:
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(1) the income which Funding would expect to receive during the next
succeeding interest period;
(2) the standard variable rate for mortgage loans forming part of the
mortgages trust and the variable mortgage rates in respect of such
mortgage loans which the administrator proposes to set under the
administration agreement; and
(3) all other resources available to Funding including the Funding reserve
fund and amounts standing to the credit of each issuer's reserve fund
and each issuer's liquidity reserve fund, if any,
whether Funding would receive an amount of income during that loan
interest period which is less than the amount which is the aggregate of
(a) the amount of interest which will be payable by Funding in order to
fund (whether by payment to a swap provider or otherwise) the amount of
interest payable in respect of the class A notes of the issuer and the
highest rated class of the previous notes issued by each previous issuer
(and the highest rated class of notes issued by each new issuer, if any)
and all amounts ranking higher in priority to such amounts on the payment
date falling at the end of that loan interest period and (b) all other
amounts payable by Funding which rank equally with or in priority to
interest due on the intercompany loan in respect of interest which is
payable by the issuer on the class A notes of the issuer and interest due
on each previous intercompany loan in respect of interest which is payable
by each previous issuer on the highest rated class of previous notes
issued by each previous issuer (and any new intercompany loan (if any) in
respect of interest which is payable by any new issuer on the highest
rated class of notes issued by each new issuer, if any). If the
administrator determines that there will be a revenue shortfall in the
foregoing amounts, it will give written notice to the mortgages trustee,
Funding and the security trustee, within one London business day of such
determination, of the amount of the revenue shortfall and recommend the
standard variable rate which would, in the administrator's opinion, need
to be set in relation to the mortgage loans within the mortgages trust in
order for no revenue shortfall to arise, having regard to the obligations
of Funding. If the mortgages trustee, Funding and/or the security trustee
notify the administrator that, having regard to the obligations of
Funding, the standard variable rate for mortgage loans within the
mortgages trust should be increased, the administrator will take all steps
which are necessary including publishing any notice required under the
mortgage conditions to effect such increase in the standard variable rate.
The mortgages trustee, Funding and/or the security trustee may terminate
the authority of the administrator to set the standard variable rate
applicable to mortgage loans included in the mortgages trust in certain
limited circumstances set out in the administration agreement including
upon the occurrence of any administrator termination event (as described
below);
(C) except as provided in relation to re-fixed mortgage loans, not to issue to
any borrower an offer for a further advance or a product switch without
having received confirmation that the seller has elected to repurchase the
relevant mortgage loan together with its related security from the seller
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 repurchase such
mortgage loans and their related security, the administrator will take all
steps to set the existing borrowers' re-fix rate at the higher of the rate
recommended by the administrator (having regard to Funding's obligations),
the rate notified to it by the mortgages trustee and Funding and the rates
notified to it by the trustee or trustees of any other securitizations of
the seller which include fixed rate mortgage loans;
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(E) to take all steps necessary under the mortgage conditions and applicable
law to notify borrowers of each change in interest rates, whether due to a
change in the standard variable rate (including any such change effected
at the request of the mortgages trustee, Funding and/or the security
trustee) or as a consequence of the mortgage conditions. The administrator
will also notify the mortgages trustee, Funding and the security trustee
of any change in the standard variable rate;
(F) to maintain such records as are necessary to enforce each mortgage loan
and its related security and to keep and maintain, on a loan by loan
basis, records and accounts on behalf of the mortgages trustee in relation
to the mortgage loans;
(G) to keep or cause to be kept the mortgage loan files and title deeds in
safe custody and to the order of the mortgages trustee, Funding and/or the
security trustee and in such a manner that they are readily identifiable
and accessible;
(H) to provide the mortgages trustee, Funding and the security trustee and
their agents with access to the title deeds and mortgage loan files at all
reasonable times;
(I) to assist the cash manager in the preparation of a quarterly report
substantially in the form set out in the cash management agreement on,
among other things, arrears. The administrator will regularly give to the
mortgages trustee and the beneficiaries written details of mortgage loans
that are in arrears;
(J) to take all reasonable steps to collect and recover payments due under or
in respect of the mortgage loans and the related security, including
instituting proceedings and enforcing any relevant mortgage loan, mortgage
or any other related security in accordance with the seller's
administration procedures but having regard to the circumstances of the
relevant borrower in each case; and
(K) to not knowingly fail to comply with any legal requirements in the
performance of its obligations under the administration agreement.
COLLECTION OF PAYMENTS
The administrator has undertaken to ensure that all payments due under the
mortgage loans which are included in the trust property will be made by the
relevant borrower by direct debit or, if such payment is late or borrowers
choose not to pay by direct debit, by check or other means into accounts in the
name of the administrator held with Barclays Bank plc, City Group Office, Percy
Street, Newcastle upon Tyne NE99 1JP and Lloyds TSB Bank plc, City Office,
Bailey Drive, Gillingham Business Park, Kent ME8 0LS (each a "COLLECTION BANK")
and other accounts (each a "COLLECTION ACCOUNT") which the administrator may
utilize from time to time in accordance with the collection bank agreement and
the administration agreement, all of which will be held on trust by the seller.
The administrator has agreed to use its reasonable endeavors to credit any
monthly payment made by a borrower to the relevant collection account within the
following time limits:
o in the case of direct debit payment, by close of business on the
London business day which immediately follows the day on which such
amounts are received;
o in the case of standing order, by close of business on the second
London business day following the day on which such amounts are
received;
o in the case of payment by cash, transfer payment from another account
of the seller or check where reference to the relevant borrower is
provided or payment made by way of paying-in book, by close of
business on the London business day which immediately follows the day
on which such amounts are received; and
o in the case of any payment by check where a reference to the relevant
borrower is not provided, by close of business on the next London
business day after notification from the relevant collection bank of
the identity of the borrower,
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provided, however, that in any event the administrator has agreed to credit
monthly payments made by a borrower to the relevant collection account within
three London business days of receiving that monthly payment.
Payments from borrowers under mortgage loans originated by the seller
which are not intended to be assigned to the mortgages trustee are also paid
into and flow through the collection accounts.
Amounts paid into the collection accounts are held on trust by the
administrator for the relevant beneficiaries including the mortgages trustee.
The trusts in favor of the mortgages trustee are in respect of all amounts
credited to the collection accounts which represent receipts in respect of
mortgage loans which are assigned to the mortgages trustee and included in the
trust property.
The collection accounts are operated by the administrator in accordance
with the collection bank agreement. Under the collection bank agreement, until
the collection banks receive notice from the security trustee that an
intercompany loan enforcement notice has been served or that the appointment of
the administrator has been terminated, each collection bank has agreed to
operate the collection accounts in accordance with the instructions of the
administrator. If the short term, unsecured, unguaranteed and unsubordinated
debt obligations of Barclays Bank plc or Lloyds TSB Bank plc are not rated at
least A-1+ by Standard & Poor's, P-1 by Moody's and F1+ by Fitch, the
administrator will arrange for the transfer of the credit balance on such
accounts to another bank which has the required ratings. The long term and short
term, unsecured, unguaranteed and unsubordinated debt obligations of Barclays
Bank plc and Lloyds TSB Bank plc as of the cut-off date are rated as of the
cut-off date AA and A-1+ and AA and A-1+, respectively, by Standard & Poor's,
Aa1 and P-1 and Aaa and P-1, respectively, by Moody's and AA+ and F1+ and AA+
and F1+, respectively, by Fitch. Amounts standing to the credit of the
collection accounts that represent amounts collected in respect of mortgage
loans that have been assigned to the mortgages trust are transferred by the
administrator to the mortgages trustee transaction account every three London
business days.
Amounts standing to the credit of the mortgages trustee transaction
account are transferred (subject to retaining a minimum balance of (pound)1 In
such account) on a weekly basis by the cash manager to the mortgages trustee GIC
account or, at the cash manager's option, invested in authorized investments,
provided that the yield on those authorized investments expressed as an annual
percentage rate of return is not less than the interest rate on the mortgages
trustee GIC account at the time the investment decision is made. Any amounts
invested in authorized investments, including the interest accrued on such
amounts, are transferred to the mortgages trustee GIC account on the related
distribution date.
In the case of monthly payments which are made by direct debit, the
administrator initially credits the applicable collection account with the full
amount of the direct debit. If an unpaid direct debit is returned in
circumstances where the administrator has credited to the mortgages trustee
transaction account the amount of the monthly payment, the administrator is
permitted to reclaim from the mortgages trustee transaction account the
corresponding amounts previously credited.
Any amount standing to the credit of the mortgages trustee GIC account
accrues interest at a margin below LIBOR.
REDEMPTION
Under the administration agreement, the administrator is responsible for
handling the procedures connected with the redemption of mortgage loans and is
authorized to release the relevant title deeds to the person or persons entitled
thereto upon redemption.
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FEES
The administrator is entitled to receive a fee for servicing the mortgage
loans. On each distribution date the mortgages trustee pays to the administrator
an administration fee of 0.12% per annum (inclusive of VAT) on the amount of the
Funding 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 latest occurring final repayment date
of the intercompany loans, or on their earlier repayment in full by Funding. The
administration agreement also provides for the administrator to be reimbursed
for all reasonable out-of-pocket expenses and charges properly incurred by the
administrator in the performance of its services under the administration
agreement.
REMOVAL OR RESIGNATION OF THE ADMINISTRATOR
The appointment of the administrator may be terminated by the mortgages
trustee, Funding or the security trustee immediately upon written notice to the
administrator, on the occurrence of certain events (each an "ADMINISTRATOR
TERMINATION EVENT") including:
o the administrator fails to pay any amount due and payable by it and
such failure is not remedied for a period of 5 London business days
after the administrator becomes aware of the default;
o subject as provided further in the transaction documents, the
administrator fails to comply with any of its other material
obligations under the administration agreement which in the opinion of
the security trustee is materially prejudicial to the interests of the
holders of the notes, the previous notes and any new notes and such
failure is not remedied for a period of 20 days after the
administrator becomes aware of the default;
o if at any time required under any UK mortgage regulatory regime the
administrator fails to obtain the necessary license or regulatory
approval enabling it to continue administering mortgage loans; or
o the occurrence of an insolvency event in relation to the
administrator.
Upon termination of the administrator, the security trustee will agree to
use its reasonable endeavors to appoint a substitute administrator.
In addition, subject to the fulfillment of certain conditions including,
without limitation, that a substitute administrator has been appointed by the
mortgages trustee, Funding and the security trustee (and in the event of failure
to agree, by the security trustee), the administrator may voluntarily resign by
giving not less than 12 months' notice of termination to the mortgages trustee,
Funding and the seller.
Any such substitute administrator (whether appointed upon a termination of
the appointment of, or the resignation of, the administrator) is required to:
o if possible, have experience administering mortgage loans secured on
residential mortgaged properties in England and Wales; and
o enter into an agreement on substantially the same terms as the
provisions of the administration agreement.
In addition, the then current ratings (if any) of the notes, the previous
notes or any new notes may not adversely be affected as a result of the
appointment of the substitute administrator, unless otherwise agreed by an
extraordinary resolution of the holders of the relevant class of notes.
Forthwith upon termination of the appointment of the administrator, the
administrator must deliver the title deeds, the mortgage loan files and all
books of account and other records maintained by the administrator relating to
the mortgage loans and/or the related security to, or at the direction of, the
mortgages trustee.
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The administration agreement will terminate automatically upon a
termination of the mortgages trust when Funding no longer has any interest in
the trust property.
DELEGATION BY THE ADMINISTRATOR
The administrator may, in some circumstances including with the prior
written consent of the mortgages trustee and Funding and after consultation with
the security trustee, delegate or subcontract the performance of any of its
obligations or duties under the administration agreement. Upon the appointment
of any such delegate or sub-contractor the administrator will nevertheless
remain responsible for the performance of those duties to Funding, the mortgages
trustee and the security trustee.
DELEGATION BY THE SECURITY TRUSTEE TO AN AUTHORIZED THIRD PARTY
Subject as provided in the transaction documents, the 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 security trustee and the issuer will not result in the ratings on the notes
being downgraded, qualified or withdrawn. The security trustee is obliged to use
reasonable endeavors to procure the appointment of an authorized third party and
in the event of any such appointment is not required to monitor or supervise the
third party's performance and is not responsible for any act or omission of such
third party or for any loss caused thereby.
GOVERNING LAW
The administration agreement is governed by English law.
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ASSIGNMENT OF THE MORTGAGE LOANS AND RELATED SECURITY
The following section describes, in summary, the material terms of the
mortgage sale agreement. The description does not purport to be complete and is
subject to the provisions of the mortgage sale agreement, a form of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
THE MORTGAGE SALE AGREEMENT
Under the mortgage sale agreement dated March 26, 2001 entered into
between the seller, the mortgages trustee, the security trustee and Funding, the
seller assigned the initial mortgage portfolio together with all related
security to the mortgages trustee. The mortgage sale agreement was amended and
restated on July 18, 2001, on September 28, 2001 and on March 20, 2002, and the
seller assigned the further mortgage portfolios with all related security to the
mortgages trustee pursuant to the second amended and restated mortgage sale
agreement on September 28, 2001 and pursuant to the third amended and restated
mortgage sale agreement on March 20, 2002. In addition to providing for the
assignment of the initial mortgage portfolio and the further mortgage portfolios
and related security, the mortgage sale agreement also sets out or provides for
the following:
o the representations and warranties given by the seller in relation to
the mortgage loans and the related security (and the representations
and warranties to be given by the seller as of each assignment date in
relation to any new mortgage loans and the related security assigned
to the mortgages trustee on that assignment date);
o the assignment of other mortgage loans and their related security to
the mortgages trust;
o the repurchase 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 seller has breached any of its
representations and warranties in respect of such mortgage loans or
their related security;
o the making of re-draws in respect of flexible mortgage loans contained
in the trust property; and
o the circumstances for the transfer of legal title to the mortgage
loans to the mortgages trustee.
THE ADDITIONAL ASSIGNED MORTGAGE PORTFOLIO
The seller will assign to the mortgages trustee on the closing date the
additional assigned mortgage portfolio and related security. The assignment will
be an equitable assignment only and the transfer of legal title to the
additional assigned mortgage loans and their related security may not occur or,
if it does occur, will not occur until a later date, as described under "-
TRANSFER OF LEGAL TITLE TO THE MORTGAGES TRUSTEE".
The consideration for the assignment of the additional assigned mortgage
portfolio together with its related security will consist of:
o the sum of approximately (pound)2,748,400,000 payable by the mortgages
trustee to the seller, being the initial purchase price for the
assignment to the mortgages trustee of the additional assigned
mortgage portfolio. The initial purchase price will be paid by the
mortgages trustee out of funds received by the mortgages trustee from
Funding in respect of Funding's initial contribution for the Funding
share of the additional trust property pursuant to the mortgages trust
deed, which initial contribution will be funded out of the proceeds of
the intercompany loan paid by the issuer to Funding;
o the covenant of the mortgages trustee to pay or procure the payment to
the seller of amounts of deferred purchase price in accordance with
the provisions of the mortgage sale agreement and the mortgages trust
deed, which payment also satisfies Funding's obligation to make
deferred contributions to the mortgages trustee for the Funding share
of the trust property;
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o an amount of deferred purchase price equal to an amount of deferred
contribution will be retained by Funding on the closing date to
partially fund the issuer reserve fund. This amount will only become
payable by Funding to the mortgages trustee under the mortgages trust
deed (and thereafter by the mortgages trustee to the seller under the
mortgage sale agreement) after the final repayment date of the latest
maturing intercompany loan of any issuer, subject to the relevant
Funding priority of payments. Further 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 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
o the covenant of the mortgages trustee to hold the additional trust
property on trust for Funding (as to the Funding share) and the seller
(as to the seller share) in accordance with the terms of the mortgages
trust deed.
Under the mortgage sale agreement, the mortgages trustee has re-assigned
to the seller the benefit of any early repayment charges which may become
payable on any mortgage loans which have been previously assigned to the
mortgages trustee. In addition, the mortgages trustee will re-assign to the
seller, on the closing date in respect of the additional assigned mortgage
portfolio or on the relevant assignment date in respect of any new mortgage
loans which are assigned to the mortgages trustee after the closing date, the
benefit of any early repayment charges which may become payable on any mortgage
loans which are assigned to the mortgages trustee on such date. Following such
re-assignments, neither of the beneficiaries of the mortgages trust will be
entitled to retain any early repayment charges received by the mortgages
trustee. Any such early repayment charges received by the mortgages trustee
will, upon receipt and identification by the administrator, be paid to the
seller.
REPRESENTATIONS AND WARRANTIES
The mortgage sale agreement contains representations and warranties given
by the seller to the mortgages trustee, Funding and the security trustee in
relation to each mortgage loan assigned, or to be assigned, to the mortgages
trustee pursuant to that agreement. None of the mortgages trustee, Funding, the
security trustee or the issuer have carried out or will carry out any searches,
inquiries or independent investigations of the type which a prudent purchaser or
mortgagee would normally be expected to carry out. Each is relying entirely on
the seller's representations and warranties under the mortgage sale agreement.
The seller's material warranties under the mortgage sale agreement include,
among others, substantially the following:
o subject to completion of any registration which may be pending at H.M.
Land Registry, the seller is the absolute legal and beneficial owner
of the mortgage loans, the related security and all property to be
sold by the seller pursuant to the mortgage sale agreement;
o each related mortgage secures the repayment of all advances, interest,
costs and expenses payable by the relevant borrower under the relevant
mortgage loan in priority to any other charges registered against the
relevant property;
o subject to completion of any registration which may be pending at H.M.
Land Registry, each mortgage either constitutes, or will constitute,
following registration at H.M. Land registry, a first ranking charge
by way of legal mortgage over the relevant mortgaged property;
o each relevant mortgaged property is located in England or Wales;
o prior to making each mortgage loan, the seller instructed 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
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standards consistent with those of a reasonable and prudent mortgage
lender, when advancing money in an amount equal to such advance to an
individual to be secured on a mortgaged property of the kind permitted
under the lending criteria;
o the seller's lending criteria are consistent with the criteria that
would be used by a reasonable and prudent mortgage lender;
o in relation to each mortgage loan, the borrower has a good and
marketable title to the relevant mortgaged property;
o prior to making a mortgage loan, an independent valuer from the panel
of valuers appointed by the seller or an employee valuer of the seller
valued the relevant mortgaged property, and the results of such
valuation would be acceptable to a reasonable and prudent mortgage
lender;
o prior to making a mortgage loan, the nature and amount of such
mortgage loan, the circumstances of the relevant borrower and nature
of the relevant mortgaged property satisfied the lending criteria in
force at that time in all material respects;
o no payment of interest (or in the case of repayment mortgage loans,
principal and interest) equivalent to an amount in excess of one
month's installment at the applicable rate in respect of a mortgage
loan was at any time during the 12 months before the relevant
assignment date in arrears;
o so far as the seller is aware, no borrower is in material breach of
its mortgage loan;
o the first payment due has been paid by the relevant borrower in
respect of each mortgage loan and each mortgage loan is fully
performing;
o each insurance contract arranged by the seller in respect of any
mortgaged property is in full force and effect and all premiums have
been paid in full and the seller is not aware of any circumstances
giving the insurer under any such insurance contract the right to
avoid or terminate such policy in so far as it relates to the
mortgaged properties or the mortgage loans;
o where the lending criteria required that a mortgage loan was covered
by a MIG insurance contract with NORMIC, that mortgage loan is covered
by such an insurance contract;
o the seller has procured that full and proper accounts, books and
records have been kept showing clearly all material transactions,
payments, receipts and proceedings relating to that mortgage loan and
its mortgage;
o each borrower is a natural person, and no borrower is, as of the
assignment date, an employee or an officer of the seller;
o all formal approvals, consents and other steps necessary to permit an
equitable transfer 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 transfer;
o in relation to any cashback mortgage loan, the seller paid to the
relevant borrower the full amount of the cashback payment either upon
completion of the relevant mortgage loan or, if subsequent to
completion, prior to the assignment of such mortgage loan to the
mortgages trustee;
o no mortgage loan has a current balance of more than (pound)350,000;
o each mortgage loan in the mortgage portfolio as of the closing date
was made not earlier than July 1, 1995; and
o each mortgage loan was originated by the seller in pounds sterling and
is denominated in pounds sterling (or was originated and is
denominated in euro at any time when the euro has been adopted as the
lawful currency of the UK) and is currently repayable in pounds
sterling.
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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 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, Funding or the security trustee, then, at the direction of
Funding or the security trustee, the seller must repurchase the relevant
mortgage loan or mortgage loans and their related security from the mortgages
trustee.
For so long as the seller is the administrator it must notify the
mortgages trustee, Funding and the security trustee of any material breach of a
warranty as soon as the administrator becomes aware of such breach.
The repurchase price payable upon the repurchase of any mortgage loan and
its related security is an amount (not less than zero) equal to the current
balance on such mortgage loan as of the date of completion of such repurchase
plus all unpaid interest (including all accrued interest and arrears of
interest) and expenses payable thereon to the date of repurchase. If the seller
fails to pay the consideration due for any repurchase or otherwise fails to
complete such repurchase in accordance with the terms of the mortgage sale
agreement, then the seller share of the trust property shall be deemed to be
reduced by an amount equal to that consideration. If on any date on which the
seller is obliged to repurchase any mortgage loan or mortgage loans pursuant to
the mortgage sale agreement, the seller assigns new mortgage loans together with
their related security to the mortgages trustee in accordance with the terms of
the mortgage sale agreement (as described below), the seller shall be entitled
to set-off against the repurchase price payable by it on such repurchase the
amount of any initial purchase price payable for any such new mortgage loans and
shall pay or be paid a net amount.
PRODUCT SWITCHES AND FURTHER ADVANCES
Except as described below with respect to re-fixed mortgage loans, under
the mortgage sale agreement, the mortgages trustee has agreed not to (and has
agreed to procure that the administrator does not) issue to a borrower an offer
for a further advance or a product switch without having received confirmation
from the seller that it has elected to repurchase the relevant mortgage loan
together with its related security in accordance with the terms of the mortgage
sale agreement. Upon receipt of such confirmation the mortgages trustee (or the
administrator on behalf of the mortgages trustee) may then issue an offer for a
further advance or a product switch and accept the mortgage documentation duly
completed by the borrower. The mortgages trustee may not itself make any further
advance.
A mortgage loan will be subject to a "PRODUCT SWITCH" if there is any
variation of the financial terms and conditions of the mortgage loan other
than:
o a variation in the financial terms and conditions of the mortgage loan
involving a permitted product switch (as described below);
o a change between interest-only and repayment mortgage loans;
o a transfer of equity;
o a release of a party to a mortgage loan or a release of part of the
land subject to the mortgage;
o any variation agreed with borrowers to control or manage arrears on a
mortgage loan;
o any variation which extends the maturity date of the mortgage loan
unless, while any intercompany loan is outstanding, it is extended
beyond January 2039;
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o any variation imposed by statute; and
o any variation of the interest rate payable where that rate is offered
to the borrowers of more than 10% by current balance of the mortgage
loans in the trust property in any interest period.
A "PERMITTED PRODUCT SWITCH" is a variation in the financial terms and
conditions of a mortgage loan in which a borrower exchanges its then current
mortgage loan product for a different mortgage loan product offered by the
seller, provided that the related borrower has made at least one monthly payment
on its then current mortgage loan product, and provided further that the new
mortgage loan for which the prior mortgage loan is to be exchanged is a
permitted replacement mortgage loan. A "PERMITTED REPLACEMENT MORTGAGE LOAN" is
a mortgage loan:
o that is subject to a variable rate of interest; and
o that has a maturity date prior to January 2039.
In addition, each of the conditions for the assignment of new mortgage
loans and their related security as set forth under "- ASSIGNMENT OF NEW
MORTGAGE LOANS AND THEIR RELATED SECURITY" must be satisfied in order for a
permitted product switch to occur, provided that conditions (a), (c), (k), (n)
and (o) in that section will only be required to have been satisfied on the date
of the most recent assignment of mortgage loans to the mortgages trust. The
repurchase obligations of the seller set forth under "- REPURCHASE BY THE
SELLER" will continue to apply to any permitted replacement mortgage loan.
A mortgage loan will be subject to a "FURTHER ADVANCE", for the purposes
of this prospectus, if an existing borrower requests further monies to be
advanced to him or her under a mortgage loan either in circumstances which do
not amount to a re-draw under a flexible loan or where such mortgage loan is not
a flexible mortgage loan, and in either case such request is granted.
Except as provided below with respect to re-fixed mortgage loans, if the
administrator and the mortgages trustee are notified or are otherwise aware that
a borrower has requested a further advance or a product switch and the mortgages
trustee has received confirmation of the seller's election to repurchase 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 repurchase
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 repurchase plus all unpaid
interest (including all accrued interest and arrears of interest) and expenses
payable on such mortgage loan to the date of repurchase.
In the case of fixed rate mortgage loans, a borrower may have the right,
under the terms of such fixed rate mortgage loan, to elect to "RE-FIX" such
fixed rate mortgage loan at the applicable fixed rate then being offered to the
seller's existing borrowers for the applicable requested period within three
months following the end of the fixed rate period. Sixty days prior to the end
of the relevant fixed rate period, the mortgages trustee may offer to re-sell to
the seller all fixed rate mortgage loans which become "RE-FIXED" during the
three month period immediately following the end of the then current fixed rate
period. The seller may accept this offer by payment to the mortgages trustee on
the date on which the relevant mortgage loan becomes a re-fixed mortgage loan of
the purchase price payable for that re-fixed mortgage loan as described below.
If such fixed rate mortgage loan becomes re-fixed during the relevant
three month period and the seller pays the purchase price for that re-fixed
mortgage loan, the mortgages trustee shall assign to the seller and the seller
shall repurchase such re-fixed mortgage loan and its related security in
accordance with the mortgage sale agreement. The price payable on such
repurchase shall be at least equal to the current balance on the relevant
mortgage loan as at the date of completion of the repurchase plus all unpaid
interest (including all accrued interest and arrears of interest) and expenses
in respect of such mortgage loan.
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If the seller does not pay to the mortgages trustee the purchase price to
repurchase any mortgage loan which becomes re-fixed during such three month
period, the administrator may agree to a borrower's request to re-fix any such
mortgage loan if required by the terms of the mortgage. In any event the seller
has agreed under the mortgage sale agreement to set the existing borrowers'
re-fix rate for the three month period immediately following expiry of the
relevant fixed rate period at a rate not less than that notified from time to
time to the seller by the mortgages trustee, Funding or the administrator as
being required by the mortgages trustee or Funding.
Upon a fixed rate mortgage loan becoming re-fixed as stated above without
having been repurchased by the seller:
(1) the notional amount of the basis rate swap of the issuer, the previous
issuers and of each new issuer (if any) will automatically be reduced
by the current balance of such re-fixed mortgage loan by operation of
a basis rate mini-swap;
(2) the issuer, the previous issuers and each new issuer (if any) will be
obliged to enter into a new hedging arrangement in respect of such
mortgage loans with either an existing swap counterparty, in which
case such hedging will be fixed at such fixed rate as such swap
counterparty, on the basis of fixed rates being offered in the swap
market, determines to be the fixed rate applicable to the relevant
fixed rate period of the relevant mortgage loans (which may be
different from the fixed rate being offered to the seller's existing
borrowers) or at an issuer's option, another counterparty whose rating
will not affect the then current ratings of the notes; and
(3) if required, the seller will set the existing borrowers' re-fix rate
at the rate notified to it by the mortgages trustee, Funding or the
administrator as being required by the mortgages trustee or Funding.
RE-DRAWS UNDER FLEXIBLE MORTGAGE LOANS
Only the seller is responsible for funding all future re-draws in respect
of flexible mortgage loans contained in the trust property. The seller share of
the trust property increases by the amount of any re-draw.
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) on or
as at the relevant assignment date as follows:
(a) the aggregate arrears of interest in respect of all the mortgage loans in
the mortgages trust, as a percentage of the aggregate gross interest due on
all mortgage loans during the previous 12 months, does not exceed 2% or
such other percentage as is then acceptable to the then current rating
agencies at such time ("ARREARS OF INTEREST" for the purpose of this
clause, in respect of a mortgage loan on any date, shall mean the aggregate
amount overdue on that date, but only where such aggregate amount overdue
equals or exceeds an amount equal to the monthly payment then due on the
mortgage loan and such amount has been overdue for an entire calendar
month);
(b) the long term, unsecured, unsubordinated and unguaranteed debt obligations
of the seller are rated no lower than A3 by Moody's and A- by Fitch;
(c) on the relevant assignment date, the aggregate current balance of the
mortgage loans in the mortgages trust, which are then in arrears for at
least 3 months is less than 4% of the aggregate current balance of all
mortgage loans in the mortgages trust on such date, unless the rating
agencies have confirmed that the then current ratings of the notes will not
be adversely affected;
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(d) the seller originated the new mortgage loans in accordance with its lending
criteria in force at the time of origination of the relevant mortgage loan
or with material variations from such lending criteria provided that the
then current rating agencies have been notified of any such material
variation;
(e) no new mortgage loan has on the relevant assignment date an aggregate
amount in arrears which is greater than the amount of the monthly payment
then due;
(f) the rating agencies have not provided written confirmation to the mortgages
trustee, the security trustee and the issuer that the assignment to the
mortgages trustee of new mortgage loans on the assignment date will
adversely affect the then current ratings of the existing notes of any
issuer (provided that at a time when a new issuer issues new notes the
rating agencies will have provided written confirmation that the then
current ratings of the existing notes have not been downgraded or otherwise
adversely affected);
(g) the aggregate current balance of new mortgage loans transferred in any one
interest period does not exceed 10% of the aggregate current balance of the
mortgage loans in the mortgages trust as at the beginning of that interest
period;
(h) each issuer reserve fund is fully funded on the relevant assignment date up
to the relevant required amount (or, if any issuer reserve fund is not so
fully funded on such relevant assignment date, no payments have been made
from such issuer reserve fund);
(i) no intercompany loan enforcement notice has been served in respect of any
intercompany loan;
(j) the assignment of new mortgage loans does not result in the product of the
weighted average repossession frequency ("WAFF") and the weighted average
loss severity ("WALS") for the mortgage loans in the mortgages trust after
such purchase, calculated on such assignment date in the same way as for
the initial mortgage portfolio (or as agreed by the administrator and the
rating agencies from time to time), exceeding the product of the WAFF and
WALS for the mortgage loans in the mortgages trust calculated on the most
recent preceding closing date, plus 0.25%;
(k) new mortgages loans may only be assigned to the mortgages trustee if (to
the extent necessary) each issuer has entered into appropriate hedging
arrangements in respect of such mortgage loans;
(l) no event of default under the transaction documents shall have occurred
which is continuing at the relevant assignment date;
(m) the weighted average yield on the mortgage loans in the mortgages trust
together with the new mortgage loans to be assigned to the mortgages
trustee on the relevant assignment date is not less than LIBOR for
three-month sterling deposits plus 0.6%, taking into account the weighted
average yield on the mortgage loans and the margins on the basis rate swaps
as at the relevant assignment date;
(n) the assignment of new mortgage loans on the relevant assignment date does
not result in the weighted average LTV ratio of the mortgage loans and the
new mortgage loans, after application of the LTV test on the relevant
assignment date, exceeding the LTV ratio (based on the LTV test), as
determined in relation to the mortgage loans in the mortgages trust on the
most recent preceding closing date, plus 0.25%;
(o) each new mortgage loan has a maturity date prior to January 2039;
(p) the related borrower under each new mortgage loan has made at least one
monthly payment;
(q) for so long as any notes issued by the issuer, any previous issuer or any
new issuer that have a final maturity date earlier than January 2041 are
outstanding, the assignment of new mortgage loans to the mortgages trustee
may only occur if, following such assignment, the aggregate number of
repayment mortgage loans in the mortgage portfolio is greater than or equal
to 25% of the aggregate number of mortgage loans in the mortgage portfolio;
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(r) the rating agencies have provided written confirmation that the then
current ratings on the notes would not be adversely affected by the
assignment to the mortgages trustee of a new mortgage loan in respect of a
mortgage loan product having characteristics and/or features that differ
materially from the characteristics and/or features of the mortgage loans
in the initial mortgage portfolio; and
(s) each new mortgage loan and its related security must comply at the relevant
assignment date with the representations and warranties set out in the
mortgage sale agreement, which are described earlier in this section under
"- REPRESENTATIONS AND WARRANTIES";
PROVIDED THAT, if an initial purchase price for the new mortgage loans is
payable to the seller by the mortgages trustee on the relevant assignment date,
only the conditions set out in paragraphs (e), (f), (i), (k), (l), (m), (o),
(p), (q), (r) and (s) are required to be satisfied to effect an assignment of
the new mortgage loans.
In addition, no assignment of new mortgage loans may occur after the
payment date falling in January 2008 if the option to redeem the first issuer
notes on the payment date in January 2008 pursuant to condition number 5(D) of
the terms and conditions of the first issuer notes is not exercised.
Any new mortgage loans and related security so assigned will be held by
the mortgages trustee on trust for Funding and the seller in accordance with the
terms of the mortgages trust deed.
The mortgage sale agreement provides that the seller may not assign new
mortgage loans to the mortgages trustee during any trust calculation period
prior to the distribution date occurring in that trust calculation period, and
that the seller may only make one assignment of new mortgage loans to the
mortgages trustee during any trust calculation period.
The consideration for the assignment of the new mortgage loans and their
related security to the mortgages trustee will consist of:
o the payment by the mortgages trustee to the seller of the initial
purchase price for the assignment to the mortgages trustee of the new
mortgage loans. The initial purchase price will be paid by the
mortgages trustee out of funds received by the mortgages trustee in
respect of Funding's initial contribution for the Funding share of the
new trust property pursuant to the mortgages trust deed, which initial
contribution will be funded out of the proceeds of any new
intercompany loan paid by any new issuer to Funding;
o the covenant of the mortgages trustee to pay or procure the payment to
the seller of amounts of deferred purchase price in accordance with
the provisions of the mortgage sale agreement and the mortgages trust
deed, which payment also satisfies Funding's obligation to make
deferred contributions to the mortgages trustee for the Funding share
of the trust property. 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 is entitled in accordance with and subject to
the priority of payments set out in "THE MORTGAGES TRUST - MORTGAGES
TRUST ALLOCATION OF REVENUE RECEIPTS"; and/or
o the covenant of the mortgages trustee to hold the trust property on
trust for Funding (as to the Funding share) and the seller (as to the
seller share of the trust property) in accordance with the terms of
the mortgages trust deed.
In the mortgage sale agreement, the seller has undertaken to use
reasonable efforts to assign to the mortgages trustee, and the mortgages trustee
has undertaken to use reasonable efforts to acquire from the seller and hold in
accordance with the terms of the mortgages trust deed, until the earlier of the
payment date falling in January 2008 (or such later date as may be notified by
Funding) 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
133
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 enters into a new 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 1.10 and the principal amount
outstanding of all notes of all issuers on such distribution date provided that
where the notes outstanding are controlled amortization notes, the principal
amount outstanding of such notes will be calculated on a straight-line basis by
applying the appropriate constant payment rate applicable to each series of
notes on a monthly, rather than quarterly, basis.
TRANSFER OF LEGAL TITLE TO THE MORTGAGES TRUSTEE
The existing mortgage portfolio and related security have been assigned,
and the additional assigned mortgage portfolio and related security will be
assigned, to the mortgages trustee by way of equitable assignment. 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, until such time as transfers
of such mortgages in favor of the mortgages trustee have been completed and
registered at H.M. Land Registry, the assignment of the mortgages to the
mortgages trustee takes effect in equity and transfers beneficial title only. In
the case of mortgages of unregistered land, 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 or the security trustee will require notification of such
assignments to the borrowers or the execution and completion of such transfers
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 of the mortgages to the mortgages trustee and
the notifications of assignments of mortgage loans to the borrowers will be
required to be completed within 20 business days of receipt of written notice
from the mortgages trustee, Funding and/or the security trustee upon the
occurrence of any of:
o the valid service of an intercompany loan enforcement notice or
(unless the sole reason for service of any note enforcement notice is
default by a currency swap provider of any issuer) a note enforcement
notice;
o unless otherwise agreed by the rating agencies, the termination of the
seller's role as administrator under the administration agreement and
failure of any substitute administrator to assume the duties of the
administrator;
o the seller being required, by an order of a court of competent
jurisdiction, or by a change in law occurring after the 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;
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o the security under the Funding deed of charge or any material part of
such security being in jeopardy and it being necessary to perfect the
transfer of legal title to the mortgage loans in favor of the
mortgages trustee in order to reduce such jeopardy materially;
o the occurrence of an insolvency event in relation to the seller; or
o notice in writing from the seller to the mortgages trustee and Funding
(with a copy to the security trustee) requesting such transfer.
If the seller ceases to have a long term unsecured, unsubordinated and
unguaranteed credit rating by Standard & Poor's of at least BBB-, by Moody's of
at least Baa3 and by Fitch of at least BBB- (unless Standard & Poor's, Moody's
and Fitch confirm that the then current ratings of the notes will not be
adversely affected) the seller will be obliged to give notice only of the
transfer of the equitable 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 in favor of the mortgages trustee.
TITLE DEEDS
The title deeds and mortgage loan files relating to the mortgage loans are
currently held by or to the order of the seller or by solicitors acting for the
seller in connection with the creation of the mortgage loans and their related
security. Under the administration agreement the administrator has undertaken
that all the title deeds and mortgage loan files at any time in its possession
or under its control or held to its order relating to the mortgage loans which
are at any time assigned to the mortgages trustee will be held to the order of
the mortgages trustee. The administrator will keep, or cause to be kept, the
title deeds and mortgage loan files relating to each mortgage loan and each
mortgaged property in safe custody and shall not part with possession, custody
or control of them except in the limited circumstances specified in the
administration agreement.
GOVERNING LAW
The mortgage sale agreement is governed by English law.
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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 is a trust formed under English law with the mortgages
trustee as trustee for the benefit of the seller and Funding as beneficiaries.
The mortgages trust was formed on March 26, 2001 in connection with the issuance
of the previous notes, the issuance of our notes and the issuances of any new
notes. This section describes the material terms of the mortgages trust,
including how money is distributed from the mortgages trust to Funding and the
seller.
Under the terms of the mortgages trust deed, the mortgages trustee has
agreed to hold all of the trust property on trust absolutely for Funding (as to
the Funding share) and for the seller (as to the seller share). The "TRUST
PROPERTY" consists (or, in respect of the assignment on the closing date of the
additional assigned mortgage portfolio or the assignment of any new mortgage
portfolio, will consist) of:
o the sum of (pound)100 settled by Law Debenture Corporate Services
Limited on trust on the date of the mortgages trust deed;
o the existing mortgage portfolio;
o the additional assigned mortgage portfolio to be assigned to the
mortgages trustee by the seller on the closing date, including the
mortgage loans and their related security, the rights under any MIG
policies and the other seller arranged insurance policies, but
excluding any early repayment charges which are re-assigned to the
seller;
o any new mortgage portfolio that is assigned to the mortgages trustee
by the seller after the closing date, including the mortgage loans
and their related security, the rights under any MIG policies and
the other seller arranged insurance policies, but excluding any
early repayment charges which are re-assigned to the seller;
o any permitted replacement mortgage loan and its related security
(including the rights under any related MIG policy and other seller
arranged insurance policies, but excluding any early repayment
charges which are re-assigned to the seller) relating to any
permitted product switch effected in relation to any mortgage loan
and assigned to the mortgages trustee in accordance with the
mortgage sale agreement and thereby included in the trust property;
o any interest and principal paid by borrowers on their mortgage loans
on or after the relevant assignment date;
o any other amounts received under the mortgage loans and related
security on or after the relevant assignment date excluding third
party amounts;
o any re-draws under flexible mortgage loans included in the trust
property;
o any further advances made by the seller to existing borrowers which
are assigned to the trust in accordance with the mortgage sale
agreement;
o any contribution paid by either Funding or the seller to the
mortgages trustee for application in accordance with the terms of
the mortgages trust but only up to the time of such application;
o amounts on deposit (and interest earned on such amounts) in the
mortgages trustee transaction account and the mortgages trustee GIC
account; and
o the proceeds of sale of any mortgage loan and its related security
pursuant to the mortgage sale agreement or other proceeds of sale of
any trust property;
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LESS
o any actual losses in relation to the mortgage loans and any actual
reductions occurring in respect of the mortgage loans as described
in paragraph (1) in "- ADJUSTMENTS TO TRUST PROPERTY" below; and
o distributions of principal made from time to time to the
beneficiaries of the mortgages trust.
In addition, the outstanding principal balances of any Together
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, as described under "THE MORTGAGE LOANS - CHARACTERISTICS OF THE
MORTGAGE LOANS - MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER".
Funding is not entitled to particular mortgage loans and their related
security separately from the seller. Instead, each of the beneficiaries has an
undivided interest in all of the mortgage loans and their related security
constituting the trust property.
At the closing date, the amount of Funding's beneficial interest in the
trust property is expected to be approximately (pound)7,430,000,000, which
corresponds to 87.40% of the trust property. The actual share of Funding's
beneficial interest in the trust property on the closing date will not be
determined until the day prior to the closing date.
At the closing date, the amount of the seller's beneficial interest in the
trust property is expected to be approximately (pound)1,070,000,000, which
corresponds to 12.60% of the trust property. The actual share of the seller's
beneficial interest in the trust property on the closing date will not be
determined until the day prior to the closing date.
Following the final repayment date of the latest maturing intercompany
loan of any issuer and provided that there are no further claims under any
intercompany loan, or on such earlier date on which there are no claims
outstanding under any intercompany loan, Funding will make a final deferred
contribution to the mortgages trustee. This final deferred contribution will be
in an amount equal to the aggregate amount standing to the credit of the Funding
bank accounts (including any account established by Funding for the purpose of
any issuer reserve fund and/or any issuer liquidity reserve fund of any issuer)
after making any payments ranking in priority, subject to and in accordance with
the relevant Funding priority of payments. On receipt of such amount, the
mortgages trustee will be obliged to pay such amount to the seller in
satisfaction of the mortgages trustee's obligation to make a final payment of
deferred purchase price to the seller under the mortgage sale agreement.
FLUCTUATION OF THE SELLER SHARE/FUNDING SHARE OF THE TRUST PROPERTY
The Funding share and the seller share of the trust property fluctuates
depending on a number of factors including:
o the allocation of principal receipts from the mortgage loans to
Funding and/or the seller on each distribution date;
o losses arising on the mortgage loans;
o the assignment of new mortgage loans and their related security to
the mortgages trustee;
o Funding increasing its beneficial interest in, and the Funding share
of, the trust property by making contributions (excluding any
deferred contribution) to the mortgages trustee in accordance with
the mortgages trust deed;
o the seller increasing its beneficial interest in, and the seller
share of, the trust property by making contributions to the
mortgages trustee in accordance with the mortgages trust deed;
o a borrower making a re-draw under a flexible mortgage loan;
o the capitalization of arrears in respect of any mortgage loan; and
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o the seller making a further advance to an existing borrower.
Although the seller does not currently intend either to assign to
the mortgages trustee further advances made in respect of a mortgage
loan following the assignment of that mortgage loan to the mortgages
trustee or to retain mortgage loans subject to such further advances
within the mortgages trust, it may do so in the future.
The Funding share of the trust property may not 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 the Funding share of the trust property has been reduced
to zero or following the occurrence of an asset trigger event.
The cash manager will recalculate the Funding share and the seller share
on each distribution date and on the date of each assignment of any new mortgage
portfolio (including the additional assigned mortgage portfolio) to the
mortgages trustee (each such date, an "ASSIGNMENT DATE"). The reason for the
recalculation on an assignment date is to determine the percentage shares of
Funding and the seller in the trust property which will reflect the assignment
of the new mortgage loans to the trust property. When the cash manager
recalculates the Funding share, Funding share percentage, seller share and
seller share percentage 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, 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) the relevant assignment date. The new recalculation made by
the cash manager on that relevant assignment date will apply from (and
including) that assignment date 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 during which any single calculation of the
Funding share, Funding share percentage, seller share and seller share
percentage applies is called an "INTERIM CALCULATION PERIOD".
The percentage shares that each of Funding and the seller has in the trust
property will determine their entitlement to interest and principal receipts
from the mortgage loans in the trust property and also the allocation of losses
arising on the mortgage loans for each trust calculation period or interim
calculation period, as applicable. The method for determining those new
percentage shares is set out in the next two sections.
FUNDING SHARE OF TRUST PROPERTY (DISTRIBUTION DATE RECALCULATION)
On each distribution date (also referred to in this section as the
"RELEVANT DISTRIBUTION DATE") or such time as the mortgages trust terminates,
the interest of Funding in the trust property will be recalculated for the then
current trust calculation period or related interim calculation period, as
applicable, in accordance with the following formula:
o The current Funding share of the trust property will be an amount
equal to:
A - B - C + D + E + F
o The current Funding share percentage of the trust property will be
an amount equal to:
A - B - C + D + E + F
--------------------- X 100
G
expressed as a percentage and rounded upwards to five decimal places,
where:
A = the amount of the Funding share of the trust property as determined on
the distribution date immediately preceding the relevant distribution
date;
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B = the amount of any principal receipts on the mortgage loans distributed
to Funding on the relevant distribution date (as described under "-
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF PRINCIPAL RECEIPTS PRIOR TO
THE OCCURRENCE OF A TRIGGER EVENT" and "- MORTGAGES TRUST ALLOCATION AND
DISTRIBUTION OF PRINCIPAL RECEIPTS AFTER THE OCCURRENCE OF A TRIGGER
EVENT");
C = the amount of losses sustained on the mortgage loans during the
immediately preceding trust calculation period and the amount of any
reductions occurring in respect of the mortgage loans as described in
paragraphs (1) to (5) in "- ADJUSTMENTS TO TRUST PROPERTY" below, in each
case allocated to Funding in the trust calculation period ending on the
relevant distribution date;
D = the amount of any initial contribution paid by Funding to the mortgages
trustee during the immediately preceding trust calculation period in
respect of the Funding share of any new trust property;
E = the amount of any further contribution paid by Funding to the mortgages
trustee during the immediately preceding trust calculation period to
increase Funding's beneficial interest in the trust property;
F = the amount of any capitalized arrears which have been allocated to
Funding in the immediately preceding trust calculation period; and
G = 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 ", "D ", "E" and "F" above and after taking account of:
(i) the assignment, if any, of new mortgage loans during the immediately
preceding trust calculation period,
(ii) any distribution of principal receipts to the seller (including any
special distribution) and Funding,
(iii) the amount of any losses or capitalized arrears allocated to the
seller and Funding,
(iv) the adjustments referred to in paragraphs (1) to (5) in "-
ADJUSTMENTS TO TRUST PROPERTY" below,
(v) the amount of any other additions to or removals from the trust
property (including any additions to the trust property resulting
from re-draws made by borrowers), and
(vi) any reduction in the outstanding principal balances of Together
Connections mortgage loans resulting from borrowers being allocated
a portion of the related Together Connections Benefit under such
mortgage loans.
FUNDING SHARE OF TRUST PROPERTY (ASSIGNMENT DATE RECALCULATION)
On each assignment date (also referred to in this section as the "RELEVANT
ASSIGNMENT DATE"), the interest of Funding in the trust property will be
recalculated for the related interim calculation period, for the sole purpose of
calculating the distributions to be made from the trust property on the
immediately succeeding distribution date, in accordance with the following
formula:
o The current Funding share of the trust property will be an amount
equal to:
A + D
o The current Funding share percentage of the trust property will be
an amount equal to:
A + D
----- x 100
G
where,
A = the amount of the Funding share of the trust property as determined on
the distribution date immediately preceding the relevant assignment date;
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D = the amount of any initial contribution paid by Funding to the mortgages
trustee on that relevant assignment date in respect of the Funding share
of any new trust property; and
G = the sum of (i) the aggregate current balance of all of the mortgage
loans in the trust property as at the immediately preceding distribution
date, and (ii) the aggregate current balance of the new mortgage loans
assigned to the mortgages trustee on that relevant assignment date.
ADJUSTMENTS TO TRUST PROPERTY
If any of the following events occurs during a trust calculation period,
then the aggregate current balance of the mortgage loans in the trust property
will be reduced or deemed to be reduced for the purposes of the calculation in
"G" with respect to the assignment date recalculation and the distribution date
recalculation:
(1) any borrower exercises a right of set-off so that the amount of
principal and interest owing under a mortgage loan is reduced but no
corresponding payment is received by the mortgages trustee. In this
event, the aggregate current balance of the mortgage loans in the
trust property will be reduced by an amount equal to the amount of
such set-off; and/or
(2) a mortgage loan or its related security is (i) in breach of the loan
warranties contained in the mortgage sale agreement or (ii) the
subject of a product switch or further advance in respect of which
the seller has elected to repurchase the relevant mortgage loan or
mortgage loans and their related security, and in each case the
seller fails to repurchase the mortgage loan or mortgage loans under
the relevant mortgage account and their related security as required
by the terms of the mortgage sale agreement. In this event, the
aggregate current balance of the mortgage loans in the trust
property will be deemed to be reduced for the purposes of the
calculation in "G" 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 is 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 over the relevant mortgaged property,
in which event, the aggregate current balance of the mortgage loans
in the trust property will be deemed to be reduced for the purposes
of the calculation in "G" above 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 over the relevant mortgaged
property; and/ or
(4) the seller would be required to repurchase a mortgage loan and its
related security as required by the terms of the mortgage sale
agreement, but the mortgage loan is not capable of being
repurchased. In this event, the aggregate current balance of the
mortgage loans in the trust property will be deemed to be reduced
for the purposes of the calculation in "G" by an amount equal to the
current balance of the relevant mortgage loan (together with arrears
of interest and accrued interest); and/or
(5) the seller breaches any other material warranty under the mortgage
sale agreement and/or (for so long as the seller is the
administrator) the administration agreement, which will also be
grounds for terminating the appointment of the administrator. In
this event, the aggregate current balance of the mortgage loans in
the trust property will be deemed to be reduced by an amount equal
to the resulting loss incurred by Funding and the seller.
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The reductions set out in paragraphs (1) to (5) (as well as any resulting
loss in respect thereof) will be made on the relevant calculation date first to
the seller's share (including the minimum seller share) of the trust property
only, and thereafter will be made to the Funding share 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 will
constitute a revenue receipt under the relevant mortgage loan. Such revenue
receipt will belong to Funding (but only if and to the extent that the related
reductions were applied against Funding's share 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, as described below under "- ADDITIONS TO,
AND REDUCTIONS FROM, THE TRUST PROPERTY" and "- INCREASING AND DECREASING THE
SELLER SHARE OF THE TRUST PROPERTY".
WEIGHTED AVERAGE FUNDING SHARE PERCENTAGE
On any distribution date with respect to which the seller had assigned new
mortgage loans to the mortgages trustee during the immediately preceding trust
calculation period, the cash manager will calculate (for the sole purpose of
making the distributions to be made on that distribution date) the weighted
average of the current Funding share percentages 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 amount
of revenue receipts and principal receipts received and losses sustained during
each of the foregoing interim calculation periods. The "WEIGHTED AVERAGE FUNDING
SHARE PERCENTAGE" for any such distribution date will be equal to:
o in respect of the distribution of revenue receipts to be made on
that distribution date, the sum, in respect of all interim
calculation periods during the trust calculation period immediately
preceding that distribution date, of (i) for each interim
calculation period during that trust calculation period, the product
of (1) the related current Funding share percentage for that interim
calculation period, and (2) the amount of all revenue receipts
received by the mortgages trustee during that interim calculation
period, divided by (ii) the aggregate of all revenue receipts
received by the mortgages trustee during the trust calculation
period immediately preceding that distribution date;
o in respect of the distribution of principal receipts to be made on
that distribution date, the sum, in respect of all interim
calculation periods during the trust calculation period immediately
preceding that distribution date, of (i) for each interim
calculation period during that trust calculation period, the product
of (1) the related current Funding share percentage for that interim
calculation period, and (2) the amount of all principal receipts
received by the mortgages trustee during that interim calculation
period, divided by (ii) the aggregate of all principal receipts
received by the mortgages trustee during the trust calculation
period immediately preceding that distribution date; and
o in respect of the allocation of losses to be made on that
distribution date, the sum, in respect of all interim calculation
periods during the trust calculation period immediately preceding
that distribution date, of (i) for each interim calculation period
during that trust calculation period, the product of (1) the related
current Funding share percentage for that interim calculation
period, and (2) the amount of all losses sustained on the mortgage
loans during that interim calculation period, divided by (ii) the
aggregate of all losses sustained on the mortgage loans during the
trust calculation period immediately preceding that distribution
date.
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SELLER SHARE OF TRUST PROPERTY (DISTRIBUTION DATE RECALCULATION)
On each relevant distribution date, the current seller share of the trust
property will be recalculated for the then current trust calculation period or
related interim calculation period, as applicable, in accordance with the
following formula:
o the aggregate amount of the trust property as at the relevant
distribution date minus the current Funding share,
where "CURRENT FUNDING SHARE" has the meaning given in "FUNDING SHARE OF
TRUST PROPERTY (DISTRIBUTION DATE RECALCULATION)" above.
On each relevant distribution date, the current seller share percentage of
the trust property will be recalculated for the then current trust calculation
period or related interim calculation period, as applicable, in accordance with
the following formula:
o 100% minus the current Funding share percentage,
where "CURRENT FUNDING SHARE PERCENTAGE" has the meaning given in "FUNDING
SHARE OF TRUST PROPERTY (DISTRIBUTION DATE RECALCULATION)" above.
SELLER SHARE OF TRUST PROPERTY (ASSIGNMENT DATE RECALCULATION)
On each relevant assignment date, the current seller share of the trust
property will be recalculated for the related interim calculation period in
accordance with the following formula:
o the aggregate amount of the trust property as at the relevant
assignment date minus the current Funding share,
where "CURRENT FUNDING SHARE" has the meaning given in "FUNDING SHARE OF
TRUST PROPERTY (ASSIGNMENT DATE RECALCULATION)" above.
On each relevant assignment date, the current seller share percentage of
the trust property will be recalculated for the related interim calculation
period in accordance with the following formula:
o 100% minus the current Funding share percentage,
where "CURRENT FUNDING SHARE PERCENTAGE" has the meaning given in "FUNDING
SHARE OF TRUST PROPERTY (ASSIGNMENT DATE RECALCULATION)" above.
WEIGHTED AVERAGE SELLER SHARE PERCENTAGE
On any distribution date in respect of which the seller had assigned new
mortgage loans to the mortgages trustee during the immediately preceding trust
calculation period, the cash manager will calculate (for the sole purpose of
making the distributions to be made on that distribution date) the weighted
average of the seller share percentages that were calculated previously in
respect of the revenue receipts and principal receipts received, and losses
sustained, during each interim calculation period occurring in that immediately
preceding trust calculation period and will be an amount equal to:
o in respect of the distribution of revenue receipts to be made on
that distribution date:
100% minus the weighted average Funding share percentage,
where the weighted average Funding share percentage is as calculated on
that distribution date in respect of revenue receipts under "WEIGHTED AVERAGE
FUNDING SHARE PERCENTAGE" above;
o in respect of the distribution of principal receipts to be made on
that distribution date:
100% minus the weighted average Funding share percentage,
where the weighted average Funding share percentage is as calculated on
that distribution date in respect of principal receipts under "WEIGHTED AVERAGE
FUNDING SHARE PERCENTAGE" above; and
o in respect of the allocation of losses to be made on that
distribution date:
100% minus the weighted average Funding share percentage,
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where the weighted average Funding share percentage is as calculated on
that distribution date in respect of losses under "WEIGHTED AVERAGE FUNDING
SHARE PERCENTAGE" above.
MINIMUM SELLER SHARE
The seller share of the trust property includes an amount known as the
"MINIMUM SELLER SHARE". As at the closing date, the minimum seller share will be
approximately (pound)174,665,735 but the amount of the minimum seller share
will fluctuate depending on changes to the characteristics of the mortgage loans
in the trust property. The seller will not be entitled to receive principal
receipts which would reduce the seller share of the trust property to an amount
less than the minimum seller share unless and until the Funding share of the
trust property has 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:
where:
W + X + Y + Z
W = 100% of the average cleared credit balance of all applicable deposit
accounts linked to Together Connections mortgage loans in respect of each
month or part of any such month;
X = 2.0% of the aggregate current balance of mortgage loans in the trust
property;
Y = the product of: (p x q) x r where:
p = 8.0%;
q = the "FLEXIBLE CASH RE-DRAW CAPACITY ", being an amount equal to the
difference between (1) the maximum amount of cash re-draws that borrowers
may make under flexible mortgage loans included in the trust property
(whether or not drawn) as at the last day of the immediately preceding
trust calculation period and (2) the aggregate current balance of cash
re-draws which form part of the trust property as at the last day of the
immediately preceding trust calculation period; and
r = 3.0; and
Z = the aggregate current balance of re-draws in the trust property as at
the last day of the immediately preceding trust calculation period.
The purpose of "W" is to mitigate the risks relating to borrowers holding
deposits in Northern Rock bank accounts that are linked to Together Connections
mortgage loans, and 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 (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 in the trust
property. The purpose of "Z" is to mitigate enforceability and priority risks
relating to re-draws under the flexible mortgage loans in the trust property.
ADJUSTMENTS TO DISTRIBUTIONS
In calculating and making the distributions to be made on each
distribution date, the mortgages trustee or the cash manager on its behalf will
take account of and make adjustments for such calculations and distributions in
order that:
o any increase in the Funding share of the trust property as a result
of the payment by Funding to the mortgages trustee of any
contribution (excluding any deferred contribution) during the trust
calculation period immediately preceding such distribution date (or
during any interim calculation period during that trust calculation
period) is deemed to have taken effect as an increase in the Funding
share of the trust property from the date on which such contribution
was paid to the mortgages trustee; and
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o any decrease in the seller share of the trust property as a result
of the payment by the mortgages trustee to the seller of any special
distribution is deemed to have taken effect as a decrease in the
seller share from the date on which such distribution was paid to
the seller.
CASH MANAGEMENT OF TRUST PROPERTY - REVENUE RECEIPTS
Under the cash management agreement, the cash manager is responsible for
distributing revenue receipts on behalf of the mortgages trustee on each
distribution date in accordance with the order of priority described in the
following section. For further information on the role of the cash manager, see
"CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING".
MORTGAGES TRUST ALLOCATION OF REVENUE RECEIPTS
"MORTGAGES TRUSTEE AVAILABLE REVENUE RECEIPTS" will be calculated by the
cash manager on each distribution date and will be an amount equal to the sum
of:
o revenue receipts on the mortgage loans (which shall include, in
respect of any non-flexible mortgage loan only, the amount of any
overpayment made by the borrower in respect of such mortgage loan as
is equal to the amount of any underpayment of interest made by such
borrower in respect of such mortgage loan in the immediately
preceding trust calculation period provided that such underpayment
of interest is made prior to December 31 in the year in which such
overpayment is received from the borrower);
o interest payable to the mortgages trustee on the mortgages trustee
transaction account and the mortgages trustee GIC account; and
o payments made by the seller to the mortgages trustee to fund any
non-cash re-draw in respect of any flexible mortgage loan;
less
o amounts due to third parties (also known as "THIRD PARTY AMOUNTS")
including:
(1) payments of insurance premiums, if any, due to the seller in
respect of any seller arranged insurance policy and/or to the
MIG provider to the extent not paid or payable by the seller
(or to the extent such insurance premiums have been paid by
the seller in respect of any further advance which is not
repurchased by the seller to reimburse the seller);
(2) amounts under an unpaid direct debit which are repaid by the
administrator to the bank making such payment if such bank is
unable to recoup that amount itself from its customer's
account;
(3) payments by borrowers of early repayment charges and 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) in "- ADJUSTMENTS TO
TRUST PROPERTY" above, which will belong to and be paid to
Funding 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.
On each distribution date, the cash manager will apply mortgages trustee
available revenue receipts (subject as provided under "ADJUSTMENTS TO
DISTRIBUTIONS" above) in the following order of priority (the "MORTGAGES TRUST
ALLOCATION OF REVENUE RECEIPTS"):
(A) in no order of priority between them but in proportion to the
respective amounts due, to pay amounts due to:
o the mortgages trustee under the provisions of the mortgages
trust deed;
o to third parties from the mortgages trustee in respect of the
mortgages trust but only if:
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(1) 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
(2) payment has not already been provided for elsewhere;
(B) in payment of amounts (inclusive of VAT) due to the administrator or
the cash manager or to become due to the administrator or the cash
manager prior to the next following distribution date under the
provisions of the administration agreement or the cash management
agreement, as the case may be; and
(C) in no order of priority between them but in proportion to the
respective amounts due, and subject to the proviso below, to
allocate and pay mortgages trustee available revenue receipts to:
o 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
(as determined on the immediately preceding distribution
date); and
o Funding in an amount equal to the lesser of:
(x) 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 (as determined on the immediately preceding
distribution date or, in the case of the first
distribution date immediately following the closing
date, as of the closing date), and
(y) the aggregate of the amounts to be applied on the
immediately succeeding payment date as set forth under
the Funding pre-enforcement revenue priority of payments
or, as the case may be, the Funding post-enforcement
priority of payments (but excluding any principal amount
due under any intercompany loan and any amount under
item (P) of the Funding pre-enforcement revenue priority
of payments and/or item (F) of the Funding
post-enforcement priority of payments), less (in each
case only to the extent that such amounts of interest or
income would not otherwise be payable under the
intercompany loan or, as applicable, the notes, on the
immediately succeeding payment date) the sum of (i) the
interest or other income (including, for the avoidance
of doubt, amounts standing to the credit of any issuer
reserve fund or issuer liquidity reserve fund after the
intercompany loan relating to that issuer has been fully
repaid) credited or to be credited to each Funding bank
account on the immediately succeeding payment date and
(ii) all other income (not derived from the distribution
of revenue receipts under the mortgages trust) which
will constitute Funding available revenue receipts
and/or issuer available revenue receipts on the
immediately succeeding payment date; and
(D) to allocate to Funding but pay at the direction of Funding to the
seller an amount equal to YY - ZZ, where "YY" is the amount of the
mortgages trustee available revenue receipts and "ZZ" is the amount
of such mortgages trustee available revenue receipts applied and/or
allocated under (A) to (C) above, such amount to be in satisfaction
of amounts of deferred purchase price due to the seller under the
terms of the mortgage sale agreement;
provided that, if an assignment 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 respect of revenue receipts in determining the amount of
mortgages trustee available revenue receipts to distribute to the seller on that
distribution date, and (ii) the weighted average Funding share percentage
(instead of the Funding share percentage) in respect of revenue receipts in
determining the amount of mortgages trustee available revenue receipts to
distribute to Funding on that distribution date.
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Amounts due to the mortgages trustee and the administrator will include
VAT, if applicable, payable under English tax law. At the date of this
prospectus, VAT is calculated at the rate of 17.5% of the amount to be paid.
Payment of VAT will reduce the amounts ultimately available to pay interest on
the notes.
CASH MANAGEMENT OF TRUST PROPERTY - PRINCIPAL RECEIPTS
Under the cash management agreement, the cash manager is also responsible
for distributing principal receipts on behalf of the mortgages trustee on each
distribution date in accordance with the order of priority described in the next
two following sections. To understand how the cash manager will distribute
principal receipts on the mortgage loans on each distribution date (the
"MORTGAGES TRUSTEE PRINCIPAL PRIORITY OF PAYMENTS") you need to understand the
following definitions:
The "FINAL REPAYMENT DATE" means, in respect of the intercompany loan, the
payment date in April 2042, being the final maturity date of the latest maturing
series 1, series 2 and series 3 notes.
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 established for any issuer with
respect to class A notes of that issuer. For more information on the issuer
principal deficiency ledger, see "CREDIT STRUCTURE".
A "NON-ASSET TRIGGER EVENT" will occur if:
o an insolvency event occurs in relation to the seller;
o the seller's role as administrator is terminated and a new
administrator is not appointed within 60 days; or
o the current seller share is equal to or less than the minimum seller
share.
The rating agencies may require the relevant parties to amend the
foregoing non-asset trigger events should a new issuer issue "BULLET" notes as
described under "MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF PRINCIPAL
RECEIPTS PRIOR TO THE OCCURRENCE OF A TRIGGER EVENT".
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF 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 or any issuer security) the cash
manager on behalf of the mortgages trustee will allocate and distribute
principal receipts (subject to the provisos below and subject as provided above
under "ADJUSTMENTS TO DISTRIBUTIONS") on each distribution date as follows:
(A) to the seller the amount of any special distribution which is then
allocable and payable to the seller in accordance with the mortgages
trust deed;
(B) to Funding an amount in respect of each issuer which is equal to the
lesser of:
(1) the principal amount due on the intercompany loan of such
issuer equal to the controlled amortization amount due, if
any, on the payment date immediately succeeding such
distribution date; and
(2) an amount equal to:
outstanding principal balance on
mortgages Funding such issuer's intercompany loan
trustee principal x share x -------------------------------
receipts percentage aggregate outstanding principal
balance on all intercompany loans
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(C) to Funding an amount in respect of each issuer towards any principal
amount remaining due and payable (following the payment to Funding
set forth in (B) above) on the immediately succeeding payment date
under such issuer's intercompany loan, and
(D) all remaining principal receipts to the seller,
PROVIDED THAT in relation to (A) through (D) above the following rules shall
apply
(1) If the notes of any issuer have become immediately due and payable
as a result of the service of a note enforcement notice or if the
intercompany loan of any issuer (and the other intercompany loans of
any other issuer) have become immediately due and payable as a
result of the service of an intercompany loan enforcement notice, or
otherwise upon the occurrence of any trigger event, principal
payments in respect of the intercompany loan of that issuer may be
made in excess of any controlled amortization amount and paragraph
(B)(1) above shall no longer apply in relation to that issuer, and,
except following a non-asset trigger event, the amount of principal
receipts to be distributed to Funding in respect of that issuer on
that distribution date may not exceed the amount determined under
paragraph (B)(2) above.
(2) If the notes of any issuer have become immediately due and payable
as a result of the service of a note enforcement notice or if the
intercompany loan of any issuer (and the other intercompany loans of
any other issuers) have become immediately due and payable as a
result of the service of an intercompany loan enforcement notice,
then for the purpose of calculating the amount in respect of that
issuer under paragraph (B)(2) above, that amount may be reduced to
the extent of any remaining amounts standing to the credit of the
issuer reserve fund ledger and/or the issuer liquidity reserve
ledger (if any) for that issuer which are to be utilized on the
immediately succeeding payment date to repay principal on that
issuer's intercompany loan, but only to the extent that those
amounts would not otherwise be payable on that intercompany loan on
that payment date.
(3) The amount of principal receipts payable to Funding in respect of
each issuer on a distribution date will be reduced in proportion to
the aggregate of the issuer available revenue receipts of that
issuer which are to be applied on the immediately succeeding payment
date in reduction of deficiencies recorded on the issuer principal
deficiency ledger of that issuer, but only to the extent that the
issuer available revenue receipts which are to be so applied on that
payment date would not otherwise be payable as principal on the
relevant notes on that payment date.
(4) For the purpose of determining the principal receipts to be
distributed to Funding in respect of the amount due on the
intercompany loan of any issuer under (B) and (C) above, the
outstanding principal balance of that intercompany loan shall be
deemed to be reduced by the amount of: (a) any deficiency recorded
on the issuer principal deficiency ledger of that issuer as at that
distribution date, but only to the extent that such deficiency has
arisen as a result of (i) losses on the mortgage loans allocated by
Funding to that issuer and/or (ii) the application of Funding
available principal receipts to fund the issuer liquidity reserve
fund of that issuer but not as a result of any other principal
deficiency of that issuer; and (b) the outstanding principal balance
as at such distribution date of any special repayment notes issued
by that issuer.
(5) Funding will not be entitled to receive and the cash manager shall
procure that Funding does not receive any amount of principal
receipts from the mortgages trustee on a distribution date which is
not required by Funding to repay principal falling due on any
intercompany loan on the immediately succeeding payment date in
order to fund payments of principal falling due on any notes of any
issuer on that payment date.
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(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.
(7) If an assignment date has occurred during the trust calculation
period immediately preceding the relevant distribution date, then
the cash manager shall use the weighted average Funding share
percentage (instead of the current Funding share percentage) in
respect of principal receipts in determining the amount of mortgages
trustee principal receipts to be distributed to Funding in respect
of each issuer pursuant to clause (B)(2) above.
A new issuer may enter into a new intercompany loan with Funding as
described under "THE INTERCOMPANY LOAN AGREEMENT - NEW INTERCOMPANY LOANS", and
may issue "BULLET" notes that are scheduled to be repaid in full on a single
payment date. As Funding's corresponding repayment of such new intercompany loan
to the new issuer also would be scheduled to be repaid in full on a single
payment date, Funding would need to accumulate a large proportion of the
principal receipts distributed by the mortgages trustee over a certain period of
time. Any accumulation of principal receipts may require the consent of the
rating agencies and the security trustee if an amendment to the foregoing
mortgages trustee principal priority of payments is required.
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF PRINCIPAL RECEIPTS AFTER THE
OCCURRENCE OF A TRIGGER EVENT
On each distribution date after the occurrence of an asset trigger event,
the cash manager will allocate and distribute all principal receipts, with no
order of priority between them but in proportion to the respective amounts due,
to Funding and the seller according to the Funding share percentage of the trust
property and the seller share percentage of the trust property, respectively,
until the Funding share of the trust property is zero, even though those
payments may reduce the seller share of the trust property to an amount less
than the minimum seller share. Notwithstanding the foregoing, if an assignment
date has occurred during the trust calculation period immediately preceding any
such distribution date, the cash manager will apply all principal receipts
between Funding and the seller in no order of priority between them but in
proportion to the weighted average Funding share percentage and weighted average
seller share percentage, each in respect of principal receipts, for that
distribution date until the Funding share of the trust property is zero.
Following the occurrence of an 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 AN ASSET TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER
SECURITY MAY ACCELERATE THE REPAYMENT OF CERTAIN NOTES AND/OR DELAY THE
REPAYMENT OF OTHER NOTES".
On each distribution date 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 principal receipts to Funding until the Funding
share of the trust property is 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".
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
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December 31 of the year in which such overpayment is received, save to the
extent that any such overpayment by a borrower is applied in reduction of an
underpayment by such borrower in respect of such mortgage loan prior to such
date. Any such overpayment shall be retained in the mortgages trustee GIC
account and the cash manager will maintain a separate ledger to record its
receipt and subsequent payment from time to time. Where any such overpayment has
been made in error the administrator will be authorized to refund the amount of
such overpayment to the relevant borrower at any time prior to December 31 of
the year in which such overpayment was made.
An overpayment in respect of any flexible mortgage loan will not be
retained by the mortgages trustee but will be distributed to the beneficiaries
on the immediately succeeding distribution date as principal receipts.
LOSSES
All losses arising on the mortgage loans will, save as otherwise provided,
be applied in reducing proportionately the Funding share of the trust property
and the seller share of the trust property. Save as otherwise provided, the
Funding share of losses will be determined on any date by multiplying the amount
of losses by the Funding share percentage (as determined on the immediately
preceding distribution date) until the Funding share of the trust property is
zero. However, if during the trust calculation period immediately preceding a
distribution date the seller had assigned new mortgage loans to the mortgages
trustee, then the amount of losses shall be multiplied by the weighted average
Funding share percentage (as calculated on that distribution date) in respect of
losses rather than the current Funding share percentage. The remainder of the
losses shall be allocated to the seller.
For a description of how losses on the mortgage loans that have been
allocated to Funding on any date will be allocated to the intercompany loan of
each issuer, see "THE INTERCOMPANY LOAN AGREEMENT - ALLOCATION OF LOSSES".
DISPOSAL OF TRUST PROPERTY
The trust property is held on trust for the benefit of Funding and the
seller. Subject as provided otherwise in the mortgages trust deed and the other
transaction documents, the mortgages trustee will not be entitled to dispose of
the trust property or create any security interest over the trust property.
If an event of default occurs under any intercompany loan agreement (an
"INTERCOMPANY LOAN EVENT OF DEFAULT") and the security trustee enforces the
security granted by Funding over its assets under the Funding deed of charge,
including its share of the trust property, then the security trustee will be
entitled, among other things, to sell the Funding share of the trust property.
For further information on the security granted by Funding over its assets, see
"SECURITY FOR FUNDING'S OBLIGATIONS".
ADDITIONS TO, AND REDUCTIONS FROM, THE TRUST PROPERTY
The trust property may be increased from time to time by the assignment of
new mortgage loans and their related security to the mortgages trustee. The
mortgages trustee will hold the new mortgage loans and their related security on
trust for Funding 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 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
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continue to make payments to the mortgages trustee in an amount equal to the
unpaid interest element in respect of such non-cash re-draw in the same manner
and for the same purposes as described above, but it is not obliged to do so.
If at any time the administrator agrees to a further advance being made
under a mortgage loan included in the mortgages trust, then the seller will be
solely responsible for funding that further advance. If at some future date the
seller decides to assign such further advance to the mortgages trustee or not
repurchase 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
included in the mortgages trust will also reduce the size of the trust property
(and, as described below under "- INCREASING AND DECREASING THE SELLER SHARE OF
THE TRUST PROPERTY", the seller share of the trust property only). This will
occur because the outstanding principal balances of any Together Connections
mortgage loans 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, as described under "THE MORTGAGE LOANS - CHARACTERISTICS OF THE MORTGAGE
LOANS - MORTGAGE LOAN PRODUCTS OFFERED BY THE SELLER". The seller will not
assign any Together Connections mortgage loans to the mortgages trustee on the
closing date, but currently anticipates assigning Together Connections mortgage
loans to the mortgages trustee in the future.
ARREARS
The aggregate current balance of the mortgage loans in the mortgages trust
will be increased at any time by the amount in which the mortgage loans that
have been assigned to the mortgages trust are in arrears and those arrears have
been capitalized. Such increase shall be allocated to Funding and the seller at
any time in proportion to their respective percentage shares in the trust
property as determined in respect of the trust calculation period or interim
calculation period, as the case may be, in which the arrears occur.
INCREASING AND DECREASING THE SELLER SHARE OF THE TRUST PROPERTY
If a borrower makes a non-cash re-draw in respect of any flexible mortgage
loan under the mortgages trust deed the seller as beneficiary has agreed under
the mortgages trust to fund such non-cash re-draw in the mortgages trust by
making a further contribution to the mortgages trustee of an amount equal to the
unpaid interest element in respect of such non-cash re-draw. Accordingly, the
size of the trust property and the seller share of the trust property will
increase by an amount equal to the further contribution made by the seller. Any
such payment received by the mortgages trustee will be treated as revenue
receipts in the mortgages trust and will be distributed on the immediately
succeeding distribution date among the beneficiaries in accordance with the
mortgages trust allocation of revenue receipts.
The seller will also fund cash re-draws in respect of flexible mortgage
loans held in the mortgages trust by payment of the amount of the cash re-draw
to the relevant borrower. Accordingly, the size of the trust property and the
seller share of the trust property will automatically increase by the amount of
any cash re-draw 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 included in the mortgages trust that reduces the size
of the trust property will also reduce the seller share of the trust property.
This will occur because the outstanding principal balances of any Together
Connections mortgage loans included in the trust property (and
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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, 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. The seller will not assign any Together
Connections mortgage loans to the mortgages trustee on the closing date, but
currently anticipates assigning Together Connections mortgage loans to the
mortgages trustee in the future.
INCREASING THE FUNDING SHARE OF THE TRUST PROPERTY
If Funding enters into a new intercompany loan, then it may apply the
proceeds of that intercompany loan as a further contribution to the mortgages
trust to increase its beneficial interest in, and the Funding share of, the
trust property on a distribution date. Funding will be permitted to do this only
if it meets certain conditions, including among others:
o that no intercompany loan enforcement notice has been served under
any intercompany loan;
o that as at the most recent payment date no deficiency was recorded
on the issuer principal deficiency ledger of any issuer;
o that no event of default under the transaction documents shall have
occurred which is continuing;
o that the rating agencies have not confirmed in writing to the
security trustee or the issuer that the proposed increase in the
Funding share would adversely affect the then current ratings by the
rating agencies of the existing notes of any issuer; and
o that, as of the last day of the immediately preceding trust
calculation period, the aggregate current balance of mortgage loans
in the mortgages trust which were then in arrears for at least 3
months is less than 4% of the aggregate current balance of all
mortgage loans in the mortgages trust as of such date, unless the
rating agencies have confirmed that the then current ratings of the
notes will not be adversely affected.
Under the mortgages trust deed, Funding and the seller have agreed that
principal receipts held by the mortgages trustee on any date in respect of any
further contribution paid by Funding to the mortgages trustee on that date will
be allocated and paid by the mortgages trustee to the seller as a distribution
(a "SPECIAL DISTRIBUTION") from the mortgages trust on such date whether or not
such date is a distribution date. The payment of any such special distribution
will reduce the seller share of the trust property.
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 all of the intercompany loans have been repaid in full or there is no
further claim under any intercompany loan or the Funding share of the trust
property has been reduced to zero or such other date which may be agreed between
the mortgages trustee, Funding and the seller so long as all amounts due from
Funding to the Funding 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 and Funding cannot replace the mortgages trustee.
GOVERNING LAW
The mortgages trust deed is governed by English law.
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THE INTERCOMPANY LOAN AGREEMENT
The following section describes, in summary, the material terms of the
intercompany loan agreement. The description does not purport to be complete and
is subject to the provisions of the 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 intercompany loan agreement, the issuer will make a
loan to Funding on the closing date in an aggregate amount in sterling equal to
the proceeds of the issue of the notes. For this purpose, the dollar proceeds of
the series 1 notes and the euro proceeds of the series 2 notes will be converted
into sterling at the relevant dollar currency swap rate or euro currency swap
rate, as applicable. Funding will then pay the proceeds of the intercompany loan
to the mortgages trustee in satisfaction of Funding's initial contribution to
the mortgages trustee for the Funding share of the additional trust property
pursuant to the mortgages trust deed. Upon receipt of Funding's initial
contribution, the mortgages trustee will pay such funds to the seller in
satisfaction of the mortgages trustee's obligation to pay to the seller the
initial purchase price for the assignment to the mortgages trustee of the
additional assigned mortgage portfolio in accordance with the mortgage sale
agreement.
CONDITIONS PRECEDENT TO DRAWDOWN
The issuer will not be obliged to make the intercompany loan available to
Funding unless on the closing date certain conditions have been met, including:
o that the notes have been issued and the proceeds have been received
by or on behalf of the issuer;
o that one or more deeds of accession relating to the Funding deed of
charge have been executed by the parties to the Funding deed of
charge;
o that each of the transaction documents has been executed by the
relevant parties to those documents; and
o that Funding has delivered a solvency certificate to the security
trustee in form and substance satisfactory to the security trustee.
THE INTERCOMPANY LOAN
Subject to the satisfaction of the conditions precedent to drawdown, the
intercompany loan will be made available by the issuer to Funding on the closing
date.
The final repayment date of the intercompany loan will be the final
maturity date of the latest maturing class of notes issued by the issuer.
None of the parties to the intercompany loan agreement may assign its
rights thereunder to any third party, except that the issuer may assign to the
note trustee by way of security its right, title and interest under the
intercompany loan agreement. The note trustee will not be entitled to assign to
a third party its or the issuer's right, title and interest under the
intercompany loan agreement following the service of a note enforcement notice.
REPRESENTATIONS, WARRANTIES AND COVENANTS
Under the intercompany loan agreement, Funding will make standard
representations and warranties to the issuer.
In addition to standard covenants, Funding will give the following
undertakings:
o it will not create or permit to subsist any security interest over
or in respect of any of its assets (unless arising by operation of
law) other than as provided for pursuant to the transaction
documents;
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o it will not sell, assign, transfer, lease or otherwise dispose of or
grant any option over all or any of its assets, properties or
undertakings or any interest, estate, right, title or benefit to or
in such assets, properties or undertakings other than as provided
for pursuant to the transaction documents;
o it will not enter into any amalgamation, demerger, merger or
reconstruction, nor acquire any assets or business not make any
investments other than as contemplated in the transaction documents;
o except as provided or contemplated under the transaction documents
it will not incur any indebtedness or give any guarantee or
indemnity in respect of any obligation of any other person;
o it will not pay any dividend or make any other distribution in
respect of any of its shares other than in accordance with the
Funding deed of charge, or issue any new shares or alter any rights
attaching to its issued shares as at the date of the intercompany
loan agreement;
o it will not carry on any business or engage in any activity other
than as contemplated by the transaction documents or which is not
incidental to or necessary in connection with any of the activities
in which the transaction documents provide or envisage that Funding
will engage; and
o save for the previous issuers, the issuer and any other issuer, 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 the intercompany loan will be made only
from and to the extent of distributions received by Funding in respect of the
Funding share of the trust property representing issuer allocable revenue
receipts which are payable to the issuer on that payment date, subject to and in
accordance with the Funding priority of payments and the rules for the
application of Funding available revenue receipts described in "CASHFLOWS"
below.
Subject as provided above and to the limited recourse provisions described
below, interest will be payable by Funding on each payment date on the
outstanding principal balance of the intercompany loan. The interest due on the
intercompany loan on each payment date will be in an amount equal to the amount
required by the issuer on that payment date to fund (by payment to any swap
provider or otherwise) the payment of interest on the notes, as set forth in the
items under "CASHFLOWS - DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS PRIOR
TO ENFORCEMENT OF THE ISSUER SECURITY" or in the relevant items under such other
issuer priority of payments as may apply on that payment date.
Subject as provided above and to the limited recourse provisions described
below, in addition, on each payment date or as and when required Funding will
pay an additional fee to the issuer. This fee will be equal to the amount
required by the issuer to pay or provide for all other amounts (but excluding
interest and principal due on the notes and tax that can be met out of the
issuer's profits) if any, falling due on that payment date as set forth in the
items under "CASHFLOWS - DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS PRIOR
TO ENFORCEMENT OF THE ISSUER SECURITY" or in the relevant items under such other
issuer priority of payments as may apply on that payment date.
Funding and the issuer will agree under the intercompany loan agreement
that to the extent that the issuer receives from Funding on any payment date an
amount of interest and/or fees which the issuer utilizes to credit the issuer
principal deficiency ledger (but only to the extent of any deficiency which has
arisen as a result of (i) losses on the mortgage loans allocated by Funding to
the issuer and/or (ii) the application of Funding available principal receipts
to fund the issuer liquidity reserve fund of the issuer but not as a result of
any other principal deficiency of the issuer) that amount of interest and/or
fees
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will be recharacterized and will constitute a payment of principal in respect of
the intercompany loan and will thereby reduce the outstanding principal balance
of the intercompany loan on that payment date by such amount.
REPAYMENT OF THE INTERCOMPANY LOAN
Payment of principal on the intercompany loan on any payment date will be
made only from and to the extent of distributions received by Funding in respect
of the Funding share of the trust property representing issuer allocable
principal receipts which are payable to the issuer on that payment date subject
to and in accordance with the Funding priority of payments and the rules for the
application of Funding available principal receipts described in "CASHFLOWS"
below.
Subject as provided above and subject to the limited recourse provisions
described below, on each payment date Funding will repay to the issuer principal
on the intercompany loan in amounts sufficient to fund (by payment to any swap
provider or otherwise) the payments of principal on the notes in the amounts and
in the priorities described in "CASHFLOWS - DISTRIBUTION OF ISSUER AVAILABLE
PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY AND/OR OCCURRENCE
OF A TRIGGER EVENT" or in the relevant amounts and priorities described in any
other issuer priority of payments as may apply on that payment date.
A "CONTROLLED AMORTIZATION AMOUNT" will be due under the intercompany loan
on any payment date equal to the aggregate of the controlled amortization
amounts due on such date under the notes.
At the option of the issuer, Funding may be required to prepay the
intercompany loan in specified circumstances, including funding any optional
redemption of the notes.
ALLOCATION OF LOSSES
Losses on the mortgage loans that have been allocated to Funding on any
date (as described under "THE MORTGAGES TRUST - LOSSES") shall be allocated to
the intercompany loan of each issuer on such date according to the following
formula:
outstanding principal balance of the
amount of losses allocated to intercompany loan of such issuer
Funding x ------------------------------------------
aggregate outstanding principal balance of
the intercompany loans of all issuers
PROVIDED THAT, for the purposes of the foregoing calculation, the
outstanding principal balance of the intercompany loan of any issuer shall be
reduced by the principal amount outstanding on such date of any special
repayment notes of that issuer.
LIMITED RECOURSE
Funding will only be obliged to pay amounts to the issuer under the
intercompany loan to the extent that it has funds to do so subject to and in
accordance with the relevant Funding priority of payments, the rules for the
application of Funding available revenue receipts and the rules for the
application of Funding available principal receipts described in "CASHFLOWS"
below.
If, on the final repayment date of the intercompany loan, there is a
shortfall between the amount required to pay all outstanding interest and/or
principal on the notes and the amount available to Funding to pay amounts due
under the intercompany loan in respect thereof, then Funding will not be obliged
to pay that shortfall to the issuer under the intercompany loan agreement and
any claim that the issuer may have against Funding in respect of that shortfall
will be extinguished.
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Following enforcement of the Funding security and distribution of the
proceeds in accordance with the terms of the Funding deed of charge all
outstanding claims of any issuer will be extinguished.
INTERCOMPANY LOAN EVENTS OF DEFAULT
Each intercompany loan agreement will contain events of default (each, an
"INTERCOMPANY LOAN EVENT OF DEFAULT") including, among others, the following
events:
o Funding does not pay any amount payable under the 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
intercompany loan agreement (subject always to the limited recourse
provisions set out in the intercompany loan agreement); or
o Funding does not comply in any material respect with any of its
obligations under the transaction documents (except for its payment
obligations under the intercompany loan agreement) and, if capable
of remedy, such non-compliance is not remedied within 20 London
business days of Funding becoming aware of it or of receiving notice
from the security trustee requiring it to be remedied; or
o a representation or warranty of Funding made or repeated in
connection with any of the transaction documents is incorrect in any
material respect when made or deemed to be made or repeated; or
o an insolvency event occurs in relation to Funding; or
o it is, or becomes, unlawful for Funding to perform its obligations
under any of the transaction documents; or
o the Funding deed of charge is no longer binding or enforceable
against Funding or is no longer effective to create the security
intended to be created by it.
If an intercompany loan event of default occurs and is continuing under
the intercompany loan agreement or any other intercompany loan agreement, then
the security trustee may, by delivery of an intercompany loan enforcement notice
to Funding, declare the intercompany loan and each other intercompany loan to be
immediately due and payable and/or declare the intercompany loan and each other
intercompany loan to be due and payable on demand of the security trustee.
You should be aware that the non-payment by Funding of any amount due
under the intercompany loan agreement in circumstances where Funding does not
have sufficient funds available to make the relevant payment to the issuer will
not be an intercompany loan event of default. The ability of the issuer to repay
the notes will depend, among other things, upon payments received by the issuer
from Funding under the intercompany loan agreement. See "RISK FACTORS - FUNDING
IS NOT REQUIRED TO MAKE PAYMENTS ON THE INTERCOMPANY LOAN IF IT DOES NOT HAVE
ENOUGH MONEY TO DO SO, WHICH COULD ADVERSELY AFFECT THE PAYMENT ON THE NOTES"
and "OUR RECOURSE TO FUNDING UNDER THE INTERCOMPANY LOAN IS LIMITED, WHICH COULD
ADVERSELY AFFECT THE PAYMENT ON THE NOTES".
OTHER INTERCOMPANY LOAN AGREEMENTS
Funding has entered into a previous intercompany loan with each of the
previous issuers. In addition, new issuers may be established by Funding for the
purpose of issuing new notes to investors. The intercompany loan agreement will
permit Funding, by written notice to the security trustee and the rating
agencies, to enter into a new intercompany loan agreement with a new issuer at
any time and to borrow additional money under such new intercompany loan
agreement. The drawdown of any new intercompany loan will be financed by the
issue of new notes by the new issuer, and will only be permitted if certain
conditions precedent are satisfied, including among others:
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o that the proceeds of the new intercompany loan are used by Funding
(1) to pay Funding's initial contribution to the mortgages trustee
for the Funding share in respect of any new trust property (which
amount will be paid to the seller by the mortgages trustee in
satisfaction of the initial purchase price for the assignment to the
mortgages trustee of new mortgage loans and related security to be
assigned to the mortgages trustee pursuant to the mortgage sale
agreement) and/or (2) to fund a further contribution to the
mortgages trustee in order to increase the Funding share of the
trust property and/or (3) to refinance the existing debts of
Funding, including the intercompany loan which is funding payments
on the notes; and
o any conditions for such assignment of new loans or such increase in
the funding share of the existing trust property or such refinancing
(if any) have been or will be satisfied prior to drawdown.
The previous intercompany loan agreements were, and each new intercompany
loan agreement will be, on substantially the same terms as the intercompany loan
agreement, except as to the amount advanced, the date that monies were, or are,
drawn and the terms for repayment. Each intercompany loan is repayable by
Funding from the issuer allocable principal receipts which are allocated to the
relevant new issuer. You should note that each intercompany loan agreement is
subject to the same general terms and conditions, which are then supplemented by
a separate intercompany loan confirmation to provide for the specific terms and
conditions of that related intercompany loan. If Funding enters into a new
intercompany loan agreement, then the provisions of the intercompany loan
agreement that we have entered into with Funding may be varied without our
consent to the extent necessary to reflect the terms of that new intercompany
loan, provided that no variation shall be made to certain fundamental terms of
the intercompany loan, including the payment dates and the limited recourse
nature of the intercompany loan, without the prior written consent of the
Funding secured creditors and the rating agencies.
FUNDING'S BANK ACCOUNTS
Funding currently maintains the "FUNDING GIC ACCOUNT" in its name with the
account bank to which the Funding reserve fund is credited from time to time. A
separate "FUNDING RESERVE LEDGER" is maintained to record amounts standing to
the credit of the Funding reserve fund from time to time. Among other things,
Funding may use amounts credited to the Funding reserve ledger from time to time
to fund issuer reserve funds, if any, in respect of new issuers, to pay the
start-up costs in connection with new issuers and to cover losses and shortfalls
of any issuers as part of fees payable under the relevant intercompany loan
agreement.
On each distribution date the Funding share of each of the mortgages
trustee available revenue receipts and mortgages trustee available principal
receipts payable to Funding under the mortgages trust will initially be
deposited in the Funding GIC account. On each payment date, amounts required to
meet Funding's obligations to its various creditors will, with the consent of
the security trustee, be transferred from the Funding GIC account to the
"FUNDING TRANSACTION ACCOUNT" and applied by the cash manager in accordance with
the relevant Funding priority of payments. Amounts representing Funding's
profits will be retained in the Funding transaction account.
Funding will also establish accounts from time to time to which the
reserve funds it holds in respect of the issuer or any new issuer may be
credited.
On the closing date, Funding will establish a reserve account for our
benefit (the "FUNDING (GRANITE 02-2) GIC ACCOUNT") in its name with the account
bank. On the closing date, the issuer reserve fund will be credited to the
Funding (Granite 02-2) GIC account, and a separate "ISSUER RESERVE LEDGER" will
be maintained to record amounts standing to the credit of the issuer reserve
fund from time to time. If at any time an issuer liquidity reserve fund is
required to be established, the issuer liquidity reserve fund will also be
credited to the Funding (Granite 02-2) GIC account and a separate "ISSUER
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LIQUIDITY RESERVE LEDGER" will be maintained to record amounts standing to the
credit of the issuer liquidity reserve fund from time to time. Pursuant to the
Funding deed of charge, Funding will grant a security interest to the security
trustee in respect of its rights and interest in, and all monies standing to the
credit of, the Funding (Granite 02-2) GIC account as security for its
obligations to the issuer under the intercompany loan. Subject to certain
limitations, Funding will be entitled to utilize monies credited to the issuer
reserve ledger and the issuer liquidity reserve ledger to meet certain of its
payment obligations to the issuer under the intercompany loan in circumstances
where there would otherwise be a deficit as described in "CREDIT STRUCTURE -
ISSUER RESERVE FUND" and "CREDIT STRUCTURE - ISSUER LIQUIDITY RESERVE FUND".
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CASHFLOWS
DISTRIBUTIONS OF FUNDING AVAILABLE REVENUE RECEIPTS
DEFINITIONS
"FUNDING AVAILABLE REVENUE RECEIPTS" in respect of any payment date will be
calculated by the cash manager on the distribution date immediately preceding
such payment date and will be an amount equal to the sum of:
(1) all mortgages trustee available revenue receipts distributed to
Funding during the interest period ending on the relevant payment
date;
(2) other net income of Funding including all amounts of interest received
on the Funding GIC account and the Funding transaction account, and/or
all income from authorized investments (as defined in the glossary),
in each case to be received on or prior to the relevant payment date;
and
(3) the amount standing to the credit of the Funding reserve ledger,
PROVIDED THAT for the purpose only of the payments to be made to any issuer
on the relevant payment date in respect of the intercompany loan made by that
issuer (but not for the purpose of any other payment to be made by Funding on
the relevant payment date including any payment in respect of any other
intercompany loan made by any other issuer), it shall also include the sum of:
o the amount standing to the credit of the issuer reserve ledger in
respect of that issuer (but not in respect of any other issuer),
subject to any limits or conditions on the purposes for which that
reserve may be utilized as set out in the Funding deed of charge; and
o the amount standing to the credit of the issuer liquidity reserve
ledger, if any, in respect of that issuer (but not in respect of any
other issuer), subject to any limits or conditions of the purposes for
which that reserve may be utilized as set out in the Funding deed of
charge.
In the case of the issuer, the limits and conditions on the utilization of
the issuer reserve fund and the issuer liquidity reserve fund, if any, are
described in "CREDIT STRUCTURE - ISSUER RESERVE FUND" and "CREDIT STRUCTURE -
ISSUER LIQUIDITY RESERVE FUND".
"ISSUER ALLOCABLE REVENUE RECEIPTS" for each issuer will be calculated by
the cash manager on the distribution date immediately preceding the relevant
payment date and will be an amount for each issuer equal to the sum of:
(1) the amount calculated by reference to the following formula:
outstanding principal balance of the
(Funding available revenue intercompany loan of the issuer
receipts (excluding all issuer X -----------------------------------------
reserve funds and issuer aggregate outstanding principal balance
liquidity reserve funds) - R) of the intercompany loans of all issuers
where "R" = the sum of items (A), (B), (C) and (D) of the Funding
pre-enforcement revenue priority of payments or, as applicable, the sum of
items (A), (B) and (C) of the Funding post-enforcement priority of
payments;
(2) the amount standing to the credit of the issuer reserve ledger in
respect of that issuer (but not in respect of any other issuer),
subject to any limits or conditions on the purposes for which that
reserve may be utilized; and
(3) the amount standing to the credit of the issuer liquidity reserve
ledger, if any, in respect of that issuer (but not in respect of any
other issuer), subject to any limits or conditions on the purposes for
which that reserve may be utilized.
As of the closing date the only issuers will be Granite Mortgages 02-2 plc,
the first issuer, the second issuer and the third issuer.
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RULES FOR APPLICATION OF FUNDING AVAILABLE REVENUE RECEIPTS
The Funding deed of charge sets out certain rules for the application by
Funding, or the cash manager on its behalf, of Funding available revenue
receipts on each payment date. The principal rules are as follows:
(1) Subject as provided in paragraphs (2) through (4) below, the portion
of issuer allocable revenue receipts, if any, not required to be
applied by the issuer on a payment date to pay interest on the notes,
to credit the related issuer principal deficiency ledger or to pay any
other costs and expenses due by the issuer on that date pursuant to
the relevant issuer priority of payments, together with the portion of
issuer allocable revenue receipts relating to all other issuers not
required to be so applied by those other issuers on that payment date
(excluding any issuer reserve fund or issuer liquidity reserve fund
(if any) of any issuer), shall constitute "SHARED ISSUER REVENUE
RECEIPTS". Shared issuer revenue receipts will be reallocated by the
cash manager and distributed on such payment date among the issuers as
payments of interest and fees under the applicable intercompany loans
to the extent required to make payments of interest due on notes, to
credit the related issuer principal deficiency ledgers and to pay
other costs, expenses and third party amounts payable by the issuers
under the relevant issuer priority of payments (but excluding
principal payable under any intercompany loan). Such reallocation and
distribution will continue to be made on such payment date until there
are no remaining amounts of shared issuer revenue receipts to be
reallocated and distributed on such payment date. If there is more
than one issuer that is entitled to shared issuer revenue receipts,
then each such issuer will be reallocated a portion of shared issuer
revenue receipts equal to:
outstanding principal balance of the
amount of shared issuer intercompany loan of the issuer
revenue receipts X -----------------------------------------
aggregate outstanding principal balance
of the intercompany loans of all issuers.
(2) No issuer shall be entitled to or shall receive any amount of issuer
allocable revenue receipts from Funding on a payment date on which
such issuer is not required by that issuer to make a payment on that
date in accordance with the relevant issuer pre-enforcement revenue
priority of payments or other relevant issuer priority of payments
which applies to that issuer on that date, and the cash manager will
take account of all of the funds which are or will become available to
that issuer on that payment date and which constitute issuer available
revenue receipts (including any payments due under any swap agreement
and any interest or other income received or to be received) for that
issuer for the purpose of making this determination.
(3) Unless and until the intercompany loan of any issuer has been repaid
in full and Funding has no further liability under the relevant
intercompany loan agreement, amounts standing to the credit of the
issuer reserve ledger and the issuer liquidity reserve ledger, if any,
established by Funding for that issuer may only be utilized by Funding
in making payments due under that issuer's intercompany loan and may
not be used in or towards the payment of any other liability of
Funding. On the payment date following the repayment in full of the
intercompany loan of that issuer and provided that Funding has no
further liability in respect of the relevant intercompany loan
agreement, any remaining amounts standing to the credit of the issuer
reserve ledger and the issuer liquidity reserve ledger, if any, of
that issuer will constitute "SHARED ISSUER REVENUE RECEIPTS" for the
purpose of paragraph (1) above and may be utilized by Funding in
paying any other liability of Funding subject to and in accordance
with the relevant Funding priority of payments.
(4) If on any payment date any issuer allocable revenue receipts and/or
any shared issuer revenue receipts are paid to an issuer and are
applied by that issuer in reducing any deficiency recorded on the
issuer principal deficiency ledger of that
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issuer (but only to the extent of any deficiency which has arisen as a
result of (i) losses on the mortgage loans allocated by Funding to the
issuer and/or (ii) the application of Funding available principal receipts
to fund the issuer liquidity reserve fund of the issuer but not as a result
of any other principal deficiency of the issuer), then the issuer allocable
revenue receipts and/or shared issuer revenue receipts so applied shall
constitute repayments of principal under the relevant intercompany loan and
shall reduce the outstanding principal balance of that intercompany loan
accordingly.
DISTRIBUTION OF FUNDING AVAILABLE REVENUE PRIOR TO ENFORCEMENT OF
THE FUNDING SECURITY
This section sets out the order of priority of payments of Funding
available revenue receipts as at the closing date.
On each payment date or, in respect of amounts due to third parties by
Funding under paragraph (B), when due, prior to enforcement of the Funding
security, the cash manager will, subject to the rules for application of Funding
available revenue receipts, apply Funding available revenue receipts in the
following order of priority (the "FUNDING PRE-ENFORCEMENT REVENUE PRIORITY OF
PAYMENTS"):
(A) first, to pay amounts due to the security trustee (together with
interest and (to the extent not already inclusive) VAT on those
amounts) and to provide for any amounts due or to become due during
the following interest period to the security trustee, under the
Funding deed of charge or any other transaction document;
(B) second, to pay amounts due to any third party creditors of Funding
(other than those referred to later in this order of priority of
payments or in the Funding pre-enforcement principal priority of
payments) of which the cash manager has notice prior to the relevant
payment date, which amounts have been incurred without breach by
Funding 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 during
the following interest period and to pay or discharge any liability of
Funding for corporation tax on any chargeable income or gain of
Funding;
(C) third, 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);
(D) fourth, in no order of priority between them, but in proportion to the
respective amounts due, towards payment of amounts, if any, due to the
account bank under the terms of the bank account agreement and to the
corporate services provider under the corporate services agreement;
(E) fifth, to pay, in no order of priority between them, but in proportion
to the respective amounts due, to each issuer an amount up to its
issuer allocable revenue receipts in respect of interest and fees due
on that issuer's intercompany loan but not exceeding the aggregate
amount of, and to be applied in the amounts and priorities set forth
in, the issuer pre-liquidity payments for that issuer. "ISSUER
PRE-LIQUIDITY PAYMENTS" means, in the case of the issuer, the payments
set out in items (A) through (G) under "- DISTRIBUTION OF ISSUER
AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER
SECURITY" (or the relevant payments in the equivalent items under such
other issuer priority of payments as may apply to the issuer on that
payment date) and, in the case of any other issuer, the payment(s)
identified as such for that other issuer;
(F) sixth, to pay, in no order of priority between them, but in proportion
to the respective amounts due, such amount for each issuer up to its
issuer allocable revenue receipts as is necessary to replenish the
issuer liquidity reserve fund, if any, established in respect of that
issuer up to the issuer liquidity reserve required amount (in the case
of the issuer, as defined in "CREDIT STRUCTURE - ISSUER LIQUIDITY
RESERVE FUND") (but only to the extent that monies have been drawn
from the relevant issuer liquidity
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reserve fund to pay interest and fees due under the relevant
intercompany loan and only to replenish the issuer liquidity reserve
fund of an issuer to the extent that there are class A notes issued by
such issuer outstanding on such payment date);
(G) seventh, to pay, in no order of priority between them, but in
proportion to the respective amounts due, to each issuer an amount up
to its issuer allocable revenue receipts in respect of interest and
fees due on that issuer's intercompany loan but not exceeding the
aggregate amount of, and to be applied in the amounts and priorities
set forth in, the issuer post-liquidity payments for that issuer.
"ISSUER POST-LIQUIDITY PAYMENTS" means, in the case of the issuer, the
payments set out in items (H) through (J) under "- DISTRIBUTION OF
ISSUER AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER
SECURITY" (or the relevant payments in the equivalent items under such
other issuer priority of payments as may apply to the issuer on that
payment date) and in the case of any new issuer the payment(s)
identified as such for that new issuer;
(H) eighth, to pay in no order of priority between them, but in proportion
to the respective amounts due, such amount for each issuer up to its
issuer allocable revenue receipts as is necessary to fund the issuer
reserve fund established in respect of that issuer up to the issuer
reserve required amount (in the case of the issuer, as defined in
"CREDIT STRUCTURE - ISSUER RESERVE FUND") or to replenish such issuer
reserve fund up to the related issuer reserve required amount (to the
extent that monies have been drawn from such issuer reserve fund to
pay interest and fees under the relevant intercompany loan);
(I) ninth, to pay, in no order of priority between them, but in proportion
to the respective amounts due, to each issuer an amount up to its
issuer allocable revenue receipts in respect of interest, principal
(in the case of the special repayment notes) and fees due on that
issuer's intercompany loan but not exceeding the aggregate amount of,
and to be applied in the amounts and priorities set forth in, the
issuer pre-reserve payments for that issuer. "ISSUER PRE-RESERVE
PAYMENTS" means the relevant payments in the items under such other
issuer priority of payments as may apply to such other issuer on that
payment date) and in the case of any new issuer the payment(s)
identified as such for that new issuer;
(J) tenth, in no order of priority between them in proportion to the
respective amounts due, from each issuer's allocable revenue receipts,
to credit the Funding reserve ledger in an amount up to the Funding
reserve required amount (as defined in "CREDIT STRUCTURE - FUNDING
RESERVE FUND");
(K) eleventh, to pay, to each issuer in no order of priority between them,
but in proportion to the respective amounts due, an amount up to its
issuer allocable revenue receipts in respect of interest and fees due
on that issuer's intercompany loan but not exceeding the aggregate
amount of, and to be applied in the amounts and priorities set forth
in, the issuer post-reserve payments for that issuer. "ISSUER
POST-RESERVE PAYMENTS" means, in the case of the issuer, the payments
set out in item (K) under "- DISTRIBUTION OF ISSUER AVAILABLE REVENUE
RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY" (or the relevant
payments in the equivalent items under such other issuer priority of
payments as may apply to the issuer on that payment date) and in the
case of any new issuer the payment(s) identified as such for that
issuer;
(L) twelfth, in no order of priority between them, but in proportion to
the respective amounts due, from issuer allocable revenue receipts,
towards payment of interest and principal amounts due to each start-up
loan provider under the relevant start-up loan agreement;
(M) thirteenth, to pay each issuer, in no order of priority between them
but in proportion to the respective amounts due, an amount up to its
issuer allocable revenue receipts in respect of interest and fees and
any other amount (if any) due on that issuer's intercompany loan but
not exceeding the aggregate amount of, and to be applied in
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the amounts and priorities set forth in, the issuer post start-up
payments for that issuer. "ISSUER POST START-UP PAYMENTS" means, in
the case of the issuer, the payments set out in items (L) and (M)
under "- DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS PRIOR TO
ENFORCEMENT OF THE ISSUER SECURITY" (or the relevant payments in the
equivalent items under such other issuer priority of payments as may
apply to the issuer on that payment date) and in the case of any new
issuer the payment(s) identified as such for that issuer;
(N) fourteenth, to the extent required, to apply all shared issuer revenue
receipts in the priorities set forth in items (E) through (M) above;
(O) fifteenth, towards payment to Funding of an amount equal to 0.01% per
annum of the Funding available revenue receipts, which amount will be
retained by Funding as profit, less corporation tax in respect of
those profits provided for or paid at item (B) above;
(P) sixteenth, towards payment of any deferred contribution due to the
mortgages trustee pursuant to the terms of the mortgages trust deed;
and
(Q) last, towards payment to the shareholders of Funding of any dividend
declared by Funding,
PROVIDED THAT no amount will be applied in replenishing any of the reserve
funds held by Funding in respect of an issuer under paragraphs (F) and/or (H)
above following an enforcement of the issuer security relating to that issuer.
DISTRIBUTION OF ISSUER AVAILABLE RECEIPTS PRIOR TO ENFORCEMENT OF
THE ISSUER SECURITY
DEFINITION OF ISSUER AVAILABLE REVENUE RECEIPTS
"ISSUER AVAILABLE REVENUE RECEIPTS" for the issuer in respect of any
payment date will be calculated by the issuer cash manager on the distribution
date immediately preceding that payment date and will be an amount equal to the
sum of:
o interest, fees and any other amount (excluding principal) paid by
Funding on the relevant payment date in respect of the intercompany
loan;
o amounts received by the issuer under or in accordance with the swap
agreements (other than any early termination amounts received by the
issuer under the swap agreements);
o interest payable on the issuer transaction account and any income from
authorized investments (as defined in the glossary), in either case
which has been or will be received on or before the relevant payment
date; and
o (only to the extent required after making the calculation set out
below) the aggregate of all principal amounts (if any) repaid by
Funding to the issuer under the intercompany loan on the relevant
payment date which are to be applied on the relevant payment date to
pay items (A) through (E), (G) and/or (I) of the issuer
pre-enforcement revenue priority of payments.
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 (O) of the issuer pre-enforcement revenue priority of payments
(after taking account of shared issuer revenue receipts, if any, available
therefor).
Subject as provided below, if there is a deficit in the amount of issuer
available revenue receipts to pay items (A) through (E), (G) and (I) of the
issuer pre-enforcement revenue priority of payments, then the issuer cash
manager shall pay or provide for that deficit by applying amounts which
constitute issuer allocable principal receipts, if any, paid to the issuer and
the issuer cash manager shall make a corresponding entry in the issuer principal
deficiency ledger, as described in "CREDIT STRUCTURE". Issuer allocable
principal receipts may not, however, be used to pay interest to any class of
notes if the application of that interest by the relevant issuer would create or
increase a principal deficiency in respect of a higher-ranking class of notes
issued by such issuer.
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DISTRIBUTION OF ISSUER AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF
THE ISSUER SECURITY
The issuer cash management agreement sets out the order of priority of
distribution by the issuer cash manager, prior to the enforcement of the issuer
security, of issuer available revenue receipts on each payment date. As at the
closing date, the order of priority will be as described in this section.
As used in this prospectus, "DOLLAR CURRENCY SWAP PROVIDER DEFAULT" means
the occurrence of an event of default or downgrade termination event (as defined
in the relevant dollar currency swap agreement) where the dollar currency swap
provider is the defaulting party or the affected party (as defined in the
relevant dollar currency swap agreement). The term "EURO CURRENCY SWAP PROVIDER
DEFAULT" means the occurrence of an event of default or downgrade termination
event (as defined in the relevant euro currency swap agreement) where the euro
currency swap provider is the defaulting party or the affected party (as defined
in the relevant euro currency swap agreement). The term "BASIS RATE SWAP
PROVIDER DEFAULT" means the occurrence of an event of default or downgrade
termination event (as defined in the basis rate swap agreement) where the basis
rate swap provider is the defaulting party or the affected party (as defined in
the basis rate swap agreement). As used in this prospectus, "ISSUER SWAP
PROVIDER DEFAULT" means the occurrence of either a dollar currency swap provider
default, a euro currency swap provider default or a basis rate swap provider
default and "ISSUER SWAP DEFAULT" means the occurrence of an event of default
(as defined in the relevant swap agreement) where the issuer is the defaulting
party (as defined in the relevant swap agreement).
On (i) each payment date or (ii) the date when due in respect of amounts
due to third parties under paragraph (C) below, the issuer cash manager will
apply issuer available revenue receipts in the following order of priority (the
"ISSUER PRE-ENFORCEMENT REVENUE PRIORITY OF PAYMENTS"):
(A) first, to pay amounts due to the note trustee, together with interest
and (to the extent not already inclusive) VAT on those amounts, and to
provide for any amounts due or to become due during the following
interest period to the note trustee, under the trust deed, the issuer
deed of charge or any other transaction document;
(B) second, in no order of priority between them but in proportion to the
respective amounts due, to pay amounts due to the agent bank, the
paying agents, the transfer agent and the registrar together with
interest and (to the extent not already inclusive) VAT on those
amounts, and to provide for any costs, charges, liabilities and
expenses due or to become due during the following interest period to
the agent bank, the paying agents, the transfer agent and the
registrar, under the paying agent and agent bank agreement;
(C) third, to pay amounts due to any third party creditors of the issuer
(other than those referred to later in this order of priority of
payments or in the issuer pre-enforcement principal priority of
payments), of which the issuer cash manager has notice prior to the
relevant payment date, which amounts have been incurred without breach
by the issuer of the transaction documents to which it is a party and
for which payment has not been provided for elsewhere and to provide
for any such amounts expected to become due and payable during the
following interest period by the issuer and to pay or discharge any
liability of the issuer for corporation tax on any chargeable income
or gain of the issuer;
(D) fourth, in no order or priority between 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
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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, in no order of priority between them but in proportion to the
respective amounts due, to pay:
o amounts (including such part of any termination payment) due to
the basis rate swap provider (except for any termination payment
or any part thereof due and payable to the basis rate swap
provider as a result of a basis rate swap provider default, save
to the extent such termination payment may be satisfied by any
swap replacement payment made to the issuer following a downgrade
termination event in respect of the basis rate swap and applied
in accordance with this order of priority of payments);
o amounts due in respect of interest and such part of any
termination payment due to the series 1 class A1 dollar currency
swap provider under the series 1 class A1 dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class A1 dollar currency swap
and applied in accordance with this order of priority of
payments) and from amounts received in respect of interest from
the series 1 class A1 dollar currency swap provider to pay
interest due or overdue on the series 1 class A1 notes to the
holders of the series 1 class A1 notes;
o amounts due in respect of interest and such part of any
termination payment due to the series 1 class A2 dollar currency
swap provider under the series 1 class A2 dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class A2 dollar currency swap
and applied in accordance with this order of priority of
payments) and from amounts received in respect of interest from
the series 1 class A2 dollar currency swap provider to pay
interest due or overdue on the series 1 class A2 notes to the
holders of the series 1 class A2 notes;
o amounts due in respect of interest and such part of any
termination payment due to the series 2 class A euro currency
swap provider under the series 2 class A euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency swap
provider default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 2 class A euro currency swap and
applied in accordance with this order of priority of payments)
and from amounts received in respect of interest from the series
2 class A euro currency swap provider to pay interest due or
overdue on the series 2 class A notes to the holders of the
series 2 class A notes; and
o amounts due to pay interest due or overdue on the series 3 class
A notes to the holders of the series 3 class A notes;
(F) sixth, towards a credit to the principal deficiency sub ledger for the
class A notes in an amount up to the amount necessary to eliminate any
debit on that ledger;
(G) seventh, in no order of priority between them but in proportion to the
respective amounts due, to pay:
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o amounts due in respect of interest and such part of any
termination payment due to the series 1 class B dollar currency
swap provider under the series 1 class B dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class B dollar currency swap and
applied in accordance with this order of priority of payments)
and from amounts received in respect of interest from the series
1 class B dollar currency swap provider to pay interest due or
overdue on the series 1 class B notes to the holders of the
series 1 class B notes;
o amounts due in respect of interest and such part of any
termination payment due to the series 2 class B euro currency
swap provider under the series 2 class B euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency swap
provider default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 2 class B euro currency swap and
applied in accordance with this order of priority of payments)
and from amounts received in respect of interest from the series
2 class B euro currency swap provider to pay interest due or
overdue on the series 2 class B notes to the holders of the
series 2 class B notes; and
o amounts due to pay interest due or overdue on the series 3 class
B notes to the holders of the series 3 class B notes;
(H) eighth, towards a credit to the principal deficiency sub ledger for
the class B notes in an amount up to the amount necessary to eliminate
any debit on that ledger;
(I) ninth, in no order of priority between them but in proportion to the
respective amounts due, to pay:
o amounts due in respect of interest and such part of any
termination payment due to the series 1 class C dollar currency
swap provider under the series 1 class C dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class C dollar currency swap and
applied in accordance with this order of priority of payments)
and from amounts received in respect of interest from the series
1 class C dollar currency swap provider to pay interest due or
overdue on the series 1 class C notes to the holders of the
series 1 class C notes;
o amounts due in respect of interest and such part of any
termination payment due to the series 2 class C euro currency
swap provider under the series 2 class C euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency swap
provider default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 2 class C euro currency swap and
applied in accordance with this order of priority of payments)
and from amounts received in respect of interest from the series
2 class C euro currency swap provider to pay interest due or
overdue on the series 2 class C notes to the holders of the
series 2 class C notes; and
o amounts due to pay interest due or overdue on the series 3 class
C notes to the holders of the series 3 class C notes;
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(J) tenth, towards a credit to the principal deficiency sub ledger for the
class C notes in an amount up to the amount necessary to eliminate any
debit on that ledger;
(K) eleventh, in no order of priority between them but in proportion to
the respective amounts due, to pay any termination payment to:
o the basis rate swap provider following a basis rate swap provider
default;
o the dollar currency swap provider following a dollar currency
swap provider default; and
o the euro currency swap provider following a euro currency swap
provider default;
(L) twelfth, to pay to the issuer an amount equal to 0.01% per annum of
the interest received under the intercompany loan, which will be
retained by the issuer as profit, less corporation tax in respect of
those profits provided for or paid at item (C) above; and
(M) last, to pay to shareholders of the issuer any dividend declared by
the issuer.
DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO THE ENFORCEMENT OF
THE FUNDING SECURITY
DEFINITION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS
"FUNDING AVAILABLE PRINCIPAL RECEIPTS" in respect of any payment date will
be calculated by the cash manager or otherwise on behalf of Funding (or,
following enforcement of the Funding security, the security trustee) on the
distribution date immediately preceding that payment date and will be an amount
equal to the sum of all Funding principal receipts received by Funding from the
mortgages trustee during the interest period ending on the relevant payment date
provided that, subject as provided otherwise, for the purpose only of
determining the amount of Funding available principal receipts which may be
allocated and paid to any issuer following an enforcement of the issuer security
relating to that issuer, it may also include:
o the aggregate of any amounts standing to the credit of the issuer
liquidity reserve ledger, if any, and the issuer reserve ledger of
that issuer remaining on that payment date after the application of
such reserve funds in accordance with the Funding pre-enforcement
revenue priority of payments; and
o in certain circumstances (as described below) that issuer's portion of
any shared issuer principal receipts for the relevant payment date.
RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS
The Funding deed of charge sets out certain rules for the application by
Funding, or the cash manager on its behalf, of Funding available principal
receipts on each payment date. The principal rules are as follows:
(1) On the distribution date immediately preceding such payment date, the
cash manager will calculate the "ISSUER ALLOCABLE PRINCIPAL RECEIPTS"
for each issuer in respect of the relevant payment date which, subject
as provided in paragraphs (2) through (7) below, is for any issuer an
amount which is equal to the lesser of:
(a) (only if relevant) the principal amount due on the intercompany
loan of such issuer which is an amount equal to the controlled
amortization amount due, if any, on the payment date immediately
succeeding such distribution date; and
(b) an amount equal to:
outstanding principal balance on such
Funding available issuer's intercompany loan
principal receipts X ---------------------------------------
aggregate outstanding principal balance
all intercompany loans
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PROVIDED THAT:
o subject as provided in paragraphs (2) through (7) below, for the
purpose only of determining the amount of issuer allocable principal
receipts which may be allocated and paid to that issuer (but not to
any other issuer) in accordance with this paragraph (1), following an
enforcement of the issuer security relating to that issuer the amount
so determined may be increased to the extent of the aggregate of any
amounts standing to the credit of the issuer liquidity reserve ledger,
if any, and the issuer reserve ledger of that issuer remaining on that
payment date after the application of such reserve funds in accordance
with the Funding pre-enforcement revenue priority of payments; and
o for the purpose of determining the amount of shared issuer principal
receipts in accordance with paragraph (6) below, issuer allocable
principal receipts shall be an amount equal to the amount calculated
in accordance with paragraph (1)(b) above only and paragraph (1)(a)
above shall not apply.
(2) If the notes of any issuer have become immediately due and payable as
a result of the service of a note enforcement notice or if the
intercompany loan of any issuer and the other intercompany loans of
any other issuers have become immediately due and payable as a result
of the service of an intercompany loan enforcement notice or otherwise
on any payment date following the occurrence of any trigger event,
principal payments in respect of any intercompany loan may be made in
excess of any controlled amortization amount and paragraph (1)(a)
above shall no longer apply in relation to that issuer and the amount
of issuer allocable principal receipts payable to that issuer on the
relevant payment date may not exceed the amount determined under
paragraph (1)(b) above but subject always to any increase in that
amount as a result of the utilization of the issuer reserve fund and
the issuer liquidity reserve fund (if any) following enforcement of
the issuer security relating to that issuer as provided in that
paragraph.
(3) For the purpose of determining the amount of issuer allocable
principal receipts and/or shared issuer principal receipts which may
be paid to any issuer on a payment date pursuant to paragraph (1)
above or paragraph (6) below, the outstanding principal balance of
that intercompany loan shall be deemed to be reduced by the amount of:
(a) any deficiency recorded on the issuer principal deficiency ledger
of that issuer as at such payment date, but only to the extent that
such deficiency has arisen as a result of (i) losses on the mortgage
loans allocated by Funding to that issuer and/or (ii) the application
of Funding available principal receipts to fund the issuer liquidity
reserve fund of that issuer but not as a result of any other principal
deficiency of that issuer; and (b) the outstanding principal balance
as of such payment date of any special repayment notes issued by that
issuer.
(4) The amount of Funding available principal receipts payable to each
issuer on a payment date will be reduced by an amount equal to the
aggregate of the issuer available revenue receipts of that issuer
which are to be applied on that payment date in reducing deficiencies
recorded on the issuer principal deficiency ledgers, but only to the
extent that the issuer available revenue receipts which are to be so
applied on that payment date would not otherwise be payable as
principal on the relevant notes on such payment date.
(5) No issuer shall be entitled to, or shall receive on a payment date,
any amount of issuer allocable principal receipts from Funding which
is not required by that issuer to make a payment on that date in
accordance with the relevant issuer pre-enforcement principal priority
of payments or otherwise to make a payment of principal on the notes.
(6) The portion of issuer allocable principal receipts (calculated in
accordance with paragraph (1)(b) above), if any, not required to be
applied by the issuer to pay principal on the notes on a payment date
together with the portion of issuer allocable
167
principal receipts relating to all other issuers not required to be so
applied by such other issuers (or otherwise required to be set aside
by Funding for any issuer) on that payment date (excluding the amount
of any issuer reserve fund or issuer liquidity reserve fund (if any)
of any issuer) shall constitute "SHARED ISSUER PRINCIPAL RECEIPTS".
Shared issuer principal receipts will be reallocated by the cash
manager and distributed on such payment date among the issuers as
payments of principal under the applicable intercompany loans to the
extent required to make payments of principal due on the relevant
notes. Such reallocation and distribution will continue to be made on
such payment date until there are no remaining amounts of shared
issuer principal receipts to be reallocated and distributed on such
payment date. Save as provided in paragraph (2) above, if there is
more than one issuer that is entitled to shared issuer principal
receipts, then each such issuer will be reallocated a portion of the
shared issuer principal receipts equal to:
outstanding principal balance of the
amount of shared issuer intercompany loan of the issuer
principal receipts X ---------------------------------------
aggregate outstanding principal balance
of the intercompany loans of all issuers
(7) The repayment of any intercompany loan prior to the occurrence of a
trigger event, enforcement of the issuer security by the note trustee
under the issuer deed of charge or enforcement of the Funding security
by the security trustee under the Funding deed of charge will be made
in accordance with the terms of the relevant intercompany loan
agreement.
DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF
THE FUNDING SECURITY
This section sets out the order of priority of payments of Funding
available principal receipts as at the closing date.
On each payment date prior to enforcement of the Funding security, the cash
manager will, subject to the rules for application of Funding available
principal receipts, apply Funding available principal receipts in the following
order of priority (the "FUNDING PRE-ENFORCEMENT PRINCIPAL PRIORITY OF
PAYMENTS"):
(A) first, to fund (either initially or to replenish, as the case may be)
the issuer liquidity reserve fund, if any, of each issuer up to the
issuer liquidity reserve required amount but only from and to the
extent of the issuer allocable principal receipts for that issuer;
(B) second, to pay to (or, if required under that issuer's intercompany
loan, set aside for) each issuer an amount up to its issuer allocable
principal receipts in respect of principal due (or, if required under
that issuer's intercompany loan, to become due) on that issuer's
intercompany loan, which shall be an amount up to the aggregate amount
of, and shall be applied in the amounts and priorities set forth in,
the issuer principal payments for that issuer. "ISSUER PRINCIPAL
PAYMENTS" means, in relation to the issuer, the payments set forth in
items (A) through (E) under "- DISTRIBUTION OF ISSUER AVAILABLE
PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY AND/OR
OCCURRENCE OF A TRIGGER EVENT" or the relevant payments set forth in
the equivalent items in such other issuer priority of payments as may
be applicable to the issuer on that payment date and in relation to
any new issuer the payment(s) identified as such for that new issuer;
and
(C) last, to pay to (or, if required under that issuer's intercompany
loan, set aside for) each issuer an amount up to its allocable portion
of shared issuer principal receipts in respect of principal due (or,
if required under that issuer's intercompany loan, to become due) on
that issuer's intercompany loan, which in the case of the issuer shall
be an amount up to the aggregate amount of, and shall be applied in
the amounts and priorities set forth in, the issuer principal payments
for that issuer until there are no remaining Funding available
principal receipts on such payment date,
168
PROVIDED THAT no amount will be applied in replenishing the issuer
liquidity reserve fund held by the Funding in respect of an issuer under
paragraph (A) above following an enforcement of the issuer security relating to
that issuer.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS
DEFINITION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS
Prior to enforcement of the issuer security, "ISSUER AVAILABLE PRINCIPAL
RECEIPTS" for the issuer in respect of any payment date will be calculated by
the issuer cash manager on the distribution date immediately preceding that
payment date and will be an amount equal to the sum of:
o all principal amounts repaid by Funding to the issuer under the
intercompany loan during the period from (but excluding) the
immediately preceding payment date to (and including) that payment
date; and
o all issuer available revenue receipts which are to be applied on that
payment date to credit any issuer principal deficiency ledger for any
class of notes issued by such issuer;
less
o the aggregate of all principal amounts (if any) repaid by Funding to
the issuer under the intercompany loan on the relevant payment date
which are to be applied on that date to pay items (A) through (E), (G)
or (I) of the issuer pre-enforcement revenue priority of payments.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY AND/OR THE OCCURRENCE OF A TRIGGER EVENT
Prior to enforcement of the issuer security, and/or the occurrence of a
trigger event, the issuer, or the issuer cash manager on its behalf, will apply
any issuer available principal receipts on each payment date in the following
manner (the "ISSUER PRE-ENFORCEMENT PRINCIPAL PRIORITY OF PAYMENTS"):
(A) first, amounts due in respect of principal and such part of any
termination payment due to the series 1 class A1 dollar currency swap
provider under the series 1 class A1 dollar currency swap (except for
any termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider default
by that swap provider, save to the extent such termination payment may
be satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the series 1
class A1 dollar currency swap and applied in accordance with this
order of priority of payments) and from amounts received in respect of
principal from the series 1 class A1 dollar currency swap provider to
pay up to the series 1 class A1 controlled amortization amount to the
holders of the series 1 class A1 notes;
(B) second, in no order of priority between them but in proportion to the
respective amounts due, to pay:
o amounts due in respect of principal and such part of any
termination payment due to the series 1 class A2 dollar currency
swap provider under the series 1 class A2 dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class A2 dollar currency swap
and applied in accordance with this order of priority of
payments) and from amounts received in respect of principal from
the series 1 class A2 dollar currency swap provider to pay up to
the series 1 class A2 controlled amortization amount to the
holders of the series 1 class A2 notes; and
169
o amounts due in respect of principal and such part of any
termination payment due to the series 2 class A euro currency
swap provider under the series 2 class A euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency swap
provider default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 2 class A euro currency swap and
applied in accordance with this order of priority of payments)
and from amounts received in respect of principal from the series
2 class A euro currency swap provider to pay up to the series 2
class A controlled amortization amount to the holders of the
series 2 class A notes;
(C) third, up to the series 3 class A controlled amortization amount to
the holders of the series 3 class A notes;
(D) fourth, provided that the issuer reserve requirement, the issuer
arrears test and the subordinated principal test are satisfied on such
payment date (or, if any of the issuer reserve requirement, the issuer
arrears test and the subordinated principal test are not satisfied on
such payment date, but the class A notes have been repaid in full), in
no order of priority between them but in proportion to the respective
amounts due, to pay:
o amounts due in respect of principal and such part of any
termination payment due to the series 1 class B dollar currency
swap provider under the series 1 class B dollar currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a dollar currency
swap provider default by that swap provider, save to the extent
such termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class B dollar currency swap and
applied in accordance with this order of priority of payments)
and from amounts received in respect of principal from the series
1 class B dollar currency swap provider to pay up to the series 1
class B controlled amortization amount to the holders of the
series 1 class B notes;
o amounts due in respect of principal and such part of any
termination payment due to the series 2 class B euro currency
swap provider under the series 2 class B euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency swap
provider default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 2 class B euro currency swap and
applied in accordance with this order of priority of payments)
and from amounts received in respect of principal from the series
2 class B euro currency swap provider to pay up to the series 2
class B controlled amortization amount to the holders of the
series 2 class B notes; and
o up to the series 3 class B controlled amortization amount to the
holders of the series 3 class B notes; and
(E) last, provided that the issuer reserve requirement, the issuer arrears
test and the subordinated principal test are satisfied on such payment
date (or, if any of the issuer reserve requirement, the issuer arrears
test and the subordinated principal test are not satisfied on such
payment date, but the class A notes have been repaid in full), to pay:
o amounts due in respect of principal and such part of any
termination payment due to the series 1 class C dollar currency
swap provider (except for any termination payment or any part
thereof due and payable to that swap provider as a result of a
dollar currency swap provider default by that dollar currency
swap provider, save to the extent such termination payment may be
satisfied by
170
any swap replacement payment made to the issuer following a
downgrade termination event in respect of the series 1 class C
dollar currency swap and applied in accordance with this order of
priority of payments) under the series 1 class C dollar currency
swap and from amounts received in respect of principal from the
series 1 class C dollar currency swap provider to pay up to the
series 1 class C controlled amortization amount to the holders of
the series 1 class C notes;
o amounts due in respect of principal and such part of any
termination payment due to the series 2 class C euro currency
swap provider under the series 2 class C euro currency swap
(except for any termination payment or any part thereof due and
payable to that swap provider as a result of a euro currency swap
provider default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 2 class C euro currency swap and
applied in accordance with this order of priority of payments)
and from amounts received in respect of principal from the series
2 class C euro currency swap provider to pay up to the series 2
class C controlled amortization amount to the holders of the
series 2 class C notes; and
o up to the series 3 class C controlled amortization amount to the
holders of the series 3 class C notes.
The "ISSUER ARREARS TEST" is satisfied on a payment date if the issuer or
the issuer cash manager on its behalf calculates on the distribution date
immediately preceding that 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 which are then in arrears for at
least 3 months is less than 4% of the aggregate current balance of all mortgage
loans, unless the rating agencies have confirmed that the then current ratings
of the notes will not be adversely affected by the issuer arrears test not
having been met; and (ii) the aggregate interest arrears in respect of all the
mortgage loans in the mortgages trust as a percentage of the aggregate gross
interest due on all mortgage loans during the previous 12 months does not exceed
2%, or such other percentage as is then acceptable to the then current rating
agencies at such time.
The "ISSUER RESERVE REQUIREMENT" is satisfied on a payment date if, after
taking account of the application of any Funding available revenue receipts to
the credit of the issuer reserve fund ledger, the amount of funds in the issuer
reserve fund is equal to the issuer reserve required amount.
The "SUBORDINATED PRINCIPAL TEST" is satisfied if both of the following
conditions are met:
o on any payment date occurring on or after the fourth anniversary of
the closing date; and
o on any payment date on which:
o the percentage equal to the aggregate principal amount
outstanding of the class B notes and the class C notes as at that
payment date as a percentage of the aggregate principal amount
outstanding of the notes as at that payment date is greater than
o the product of (i) 2 and (ii) the percentage equal to the
aggregate principal amount outstanding of the class B notes and
the class C notes as at the closing date as a percentage of the
aggregate principal amount outstanding of the notes as at the
closing date.
The purpose of the subordinated principal test is to ensure that there is a
sufficient level of credit enhancement provided to the class A notes by the
class B notes and the class C notes while the notes are outstanding.
171
The "CONTROLLED AMORTIZATION AMOUNT" for each series and/or class of
notes of the issuer for any payment date set forth below is an amount equal to
the amount which the issuer would be required to repay in respect of such class
of notes so that on that payment date the aggregate principal amount outstanding
of such class of notes has been reduced to (but is not less than) the stated
amount or "TARGET BALANCE" set out in the following table:
PAYMENT
DATE (POUND)/($*) TARGET (POUND)/($*) TARGET (POUND)/($*) TARGET (POUND)/($*) TARGET
OCCURRING BALANCE FOR SERIES 1 BALANCE FOR SERIES 1 BALANCE FOR SERIES 1 BALANCE FOR SERIES 1
IN: CLASS A1 NOTES CLASS A2 NOTES CLASS B NOTES CLASS C NOTES
--------------------------- ----------------------------- -------------------------- --------------------------
(POUND) $ (POUND) $ (POUND) $ (POUND) $
---------- ------------- ---------- --------------- ---------- ------------ ---------- ------------
Jan 2003 311,688,312 480,000,000 746,753,247 1,150,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Apr 2003 201,298,701 310,000,000 746,753,247 1,150,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Jul 2003 100,649,351 155,000,000 746,753,247 1,150,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Oct 2003 0 0 737,012,987 1,135,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Jan 2004 0 0 701,298,701 1,080,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Apr 2004 0 0 652,597,403 1,005,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Jul 2004 0 0 610,389,610 940,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Oct 2004 0 0 568,181,818 875,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Jan 2005 0 0 525,974,026 810,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Apr 2005 0 0 487,012,987 750,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Jul 2005 0 0 451,298,701 695,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Oct 2005 0 0 415,584,416 640,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Jan 2006 0 0 366,883,117 565,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Apr 2006 0 0 321,428,571 495,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Jul 2006 0 0 282,467,532 435,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Oct 2006 0 0 240,259,740 370,000,000 38,961,039 60,000,000 57,142,857 88,000,000
Jan 2007 0 0 207,792,208 320,000,000 35,714,286 55,000,000 53,571,429 82,500,000
Apr 2007 0 0 178,571,429 275,000,000 33,116,883 51,000,000 48,701,299 75,000,000
Jul 2007 0 0 149,350,649 230,000,000 30,844,156 47,500,000 45,454,545 70,000,000
Oct 2007 0 0 123,376,623 190,000,000 27,597,403 42,500,000 42,207,792 65,000,000
Jan 2008 0 0 97,402,597 150,000,000 25,974,026 40,000,000 37,337,662 57,500,000
- ----------
* The target balances for the series 1 class A notes which are stated in US
dollars in the above table have been calculated based upon the dollar
currency swap rate under the dollar currency swaps for the series 1 class A
notes of (pound)1 = $1.54
172
PAYMENT
DATE (POUND)/(E*) TARGET BALANCE (POUND)/(E*) TARGET BALANCE (POUND)/(E*) TARGET BALANCE
OCCURRING FOR SERIES 2 FOR SERIES 2 FOR SERIES 2
IN: CLASS A NOTES CLASS B NOTES CLASS C NOTES
----------------------------- -------------------------- --------------------------
(POUND) E (POUND) E (POUND) E
---------- --------------- ---------- ------------ ---------- ------------
Jan 2003 700,636,943 1,100,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Apr 2003 700,636,943 1,100,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Jul 2003 700,636,943 1,100,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Oct 2003 691,082,803 1,085,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Jan 2004 656,050,955 1,030,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Apr 2004 614,649,682 965,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Jul 2004 573,248,408 900,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Oct 2004 531,847,134 835,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Jan 2005 493,630,573 775,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Apr 2005 458,598,726 720,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Jul 2005 423,566,879 665,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Oct 2005 388,535,032 610,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Jan 2006 343,949,045 540,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Apr 2006 302,547,771 475,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Jul 2006 261,146,497 410,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Oct 2006 226,114,650 355,000,000 26,114,650 41,000,000 33,757,962 53,000,000
Jan 2007 194,267,516 305,000,000 23,885,350 37,500,000 31,210,191 49,000,000
Apr 2007 168,789,809 265,000,000 22,292,994 35,000,000 28,662,420 45,000,000
Jul 2007 140,127,389 220,000,000 20,700,637 32,500,000 27,070,064 42,500,000
Oct 2007 114,649,682 180,000,000 18,949,045 29,750,000 25,477,707 40,000,000
Jan 2008 92,356,688 145,000,000 17,197,452 27,000,000 22,292,994 35,000,000
- ----------
* The target balances for the series 2 notes which are stated in euro in the
above table have been calculated based upon the euro currency swap rate
under the euro currency swaps for the series 2 notes of (pound)1 = (euro)1.57.
(POUND) TARGET BALANCE (POUND) TARGET BALANCE (POUND) TARGET BALANCE
FOR SERIES 3 FOR SERIES 3 FOR SERIES 3
PAYMENT DATE OCCURRING IN: CLASS A NOTES CLASS B NOTES CLASS C NOTES
---------------------- ---------------------- ---------------------
(POUND) (POUND) (POUND)
------------- ------------ ------------
Jan 2003 665,000,000 25,000,000 33,000,000
Apr 2003 665,000,000 25,000,000 33,000,000
Jul 2003 665,000,000 25,000,000 33,000,000
Oct 2003 665,000,000 25,000,000 33,000,000
Jan 2004 665,000,000 25,000,000 33,000,000
Apr 2004 665,000,000 25,000,000 33,000,000
Jul 2004 665,000,000 25,000,000 33,000,000
Oct 2004 665,000,000 25,000,000 33,000,000
Jan 2005 665,000,000 25,000,000 33,000,000
Apr 2005 665,000,000 25,000,000 33,000,000
Jul 2005 665,000,000 25,000,000 33,000,000
Oct 2005 665,000,000 25,000,000 33,000,000
Jan 2006 665,000,000 25,000,000 33,000,000
Apr 2006 665,000,000 25,000,000 33,000,000
Jul 2006 665,000,000 25,000,000 33,000,000
Oct 2006 665,000,000 25,000,000 33,000,000
Jan 2007 665,000,000 25,000,000 33,000,000
Apr 2007 665,000,000 25,000,000 33,000,000
Jul 2007 665,000,000 25,000,000 33,000,000
Oct 2007 665,000,000 25,000,000 33,000,000
Jan 2008 665,000,000 25,000,000 33,000,000
Notwithstanding the foregoing, on the payment date immediately following
the step-up date in respect of the issuer and on each payment date thereafter:
(1) the target balance for the series 1 class A1 notes will be zero; and
(2) the target balances for each other class of notes will be an amount
equal to the greater of:
(a) zero, and
173
(b) the aggregate principal amount outstanding on that class of notes
as at the immediately preceding payment date (after taking into
account principal payments on such payment date) less an amount
equal to the product of:
(i) the product of (A) the sum of the mortgages trustee
principal receipts for each distribution date since the
immediately preceding payment date, and (B) the Funding
share percentage or, as applicable, the weighted average
Funding share percentage applicable as at the later to occur
of the immediately preceding assignment date and the
immediately preceding distribution date; and
(ii) the quotient of (A) the outstanding principal balance of the
issuer's intercompany loan as at the immediately preceding
payment date (after taking into account principal payments
on such payment date) less the aggregate of amounts recorded
on the principal deficiency ledger of the issuer, divided by
(B) the aggregate outstanding principal balance on all
intercompany loans as at the immediately preceding payment
date (after taking into account principal payments on such
payment date) less the sum of (1) the aggregate outstanding
principal balance of all special repayment notes and (2) the
aggregate of amounts recorded on the principal deficiency
ledgers of all issuers; and
(iii) the quotient of (A) the aggregate principal amount
outstanding on that class of notes as at the immediately
preceding payment date (after taking into account principal
payments on such payment date), divided by (B) the aggregate
principal amount outstanding on all classes of notes of the
issuer as at the immediately preceding payment date (after
taking into account principal payments on such payment
date).
To the extent not repaid earlier, the full principal amount outstanding
on a class of notes will become due and payable on the legal final maturity date
of that class of notes.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS FOLLOWING THE
OCCURRENCE OF A NON-ASSET TRIGGER EVENT
Following the occurrence of a non-asset trigger event but prior to the
enforcement of the Funding security under the Funding deed of charge and/or the
issuer security under the issuer deed of charge, the issuer cash manager will
apply issuer available principal receipts in the following order of priority:
(A) first, to pay amounts (including such part of any termination payment)
due to the series 1 class A1 dollar currency swap provider under the
series 1 class A1 dollar currency swap (except for any termination
payment or any part thereof due and payable to that swap provider as a
result of a dollar currency swap provider default by that swap
provider, save to the extent such termination payment may be satisfied
by any swap replacement payment made to the issuer following a
downgrade termination event in respect of the series 1 class A1 dollar
currency swap and applied in accordance with this order of priority of
payments) and from amounts received from the series 1 class A1 dollar
currency swap provider to repay the series 1 class A1 notes until the
series 1 class A1 notes have been repaid in full;
(B) second, in no order of priority between them, but in proportion to the
amounts due:
o to pay amounts (including such part of any termination payment)
due to the series 1 class A2 dollar currency swap provider under
the series 1 class A2 dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class A2 dollar currency swap
and applied in accordance with this order of priority of
174
payments) and from amounts received from the series 1 class A2
dollar currency swap provider to repay the series 1 class A2
notes until the series 1 class A2 notes have been repaid in full;
and
o to pay amounts (including such part of any termination payment)
due to the series 2 class A euro currency swap provider under the
series 2 class A euro currency swap (except for any termination
payment or any part thereof due and payable to that swap provider
as a result of a euro currency swap provider default by that swap
provider, save to the extent such termination payment may be
satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the series
2 class A euro currency swap and applied in accordance with this
order of priority of payments) and from amounts received from the
series 2 class A euro currency swap provider to repay the series
2 class A notes until the series 2 class A notes have been repaid
in full;
(C) third, to repay the series 3 class A notes until the series 3 class A
notes have been repaid in full;
(D) fourth, in no order of priority between them, but in proportion to the
amounts due:
o to pay amounts (including such part of any termination payment)
due to the series 1 class B dollar currency swap provider under
the series 1 class B dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class B dollar currency swap and
applied in accordance with this order of priority of payments)
and from amounts received from the series 1 class B dollar
currency swap provider to repay the series 1 class B notes until
the series 1 class B notes have been repaid in full;
o to pay amounts (including such part of any termination payment)
due to the series 2 class B euro currency swap provider under the
series 2 class B euro currency swap (except for any termination
payment or any part thereof due and payable to that swap provider
as a result of a euro currency swap provider default by that swap
provider, save to the extent such termination payment may be
satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the series
2 class B euro currency swap and applied in accordance with this
order of priority of payments) and from amounts received from the
series 2 class B euro currency swap provider to repay the series
2 class B notes until the series 2 class B notes have been repaid
in full; and
o to repay the series 3 class B notes until the series 3 class B
notes have been repaid in full; and
(E) last, in no order of priority between them, but in proportion to the
amounts due:
o to pay amounts (including such part of any termination payment)
due to the series 1 class C dollar currency swap provider under
the series 1 class C dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class C dollar currency swap and
applied in accordance with this order of priority of payments)
and from amounts received from the series 1 class C dollar
currency swap provider to repay the series 1 class C notes until
the series 1 class C notes have been repaid in full;
175
o to pay amounts (including such part of any termination payment)
due to the series 2 class C euro currency swap provider under the
series 2 class C euro currency swap (except for any termination
payment or any part thereof due and payable to that swap provider
as a result of a euro currency swap provider default by that swap
provider, save to the extent such termination payment may be
satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the series
2 class C euro currency swap and applied in accordance with this
order of priority of payments) and from amounts received from the
series 2 class C euro currency swap provider to repay the series
2 class C notes until the series 2 class C notes have been repaid
in full; and
o to repay the series 3 class C notes until the series 3 class C
notes have been repaid in full.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS FOLLOWING THE
OCCURRENCE OF AN ASSET TRIGGER EVENT
Following the occurrence of an asset trigger event but prior to enforcement
of the Funding security under the Funding deed of charge and/or the issuer
security under the issuer deed of charge, the issuer cash manager will apply
issuer available principal receipts in the following order of priority:
(A) first, in no order of priority between them, but in proportion to the
amounts due:
o to pay amounts (including such part of any termination payment)
due to the series 1 class A1 dollar currency swap provider under
the series 1 class A1 dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class A1 dollar currency swap
and applied in accordance with this order of priority of
payments) and from amounts received from the series 1 class A1
dollar currency swap provider to repay the series 1 class A1
notes until the series 1 class A1 notes have been repaid in full;
o to pay amounts (including such part of any termination payment)
due to the series 1 class A2 dollar currency swap provider under
the series 1 class A2 dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class A2 dollar currency swap
and applied in accordance with this order of priority of
payments) and from amounts received from the series 1 class A2
dollar currency swap provider to repay the series 1 class A2
notes until the series 1 class A2 notes have been repaid in full;
o to pay amounts (including such part of any termination payment)
due to the series 2 class A euro currency swap provider under the
series 2 class A euro currency swap (except for any termination
payment or any part thereof due and payable to that swap provider
as a result of a euro currency swap provider default by that swap
provider, save to the extent such termination payment may be
satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the series
2 class A euro currency swap and applied in accordance with this
order of priority of payments) and from amounts received from the
series 2 class A euro currency swap provider to repay the series
2 class A notes until the series 2 class A notes have been repaid
in full; and
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o to repay the series 3 class A notes until the series 3 class A
notes have been repaid in full;
(B) second, in no order of priority between them, but in proportion to the
amounts due:
o to pay amounts (including such part of any termination payment)
due to the series 1 class B dollar currency swap provider under
the series 1 class B dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class B dollar currency swap and
applied in accordance with this order of priority of payments)
and from amounts received from the series 1 class B dollar
currency swap provider to repay the series 1 class B notes until
the series 1 class B notes have been repaid in full;
o to pay amounts (including such part of any termination payment)
due to the series 2 class B euro currency swap provider under the
series 2 class B euro currency swap (except for any termination
payment or any part thereof due and payable to that swap provider
as a result of a euro currency swap provider default by that swap
provider, save to the extent such termination payment may be
satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the series
2 class B euro currency swap and applied in accordance with this
order of priority of payments) and from amounts received from the
series 2 class B euro currency swap provider to repay the series
2 class B notes until the series 2 class B notes have been repaid
in full; and
o to repay the series 3 class B notes until the series 3 class B
notes have been repaid in full; and
(C) last, in no order of priority between them, but in proportion to the
amounts due:
o to pay amounts (including such part of any termination payment)
due to the series 1 class C dollar currency swap provider under
the series 1 class C dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class C dollar currency swap and
applied in accordance with this order of priority of payments)
and from amounts received from the series 1 class C dollar
currency swap provider to repay the series 1 class C notes until
the series 1 class C notes have been repaid in full;
o to pay amounts (including such part of any termination payment)
due to the series 2 class C euro currency swap provider under the
series 2 class C euro currency swap (except for any termination
payment or any part thereof due and payable to that swap provider
as a result of a euro currency swap provider default by that swap
provider, save to the extent such termination payment may be
satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the series
2 class C euro currency swap and applied in accordance with this
order of priority of payments) and from amounts received from the
series 2 class C euro currency swap provider to repay the series
2 class C notes until the series 2 class C notes have been repaid
in full; and
o to repay the series 3 class C notes until the series 3 class C
notes have been repaid in full.
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DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND FUNDING AVAILABLE
REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE FUNDING SECURITY
The Funding deed of charge sets out the order of priority of distribution
by the security trustee, following service of an intercompany loan enforcement
notice, of amounts received or recovered by the security trustee or a receiver
appointed on its behalf.
The security trustee (or the cash manager on its behalf) will apply amounts
received or recovered following enforcement of the Funding security on each
payment date in accordance with the following order of priority (known as the
"FUNDING POST-ENFORCEMENT PRIORITY OF PAYMENTS"):
(A) first, to pay amounts due to the security trustee and any receiver
appointed by the security trustee, together with interest and (to the
extent not already inclusive) VAT on those amounts, and to provide for
any amounts due or to become due to the security trustee and the
receiver in the following interest period under the Funding deed of
charge or any other transaction document;
(B) second, towards payment of amounts due and payable to the cash manager
and any costs, charges, liabilities and expenses then due or to become
due and payable to the cash manager under the cash management
agreement, together with (to the extent not already inclusive) VAT on
those amounts;
(C) third, in no order of priority between them but in proportion to the
respective amounts due, towards payment of amounts (if any) due to the
account bank under the terms of the bank account agreement and to the
corporate services provider under the corporate services agreement;
(D) fourth, in no order of priority between them but in proportion to the
respective amounts due, to each issuer its issuer allocable revenue
receipts and issuer allocable principal receipts towards payment of
amounts of interest, principal and fees due to such issuer under such
issuer's intercompany loan agreement, which in the case of the issuer
shall be up to the aggregate of the amounts, and shall be applied in
the amounts and priorities, as set forth in "- DISTRIBUTION OF ISSUER
AVAILABLE PRINCIPAL RECEIPTS AND ISSUER AVAILABLE REVENUE RECEIPTS
FOLLOWING ENFORCEMENT OF THE ISSUER SECURITY" below;
(E) fifth, towards payment of amounts due to each start-up loan provider
under the relevant start-up loan agreement;
(F) sixth, towards payment of any deferred contribution due to the
mortgages trustee under the mortgages trust deed; and
(G) last, to pay any amount remaining following the application of
principal and revenue set forth in paragraphs (A) through (F) above,
to Funding.
DISTRIBUTION OF ISSUER AVAILABLE PRINCIPAL RECEIPTS AND ISSUER AVAILABLE REVENUE
RECEIPTS FOLLOWING ENFORCEMENT OF THE ISSUER SECURITY
Following enforcement of the issuer security, "ISSUER AVAILABLE PRINCIPAL
RECEIPTS" for the issuer in respect of any payment date means the sum calculated
by or on behalf of the note trustee on the distribution date immediately
preceding such payment date as the amount to be repaid by Funding to the issuer
under the intercompany loan during the relevant interest period and/or the sum
otherwise recovered by the note trustee (or the receiver appointed on its
behalf) representing the outstanding principal balance of the notes.
The issuer deed of charge sets out the order of priority of distribution by
or on behalf of the note trustee, following enforcement of the issuer security,
of amounts received or recovered by the note trustee (or a receiver appointed on
its behalf) pursuant to the issuer deed of charge. If the Funding security is
enforced under the Funding deed of charge, then there will be an event of
default in respect of the issuer security under each issuer deed of charge.
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On each payment date the note trustee (or the issuer cash manager on its
behalf) will apply amounts received or recovered following enforcement of the
issuer security as follows:
(A) first, to pay amounts due to the note trustee (and any receiver
appointed by the note trustee) together with the interest and VAT on
those amounts and to provide for any amounts then due or to become due
and payable to the note trustee and the receiver under the provisions
of the trust deed, the issuer deed of charge and any other transaction
document;
(B) second, to pay, in no order of priority between 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 between 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 and to the corporate services
provider under the corporate services agreement and to the issuer
account bank under the issuer bank account agreement;
(D) fourth, in no order of priority between them but in proportion to the
respective amounts due, to pay:
o amounts (including such part of any termination payment) due to
the basis rate swap provider (except for any termination payment
or any part thereof due and payable to the basis rate swap
provider as a result of a basis rate swap provider default, save
to the extent such termination payment may be satisfied by any
swap replacement payment made to the issuer following a downgrade
termination event in respect of the basis rate swap and applied
in accordance with this order of priority of payments);
o amounts (including such part of any termination payment) due to
the series 1 class A1 dollar currency swap provider under the
series 1 class A1 dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class A1 dollar currency swap
and applied in accordance with this order of priority of
payments) and from amounts received from the series 1 class A1
dollar currency swap provider to pay interest due or overdue and
to repay principal of the series 1 class A1 notes until the
series 1 class A1 notes have been repaid in full;
o amounts (including such part of any termination payment) due to
the series 1 class A2 dollar currency swap provider under the
series 1 class A2 dollar currency swap (except for any
termination payment or any part thereof due and payable to that
swap provider as a result of a dollar currency swap provider
default by that swap provider, save to the extent such
termination payment may be satisfied by any swap replacement
payment made to the issuer following a downgrade termination
event in respect of the series 1 class A2 dollar currency swap
and applied in accordance with this order of priority of
payments) and from amounts received from the series 1 class A2
dollar currency swap provider to pay interest due or overdue and
to repay principal of the series 1 class A2 notes until the
series 1 class A2 notes have been repaid in full;
o amounts (including such part of any termination payment) due to
the series 2 class A euro currency swap provider under the series
2 class A euro currency swap (except for any termination payment
or any part thereof due and payable to that swap provider as a
result of a euro currency swap provider default by that
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swap provider, save to the extent such termination payment may be
satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the series
2 class A euro currency swap and applied in accordance with this
order of priority of payments) and from amounts received from the
series 2 class A euro currency swap provider to pay interest due
or overdue and to repay principal of the series 2 class A notes
until the series 2 class A notes have been repaid in full; and
o interest due or overdue and to repay principal of the series 3
class A notes until the series 3 class A notes have been repaid
in full;
(E) fifth, in no order of priority between them but in proportion to the
respective amounts due, to pay:
o amounts (including such part of any termination payment) due to
the series 1 class B dollar currency swap provider under the
series 1 class B dollar currency swap (except for any termination
payment or any part thereof due and payable to that swap provider
as a result of a dollar currency swap provider default by that
swap provider, save to the extent such termination payment may be
satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the series
1 class B dollar currency swap and applied in accordance with
this order of priority of payments) and from amounts received
from the series 1 class B dollar currency swap provider to pay
interest due or overdue and to repay principal of the series 1
class B notes until the series 1 class B notes have been repaid
in full;
o amounts (including such part of any termination payment) due to
the series 2 class B euro currency swap provider under the series
2 class B euro currency swap (except for any termination payment
or any part thereof due and payable to that swap provider as a
result of a euro currency swap provider default by that swap
provider, save to the extent such termination payment may be
satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the series
2 class B euro currency swap and applied in accordance with this
order of priority of payments) and from amounts received from the
series 2 class B euro currency swap provider to pay interest due
or overdue and to repay principal of the series 2 class B notes
until the series 2 class B notes have been repaid in full; and
o interest due or overdue and to repay principal of the series 3
class B notes until the series 3 class B notes have been repaid
in full;
(F) sixth, in no order of priority between them but in proportion to the
respective amounts due, to pay:
o amounts (including such part of any termination payment) due to
the series 1 class C dollar currency swap provider under the
series 1 class C dollar currency swap (except for any termination
payment or any part thereof due and payable to that swap provider
as a result of a dollar currency swap provider default by that
swap provider, save to the extent such termination payment may be
satisfied by any swap replacement payment made to the issuer
following a downgrade termination event in respect of the series
1 class C dollar currency swap and applied in accordance with
this order of priority of payments) and from amounts received
from the series 1 class C dollar currency swap provider to pay
interest due or overdue and to repay principal of the series 1
class C notes until the series 1 class C notes have been repaid
in full;
o amounts (including such part of any termination payment) due to
the series 2 class C euro currency swap provider under the series
2 class C euro currency swap (except for any termination payment
or any part thereof due and payable to that swap provider as a
result of a euro currency swap provider default by that swap
provider, save to the extent such termination payment may be
satisfied by
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any swap replacement payment made to the issuer following a
downgrade termination event in respect of the series 2 class C
euro currency swap and applied in accordance with this order of
priority of payments) and from amounts received from the series 2
class C euro currency swap provider to pay interest due or
overdue and to repay principal of the series 2 class C notes
until the series 2 class C notes have been repaid in full; and
o interest due or overdue and to repay principal of the series 3
class C notes until the series 3 class C notes have been repaid
in full;
(G) seventh, in no order of priority between them but in proportion to the
respective amounts due, to pay any termination payment to:
o the basis rate swap provider following a basis rate swap provider
default;
o any dollar currency swap provider following a dollar currency
swap provider default; and
o any euro currency swap provider following a euro currency swap
provider default; and
(H) last, to pay any amount remaining following the application of
principal and revenue set forth in paragraphs (A) through (G) above,
to the issuer.
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CREDIT STRUCTURE
The notes will be an obligation of the issuer only and will not be
obligations of, or the responsibility of, or guaranteed by, any other party.
However, there are nine main features of the transaction which enhance the
likelihood of timely receipt of payments to noteholders, as follows:
o mortgages trustee available revenue receipts remaining after payment
to the seller of the seller share of the trust property are expected
to exceed interest and fees payable to the issuers under the
intercompany loans;
o a revenue shortfall in issuer available revenue receipts may be met
from issuer available principal receipts;
o an issuer reserve fund will be established by Funding for the issuer
to meet revenue shortfalls in Funding available revenue receipts to
pay fees and interest due on the intercompany loan;
o each of the series 1, series 2 and series 3 payments on the class C
notes will be subordinated to payments on the class A notes and the
class B notes;
o each of the series 1, series 2 and series 3 payments on the class B
notes will be subordinated to payments on the class A notes;
o the mortgages trustee GIC account, the Funding GIC account and the
Funding (Granite 02-2) GIC account each earn interest at a specified
rate (expected to be 0.375% below LIBOR for three-month sterling
deposits);
o a reserve fund will be available to Funding to meet revenue shortfalls
in fees and interest due on the intercompany loan and any other
intercompany loans;
o Funding will be obliged to establish an issuer liquidity reserve fund
for the issuer if the seller ceases to have a long-term unsecured,
unsubordinated and unguaranteed credit rating by Moody's of at least
A3 or at least A- by Fitch (unless the relevant rating agency confirms
that the then current ratings of the notes will not be adversely
affected by the ratings downgrade of the seller); and
o a start-up loan will be provided to Funding to meet the costs of
setting up the structure and to partially fund the issuer reserve
fund.
Each of these factors is considered more fully in the remainder of this
section.
CREDIT SUPPORT FOR THE NOTES PROVIDED BY MORTGAGES TRUSTEE
AVAILABLE REVENUE RECEIPTS
The interest rates charged on the mortgage loans vary according to product
type. It is anticipated, however, that during the life of the notes, the revenue
receipts received from borrowers on the mortgage loans remaining after payment
to the seller of the seller share of such revenue receipts will, assuming that
all of the mortgage loans are fully performing, be greater than the sum of the
interest which Funding is required to pay on the intercompany loans in order to
fund (by payment to a swap provider or otherwise) the interest payments due on
the notes and the notes of all other issuers and the other costs and expenses of
the structure and the structures relating to all other issuers. Based on the
same assumption, issuer allocable revenue receipts are expected to be sufficient
to pay the amounts payable under items (A) through (E), (G) and (I) of the
issuer pre-enforcement revenue priority of payments.
The actual amount of any excess will vary during the life of the notes. The
key factors determining such variation are as follows:
o the weighted average interest rate on the mortgage portfolio; and
o the level of arrears experienced.
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On any distribution date, any excess will be available to meet the payments
referred to in the mortgages trust allocation of revenue receipts and the
payment of amounts of deferred contribution to the mortgages trustee which, in
turn, will fund the payment of deferred purchase price to the seller. Any
deferred contribution so paid to the mortgages trustee cannot subsequently be
reclaimed by Funding.
INTEREST RATE ON THE MORTGAGE PORTFOLIO
The weighted average interest rate on the mortgage portfolio will depend
on:
o the standard variable rate or other interest rate payable on, and the
aggregate current balance of, the variable rate mortgage loans
included in the trust property from time to time; and
o the fixed rates of interest payable on, and the aggregate current
balance of, the fixed rate mortgage loans included in the trust
property from time to time.
The issuer will enter into a basis rate swap agreement to hedge against the
variances on the rates payable on the mortgage loans. See "THE SWAP AGREEMENTS".
Scheduled and unscheduled repayments will also affect the weighted average
interest rate on the mortgage portfolio. For historical data on the level of
scheduled and unscheduled repayments in the UK housing market, see
"CHARACTERISTICS OF UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET - CPR RATES".
LEVEL OF ARREARS EXPERIENCED
If the level of arrears of interest payments made by the borrowers results
in Funding experiencing an income deficit on any payment date, then the issuer
reserve fund and the issuer liquidity reserve fund, if any, established by
Funding in respect of the issuer may be utilized by Funding in making payments
of interest (or, in limited circumstances, payments of principal following the
enforcement of the issuer security) to the issuer under the intercompany loan on
that payment date. However, no issuer reserve fund or issuer liquidity reserve
fund established by Funding in respect of any other issuer may be utilized by
Funding in making any payments to the issuer under the intercompany loan.
In addition (but only if there are no amounts standing to the credit of the
relevant issuer reserve ledger and issuer liquidity reserve ledger, if any, of
the issuer) Funding will be able to apply the issuer's share of any amounts
standing to the credit of the Funding reserve ledger, as described in " -
FUNDING RESERVE FUND", against that income deficit.
Funding available revenue receipts which are paid to the issuer on a
payment date may be applied on that payment date by the issuer to extinguish
amounts standing to the credit of the issuer principal deficiency ledger in
accordance with the issuer pre-enforcement revenue priority of payments.
Funding available revenue receipts which are not paid to the issuer also
may be utilized to replenish the issuer reserve fund in accordance with the
issuer pre-enforcement revenue priority of payments to the extent of the
issuer's allocable share.
FUNDING RESERVE FUND
The Funding reserve fund has been established:
o to be allocated among issuers to help meet any deficit in Funding
available revenue receipts and thereby to help meet any deficit
recorded on the issuer principal deficiency ledgers; and
o to fund initial reserves and other expenses in connection with the
issuance of notes by the issuer and any other issuers.
The Funding reserve fund is funded from Funding available revenue receipts
which are distributed to Funding from the mortgages trust and deposited in the
Funding GIC account. The Funding reserve ledger is maintained by the cash
manager to record the balance from time to time of the Funding reserve fund.
183
On each payment date funds standing to the credit of the Funding reserve
fund will be added to certain other income of Funding in calculating Funding
available revenue receipts which are available to make payments of interest and
fees on the intercompany loan and any other intercompany loan.
Prior to enforcement of the Funding security, amounts standing to the
credit of the Funding reserve fund may be utilized through their inclusion in
the calculation of Funding available revenue receipts to meet, and thereby to
satisfy, any deficit on each issuer principal deficiency ledger.
The Funding reserve fund will be funded and replenished from Funding
available revenue receipts up to and including an amount equal to the "FUNDING
RESERVE REQUIRED AMOUNT", being the amount from time to time equal to the sum of
(1) (pound)200,000 plus (2) the product of 0.50% and the greater of (a) the
aggregate principal amount outstanding of the notes outstanding of all issuers
on the relevant determination date and (b) the aggregate outstanding principal
balance of the intercompany loans of all issuers on the relevant determination
date, or such other amount as may be agreed from time to time with the rating
agencies. As at the closing date, the Funding reserve required amount will be
approximately (pound)37,150,000. All amounts currently in the Funding reserve
fund as of the closing date will be used to partially fill the issuer reserve
fund and/or to pay a portion of the costs and expenses in connection with the
issuance of the notes. The balance of the Funding reserve fund as of July 31,
2002 was (pound)11,190,645. Funding available revenue receipts will only be
applied to replenish the Funding reserve fund after paying interest due on each
intercompany loan (which, in turn, is funding interest due on the notes and any
new notes (if any) and reducing any deficiency on the issuer principal
deficiency ledgers) as described in "CASHFLOWS - DISTRIBUTION OF FUNDING
AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY".
The seller, Funding, the rating agencies and the security trustee may agree
to increase the Funding reserve required amount from time to time.
ISSUER RESERVE FUND
On the closing date, an issuer reserve fund will be established by Funding.
The issuer reserve fund will be initially funded to an amount of
(pound)28,900,000 from a portion of the start-up loan and amounts in the Funding
reserve fund as of the closing date and will be deposited into the Funding
(Granite 02-2) GIC account, which will be a separate GIC account in the name of
Funding. The issuer reserve ledger will be maintained by the cash manager to
record the balance from time to time of the issuer reserve fund. Funding will
grant to the security trustee a security interest in respect of the Funding
(Granite 02-2) GIC account as security for its obligations to the issuer under
the intercompany loan agreement.
On each payment date prior to the enforcement of the issuer security funds
standing to the credit of the issuer reserve fund will be added to certain other
income of Funding in calculating the Funding available revenue receipts which
are to be allocated to the issuer to make payments of interest and fees due
under the intercompany loan. Once received by the issuer those revenue receipts
may be utilized by the issuer in meeting, and thereby satisfying, any deficit on
the issuer principal deficiency ledger. Funding is not entitled to utilize the
issuer reserve fund to meet any deficit in Funding available revenue receipts
which are allocated to any other issuer to make payments due under any other
intercompany loan agreement. However, Funding will be entitled to establish a
separate reserve fund which will be deposited into a separate GIC account in the
name of Funding to help meet that deficit allocated to any new issuer and has
established issuer reserve funds with respect to the previous issuers.
The cash manager will apply funds available in the issuer reserve fund and
the issuer liquidity reserve fund, if any, prior to applying funds available in
the Funding reserve fund in calculating the Funding available revenue receipts
to be allocated to the issuer. In
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addition, prior to utilizing any amounts credited to the issuer reserve fund or
the issuer liquidity reserve fund, if any, the cash manager will apply other
Funding available revenue receipts in making payments of interest and fees under
any intercompany loan.
The issuer reserve fund will be funded and, if necessary, replenished from
excess Funding available revenue receipts which are allocated to the issuer up
to and including an amount equal to the "ISSUER RESERVE REQUIRED AMOUNT", being
the sum of (pound)39,000,000. Funding available revenue receipts will only be
applied to replenish the issuer reserve fund after paying interest due under the
intercompany loan to fund interest due on the notes on the relevant payment
date, after paying such fees under the intercompany loan as will be sufficient
to reduce any deficiency on the issuer principal deficiency sub ledgers and
after application of Funding available reserve receipts to pay certain expenses
of Funding and to fund the issuer liquidity reserve fund up to the issuer
liquidity reserve required amount, all as described in the "CASHFLOWS -
DISTRIBUTION OF FUNDING AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE
FUNDING SECURITY".
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 intercompany loan of the issuer (but not in respect of
any other intercompany loan of any other issuer).
The seller, Funding, the rating agencies and the security trustee may agree
to increase the issuer reserve required amount from time to time.
ISSUER LIQUIDITY RESERVE FUND
Funding will be required to establish a liquidity reserve fund for the
issuer if the long-term, unsecured, unsubordinated and unguaranteed debt
obligations of the seller cease to be rated at least A3 by Moody's or A- by
Fitch (unless Moody's or Fitch, as applicable, confirms that the then current
ratings of the notes will not be adversely affected by the ratings downgrade).
Prior to enforcement of the issuer security, the issuer liquidity reserve
fund may be used:
o to help meet any deficit in Funding available revenue receipts which
are allocated to the issuer to pay amounts due on the intercompany
loan, but only to the extent that such amounts are necessary to fund
the payment by the issuer of interest and fees due on the relevant
payment date in respect of the class A notes and/or the class B notes
and to help meet any deficit recorded on the issuer principal
deficiency ledger in respect of the class A notes; and
o (provided that there are no class A notes outstanding) to help meet
any deficit in Funding available revenue receipts which are allocated
to the issuer to pay all interest and fees due on the intercompany
loan.
The issuer liquidity reserve fund, if any, will be funded initially from
Funding available principal receipts which are allocated to the issuer in
accordance with the Funding pre-enforcement principal priority of payments. The
issuer liquidity reserve fund will be funded up to the "ISSUER LIQUIDITY RESERVE
REQUIRED AMOUNT", being an amount as of any payment date equal to the excess, if
any, of 3% of the aggregate outstanding balance of the notes on that payment
date over amounts standing to the credit of the issuer reserve fund on that
payment date.
The issuer liquidity reserve fund will be deposited in Funding's name in
the Funding (Granite 02-2) GIC account into which the issuer reserve fund also
will be deposited. All interest or income accrued on the amount of the issuer
liquidity reserve fund while on deposit in the Funding (Granite 02-2) GIC
account will belong to Funding. The cash manager will maintain a separate issuer
liquidity reserve ledger to record the balance from time to time of the issuer
liquidity reserve fund.
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Funding will not be entitled to utilize the issuer liquidity reserve fund
to meet any deficit in Funding available revenue receipts which are allocated to
any other issuer to make payments due under any other intercompany loan, but
Funding will be entitled to establish a separate liquidity reserve fund for each
new issuer which will be deposited into a separate GIC account in the name of
Funding to help meet that deficit allocated to any new issuer.
On each payment date prior to enforcement of the issuer security, funds
standing to the credit of the issuer liquidity reserve fund will be added to
certain other income of Funding in calculating Funding available revenue
receipts which are allocated to the issuer to make payments due under the
intercompany loan.
Once it has been initially funded, the issuer liquidity reserve fund will
be replenished from any Funding available revenue receipts or Funding available
principal receipts, as applicable, which are allocated to the issuer up to the
amount used to pay interest and fees under the intercompany loans. Funding
available revenue receipts will only be applied to replenish the issuer
liquidity reserve fund after paying amounts due on the intercompany loan to the
extent that such amounts will fund the payment of interest due on the class A
notes and the class B notes and the reduction of any deficiency on the principal
deficiency sub ledger for the class A notes (but not to fund any payment which
would reduce any deficiency on the principal deficiency sub ledgers for the
class B notes or the class C notes as described in "CASHFLOWS - DISTRIBUTION OF
FUNDING AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING
SECURITY").
Following enforcement of the issuer security, amounts standing to the
credit of the issuer liquidity reserve ledger may be applied in making payments
of principal due under the intercompany loan of the issuer (but not in respect
of any other intercompany loan of any previous issuer or any new issuer).
ISSUER PRINCIPAL DEFICIENCY LEDGER
AS AT THE CLOSING DATE
An issuer principal deficiency ledger will be established for the issuer on
the closing date to record:
o any principal losses on the mortgage loans allocated by Funding to the
intercompany loan of the issuer;
o the application of issuer allocable principal receipts to meet any
deficiency in issuer available revenue receipts as described in " -
USE OF PRINCIPAL RECEIPTS TO PAY ISSUER INCOME DEFICIENCY"; and
o the application of Funding available principal receipts which are
allocated to the issuer to fund the issuer liquidity reserve fund as
described in "CASHFLOWS - DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL
RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY".
On the closing date, the issuer principal deficiency ledger will be divided
into three sub ledgers which will correspond to each of the class A notes, class
B notes and class C notes, respectively. The sub ledger for each class will show
separate entries for each class of notes.
The allocation of losses on the mortgage loans to the intercompany loan of
the issuer or the application of issuer available principal receipts to pay
interest on the notes or the application by Funding of issuer allocable
principal receipts to fund the issuer liquidity reserve fund will be recorded as
follows:
o first, on the class C principal deficiency sub ledger until the
balance of that sub ledger is equal to the aggregate outstanding
balance of the series 1 class C notes, the series 2 class C notes and
the series 3 class C notes;
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o second, on the class B principal deficiency sub ledger, until the
balance of that sub ledger is equal to the aggregate outstanding
balance of the series 1 class B notes, the series 2 class B notes and
the series 3 class B notes; and
o last, on the class A principal deficiency sub ledger, at which point
there will be an asset trigger event.
Losses on the mortgage loans that have been allocated to Funding on any
date shall be allocated to the intercompany loan of each issuer as described
under "THE INTERCOMPANY LOAN AGREEMENT - ALLOCATION OF LOSSES".
Each time a record is made on the principal deficiency ledger of the
issuer, the issuer cash manager will describe whether the source of such
deficiency is:
o principal losses on the mortgage loans allocated by Funding to the
intercompany loan of such issuer;
o the application of issuer available principal receipts to meet any
deficiency in issuer available revenue receipts; or
o the application by Funding of Funding allocable principal receipts to
fund the issuer liquidity reserve fund.
As described in "CASHFLOWS - DISTRIBUTION OF ISSUER AVAILABLE REVENUE
RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY", issuer available revenue
receipts may, on each payment date, be applied as follows:
o first, provided that interest due on the series 1 class A1 notes, the
series 1 class A2 notes, the series 2 class A notes and the series 3
class A notes has been paid, in an amount necessary to reduce to zero
the balances in respect of the series 1 class A1 notes, the series 1
class A2 notes, the series 2 class A notes and the series 3 class A
notes (in no order of priority but in proportion to their outstanding
balances) on the class A principal deficiency sub ledger;
o second, provided that interest due on the series 1 class B notes, the
series 2 class B notes and the series 3 class B notes has been paid,
in an amount necessary to reduce to zero the balances in respect of
the series 1 class B notes, the series 2 class B notes and the series
3 class B notes (in no order of priority but in proportion to their
outstanding balances) on the class B principal deficiency sub ledger;
and
o last, provided that interest due on the series 1 class C notes, the
series 2 class C notes and the series 3 class C notes has been paid,
in an amount necessary to reduce to zero the balances in respect of
the series 1 class C notes, the series 2 class C notes and the series
3 class C notes (in no order of priority but in proportion to their
outstanding balances) on the class C principal deficiency sub ledger.
FUNDING PRINCIPAL DEFICIENCY LEDGER
A principal deficiency ledger has been established for Funding to record
any principal losses on the mortgage loans allocated to Funding pursuant to the
terms of the mortgages trust, and to record the application of Funding available
principal receipts to any issuer to fund the issuer liquidity reserve fund of
that issuer. As to principal losses on the mortgage loans and the application of
Funding available principal receipts to fund issuer liquidity reserve funds, the
Funding principal deficiency ledger will reflect the aggregate positions of the
issuer principal deficiency ledgers of the issuers.
On each occasion on which an issuer principal deficiency ledger is credited
(and the related principal deficiencies are thereby reduced), the cash manager
on behalf of Funding will credit the Funding principal deficiency ledger and
thereby record a similar reduction in aggregate principal deficiencies.
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USE OF PRINCIPAL RECEIPTS TO PAY ISSUER INCOME DEFICIENCY
On the distribution date immediately preceding each payment 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 (M) of the issuer
pre-enforcement revenue priority of payments (after taking account of any shared
issuer revenue receipts, if any, available therefor).
If there is a deficit in the amount of issuer available revenue receipts to
pay items (A) through (E), (G) and (I) of the issuer pre-enforcement revenue
priority of payments, then the issuer shall pay or provide for that deficit by
the application of funds which constitute issuer allocable principal receipts,
if any, paid to the issuer and the issuer cash manager shall make a
corresponding debit entry in the relevant issuer principal deficiency sub
ledger, as described in " - ISSUER PRINCIPAL DEFICIENCY LEDGER".
Issuer available principal receipts may not be used to pay interest on any
class of notes 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 class of notes, and may not be used to
make up any deficit other than in respect of items (A) through (E), (G) and/or
(I) of the issuer pre-enforcement revenue priority of payments. Principal
therefore may not be used to pay interest on a class of notes if the balance on
the relevant principal deficiency sub ledger for such class of notes is equal to
the principal amount outstanding on such class of notes.
The issuer shall apply any excess issuer available revenue receipts to
extinguish any balance on the issuer principal deficiency ledger, as described
in " - ISSUER PRINCIPAL DEFICIENCY LEDGER".
ISSUER BASIS AND CURRENCY SWAPS
On the closing date, the issuer will enter into the basis rate swap
agreement with the basis rate swap provider and the note trustee, which swap
will hedge against the rate of interest applicable to payments to be made by
Funding in respect of the intercompany loan (which will be related to the
interest rates applicable to the mortgage loans in the trust property) and the
rates of interest at which the issuer is obliged to make payments in respect of
the notes.
On the closing date, the issuer also will enter into the dollar currency
swaps with the dollar currency swap provider and the note trustee to hedge
against the possible variance between:
o the interest received by the issuer in respect of the basis rate swap
agreement, which will be related to sterling LIBOR for three month
sterling deposits, and the interest which the issuer is obliged to pay
in respect of the series 1 notes, which will be related to US dollar
LIBOR for three-month dollar deposits; and
o fluctuations in the exchange rate in respect of principal received on
the intercompany loan, which will be received in sterling, and
principal which the issuer is obliged to repay in respect of the
series 1 notes, which must be repaid in dollars.
On the closing date, the issuer also will enter into the euro currency
swaps with the euro currency swap provider and the note trustee to hedge against
the possible variance between:
o the interest received by the issuer in respect of the basis rate swap
agreement, which will be related to sterling LIBOR for three month
sterling deposits, and the interest which the issuer is obliged to pay
in respect of the series 2 notes, which will be related to EURIBOR for
three-month euro deposits; and
o fluctuations in the exchange rate in respect of principal received on
the intercompany loan, which will be received in sterling, and
principal which the issuer is obliged to repay in respect of the
series 2 notes, which must be repaid in euro.
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PRIORITY OF PAYMENTS AMONG THE CLASS B NOTES AND THE CLASS C NOTES
The order of payments of interest to be made on the classes of notes will
be prioritized so that interest payments on the class C notes will be
subordinated to interest payments on the class B notes and the class A notes and
interest payments on the class B notes will be subordinated to interest payments
on the class A notes, in each case in accordance with the issuer priority of
payments.
Any revenue shortfall in payments of interest due on the class B notes or
the class C notes on any payment date will be deferred until the immediately
succeeding payment date. On that immediately succeeding payment date, the amount
of interest due on the relevant class of notes will be increased to take account
of any deferred interest. If on that payment date there is still a revenue
shortfall, that revenue shortfall will be deferred again. This deferral process
will continue until the final repayment date of the notes, at which point if
there is insufficient money available to us to pay interest on the class B notes
or the class C notes, then you may not receive all interest amounts payable on
those classes of notes.
We are not able to defer payments of interest due on any payment date in
respect of the class A notes. The failure to pay interest on the class A notes
will be an event of default under the notes.
The class A notes, the class B notes and the class C notes will be
constituted by the trust deed and will share the same security. Upon enforcement
of that security or the occurrence of a trigger event, the class A notes of each
series will rank in priority to each series of class B notes and each series of
class C notes and the class B notes of each series will rank in priority to each
series of class C notes.
MORTGAGES TRUSTEE GIC ACCOUNT/FUNDING GIC ACCOUNT/FUNDING
(GRANITE 02-2) GIC ACCOUNT
All amounts held by the mortgages trustee which are not invested in
authorized investments will be deposited in the mortgages trustee GIC account
with the mortgages trustee GIC provider. This 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
0.375% per annum below LIBOR for three-month sterling deposits.
Save as provided below, all amounts held by Funding which are not invested
in authorized investments will be deposited in the Funding GIC account. The
Funding GIC account is maintained with the Funding GIC provider. This account is
subject to a guaranteed investment contract such that the Funding GIC provider
has agreed to pay a variable rate of interest on funds in the Funding GIC
account of 0.375% per annum below LIBOR for three-month sterling deposits.
All amounts held by Funding in respect of the issuer and standing at any
time to the credit of the issuer reserve ledger or the issuer liquidity reserve
ledger, if any, and which are not invested in authorized investments will be
deposited in the Funding (Granite 02-2) GIC account. The Funding (Granite 02-2)
GIC account will be maintained with the Funding GIC provider. This account will
be subject to a guaranteed investment contract such that the Funding GIC
provider will agree to pay a variable rate of interest on funds in the Funding
(Granite 02-2) GIC account of 0.375% per annum below LIBOR for three-month
sterling deposits.
START-UP LOAN
The following section contains a summary of the material terms of the
start-up loan agreement. The summary does not purport to be complete and is
subject to the provisions of the start-up loan agreement, a form of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
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GENERAL DESCRIPTION
On the closing date, Northern Rock plc (the "START-UP LOAN PROVIDER") will
make available to Funding a start-up loan under the start-up loan agreement in
an amount of approximately (pound)24,000,000 a portion of which will be used to
partially fund the issuer reserve fund, and the other portion of which will be
used to meet the costs and expenses incurred by Funding in connection with the
acquisition by Funding of the Funding share of the additional assigned mortgage
portfolio and the fees payable under the intercompany loan agreement which will
enable the issuer to meet its costs in relation to the issuance of the notes.
INTEREST ON THE START-UP LOAN
The start-up loan will bear interest at the rate of three-month sterling
LIBOR plus 0.90% per annum until repaid. Any unpaid interest will be added to
the principal amount owed and will bear interest. Interest is payable by Funding
on each payment date.
REPAYMENT OF START-UP LOAN
Funding will repay the start-up loan only to the extent that it has Funding
available revenue receipts after making payments ranking in priority to payments
to the start-up loan provider as described in "CASHFLOWS - DISTRIBUTION OF
FUNDING AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY"
or "CASHFLOWS - DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND FUNDING
AVAILABLE REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE FUNDING SECURITY".
Amounts due to the start-up loan provider are payable on any payment date after
amounts of interest due to the issuer on the intercompany loan and to any other
issuers on the related intercompany loans. Funding will have no further recourse
to the start-up loan provider after it has repaid the start-up loan.
EVENT OF DEFAULT
It will be an event of default under the start-up loan agreement if Funding
has available funds to pay amounts due to the start-up loan provider and it does
not pay them.
ACCELERATION
Subject to the Funding deed of charge, the start-up loan will become
immediately due and payable upon service of an intercompany loan enforcement
notice.
GOVERNING LAW
The start-up loan will be governed by English law.
EXISTING AND FUTURE START-UP LOANS
The start-up loan provider has in the past made available to Funding
start-up loans in connection with the making of the previous intercompany loans
which were used by Funding for meeting the costs and expenses incurred by
Funding in connection with the acquisitions by Funding of the Funding share of
the initial and further mortgage portfolios and the fees payable under the
previous intercompany loan agreements. In the future, Funding may enter into new
start-up loan agreements, the proceeds of which may be used to help fund any
relevant issuer reserve fund and/or to meet the costs and expenses incurred in
the acquisition of additional assigned mortgage loans and their related security
and in the payment of fees under any new intercompany loan agreements. Each
previous start-up loan agreement was, and each new start-up loan agreement will
be, on substantially the same terms as the start-up loan agreement, except as to
the amount advanced, the date that monies were, are, or will be drawn and the
terms for repayment. Each start-up loan is repayable by Funding from Funding
available revenue receipts after making payments ranking in priority to payments
to the start-up loan provider.
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THE SWAP AGREEMENTS
GENERAL
The issuer will enter into the basis rate swap with Northern Rock plc as
the basis rate swap provider and the note trustee. The issuer will also enter
into dollar currency swaps with the dollar currency swap provider and the note
trustee and euro currency swaps with the euro currency swap provider and the
note trustee. In general, the swaps are designed to do the following:
o basis rate swap: to protect the issuer against the possible variance
between the seller's standard variable rate payable on the variable
rate mortgage loans, the rates of interest payable on the flexible
mortgage loans which pay variable rates of interest no higher than the
rate offered by a basket of UK mortgage lenders or a rate which tracks
the Bank of England base rate, and the fixed rates of interest payable
on the fixed rate mortgage loans and a LIBOR based rate for
three-month sterling deposits;
o dollar currency swaps: to protect the issuer against changes in the
sterling to dollar exchange rate following the closing date and the
possible variance between a LIBOR based rate for three-month sterling
deposits and a LIBOR based rate for three-month dollar deposits
applicable to the series 1 notes; and
o euro currency swaps: to protect the issuer against changes in the
sterling to euro exchange rate following the closing date and the
possible variance between a LIBOR based rate for three-month sterling
deposits and a EURIBOR based rate for three-month euro deposits
applicable to the series 2 notes.
In addition to the foregoing, the issuer may from time to time enter into
additional swap arrangements or add additional features to the swap arrangements
described above in order to hedge against interest rate risks that may arise in
connection with new mortgage loan products that the seller assigns into the
mortgages trust at a later date.
THE BASIS RATE SWAP
Some of the mortgage loans in the mortgage portfolio pay a variable rate of
interest for a period of time which may either be linked to the seller's
standard variable rate or linked to an interest rate other than the seller's
standard variable rate, such as a variable rate offered by a basket of UK
mortgage lenders or a rate that tracks the Bank of England base rate. Other
mortgage loans pay a fixed rate of interest for a period of time.
The amount of revenue receipts that Funding receives will fluctuate
according to the interest rates applicable to the mortgage loans in the
mortgages trust. The amount of interest payable by Funding to the issuer under
the intercompany loan, from which the issuer will fund, inter alia, its payment
obligations under the currency swaps and the notes, will be made in sterling.
However, the issuer will be required to pay interest (1) on the series 1
notes in dollars, based upon a LIBOR based rate for three-month dollar deposits,
(2) on the series 2 notes in euro, based upon a EURIBOR based rate for
three-month euro deposits, and (3) on the series 3 notes in sterling, based upon
a LIBOR based rate for three-month sterling deposits.
Under the dollar currency swaps and the euro currency swaps (as described
below), the issuer will be required to pay to the currency swap providers
certain amounts based upon a LIBOR based rate for three-month sterling deposits
in return for the US dollar and euro amounts it needs to pay the interest on the
series 1 notes and the series 2 notes, respectively. The amounts payable by the
issuer to the dollar currency swap provider under the dollar currency swaps, to
the euro currency swap provider under the euro currency swaps and to the holders
of the series 3 notes will be made in sterling.
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To provide a hedge against the possible variance between:
(1) the seller's standard variable rate payable on the variable rate
mortgage loans, the rates of interest payable on the flexible mortgage
loans which pay variable rates of interest no higher than the rate
offered by a basket of UK mortgage lenders or a rate which tracks the
Bank of England base rate and the fixed rates of interest payable on
the fixed rate mortgage loans; and
(2) a margin over the LIBOR based rate for three-month sterling deposits,
the issuer will enter into the basis rate swap with the basis rate swap
provider and the note trustee.
Under the basis rate swap, the following amounts will be calculated in
respect of each calculation period:
o the amount (known as the "CALCULATION PERIOD SWAP PROVIDER AMOUNT")
produced by applying LIBOR for three-month sterling deposits plus a
spread to the notional amount of the basis rate swap as defined later
in this section; and
o the amount (known as the "CALCULATION PERIOD ISSUER AMOUNT") produced
by applying a rate equal to the weighted average of:
(1) the average of the standard variable mortgage rates or their
equivalent charged to existing borrowers on residential mortgage
loans as published from time to time, after excluding the highest
and the lowest rate, of Abbey National plc, Alliance & Leicester
plc, Bradford & Bingley, HBOS plc, Lloyds TSB Bank plc, National
Westminster Bank plc and Woolwich plc;
(2) in respect only of any flexible residential mortgage loans (as
described below) the difference between (a) the average of the
standard variable mortgage rates or their equivalent charged to
existing borrowers on residential mortgage loans as published
from time to time, after excluding the highest and the lowest
rate, of Abbey National plc, Alliance & Leicester plc, Bradford &
Bingley, HBOS plc, Lloyds TSB Bank plc, National Westminster Bank
plc and Woolwich plc, and (b) the weighted average of the
discount to the average interest rate calculated in (a) above in
respect of the flexible residential mortgage loans; and
(3) the weighted average of the rates of interest payable on the
fixed rate mortgage loans,
to the notional amount of the basis rate swap.
For the purposes of (2) above, a "FLEXIBLE RESIDENTIAL MORTGAGE LOAN" is a
mortgage loan secured by a residential mortgaged property which is subject to a
variable rate of interest, and which generally allows the borrower certain
flexible payment features, including the ability to make larger repayments than
are due on a given payment date, and which also may allow the borrower to make
underpayments, take payment holidays and make cash re-draws of amounts
previously overpaid.
After these two amounts are calculated in relation to a payment date, the
following payments will be made on that payment date:
o if the calculation period swap provider amount is greater than the
calculation period issuer amount, then the basis rate swap provider
will pay the difference (after such difference is adjusted to take
account of amounts payable by the basis rate swap provider and the
issuer under the basis rate mini-swaps (as described below)) to the
issuer;
o if the calculation period issuer amount is greater than the
calculation period swap provider amount, then the issuer will pay the
difference (after such difference is adjusted to take account of
amounts payable by the basis rate swap provider and the issuer under
the basis rate mini-swaps) to the basis rate swap provider; and
o if the calculation period swap provider amount is equal to the
calculation period issuer amount, neither party will make any payment
to the other party.
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If a payment is to be made by the basis rate swap provider, once received
by the issuer that payment will be included in the issuer available revenue
receipts and will be applied on the relevant payment date according to the
relevant issuer priority of payments. If a payment is to be made by the issuer,
it will be made according to the relevant issuer priority of payments.
The "NOTIONAL AMOUNT OF THE BASIS RATE SWAP" will be an amount in sterling
equal to the aggregate principal amount outstanding of the notes on the closing
date.
The terms of the basis rate swap will provide for a number of conditional
mini swaps (the "BASIS RATE MINI SWAPS"). The purpose of the basis rate
mini-swaps is to allow the net payment under the basis rate swap to have the
same effect as if the notional amount of the basis rate swap were amortizing at
the same rate as the notes.
In the event that the basis rate swap is terminated prior to the service of
a note enforcement notice or the final redemption of any class of notes, the
issuer shall use its best efforts to enter into a replacement basis rate swap on
terms acceptable to the rating agencies and the note trustee and with a swap
provider whom the rating agencies have previously confirmed in writing to the
issuer and the note trustee will not cause the then current ratings of the
issuer's notes to be downgraded, withdrawn or qualified.
THE DOLLAR CURRENCY SWAPS
The series 1 notes will be denominated in US dollars and investors will
receive payments of interest and principal on those notes in US dollars.
However, the repayments of principal and payments of interest by Funding to the
issuer under the intercompany loan will be made in sterling. In addition, the
series 1 notes will bear interest at a rate based on US dollar LIBOR but the
payment to be made by the basis rate swap provider to the issuer will be based
on sterling LIBOR. To hedge the variance between the LIBOR rates and its
currency exchange rate exposure in respect of these notes, the issuer will enter
into four dollar currency swaps relating to the series 1 notes with the dollar
currency swap provider and the note trustee.
Under each dollar currency swap, the issuer will pay to the dollar currency
swap provider:
o on the closing date, an amount in US dollars equal to the net proceeds
of the issue of the relevant class of series 1 notes;
o on each payment date, an amount in sterling equal to the dollar amount
of principal payments to be made on the relevant class of series 1
notes on that payment date, such dollar amount to be converted into
sterling at the relevant dollar currency swap rate; and
o on each payment date, an amount in sterling based on three-month
sterling LIBOR, which the dollar currency swap provider will then
exchange for an amount in US dollars based on three-month US dollar
LIBOR in order to pay to the issuer the interest amounts set forth
below.
Under each dollar currency swap, the dollar currency swap provider will pay
to the issuer:
o on the closing date, an amount in sterling equal to the net dollar
proceeds of the issue of the relevant class of series 1 notes, such
dollar proceeds to be converted into sterling at the relevant dollar
currency swap rate;
o on each payment date, an amount in US dollars equal to the amount of
principal payments to be made on the relevant class of series 1 notes
on such payment date; and
o on each payment date, an amount in dollars equal to the interest to be
paid in US dollars on the relevant class of series 1 notes on such
payment date.
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As defined in this prospectus, "DOLLAR CURRENCY SWAP RATE" means the rate
at which dollars are converted to sterling or, as the case may be, sterling is
converted to dollars, under the relevant dollar currency swap.
The terms of each dollar currency swap will provide for a number of
conditional mini swaps (the "DOLLAR MINI SWAPS"). The purpose of the dollar mini
swaps is to allow each dollar currency swap to amortize by reference to the same
amount as the relevant class of series 1 notes.
In the event that any dollar currency swap is terminated prior to the
service of a note enforcement notice or the final redemption of the relevant
class of series 1 notes, the issuer shall use its best efforts to enter into a
replacement dollar currency swap in respect of the notes or that class of notes
to hedge against fluctuations in the exchange rate between dollars and sterling
and/or the possible variance between LIBOR for three-month sterling deposits and
LIBOR for three-month US dollar deposits. Any replacement dollar currency swap
must be entered into on terms acceptable to the rating agencies, the issuer and
the note trustee and with a replacement dollar currency swap provider that the
rating agencies have previously confirmed in writing to the issuer and the note
trustee will not cause the then current ratings of the notes to be downgraded,
withdrawn or qualified.
THE EURO CURRENCY SWAPS
The series 2 notes will be denominated in euro and investors will receive
payments of interest and principal on those notes in euro. However, the
repayments of principal and payments of interest by Funding to the issuer under
the intercompany loan will be made in sterling. In addition, the series 2 notes
will bear interest at a rate based on EURIBOR, but the payment to be made by the
basis rate swap provider to the issuer will be based on sterling LIBOR. To hedge
the variance between the LIBOR rate and the relevant EURIBOR rate and its
currency exchange rate exposure in respect of these notes, the issuer will enter
into three euro currency swaps relating to the series 2 notes with the euro
currency swap provider and the note trustee.
Under each euro currency swap, the issuer will pay to the euro currency
swap provider:
o on the closing date, an amount in euro equal to the net proceeds of
the issue of the relevant class of series 2 notes;
o on each payment date, an amount in sterling equal to the euro amount
of principal payments to be made on the relevant class of series 2
notes on that payment date, such euro amount to be converted into
sterling at the relevant euro currency swap rate; and
o on each payment date, an amount in sterling based on three-month
sterling LIBOR, which the euro currency swap provider will then
exchange for an amount in euro based on three-month EURIBOR with
respect to the series 2 notes in order to pay to the issuer the
interest amounts set forth below.
Under each euro currency swap, the euro currency swap provider will pay to
the issuer:
o on the closing date, an amount in sterling equal to the net euro
proceeds of the issue of the relevant class of series 2 notes, such
euro proceeds to be converted into sterling at the relevant euro
currency swap rate;
o on each payment date, an amount in euro equal to the amount of
principal payments to be made on the relevant class of series 2 notes
on such payment date; and
o on each payment date, an amount in euro equal to the interest to be
paid in euro on the relevant class of series 2 notes on such payment
date.
As defined in this prospectus, "EURO CURRENCY SWAP RATE" means the rate at
which euro are converted to sterling or, as the case may be, sterling is
converted to euro, under the relevant euro currency swap.
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The terms of each euro currency swap will provide for a number of
conditional mini swaps (the "EURO MINI SWAPS"). The purpose of the euro mini
swaps is to allow each euro currency swap to amortize by reference to the same
amount as the relevant class of series 2 notes.
In the event that any euro currency swap is terminated prior to the service
of a note enforcement notice or the final redemption of the relevant class of
series 2 notes, the issuer shall use its best efforts to enter into a
replacement euro currency swap in respect of the notes or that class of notes to
hedge against fluctuations in the exchange rate between euro and sterling and/or
the possible variance between LIBOR for three-month sterling deposits and
EURIBOR for three-month euro deposits with respect to the series 2 notes. Any
replacement euro currency swap must be entered into on terms acceptable to the
rating agencies, the issuer and the note trustee and with a replacement euro
currency swap provider that the rating agencies have previously confirmed in
writing to the issuer and the note trustee will not cause the then current
ratings of the notes to be downgraded, withdrawn or qualified.
RATINGS DOWNGRADE OF SWAP PROVIDERS
Under the terms of the basis rate swap, in the event that the short-term,
unsecured and unsubordinated credit rating of the basis swap provider is
downgraded below A-1 by Standard & Poor's or F1 by Fitch, respectively, and as a
result of such downgrade the then-current ratings of the notes may, in the
opinion of Standard & Poor's or Fitch, respectively, be downgraded or placed
under review for possible downgrade, then the basis rate swap provider will, in
accordance with the basis rate swap agreement, be required to take certain
remedial measures in order to ensure that the then-current ratings of the notes
are maintained, including providing collateral for its obligations under the
basis rate swap, arranging for its obligations under the basis rate swap
agreement to be transferred to an entity with an A-1 or a F1 rating,
respectively, procuring another entity to become co-obligor in respect of its
obligations under the basis rate swap, or taking such other action as it may
agree with Standard & Poor's or Fitch, respectively, in order to maintain the
ratings of the notes at their then-current ratings.
Under the terms of the basis rate swap, in the event that either the
short-term, unsecured and unsubordinated credit rating of the basis swap
provider is downgraded below P-1 or its long-term, unsecured and unsubordinated
credit rating is downgraded below A2 by Moody's, and as a result of such
downgrade the then-current ratings of the notes may, in the opinion of Moody's,
be downgraded or placed under review for possible downgrade, then the basis rate
swap provider will, in accordance with the basis rate swap agreement, provide
collateral for its obligations under the basis rate swap until it is able to
arrange for its obligations under the basis rate swap agreement to be
transferred to an entity with a short-term rating of P-1 and a long-term rating
of A1 by Moody's, procure another entity to become co-obligor in respect of its
obligations under the basis rate swap, or take such other action as it may agree
with Moody's in order to maintain the ratings of the notes at their then-current
ratings.
In addition, in the event that either the short-term, unsecured and
unsubordinated credit rating of the basis rate swap provider is further
downgraded below P-2 or its long-term, unsecured and unsubordinated credit
rating of the basis rate swap provider is further downgraded below A3 by Moody's
and, as a result of such downgrade, the then-current ratings of the notes may,
in the opinion of Moody's, be downgraded or placed under review for possible
downgrade, then the basis rate swap provider will, in accordance with the basis
rate swap agreement, provide additional collateral for its obligations under the
basis rate swap and will arrange for its obligations under the basis rate swap
agreement to be transferred to an entity with a short-term rating of P-1 and a
long-term rating of A1
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by Moody's, procure another entity to become co-obligor in respect of its
obligations under the basis rate swap agreement, or take such other action as it
may agree with Moody's in order to maintain the ratings of the notes at their
then-current ratings.
A failure to take such steps will allow the issuer to terminate the basis
rate swap agreement.
Under the terms of the dollar currency swaps and the euro currency swaps,
in the event that the long-term, unsecured and unsubordinated credit rating of
the dollar currency swap provider, the euro currency swap provider, or any
provider of credit support, as the case may be, is downgraded below AA- by
Standard & Poor's or AA- by Fitch, respectively, and, as a result of such
downgrade, the then-current ratings of the relevant notes may, in the opinion of
Standard & Poor's or Fitch, respectively, be downgraded or placed under review
for possible downgrade, then the relevant currency swap provider will, in
accordance with the relevant currency swap agreement, be required to take
certain remedial measures in order to ensure that the then-current ratings of
the Notes are maintained, including providing collateral for its obligations
under the relevant currency swap, arranging for its obligations under the
relevant currency swap agreement to be transferred to an entity with a long-term
rating of AA- by Standard & Poor's or Fitch, as the case may be, procuring
another entity to become co-obligor in respect of its obligations under the
relevant currency swap, or taking such other action as it may agree with
Standard & Poor's or Fitch, respectively, in order to maintain the ratings of
the notes at their then-current ratings.
Under the terms of the dollar currency swaps and the euro currency swaps,
in the event that either the long-term, unsecured and unsubordinated credit
rating of the dollar currency swap provider, the euro currency swap provider, or
any provider of credit support, as the case may be, is downgraded below A1 or
its short-term, unsecured and unsubordinated credit rating is downgraded below
P-1 by Moody's, and, as a result of such downgrade, the then-current ratings of
the relevant notes may, in the opinion of Moody's, be downgraded or placed under
review for possible downgrade, then the relevant currency swap provider will, in
accordance with the relevant currency swap agreement, provide collateral for its
obligations under the relevant currency swap until it is able to arrange for its
obligations under the relevant currency swap agreement to be transferred to an
entity with a long-term rating of A1 and a short-term rating of P-1 by Moody's,
procure another entity to become co-obligor in respect of its obligations under
the relevant currency swap, or take such other action as it may agree with
Moody's in order to maintain the ratings of the notes at their then-current
ratings.
In addition, in the event that either the long-term, unsecured and
unsubordinated credit rating of the relevant currency swap provider or any
provider of credit support, is further downgraded below A3 or its short-term,
unsecured and unsubordinated credit rating, is further downgraded below P-2 by
Moody's, and, as a result of such downgrade, the then-current ratings of the
relevant notes may, in the opinion of Moody's be downgraded or placed under
review for possible downgrade, then the relevant currency swap provider will, in
accordance with the relevant currency swap agreement, provide additional
collateral for its obligations under the relevant currency swap and will arrange
for its obligations under the relevant currency swap agreement to be transferred
to an entity with a short-term rating of P-1 and a long-term rating of A1 by
Moody's, procure another entity to become co-obligor in respect of its
obligations under the relevant currency swap, or take such other action as it
may agree with Moody's in order to maintain the ratings of the notes at their
then-current ratings.
A failure to take such steps will allow the issuer to terminate the
relevant currency swap agreement.
TERMINATION OF THE SWAPS
o The basis rate swap will terminate on the earlier of the payment date
falling in January 2043 and the date on which all of the notes are
redeemed in full;
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o The dollar currency swap for the series 1 class A1 notes will
terminate on the earlier of the payment date falling in January 2017
and the date on which all of the series 1 class A1 notes are redeemed
in full;
o The dollar currency swap for the series 1 class A2 notes will
terminate on the earlier of the payment date falling in January 2043
and the date on which all of the series 1 class A2 notes are redeemed
in full;
o The dollar currency swap for the series 1 class B notes will terminate
on the earlier of the payment date falling in January 2043 and the
date on which all of the series 1 class B notes are redeemed in full;
o The dollar currency swap for the series 1 class C notes will terminate
on the earlier of the payment date falling in January 2043 and the
date on which all of the series 1 class C notes are redeemed in full;
o The euro currency swap for the series 2 class A notes will terminate
on the earlier of the payment date falling in January 2043 and the
date on which all of the series 2 class A notes are redeemed in full;
o The euro currency swap for the series 2 class B notes will terminate
on the earlier of the payment date falling in January 2043 and the
date on which all of the series 2 class B notes are redeemed in full;
and
o The euro currency swap for the series 2 class C notes will terminate
on the earlier of the payment date falling in January 2043 and the
date on which all of the series 2 class C notes are redeemed in full.
A swap could also terminate in the following circumstances, each referred
to as a "SWAP EARLY TERMINATION EVENT":
o at the option of one party to the swap, if there is a failure by the
other party to pay any amounts due and payable in accordance with the
terms of that swap. Certain amounts may be due but not payable in
accordance with the terms of the swap as described below under " -
LIMITED RECOURSE AND SWAP PAYMENT OBLIGATION";
o if an event of default under the notes occurs and the note trustee
serves a note enforcement notice;
o upon the occurrence of an insolvency of one of the parties or the
merger of the relevant swap provider without an assumption of the
obligations under the swaps, or changes in law resulting in the
obligations of one of the parties becoming illegal; and
o if the relevant swap provider is downgraded and fails to comply with
the requirements of the ratings downgrade provision contained in the
relevant swap agreement and described above under " - RATINGS
DOWNGRADE OF SWAP PROVIDERS".
Upon the occurrence of a swap early termination event, the issuer or the
relevant swap provider may be liable to make a termination payment to the other.
This termination payment will be calculated and made in sterling. The amount of
any termination payment will be based on the market value of the terminated swap
based on market quotations of the cost of entering into a swap with the same
terms and conditions that would have the effect of preserving the respective
full payment obligations of the parties (or based upon loss in the event that no
market quotation can be obtained). Any such termination payment could be
substantial.
If any termination payment is due by the issuer to a swap provider, then
pursuant to its obligations under the intercompany loan, Funding shall pay to
the issuer the amount required by the issuer to pay the termination payment due
to the relevant swap provider. Any such termination payment will be made by the
issuer to the swap provider only after paying interest amounts due on the notes,
and after providing for any debit balance on the issuer principal deficiency
ledger to the extent that a default was caused by the swap provider. However, if
the issuer causes a default to occur that results in a termination payment
becoming due from the issuer to a swap provider, such payment will be made by
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the issuer in the same priority as it pays the relevant interest amounts due on
the notes. The issuer shall apply amounts received from Funding under the
intercompany loan in respect of termination payments in accordance with the
issuer pre-enforcement revenue priority of payments, the pre-enforcement
principal priority of payments, the relevant priority of payments following the
occurrence of a trigger event or, as the case may be, the issuer
post-enforcement priority of payments. The application by the issuer of
termination payments due to a swap provider may affect the funds available to
pay amounts due to the noteholders (see "RISK FACTORS - YOU MAY BE SUBJECT TO
EXCHANGE RATE RISKS").
If the issuer receives a termination payment from the dollar currency swap
provider and/or the euro currency swap provider, then the issuer shall use those
funds towards meeting its costs in effecting currency exchanges at the spot rate
of exchange until a new dollar currency swap and/or a new euro currency swap is
entered into and/or to acquire a new dollar currency swap and/or a new euro
currency swap. You will not receive extra amounts (over and above interest and
principal payable on the notes) as a result of the issuer receiving a
termination payment.
TAXATION
The issuer is not obliged under any of the swaps to gross up payments made
by it 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 the
issuer if withholding taxes are imposed on payments made under the swaps.
LIMITED RECOURSE AND SWAP PAYMENT OBLIGATION
On any payment date the issuer will only be obliged to pay an amount to a
swap provider to the extent that the issuer has received from Funding sufficient
funds under the intercompany loan to pay that amount to that swap provider,
subject to and in accordance with the relevant issuer priority of payments. On
any payment date, each of the dollar currency swap provider and the euro
currency swap provider will only be obliged to pay to the issuer an amount that
is proportionate to the amount of the payment that it has received from the
issuer on that payment date.
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CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING
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 and the
security trustee to provide cash management services in relation to the
mortgages trustee and Funding.
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 and
the seller in the trust property (including the relevant weighted
average Funding share percentage and the relevant weighted average
seller share percentage, as applicable) in accordance with the terms
of the mortgages trust deed;
(B) maintaining the following ledgers on behalf of the mortgages trustee:
o the Funding share/seller share ledger, which will record the
current shares of the seller and Funding in the trust property;
o the losses ledger, which will record losses on the mortgage
loans;
o the principal ledger, which will record principal receipts on the
mortgage loans received by the mortgages trustee and payments of
principal from the mortgages trustee GIC account to Funding and
the seller;
o the revenue ledger, which will record revenue receipts on the
mortgage loans received by the mortgages trustee and payments of
revenue receipts from the mortgages trustee GIC account to
Funding and the seller;
o the overpayments ledger, which will record each revenue receipt
and/or principal receipt paid by a borrower in excess of the
amount required under the terms of the relevant mortgage loan
(and in the case of any non-flexible mortgage loan by an amount
equal to or less than (pound)199.99), and which will be
sub-divided into sub-ledgers to record overpayments made on
non-flexible mortgage loans and flexible mortgage loans;
o the non-flexible underpayments ledger, which will record
underpayments on non-flexible mortgage loans; and
o the re-draws ledger, which will record re-draws on the flexible
mortgage loans and which will be sub-divided into sub-ledgers to
record cash re-draws and non-cash re-draws;
(C) distributing the mortgages trustee available revenue receipts and the
mortgages trustee available principal receipts to Funding and the
seller in accordance with the terms of the mortgages trust deed;
(D) providing the mortgages trustee, Funding, the security trustee and the
rating agencies with a quarterly report in relation to the trust
property; and
(E) providing the mortgages trustee and Funding with quarterly management
accounts.
CASH MANAGEMENT SERVICES TO BE PROVIDED TO FUNDING
The cash manager's duties in relation to Funding include, but are not
limited to:
(A) determining no later than the distribution date immediately preceding
the relevant payment date:
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o the amount of Funding available revenue receipts to be applied to
pay interest and fees in relation to the intercompany loan and
any other intercompany loan on that relevant payment date; and
o the amount of Funding available principal receipts to be applied
to repay the intercompany loan and any other intercompany loan on
that relevant payment date;
(B) maintaining the following ledgers on behalf of Funding:
o any issuer reserve fund ledger(s), which will record the amount
credited to the issuer reserve fund of the issuer and of any other
issuer from time to time, and subsequent withdrawals and deposits in
respect of such issuer reserve fund(s);
o any issuer liquidity reserve fund ledger(s), which will record the
amount credited to the issuer liquidity reserve fund from time to time
of the issuer and any other issuer, and subsequent withdrawals and
deposits in respect of such issuer liquidity reserve fund(s);
o the Funding principal ledger, which will record the amount of
principal receipts received by Funding on each distribution date;
o the Funding revenue ledger, which will record all other amounts
received by Funding on each distribution date;
o the Funding reserve ledger, which will record the amount credited to
the Funding reserve fund from time to time, and subsequent withdrawals
and deposits in respect of the Funding reserve fund; and
o the intercompany loan ledger(s), which will record payments of
interest and repayments of principal made under the intercompany loan
and any other intercompany loan;
(C) investing sums standing to the credit of the Funding GIC account, the
Funding (Issuer) GIC accounts, or any other Funding bank account in
short-term authorized investments (as defined in the glossary) on
behalf of Funding or the security trustee (as the case may be);
(D) making withdrawals from the Funding reserve account as and when
required;
(E) making withdrawals from the issuer reserve fund(s), if required;
(F) making any required withdrawals under the issuer liquidity reserve
fund(s), if any;
(G) applying the Funding available revenue receipts and Funding available
principal receipts in accordance with the relevant order of priority
of payments for Funding contained in the Funding deed of charge;
(H) providing Funding, each issuer, the security trustee and the rating
agencies with a quarterly report in relation to Funding;
(I) making all returns and filings in relation to Funding and the
mortgages trustee and providing or procuring the provision of company
secretarial and administration services to them; and
(J) maintaining the Funding principal deficiency ledger.
For the definitions of Funding available revenue receipts, Funding
available principal receipts and the Funding pre-enforcement priorities of
payments, see "CASHFLOWS".
COMPENSATION OF CASH MANAGER
The cash manager is paid an annual fee of (pound)100,000 for its services
which is paid in four equal installments quarterly in arrears on each payment
date. The fee is inclusive of VAT. The fee is subject to adjustment if the
applicable rate of VAT changes.
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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 and Funding proportionately in
accordance with and subject to the terms of the mortgages trust deed and the
relevant Funding priority of payments, prior to amounts due to any issuer under
any intercompany loan.
RESIGNATION OF CASH MANAGER
The cash manager may resign only on giving 12 months' notice to the
security trustee, Funding and the mortgages trustee and provided the security
trustee, Funding and the mortgages trustee each consent in writing to the cash
manager's resignation and provided that:
o a substitute cash manager has been appointed and a new cash management
agreement is entered into on terms satisfactory to the security
trustee, the mortgages trustee and Funding; and
o the then current ratings of each issuer's notes would not be adversely
affected as a result of that replacement.
TERMINATION OF APPOINTMENT OF CASH MANAGER
The security trustee may, upon written notice to the cash manager,
terminate the cash manager's rights and obligations immediately if any of the
following events occurs:
o the cash manager defaults in the payment of any amount due and fails
to remedy such default for a period of 5 London business days after
the earlier of becoming aware of the default and receiving a written
notice from the security trustee;
o the cash manager fails to comply with any of its other obligations
under the cash management agreement which in the opinion of the
security trustee, acting at the direction of the note trustee, is
materially prejudicial to the noteholders and does not remedy that
failure within 20 days after the earlier of becoming aware of the
failure and receiving written notice from the security trustee; or
o the cash manager suffers an insolvency event.
Upon termination of the appointment of the cash manager, the security
trustee has agreed to use its reasonable endeavors to appoint a substitute cash
manager. Any such substitute cash manager will be required to enter into an
agreement on substantially the same terms as the provisions of the cash
management agreement and any termination is conditional upon the rating agencies
having previously confirmed in writing to each issuer and the security trustee
that the then current ratings of each issuer's notes will not be downgraded,
withdrawn or qualified.
If the appointment of the cash manager is terminated or it resigns, the
cash manager must deliver its books of account relating to the mortgage loans to
or at the direction of the mortgages trustee, Funding or the security trustee,
as the case may be. The cash management agreement will terminate automatically
when Funding has no further interest in the trust property and the intercompany
loan and all other intercompany loans have been repaid or otherwise discharged.
GOVERNING LAW
The cash management agreement is governed by English law.
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CASH MANAGEMENT FOR THE ISSUER
The material terms of the issuer cash management agreement are summarized
in this section. The summary does not purport to be complete and it is subject
to the terms of the issuer cash management agreement. A form of the issuer cash
management agreement has been filed as an exhibit to the registration statement
of which this prospectus is a part.
On the closing date, the issuer and the note trustee will appoint Northern
Rock to provide cash management services to the issuer.
CASH MANAGEMENT SERVICES TO BE PROVIDED TO THE ISSUER
The issuer cash manager's duties will include, but are not limited to:
(A) determining no later than the distribution date immediately preceding
the relevant payment date:
o the issuer available revenue receipts to be applied to pay
interest on the notes on that relevant payment date and to pay
amounts due to other creditors of the issuer;
o the issuer available principal receipts to be applied to repay
principal on the notes on that relevant payment date; and
o such other amounts as are expressed to be calculations and
determinations made by the issuer cash manager under the
conditions of the notes;
(B) applying issuer available revenue receipts and issuer available
principal receipts in accordance with the relevant order of priority
of payments for the issuer set out in the issuer cash management
agreement;
(C) maintaining the issuer principal deficiency ledger, which will record
principal deficiencies arising from losses on the mortgage loans which
have been allocated to the intercompany loan of the issuer, the use of
issuer available principal receipts to meet any deficiency in issuer
available revenue receipts and the use of Funding available principal
receipts to fund the issuer liquidity reserve fund, if any;
(D) providing the issuer, Funding, the note trustee and the rating
agencies with quarterly reports in relation to the issuer;
(E) making all returns and filings required of the issuer and procuring
the provision of company secretarial and administration services to
the issuer;
(F) arranging payment of all fees to the London Stock Exchange plc or, as
applicable, the Financial Services Authority; and
(G) performing, if necessary, all currency and interest rate conversions
free of charge, cost or expense at the relevant exchange rate, whether
it be a conversion from sterling to dollars or vice versa, sterling to
euro or vice versa, or floating rates of interest to fixed rates of
interest or vice versa.
ISSUER'S BANK ACCOUNT
On the closing date, the issuer will maintain a bank account with the
issuer account bank (the "ISSUER TRANSACTION ACCOUNT"). The issuer may, with the
prior written consent of the note trustee, open additional or replacement bank
accounts.
If the short-term, unguaranteed and unsubordinated ratings of the issuer
account bank cease to be rated A-1+ by Standard & Poor's, P-1 by Moody's or F1+
by Fitch, then the issuer transaction account will be closed and a new issuer
transaction account opened with a bank that has the requisite ratings.
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COMPENSATION OF ISSUER CASH MANAGER
The issuer cash manager will be paid for its services an annual fee of
(pound)117,500 which will be paid in four equal installments quarterly in
arrears on each payment date. The fee is inclusive of VAT. The fees will be
subject to adjustment if the applicable rate of VAT changes.
In addition, the issuer cash manager will be entitled to reimbursement for
any expenses or other amounts properly incurred by it in carrying out its
duties. The issuer cash manager will be paid by the issuer prior to amounts due
on the notes.
RESIGNATION OF ISSUER CASH MANAGER
The issuer cash manager may resign only on giving 12 months' notice to the
note trustee and the issuer provided that we and the note trustee consent in
writing to the issuer cash manager's resignation and provided that:
o a substitute issuer cash manager has been appointed and a new issuer
cash management agreement is entered into on terms satisfactory to the
note trustee and the issuer; and
o that replacement would not adversely affect the then current ratings
of the notes.
TERMINATION OF APPOINTMENT OF ISSUER CASH MANAGER
The issuer or the note trustee may, upon written notice to the issuer cash
manager, terminate the issuer cash manager's rights and obligations immediately
if any of the following events occurs:
o the issuer cash manager defaults in the payment of any amount due and
fails to remedy such default for a period of 5 London business days
after the earlier of becoming aware of the default and receiving
written notice from us or the note trustee;
o the issuer cash manager fails to comply with any of its other
obligations under the issuer cash management agreement which in the
opinion of the note trustee is materially prejudicial to the
noteholders and does not remedy that failure within 20 days after the
earlier of becoming aware of the failure and receiving a notice from
the note trustee; or
o the issuer cash manager suffers an insolvency event.
Upon termination of the appointment of the issuer cash manager, the note
trustee will agree to use its reasonable endeavors to appoint a substitute
issuer cash manager. Any such substitute issuer cash manager will be required to
enter into an agreement on substantially the same terms as the provisions of the
issuer cash management agreement and any termination is conditional upon the
rating agencies having previously confirmed in writing to the issuer and the
note trustee that the then current ratings of the issuer's notes will not be
downgraded, withdrawn or qualified.
If the appointment of the issuer cash manager is terminated or the issuer
cash manager resigns, the issuer cash manager must deliver its books of account
relating to the notes to or at the direction of the note trustee. The issuer
cash management agreement will terminate automatically when the notes have been
fully redeemed.
GOVERNING LAW
The issuer cash management agreement shall be governed by English law.
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SECURITY FOR FUNDING'S OBLIGATIONS
To provide security for its obligations under the previous intercompany
loan agreements and the other transaction documents relating to the previous
issuers, Funding has entered into the Funding deed of charge with the Funding
secured creditors, as defined in the glossary. The issuer, Funding and the other
Funding secured creditors will enter into a deed of accession in relation to the
Funding deed of charge to enable the issuer to share in the Funding security
with the existing Funding secured creditors with respect to Funding's
obligations to the issuer under the intercompany loan agreement and the other
transaction documents. If Funding enters into new intercompany loan agreements
with new issuers, then each new issuer (and any new start-up loan provider (if
any)) will enter into one or more deeds of accession or a supplemental deed in
relation to the Funding deed of charge and share in the Funding security with
the existing Funding secured creditors with respect to Funding's obligations to
any such new issuer under any new intercompany loan agreement and related
transaction documents. A summary of the material terms of the Funding deed of
charge is set out below. The summary does not purport to be complete and is
subject to the provisions of the Funding deed of charge. This prospectus forms
part of the registration statement and a form of the Funding deed of charge has
been filed as an exhibit to that registration statement.
COVENANT TO PAY
Funding has covenanted in favor of the security trustee for the benefit of
the Funding secured creditors (including the security trustee) that Funding will
pay all amounts due to each of the Funding secured creditors as they become due
and payable (subject to the limited recourse provisions of the intercompany loan
and of the other transaction documents) and that Funding will comply with its
other obligations under the transaction documents.
FUNDING SECURITY
Subject as provided in the following paragraph, Funding has granted the
following security to be held by the security trustee for itself and on trust
for the benefit of the Funding secured creditors:
o a first fixed charge over the Funding share of the trust property,
save to the extent that any of the trust property is situated in
Jersey. Funding's share of the trust property that is situated in
Jersey will be assigned to the security trustee for the purpose of
creating a security interest in accordance with Jersey law;
o an assignment by way of first fixed security of all of Funding'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's
right, title, interest and benefit in the Funding deed of charge) to
which Funding is a party from time to time, save to the extent that
such right, title, interest and benefit are situated in Jersey. To the
extent that the same are situated in Jersey, Funding will assign such
right, title, interest and benefit to the security trustee for the
purpose of creating a security interest in those rights, title,
interest and benefit in accordance with Jersey law;
o an assignment by way of first fixed security over Funding's right,
title, interest and benefit in the Funding GIC account, the Funding
transaction account, and each other account (if any) of Funding (other
than the Funding (Issuer) GIC accounts, and any other account
established to hold the issuer reserve fund of any new issuer), all
amounts standing to the credit of those accounts (including all
interest accrued on such amounts);
o a first fixed charge (which may take effect as a floating charge) of
Funding's right, title, interest and benefit in all authorized
investments purchased from the Funding GIC account, the Funding
transaction account and each other account (if any) of
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Funding (other than the Funding (Issuer) GIC accounts, and any other
account established to hold the issuer reserve fund and issuer
liquidity reserve fund (if any) of any new issuer) and all income on
such investments; and
o a first floating charge over all the assets and the undertaking of
Funding which are not otherwise effectively subject to a fixed charge
or assignment by way of security as described in the preceding
paragraphs or as described in the following paragraph.
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.
Funding has granted a security interest to be held by the security trustee
on trust for the benefit of the relevant previous issuer over Funding's right,
title, interest and benefit in the Funding (Granite 01-1) GIC account, the
Funding (Granite 01-2) GIC account or, as the case may be, the Funding (Granite
02-1) GIC account established for the related previous issuer. In addition,
Funding will grant a security interest to be held by the security trustee on
trust for the benefit of the issuer (and will grant a separate security interest
to be held by the security trustee on trust for the benefit of each new issuer)
over Funding's right, title, interest and benefit in the Funding (Granite 02-2)
GIC account established for the issuer (or, in the case of any new issuer, in
the relevant Funding bank account established to hold any issuer reserve fund
and issuer liquidity reserve fund (if any) of that new issuer), and all amounts
standing to the credit of such account or accounts (including all interest
accrued on such amounts).
NATURE OF SECURITY - FIXED CHARGE OR FLOATING CHARGE
Funding may not deal with those of its assets which are subject to a fixed
charge without the consent of the security trustee. Accordingly, Funding will
not be permitted to deal with the assets which are expressed to be subject to a
fixed charge in its ordinary course of business. In this way, the security is
said to "FIX" over those assets which are expressed to be subject to a fixed
charge.
Unlike fixed charges, a floating charge does not attach to specific assets
but "FLOATS" over a class of assets which may change from time to time. Funding
is able to deal with assets which are subject to a floating charge 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's business. Assets which are
acquired by Funding after the closing date (including assets acquired upon the
disposition of any other asset) and which are not subject to any fixed charge
mentioned in the section above will be subject to the floating charge.
The existence of the floating charge may allow the security trustee to
appoint a receiver of Funding. Whether such a receiver would be deemed to be an
administrative receiver under the English insolvency legislation is unclear as
Funding is incorporated in Jersey. However, as the receiver will be given wide
powers in the Funding deed of charge, the main advantage of the receiver being
an administrative receiver is that a person entitled to appoint an
administrative receiver can prevent the appointment of an administrator,
ensuring that in the event of enforcement proceedings commenced in respect of
amounts due and owing by Funding, the security trustee will be able to control
those proceedings in the best interest of the Funding secured creditors.
However, the same uncertainties arise as to whether the English court has
jurisdiction to make an administration order in respect of a foreign company. As
Funding is incorporated in Jersey, the better view is that an English court
would not have jurisdiction to appoint an administrator over Funding unless
requested to do so by a court in Jersey. If an administrator of Funding were
appointed this would prevent the appointment of a receiver and freeze the
enforcement of rights and remedies without the consent of the administrator or
leave of the court. The interest of the Funding secured creditors in property
and assets over which there is a floating charge only will rank behind the
claims of certain preferential creditors on enforcement of the Funding security
- - for example, any
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amounts due to the UK tax authorities. This means that amounts due to
preferential creditors will be paid ahead of amounts due to the issuer under the
intercompany loan agreement.
The floating charge created by the Funding deed of charge may "CRYSTALLIZE"
and become a fixed charge over the relevant class of assets owned by Funding at
the time of crystallization. Crystallization will occur automatically following
the occurrence of specific events set out in the Funding deed of charge,
including, among other events, notice to Funding from the security trustee
following an intercompany loan event of default. A crystallized floating charge
will continue to rank behind the claims of preferential creditors (as referred
to in this section) on enforcement of the Funding security.
FUNDING PRE-ENFORCEMENT AND POST-ENFORCEMENT PRIORITY OF PAYMENTS
The Funding deed of charge also sets out the order of priority, as at the
closing date, for the application by the cash manager, prior to the service of
an intercompany loan enforcement notice, of amounts standing to the credit of
the Funding transaction account on each payment date. This order of priority is
described in "CASHFLOWS - DISTRIBUTION OF FUNDING AVAILABLE REVENUE RECEIPTS"
and "CASHFLOWS - DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO
ENFORCEMENT OF THE FUNDING SECURITY".
The Funding deed of charge sets out the order of priority, as at the
closing date, for the application by the security trustee (or the cash manager
on behalf of the security trustee), following service of an intercompany loan
enforcement notice, of amounts received or recovered by the security trustee or
a receiver appointed on its behalf. This order of priority is described in
"CASHFLOWS - DISTRIBUTION OF MONIES FOLLOWING ENFORCEMENT OF THE FUNDING
SECURITY".
As new issuers are established to issue new notes and accordingly to make
new advances to Funding, those new issuers (together with the new start-up loan
providers (if any)) will enter into deeds of accession or supplemental deeds in
relation to the Funding deed of charge which may, depending on the type of notes
to be issued, require amendments to any of the Funding pre-enforcement revenue
priority of payments, the Funding pre-enforcement principal priority of
payments, and the Funding post-enforcement priority of payments.
ENFORCEMENT
The Funding deed of charge sets out the circumstances upon which and the
procedures by which the security trustee may take steps to enforce the Funding
security. The Funding security will become enforceable upon the service on
Funding by the security trustee of an intercompany loan enforcement notice (see
"THE INTERCOMPANY LOAN AGREEMENT - INTERCOMPANY LOAN EVENTS OF DEFAULT")
provided that, if the Funding security has become enforceable otherwise than by
reason of a default in payment of any amount due in respect of any intercompany
loan which would be utilized to fund the payment of any class A notes of any
issuer under any intercompany loan, the security trustee will not be entitled to
dispose of all or part of the assets comprised in the Funding security unless
either:
o a sufficient amount would be realized to allow a full and immediate
discharge of such amount under each intercompany loan as would be
sufficient to fund the payment in full of all amounts owing in respect
of the class A notes of any issuer series and all prior ranking
amounts due by Funding; or
o the security trustee is of the opinion (which shall be binding on the
Funding secured creditors), reached after considering the advice of
any financial or professional advisers selected by the security
trustee (and if the security trustee is unable to obtain such advice
having made reasonable efforts to do this, this proviso shall not
apply), that the cash flow expected to be received by Funding will
not, or that there is a significant risk that it will not, be
sufficient (as certified to it by Funding), having
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regard to any other relevant actual, contingent or prospective
liabilities of Funding, to discharge in full over time such amount
under each intercompany loan as would be sufficient to fund the
payment in full of all amounts owing in respect of the class A notes
of each issuer and all prior ranking amounts due by Funding; and
o the security trustee shall not be bound to make the determination set
out above unless it shall have been indemnified and/or secured to its
satisfaction against all liabilities to which it may thereby become
liable or which it may incur by so doing.
In respect of property which is secured in accordance with Jersey law, the
security will not be enforceable until the security trustee serves a Jersey
enforcement notice on Funding. Enforcement must take place in accordance with
Jersey security law, which provides that the Jersey enforcement notice must
specify the event of default and, if the event of default is remediable, require
the assignor to remedy the default within 14 days of receiving the notice.
Thereafter enforcement may take place, and in order to enforce the Jersey
security interest, the security trustee is required to take all reasonable steps
to ensure that the property secured by Funding is sold within a reasonable time
and for a price corresponding to the value on the open market at the time that
the collateral is sold.
CONFLICTS
The Funding 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 deed of
charge, the security trustee shall act only at the request or direction of the
note trustee. The authority of the note trustee to direct the security trustee
to act derives from the issuer's (and each other issuer's) assignment to the
note trustee of its rights under the relevant intercompany loan made by such
issuer to Funding. If notes are outstanding that have been issued by the issuer
and one or more other issuers, and resolutions of holders of such notes result
in conflicting directions being given to the note trustee (and, ultimately, from
the note trustee to the security trustee), the note trustee shall have regard
only to the directions of the noteholders of the issuer or other issuers that
has or have the highest ranking class of notes outstanding at such time.
However, if more than one issuer has notes outstanding that are the highest
ranking notes outstanding among all issuers, the note trustee shall instead have
regard to the resolutions of the holders of notes of that issuer that has the
greatest aggregate principal amount of notes of the highest rank outstanding at
such time. In all cases, the note trustee and the security trustee will only be
obligated to act if they are indemnified to their satisfaction.
DELEGATION BY THE SECURITY TRUSTEE TO AN AUTHORIZED THIRD PARTY
Subject as provided further in the transaction documents, the 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 security trustee and the issuer will not result in the ratings
on the notes being downgraded, qualified or withdrawn. The security trustee
shall be obliged to use reasonable endeavors to procure the appointment of an
authorized third party and in the event of any such appointment shall not be
required to monitor or supervise the third party's performance and shall not be
responsible for any act or omission of such third party or for any loss caused
thereby.
NO ENFORCEMENT BY FUNDING SECURED CREDITORS
Each of the Funding secured creditors (other than the security trustee and
any receiver) has agreed under the Funding deed of charge that only the security
trustee may enforce the security created by the Funding deed of charge.
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MODIFICATION AND WAIVER, FEES, RETIREMENT AND RESPONSIBILITIES OF THE SECURITY
TRUSTEE
MODIFICATION AND WAIVER
Without the consent of any of the Funding secured creditors, the security
trustee (at the direction of the note trustee) may:
o agree to modifications to the transaction documents provided that the
security trustee is of the opinion that any such modification would
not materially harm the interests of the noteholders or that such
modification is of a formal, minor or technical nature or is required
by the rating agencies in respect of any new issuer or new startup
loan provider or other person which accedes to the Funding deed of
charge. Any such modification will be binding on the Funding secured
creditors; and
o authorize or waive a proposed or actual breach of any provisions of
the transaction documents provided that the security trustee is of the
opinion that such breach would not materially harm the interests of
the noteholders. Any such authorization or waiver will be binding on
the Funding secured creditors.
FEES, EXPENSES AND INDEMNITY
Funding shall reimburse the security trustee for all its costs and expenses
properly incurred in acting as security trustee (including but not limited to
the cost of using its reasonable endeavors to appoint and maintain an authorized
third party). In addition, Funding shall pay to the security trustee a fee of
such amount and on such dates as will be agreed from time to time by the
security trustee and Funding. Funding shall indemnify the 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 deed of charge by the
security trustee or any of its officers or employees.
RETIREMENT AND REMOVAL
Subject to the appointment of a successor security trustee, the security
trustee may retire after giving three months' notice in writing to Funding. If
within 60 days of having given notice of its intention to retire, Funding 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 deed of charge). Funding may remove the security trustee or appoint a
new security trustee at any time provided that it has the approval, which must
not be unreasonably withheld or delayed, of each of the Funding secured
creditors. In addition, the security trustee may, subject to conditions
specified in the Funding deed of charge, appoint a co-trustee to act jointly
with it.
ADDITIONAL PROVISIONS OF THE FUNDING DEED OF CHARGE
The Funding deed of charge contains a range of provisions limiting the
scope of the security trustee's duties and liabilities. These provisions
include, among others, that the security trustee:
o may rely on instructions or directions given to it by the note trustee
as being given on behalf of the relevant class of noteholders without
inquiry about compliance with the trust deed and on the advice of any
lawyer, banker, accountant or other expert;
o is not responsible for the legality, admissibility in evidence,
adequacy or enforceability of the Funding deed of charge or any other
transaction document;
o may rely on documents believed by it to be genuine provided by any of
the mortgages trustee, Funding or the cash manager and on the advice
of any lawyer, banker, accountant or other expert;
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o may assume that no intercompany loan event of default has occurred
unless it has received notice from a Funding secured creditor stating
that an intercompany loan event of default has occurred and describing
that intercompany loan event of default;
o is not required to monitor or supervise the functions of the account
bank or of any other person under any transaction document;
o has the power to determine all questions arising in relation to the
Funding deed of charge or other transaction document and every
determination made shall bind all of the Funding secured creditors;
o each Funding secured creditor must make its own independent appraisal,
without reliance on the security trustee, as to the financial
condition and affairs of Funding;
o the 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 deed of charge or any other transaction document unless
caused by the security trustee's fraud, negligence, willful default or
breach of the terms of the Funding deed of charge;
o the security trustee may accept such title as Funding has to the
Funding charged property and will not be required to investigate or
make inquiry into Funding's titles to such property; and
o the security trustee will not be responsible for any shortfall which
may arise because it is liable to tax in respect of the Funding
charged property or the proceeds of such property.
The 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 security trustee does not guarantee
the performance of the notes or the payment of principal or interest on the
notes.
GOVERNING LAW
The Funding deed of charge is governed by English law, except for the
provisions which relate to security interests created in property situated in
Jersey, which are governed by Jersey law.
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SECURITY FOR THE ISSUER'S OBLIGATIONS
To provide security for its obligations under the notes and the other
transaction documents, the issuer will enter into the issuer deed of charge with
the issuer secured creditors. A summary of the material terms of the issuer deed
of charge is set out below. The summary does not purport to be complete and is
subject to the provisions of the issuer deed of charge. This prospectus is a
part of the registration statement, and a form of the issuer deed of charge has
been filed as an exhibit to that registration statement.
COVENANT TO PAY
The issuer will covenant in favor of the note trustee for the benefit of
the issuer secured creditors (including the note trustee) that the issuer will
pay all amounts due to each of the issuer secured creditors as they become due
and payable and that the issuer will comply with its other obligations under the
transaction documents.
ISSUER SECURITY
The issuer will grant the following security to be held by the note trustee
for itself and on trust for the benefit of the issuer secured creditors (which
definition includes the noteholders):
o an assignment by way of first fixed security of the issuer's rights
and claims in respect of all security and other rights held on trust
by the security trustee pursuant to the Funding deed of charge, save
to the extent that any of those issuer's rights and claims derive from
property that is situated in Jersey, which will be assigned to the
note trustee for the purpose of creating a security interest in
accordance with Jersey law;
o an assignment by way of first fixed security of the issuer's right,
title, interest and benefit in the transaction documents to which it
is a party, including the intercompany loan agreement, the Funding
deed of charge, any swap agreement, the paying agent and agent bank
agreement, the subscription agreement, the underwriting agreement, the
corporate services agreement, the issuer bank account agreement, the
issuer cash management agreement, the trust deed, save to the extent
that such right, title, interest and benefit derive from property that
is situated in Jersey. To the extent that the same are derived from
property situated in Jersey, the issuer will assign such right, title,
interest and benefit to the note trustee for the purpose of creating a
security interest in those rights, title, interest and benefit in
accordance with Jersey law;
o an assignment by way of first fixed security over the issuer's right,
title, interest and benefit in the issuer transaction accounts and
each other account (if any) of the issuer, and all amounts standing to
the credit of those accounts (including all interest earned on such
amounts);
o a first fixed charge (which may take effect as a floating charge) of
the issuer's right, title, interest and benefit in all authorized
investments made by or on behalf of the issuer, including all monies
and income payable under those investments; and
o a first floating charge over all the assets and undertaking of the
issuer which are not otherwise effectively subject to a fixed charge
or assignment by way of security as described in the preceding
paragraphs.
NATURE OF SECURITY - FIXED CHARGE OR FLOATING CHARGE
For a description of the nature and certain consequences of taking fixed
charges and floating charges see "SECURITY FOR FUNDING'S OBLIGATIONS - FUNDING
SECURITY - NATURE OF SECURITY - FIXED CHARGE OR FLOATING CHARGE". However,
unlike Funding, the issuer is incorporated in England and an English court may,
in certain circumstances, appoint an administrator of the issuer. However, the
existence of the floating charge will allow the note trustee to appoint an
administrative receiver of the issuer and thereby prevent the
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appointment of an administrator. You should note that proposed changes to
bankruptcy and insolvency laws in the United Kingdom may affect the ability of
the note trustee to appoint an administrative receiver of the issuer and thereby
prevent the appointment of an administrator. See "RISK FACTORS - CHANGES OF LAW
MAY ADVERSELY AFFECT YOUR INTERESTS".
ISSUER PRE-ENFORCEMENT AND POST-ENFORCEMENT PRIORITY OF PAYMENTS
The issuer cash management agreement sets out the order of priority for the
application of cash by the issuer cash manager prior to the service of a note
enforcement notice. This payment order of priority is described in "CASHFLOWS".
The issuer deed of charge will also set out the order of priority for the
application by the note trustee (or the issuer cash manager on its behalf),
following service of a note enforcement notice, of amounts received or recovered
by the note trustee or a receiver appointed on its behalf. This order of
priority is described in "CASHFLOWS".
ENFORCEMENT
The issuer deed of charge will set out the circumstances in which and the
procedures by which the note trustee may take steps to enforce the issuer
security.
The issuer security will become enforceable upon either (1) the enforcement
of the Funding security or (2) the occurrence of a note event of default which
is not waived by the note trustee. However, as the note trustee will not be
entitled to assign to a third party its or the issuer's rights under the
intercompany loan agreement following the service of a note enforcement notice,
the most likely consequence of the issuer security becoming enforceable will be
that monies received by the note trustee from Funding will be applied in
accordance with the issuer post-enforcement priority of payments.
In respect of property which is secured in accordance with Jersey law, the
security will not be enforceable until the note trustee serves a Jersey
enforcement notice on the issuer. Enforcement must take place in accordance with
Jersey security law, which provides that the Jersey enforcement notice must
specify the event of default and, if the event of default is remediable, require
the assignor to remedy the default within 14 days of receiving the notice.
CONFLICTS
The issuer deed of charge will contain provisions which require the note
trustee to consider the interests of the noteholders as to the exercise of its
powers, trusts, authorities, duties and discretions. In the event of a conflict
between the interests of the noteholders and the interests of any other issuer
secured creditor, the note trustee is required to consider only, unless stated
otherwise, the interests of the noteholders. If, in the sole opinion of the note
trustee, there may be a conflict as among noteholders, the note trustee will
have regard to the interests of the class of noteholders with the
highest-ranking notes only. If there is a conflict between the interests of the
class A noteholders of one series and the class A noteholders of another series,
or conflict between the class B noteholders of one series and the class B
noteholders of another series or the class C noteholders of one series and the
class C noteholders of another series then a resolution directing the note
trustee to take any action must be passed at a single meeting comprising the
holders of each series of the class A notes or, as applicable, each series of
the class B notes or each series of the class C notes subject to the conflict.
In all cases, the note trustee will only be obliged to act if it is indemnified
to its satisfaction. For more information on how the note trustee will resolve
conflicts between noteholders, see "DESCRIPTION OF THE OFFERED NOTES - 11.
MEETINGS OF NOTEHOLDERS, MODIFICATIONS AND WAIVER".
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NO ENFORCEMENT BY ISSUER SECURED CREDITORS
Each of the issuer secured creditors (other than the note trustee acting on
behalf of the noteholders) will agree under the issuer deed of charge that only
the note trustee may enforce the security created by the issuer deed of charge
and it will not take steps directly against the issuer to recover amounts owing
to it by the issuer unless the note trustee has become bound to enforce the
issuer security but has failed to do so within 30 days of becoming so bound.
MODIFICATION AND WAIVER, FEES, RETIREMENT AND RESPONSIBILITIES OF THE NOTE
TRUSTEE
MODIFICATION AND WAIVER
Without the consent of any of the issuer secured creditors, the note
trustee may:
o agree to modifications to the transaction documents provided that the
note trustee is of the opinion that such modification will not
materially harm the interests of the noteholders or that such
modification is of a formal, minor or technical nature. A proposed
modification will not materially harm the interest of any noteholders
solely because new issuers accede to the Funding deed of charge. Any
such modification will be binding on the issuer secured creditors; and
o authorize or waive a proposed or actual breach of any provisions of
the notes or of any other transaction documents provided that the note
trustee is of the opinion that such breach will not materially harm
the interests of the noteholders. Any such authorization or waiver
will be binding on the noteholders and the other issuer secured
creditors.
FEES, EXPENSES AND INDEMNITY
The issuer will reimburse the note trustee for all costs and expenses
properly incurred in acting as note trustee. In addition, the issuer shall pay
to the note trustee a fee of such amount and on such dates as will be agreed
from time to time by the note trustee and the issuer. The issuer shall indemnify
the note trustee from and against all proceedings, claims, demands, losses,
costs, charges, expenses and liabilities incurred by it or to which it may
become liable in connection with the exercise of its trusts, powers, authorities
and discretions, or otherwise in respect of any matter done or not done relating
to the transaction documents, except where the same is caused by the fraud,
gross negligence, willful default or breach of the terms of the issuer deed of
charge by the note trustee or any of its officers or employees.
RETIREMENT AND REMOVAL
Subject to the appointment of a successor note trustee, the note trustee
may retire after giving three months' notice in writing to the issuer. If within
60 days of having given notice of its intention to retire, the issuer has failed
to appoint a replacement note trustee, the outgoing note trustee will be
entitled to appoint a successor (provided that such successor is acceptable to
the rating agencies and agrees to be bound by the terms of the issuer deed of
charge). The issuer may remove the note trustee or appoint a new note trustee at
any time provided that it has the approval, which must not be unreasonably
withheld or delayed, of the issuer secured creditors. In addition, the note
trustee may, subject to the conditions specified in the issuer deed of charge,
appoint a co-trustee to act jointly with it.
ADDITIONAL PROVISIONS OF THE ISSUER DEED OF CHARGE
The issuer deed of charge will contain a range of provisions regulating the
scope of the note trustee's duties and liabilities. These include the following:
o the note trustee is not responsible for the legality, admissibility in
evidence, adequacy or enforceability of the issuer deed of charge or
any other transaction document;
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o the note trustee may assume that no note event of default has occurred
unless the note trustee has received notice from an issuer secured
creditor stating that a note event of default has occurred and
describing that note event of default;
o the note trustee is not required to monitor or supervise the functions
of the account bank or of any other person under any transaction
document;
o the note trustee has the power to determine all questions arising in
relation to the issuer deed of charge or other transaction document
entered into by the issuer and every determination made shall bind the
note trustee and all of the issuer secured creditors;
o each issuer secured creditor must make its own independent appraisal,
without reliance on the note trustee, as to the financial condition
and affairs of the issuer;
o the note trustee will not be liable for any loss, cost, damage or
expense which may be caused by anything done or not done by it under
the issuer deed of charge or any other transaction document unless
caused by the note trustee's fraud, gross negligence, willful default
or breach of the terms of the issuer deed of charge;
o the note trustee may accept such title as the issuer has to the issuer
charged property and will not be required to investigate or make
inquiry into the issuer's title to such property;
o the note trustee will not be responsible for any shortfall which may
arise because it is liable to tax in respect of the issuer charged
property or the proceeds of such property; and
o the note trustee is not required to take steps or action in connection
with the transaction documents (including enforcing the issuer
security) unless (1) it has been directed or instructed to do so by an
extraordinary resolution of a class of noteholders or in writing by
the holders of at least 25% of the aggregate principal amount of the
notes of a class then outstanding or (if there are no remaining notes
outstanding) by any other issuer secured creditor provided that:
(1) the note trustee will not act at the direction or request of the
class B noteholders unless either to do so would not, in its
opinion, be materially prejudicial to the interests of the class
A noteholders or such action is sanctioned by an extraordinary
resolution of the class A noteholders;
(2) the note trustee will not act at the direction or request of the
class C noteholders unless either to do so would not, in its
opinion, be materially prejudicial to the interests of the class
A noteholders and/or the class B noteholders or such action is
sanctioned by extraordinary resolutions of the class A
noteholders and/ or the class B noteholders, as the case may be;
and
(3) it has been indemnified to its satisfaction against all costs,
liabilities and claims which it may incur or in respect of which
it may become liable.
The note trustee makes no statement or representation in this prospectus,
has not authorized or caused the issue of any part of it and takes no
responsibility for any part of it. The note trustee does not guarantee the
performance of the notes or the payment of principal or interest on the notes.
GOVERNING LAW
The issuer deed of charge will be governed by English law, except for the
provisions which relate to security interests created in property situated in
Jersey, which will be governed by Jersey law.
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DESCRIPTION OF THE TRUST DEED
The principal agreement governing the notes will be the trust deed dated on
or about the closing date and made between the issuer and the note trustee. A
summary of the material terms of the trust deed is set out below. The summary
does not purport to be complete and it is subject to the provisions of the trust
deed. A form of the trust deed has been filed as an exhibit to the registration
statement and this prospectus forms part of the registration statement.
The trust deed sets out the forms of the global note certificates and the
individual note certificates. It also sets out the terms and conditions of the
notes, and the conditions for the issue of individual note certificates and/or
the cancellation of any notes. The paying agent and agent bank agreement
contains detailed provisions regulating the appointments of the paying agents
and other agents.
The trust deed also contains covenants made by the issuer in favor of the
note trustee and the noteholders. The main covenants are that the issuer will
pay interest and repay principal on each of the notes when due. Some of the
covenants also appear in the terms and conditions of the notes (see "TERMS AND
CONDITIONS OF THE OFFERED NOTES"). The issuer also covenants that it will do all
things necessary to maintain the listing on the official list of the UK Listing
Authority and to maintain trading of the notes on the London Stock Exchange plc
and to keep in place a common depository, paying agents and an agent bank, and
further covenants with the note trustee that it will comply with and perform and
observe all its obligations in the trust deed. The trust deed provides for
delivery to the note trustee of an annual statement signed by an officer of the
issuer to the effect that the issuer has fulfilled its material obligations
under the trust deed throughout the preceding financial year, except as
specified in such statement.
The trust deed provides that the class A noteholders' interests take
precedence for so long as the class A notes are outstanding and thereafter the
interests of certain class B noteholders take precedence for so long as the
class B notes are outstanding. Certain basic terms of each class of notes may
not be amended without the consent of the majority of the holders of that class
of note and the consent of the majority of the holders of the other classes of
notes outstanding (see "TERMS AND CONDITIONS OF THE OFFERED NOTES").
The trust deed sets out the terms under which the note trustee is
appointed, the indemnification of the note trustee, the payment it receives and
the extent of the note trustee's authority to act beyond its statutory powers
under English law. The note trustee is also given the ability to appoint a
delegate or agent in the execution of any of its duties under the trust deed.
The trust deed sets out the circumstances in which the note trustee may resign
or retire.
The trust deed includes certain provisions required by the US Trust
Indenture Act of 1939. These provisions include, but are not limited to:
(a) maintenance of a noteholder list by the note trustee;
(b) provision of financial statements and other information by the issuer
to the note trustee;
(c) ability of noteholders to waive certain past defaults of the issuer;
(d) duty of the note trustee (following a note event of default) to use
the same degree of care in exercising its responsibilities as would be
exercised by a prudent person conducting their own affairs;
(e) duty of the note trustee to notify all noteholders of any note event
of default of which it has actual knowledge; and
(f) right of the note trustee to resign at any time by notifying the
issuer in writing, and the ability of the issuer to remove the note
trustee under certain circumstances.
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Finally, the trust deed provides that until the notes have been paid in
full, they shall be entitled to the benefit of and be bound by the terms and
conditions of the trust deed. The trust deed will be discharged with respect to
the collateral securing the notes upon the delivery to the note trustee for
cancellation of all the notes or, with certain limitations, upon deposit with
the note trustee of funds sufficient for the payment in full of all the notes.
TRUST INDENTURE ACT PREVAILS
The trust deed contains a stipulation that, if any provision of the trust
deed limits, qualifies or conflicts with another provision which is required to
be included in the trust deed by, and is not subject to a contractual waiver
under, the US Trust Indenture Act of 1939, as amended, the required provision of
that Act shall be deemed to be incorporated into the trust deed and shall
prevail.
GOVERNING LAW
The trust deed will be governed by English law.
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THE NOTES
The issue of the notes will be authorized by a resolution of the board of
directors of the issuer passed prior to the closing date. The notes will be
constituted by a trust deed to be dated the closing date, between the issuer and
the note trustee, as trustee for, among others, the holders for the time being
of the notes. The trust deed includes provisions which enable it to be modified
or supplemented and any reference to the trust deed is a reference also to the
document as modified or supplemented in accordance with its terms.
The material terms of the notes are described in this prospectus. However,
the statements set out in this section with regard to the notes and the global
note certificates representing the notes are subject to the detailed provisions
of the trust deed. The trust deed will include the forms of the global note
certificates and the forms of the individual note certificates. A paying agent
and agent bank agreement between the issuer, the note trustee, Citibank, N.A. in
London as "PRINCIPAL PAYING AGENT", the other paying agents (together with the
principal paying agent, called the "PAYING AGENTS"), the transfer agent, the
registrar and the agent bank, regulates how payments will be made on the notes
and how determinations and notifications will be made. It will be dated as of
the closing date and the parties 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 series 1 notes will initially be offered and sold pursuant to a registration
statement, of which this prospectus forms a part, filed with the SEC. The series
2 notes and the series 3 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 notes offered by this prospectus (the "OFFERED GLOBAL NOTE
CERTIFICATES") will be deposited with Citibank, N.A., as the custodian for, and
registered in the name of Cede & Co. as nominee of, The Depository Trust
Company, referred to in this prospectus as "DTC". On confirmation from the
custodian that it holds the offered 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 offered global note certificates.
The amount of notes represented by each global note certificate is
evidenced by the register maintained for that purpose by the registrar.
Together, the notes represented by the global note certificates and any
outstanding individual note certificates will equal the aggregate principal
amount of the notes outstanding at any time. However, except as described under
" - INDIVIDUAL NOTE CERTIFICATES", individual note certificates shall not be
issued.
Beneficial owners may hold their interests in the global note certificates
only through DTC, Clearstream, Luxembourg or Euroclear, as applicable, or
indirectly through organizations that are participants in any of those systems.
Ownership of these beneficial interests in a global note certificate will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC, Clearstream, Luxembourg or Euroclear (with respect to
interests of their participants) and the records of their participants (with
respect to interests of persons other than their participants). By contrast,
ownership of direct interests in a global note certificate will be shown on, and
the transfer of that ownership will be effected through, the register maintained
by the registrar. Because of this holding structure of the notes, beneficial
owners of notes may look only to DTC, Clearstream, Luxembourg or Euroclear, as
applicable, or their respective participants for their beneficial entitlement to
those notes. The issuer expects that DTC, Clearstream, Luxembourg or Euroclear
will take any action permitted to be taken by a beneficial owner of notes only
at the direction of one or more participants to whose account the interests in
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a global note certificate is credited and only in respect of that portion of the
aggregate principal amount of notes as to which that participant or those
participants has or have given that direction.
Beneficial owners will be entitled to the benefit of, will be bound by and
will be deemed to have notice of, all the provisions of the trust deed and the
paying agent and agent bank agreement. Beneficial owners can see copies of these
agreements at the principal office for the time being of the note trustee, which
is, as of the date of this document, The Bank of New York, London Branch and at
the specified office for the time being of each of the paying agents. Pursuant
to its obligations under the Listing Rules made by the UK Listing Authority, the
issuer will maintain a paying agent in the United Kingdom until the date on
which the notes are finally redeemed.
PAYMENT
Principal and interest payments on the offered notes will be made via the
paying agents to DTC or its nominee, as the registered holder of the offered
global note certificates. DTC's practice is to credit its participants' accounts
on the applicable payment date according to their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive payment
on that payment date.
Payments by DTC, Clearstream, Luxembourg and Euroclear participants to the
beneficial owners of notes will be governed by standing instructions, customary
practice, and any statutory or regulatory requirements as may be in effect from
time to time, as is now the case with securities held by the accounts of
customers registered in "STREET NAME". These payments will be the responsibility
of the DTC, Clearstream, Luxembourg or Euroclear participant and not of DTC,
Clearstream, Luxembourg, Euroclear, any paying agent, the note trustee or the
issuer. None of the issuer, the note trustee, any underwriter nor any paying
agent will have any responsibility or liability for any aspect of the records of
DTC, Clearstream, Luxembourg or Euroclear relating to or payments made by DTC,
Clearstream, Luxembourg or Euroclear on account of beneficial interests in the
global note certificates or for maintaining, supervising or reviewing any
records of DTC, Clearstream, Luxembourg or Euroclear relating to those
beneficial interests.
CLEARANCE AND SETTLEMENT
THE CLEARING SYSTEMS
DTC. DTC has advised us and the underwriters that it intends to follow the
following procedures:
DTC will act as securities depository for the offered global note
certificates. The offered notes represented by the offered global note
certificates will be issued as securities registered in the name of Cede & Co.
(DTC's nominee).
DTC has advised us that it is a:
o limited-purpose trust company organized under New York Banking Law;
o "BANKING ORGANIZATION" within the meaning of New York Banking Law;
o member of the Federal Reserve System;
o "CLEARING CORPORATION" within the meaning of the New York Uniform
Commercial Code; and
o "CLEARING AGENCY" registered under the provisions of Section 17A of
the Exchange Act.
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 offered 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 offered 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 offered
notes. Under its usual procedures, DTC will mail an omnibus proxy to the issuer
as soon as possible after the record date, which assigns the consenting or
voting rights of Cede & Co. to those DTC participants to whose accounts the
book-entry interests are credited on the record date, identified in a list
attached to the proxy.
The issuer understands that under existing industry practices, when the
issuer requests any action of noteholders or when a beneficial owner desires to
give or take any action which a noteholder is entitled to give or take under the
trust deed, DTC generally will give or take that action, or authorize the
relevant participants to give or take that action, and those participants would
authorize beneficial owners owning through those participants to give or take
that action or would otherwise act upon the instructions of beneficial owners
through them.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the issuer believes to be reliable, but the
issuer takes no responsibility for the accuracy thereof.
Clearstream, Luxembourg and Euroclear. 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
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need for physical movement of securities. Clearstream, Luxembourg and Euroclear
provide various services including safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Clearstream, Luxembourg and Euroclear also deal with domestic
securities markets in several countries through established depository and
custodial relationships. Clearstream, Luxembourg and Euroclear have established
an electronic bridge between their two systems across which their respective
participants may settle trades with each other. Transactions may be settled in
Clearstream, Luxembourg and Euroclear in any of numerous currencies, including
United States dollars and euro.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream, Luxembourg participants are financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, and clearing corporations. Indirect access to
Clearstream, Luxembourg is also available to others, including banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Clearstream, Luxembourg participant, either directly or
indirectly.
The Euroclear system was created in 1968 to hold securities for its
participants and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment. The
Euroclear system is operated by Euroclear Bank S.A./N.V. (the "EUROCLEAR
OPERATOR"). All operations are conducted by the Euroclear operator. All
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear operator.
Euroclear participants include banks - including central banks - securities
brokers and dealers and other professional financial intermediaries. Indirect
access to the Euroclear system is also available to other firms that maintain a
custodial relationship with a Euroclear participant, either directly or
indirectly.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing use of Euroclear and the
related Operating Procedures of the Euroclear system. These terms and conditions
govern transfers of securities and cash within the Euroclear system, withdrawal
of securities and cash from the Euroclear system, and receipts of payments for
securities in the Euroclear system. All securities in the Euroclear system are
held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear operator acts under these
terms and conditions only on behalf of Euroclear participants and has no record
of or relationship with persons holding through Euroclear participants.
As the holders of book-entry interests, beneficial owners will not have the
right under the trust deed to act on solicitations by the issuer for action by
noteholders. Beneficial owners will only be able to act to the extent they
receive the appropriate proxies to do so from DTC, Clearstream, Luxembourg or
Euroclear or, if applicable, their respective participants. No assurances are
made about these procedures or their adequacy for ensuring timely exercise of
remedies under the trust deed.
No beneficial owner of an interest in a note represented by a global note
certificate will be able to transfer that interest except in accordance with
applicable procedures, in 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 will be delivered on the closing date
to Citibank, N.A., as custodian for DTC. Customary settlement procedures will be
followed for participants of each system on the closing date. Notes will be
credited to investors' securities accounts on the closing date against payment
in same-day funds.
Secondary Trading
Secondary market sales of book-entry interests in notes between DTC
participants will occur in the ordinary way in accordance with DTC rules and
will be settled using the procedures applicable to conventional United States
corporate debt obligations.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to these
procedures to facilitate transfers of interests in securities among participants
of DTC, Clearstream, Luxembourg and Euroclear, they are not obligated to perform
these procedures. Additionally, these procedures may be discontinued at any
time. None of the issuer, any agent, the underwriters or any affiliate of any of
the foregoing, or any person by whom any of the foregoing is controlled for the
purposes of the Securities Act, will have any responsibility for the performance
by DTC, Clearstream, Luxembourg, Euroclear or their respective direct or
indirect participants or accountholders of their respective obligations under
the rules and procedures governing their operations or for the sufficiency for
any purpose of the arrangements described in this prospectus.
INDIVIDUAL NOTE CERTIFICATES
Beneficial owners of offered notes will only be entitled to receive
individual note certificates under the following limited circumstances:
o as a result of any amendment to, or change in, the laws or regulations
of the United Kingdom (or any political subdivision thereof) or of any
authority therein or thereof having power to tax or in the
interpretation or administration of such laws or regulations which
becomes effective on or after the closing date, the issuer or any
paying agent is or will be required to make any deduction or
withholding from any payment on the notes that would not be required
if the notes were represented by individual note certificates; or
o DTC notifies the issuer that it is unwilling or unable to hold the
offered global note certificates or is unwilling or unable to continue
as, or has ceased to be, a clearing agency registered under the
Exchange Act and, in each case, the issuer cannot appoint a successor
within 90 days of such notification.
In no event will individual note certificates in bearer form be issued. Any
individual note certificate will be issued in registered form in denominations
of $10,000 and $1,000 in the case of individual note certificates representing
the series 1 notes. 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 issuer, the note trustee and any
paying agent shall be entitled to treat the person in whose names any individual
note certificate is registered as the absolute owner thereof. The paying agent
and agent bank agreement contains provisions relating to the maintenance by a
registrar of a register reflecting ownership of the notes and other provisions
customary for a registered debt security.
Any person receiving individual note certificates will not be obligated to
pay or otherwise bear the cost of any tax or governmental charge or any cost or
expense relating to insurance, postage, transportation or any similar charge,
which will be solely the responsibility of the issuer. No service charge will be
made for any registration of transfer or exchange of any individual note
certificates.
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DESCRIPTION OF THE OFFERED NOTES
The following is a summary of the material terms and conditions of the
series 1 notes, numbered 1 to 15. This summary does not need to be read with the
actual terms and conditions of the series 1 notes in order to learn all the
material terms and conditions of the series 1 notes. The complete terms and
conditions of the series 1 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 "OFFERED NOTES" mean the series 1 notes
offered by this prospectus. References in this section to the "NOTES" mean
collectively the series 1 notes, the series 2 notes and the series 3 notes.
Furthermore, this section, as elsewhere in this prospectus, provides information
on the series 2 notes and the series 3 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 offered notes. You should be aware
that, as explained elsewhere in this prospectus, the series 2 notes and the
series 3 notes as a group do not provide credit support for the offered notes.
The notes are the subject of the following documents:
o a trust deed dated the closing date between the issuer and the note
trustee;
o a paying agent and agent bank agreement dated the closing date between
the issuer, the principal paying agent, the agent bank, the other
paying agents, the transfer agent, the registrar and the note trustee;
o an issuer deed of charge dated the closing date between the issuer,
the note trustee, the swap providers and certain other parties;
o the dollar currency swap agreements dated the closing date between the
issuer, the dollar currency swap provider and the note trustee;
o the euro currency swap agreements dated the closing date between the
issuer, the euro currency swap provider and the note trustee; and
o the basis rate swap agreement dated the closing date between the
issuer, the basis rate swap provider and the note trustee.
When we refer to the parties to these documents, the reference includes any
successor to that party validly appointed.
Initially the parties will be as follows:
o Granite Mortgages 02-2 plc, as issuer;
o Citibank, N.A., as principal paying agent, US paying agent, agent
bank, transfer agent and registrar;
o The Bank of New York, as security trustee and note trustee;
o CDC IXIS Capital Markets, as dollar currency swap provider;
o CDC IXIS Capital Markets, as euro currency swap provider; and
o Northern Rock plc, as basis rate swap provider.
The noteholders are bound by and deemed to have notice of all of the
provisions of the trust deed, the issuer deed of charge, the intercompany loan
agreement, the Funding deed of charge, the issuer cash management agreement, the
paying agent and agent bank agreement, the basis rate swap agreement, the dollar
currency swap agreements and the euro currency swap agreements which are
applicable to them. Noteholders can view drafts of those documents at the
specified office of any of the paying agents after the closing date.
There is no English law which prohibits US residents from holding notes
solely because of their residence outside the UK.
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There are no UK governmental laws or regulations other than in relation to
withholding tax, as described in "MATERIAL UNITED KINGDOM TAX CONSEQUENCES
- - WITHHOLDING TAX", that restrict payments made to non-UK resident noteholders.
1. FORM, DENOMINATION, REGISTER, TITLE AND TRANSFERS
The offered notes are being offered and sold to the public in the United
States and to institutional investors outside the United States.
The offered notes are in global registered form, without coupons attached.
Transfers and exchanges of beneficial interests in notes represented by global
note certificates are made in accordance with the rules and procedures of DTC,
Euroclear and/or Clearstream, Luxembourg, as applicable. The offered notes are
being offered in denominations of $10,000 and $1,000.
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 offered notes in
accordance with the provisions of the paying agent and agent bank agreement.
References in this section to a "HOLDER" of an offered note means the person in
whose name such offered 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 which will be recorded in the
register.
The holder of each offered note shall (except as otherwise required by law)
be treated as the absolute owner of such offered 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, an offered note may be transferred upon
surrender of the relevant note certificate, with the endorsed form of transfer
duly completed, at the 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 an offered note may not
be transferred unless the principal amount of offered notes transferred and
(where not all of the offered notes held by a holder are being transferred) the
principal amount of the balance of offered notes not transferred are authorized
holdings. "AUTHORIZED HOLDINGS" means holdings of $1,000 and integral multiples
in excess thereof. Where not all the offered notes represented by the
surrendered note certificate are the subject of the transfer, a new note
certificate in respect of the balance of the offered notes will be issued to the
transferor.
Within five 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 offered notes transferred to each
relevant holder at its office or (as the case may be) the office of any transfer
agent specified in the paying agent and agent bank agreement 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, "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.
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The transfer of an offered note will be effected without charge by or on
behalf of the issuer, 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 offered notes.
All transfers of offered notes and entries on the register are subject to
the detailed regulations concerning the transfer of offered notes scheduled to
the paying agent and agent bank agreement. The regulations may be changed by the
issuer with the prior written approval of the note trustee and the registrar. A
copy of the current regulations will be mailed (free of charge) by the registrar
to any noteholder who requests in writing a copy of such regulations.
2. STATUS, SECURITY AND PRIORITY
The class A notes, the class B notes and the class C notes are direct,
secured and unconditional obligations of the issuer and are all secured by the
same security. Payments on each class of notes will be made equally amongst all
notes of that class.
(A) INTEREST
Among the series 1 notes, payments of interest on the series 1 class A
notes will be made ahead of payments of interest on the series 1 class B notes
and the series 1 class C notes, and payments of interest on the series 1 class B
notes will be made ahead of payments of interest on the series 1 class C notes.
As among the series 1 notes, the series 2 notes and the series 3 notes:
o payments of interest will be made on the series 1 class A1 notes, the
series 1 class A2 notes, the series 2 class A notes and the series 3
class A notes in no order of priority between them but in proportion
to the respective amounts due on the class A notes. These payments of
interest will be made ahead of payments of interest on each series of
class B notes and each series of class C notes;
o payments of interest will be made on the series 1 class B notes, the
series 2 class B notes and the series 3 class B notes in no order of
priority between them but in proportion to the respective amounts due
on the class B notes. These payments of interest will be made ahead of
payments of interest on each series of the class C notes; and
o payments of interest will be made on the series 1 class C notes, the
series 2 class C notes and the series 3 class C notes in no order of
priority between them but in proportion to the respective amounts due
on the class C notes.
(B) PRINCIPAL
Subject to there being no trigger event and no enforcement of the Funding
security and/or the issuer security, no class of notes will be repaid an amount
of principal which is greater than the controlled amortization amount in respect
of that class of notes for the relevant payment date and, subject also to the
satisfaction of certain conditions in relation to the payment of principal on
the class B notes and the class C notes at any time when class A notes are
outstanding as specified below, payments of principal will be made in accordance
with the following priority. Repayment of principal in respect of the controlled
amortization amount on the series 1 class A1 notes will be made ahead of
repayment of principal in respect of the controlled amortization amount on each
of the series 1 class A2 notes, the series 2 class A notes and the series 3
class A notes. Repayment of principal in respect of the controlled amortization
amount on the series 1 class A2 notes and the controlled amortization amount on
the series 2 class A notes will be made in no order of priority between them but
in proportion to the respective controlled amortization amounts due on the
series 1 class A2 notes and the series 2 class A notes and will be made
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ahead of repayment of principal in respect of the controlled amortization amount
on the series 3 class A notes. Repayment of principal in respect of the
controlled amortization amount on the class A notes will be made ahead of
repayment of principal in respect of the controlled amortization amount on the
class B notes. Repayment of principal in respect of the controlled amortization
amount on the series 1 class B notes, the controlled amortization amount on the
series 2 class B notes and the controlled amortization amount on the series 3
class B notes will be made in no order of priority among them but in proportion
to the respective controlled amortization amounts due on the class B notes.
However, repayment of principal in respect of the controlled amortization amount
on the class B notes will be made ahead of repayment of principal in respect of
the controlled amortization amount on the class C notes. Repayment of principal
in respect of the controlled amortization amount on the series 1 class C notes,
the controlled amortization amount on the series 2 class C notes and the
controlled amortization amount on the series 3 class C notes will be made in no
order of priority between them but in proportion to the respective controlled
amortization amounts due on the class C notes.
The above priority of payments will change and the issuer will make
repayments of principal in accordance with and subject to the relevant issuer
priority of payments as set out in the issuer cash management agreement or, as
the case may be, the issuer deed of charge (1) following the occurrence of a
trigger event, and/or (2) following the enforcement of the Funding security
and/or the enforcement of the issuer security.
If any class A notes remain outstanding and any of the issuer arrears test,
the issuer reserve requirement or the subordinated principal test are not
satisfied on the relevant payment date, no amount of principal will be payable
in respect of the class B notes or the class C notes.
Notwithstanding the foregoing priorities, the controlled amortization
amount payable in respect of each class of notes is determined by a schedule
that indicates the target balance for that class of notes on the relevant
payment date and not all classes of notes are scheduled to receive payments of
principal on each payment date, with some lower ranking classes of notes being
repaid principal before higher ranking classes of notes. The controlled
amortization amount payable on some classes of notes will also be zero.
The issuer reserve fund provides credit enhancement for the class C notes.
The issuer reserve fund and the class C notes provide credit enhancement for the
class B notes. The issuer reserve fund, the class C notes and the class B notes
provide credit enhancement for the class A notes. You should note, however, that
the series 3 notes as a group do not provide credit enhancement for either the
series 1 notes or the series 2 notes, and the series 2 notes and the series 3
notes as a group do not provide credit enhancement for the series 1 notes.
For more information on the priority of principal repayments to you, see
"CASHFLOWS". For more information on the redemption of the notes, including a
description of asset trigger events and non-asset trigger events, see "THE
MORTGAGES TRUST - CASH MANAGEMENT OF TRUST PROPERTY - PRINCIPAL RECEIPTS" and
"CASHFLOWS".
The note trustee is required to have regard to the interests of all classes
of noteholders equally. However, if there are any class A notes outstanding and
if there is or may be a conflict between the interests of the class A
noteholders and the interests of the class B noteholders and/or the class C
noteholders, then the note trustee will have regard to the interests of the
class A noteholders only. If there are no class A notes outstanding and there
are any class B notes outstanding, and if there is or may be a conflict between
the interests of the class B noteholders and the interests of the class C
noteholders, then the note trustee will have regard to the interests of the
class B noteholders only.
Except in certain limited circumstances described in number 11, there is no
limitation on the power of class A noteholders to pass an effective
extraordinary resolution the exercise of which is binding on the class B
noteholders and the class C noteholders. As described in number 11 there are
provisions limiting the power of the class B noteholders
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and the class C noteholders to pass an effective extraordinary resolution,
depending on its effect on the class A noteholders. Likewise, except in the
limited circumstances described in number 11, there is no limitation on the
power of class B noteholders to pass an effective extraordinary resolution the
exercise of which is binding on the class C noteholders. As described in number
11 there are provisions limiting the power of the class C noteholders to pass an
effective extraordinary resolution, depending on its effect on the class B
noteholders.
The note trustee is entitled to assume that any exercise by it of any
power, discretion or duty under the transaction documents will not be materially
prejudicial to the interests of the noteholders (or any series and/or class of
noteholders) if the rating agencies have confirmed that the current ratings of
the notes will not be adversely affected by that exercise.
The security for the payment of amounts due under the notes is created by
the issuer deed of charge. The security is created by the issuer in favor of the
note trustee who will hold it for itself and on behalf of the issuer secured
creditors (which definition includes the noteholders). The security consists of
the following:
(1) an assignment by way of first fixed security of the issuer's rights
and claims in respect of all security and other rights held on trust
by the security trustee pursuant to the Funding deed of charge, save
to the extent that any of those issuer's rights and claims derive from
property that is situated in Jersey, which will be assigned to the
note trustee for the purpose of creating a security interest in
accordance with Jersey law;
(2) an assignment by way of first fixed security of the issuer's rights,
title, interest and benefit in and to the transaction documents to
which it is a party, including the intercompany loan agreement, the
funding deed of charge, the basis rate swap agreement, the dollar
currency swap agreements, the euro currency swap agreements, the
paying agent and agent bank agreement, the subscription agreement, the
underwriting agreement, the corporate services agreement, the issuer
bank account agreement, the issuer cash management agreement and the
trust deed, save to the extent that such rights, title, interest and
benefit derive from property that is situated in Jersey. To the extent
that the same are derived from property situated in Jersey, the issuer
will assign such rights, title, interest and benefit to the note
trustee for the purpose of creating a security interest in those
rights, title, interest and benefit in accordance with Jersey law;
(3) an assignment by way of first fixed security of the issuer's right,
title, interest and benefit in the issuer transaction account and each
other account (if any of the issuer), and all amounts standing to the
credit of those accounts (including all interest accrued on such
amounts);
(4) a first fixed charge (which may take effect as a floating charge) of
the issuer's right, title, interest and benefit in all authorized
investments made by or on behalf of the issuer, including all monies
and income payable under those investments; and
(5) a first ranking floating charge over all the assets and undertaking of
the issuer which are not otherwise effectively subject to a fixed
charge or assignment by way of security as described in (1), (2), (3)
or (4) above.
3. COVENANTS
If any note is outstanding, the issuer will not, unless it is provided in
or permitted by the terms of the transaction documents to which the issuer is a
party or by the written consent of the note trustee:
o create or permit to subsist any mortgage, pledge, lien, charge or
other security interest on the whole or any part of its present or
future assets or undertakings;
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o sell, assign, transfer, lease or otherwise dispose of or grant any
option or right to acquire over, all or any of its assets, properties
or undertakings or any interest or benefit in its assets or
undertakings;
o permit any other person other than itself and the note trustee (as to
itself and on behalf of the issuer secured creditors) to have any
equitable interest in any of its assets or undertakings;
o have an interest in any bank account other than the bank accounts of
the issuer maintained pursuant to the transaction documents;
o carry on any business other than as described in this prospectus or as
contemplated in the transaction documents relating to the issue of the
notes and the making of the intercompany loan;
o incur any indebtedness in respect of borrowed money whatsoever or give
any guarantee or indemnity in respect of any indebtedness or
obligation of any person;
o consolidate with or merge with any person or transfer substantially
all of its properties or assets to any person;
o waive or consent to the modification or waiver of any of the
obligations relating to the security;
o have any employees, premises or subsidiaries;
o pay any dividend or make any other distributions to its shareholders
or issue any further shares or alter any rights attaching to its
shares as at the date of the issuer deed of charge;
o purchase or otherwise acquire any notes; or
o engage in any activities in the United States (directly or through
agents), or derive any income from United States sources as determined
under United States income tax principles, or hold any property if
doing so would cause it to be engaged in a trade or business within
the United States as determined under United States income tax
principles.
4. INTEREST
Each note bears interest on its principal amount outstanding from, and
including, the closing date. Interest will stop accruing on the principal amount
outstanding of any note from the date it is due for redemption unless, when it
is presented, payment of principal is improperly withheld or refused. If this
happens it will continue to bear interest on the unpaid amount both before and
after any judgement is given, up to (but excluding) whichever is the earlier of
the following:
o the day on which all sums due in respect of that note, up to that day,
are paid; and
o the day which is seven days after the principal paying agent or other
paying agent has notified the relevant noteholder or class of
noteholders, either in accordance with number 14 or individually, that
such payment will be made, provided that subsequently on presentation
of the note payment is in fact made.
Interest on the offered notes will be paid quarterly in arrears on each
payment date. Each period beginning on, and including, the closing date or any
payment date and ending on, but excluding, the next payment date is called an
interest period. The first interest payment for the notes will be made on the
payment date occurring in January 2003 for the interest period from and
including the closing date to but excluding that payment date.
The order of payments of interest to be made on the classes of notes will
be prioritized so that interest payments due and payable on the class C notes
will be subordinated to interest payments due and payable on the class B notes
and the class A
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notes and interest payments due and payable on the class B notes will be
subordinated to interest payments due and payable on the class A notes, in each
case in accordance with the issuer priority of payments.
Any revenue shortfall in payments of interest on the class B notes and/or
the class C notes (for the reason that the issuer has not received sufficient
interest payments from Funding under the intercompany loan to fund such
payments) will not be an event of default and the unpaid interest will be
deferred until the first payment date after such date when funds are available
(after allowing for liabilities of the issuer having a higher priority and
subject to and in accordance with the relevant issuer priority of payments), to
the issuer to pay such interest. Any interest so deferred will bear interest at
the rate of interest applicable to the relevant class of notes from time to time
and payment of such additional interest will also be deferred until the first
payment date after such date when funds are available (after allowing for
liabilities of the issuer having a higher priority) to the issuer to pay such
additional interest. Neither deferred interest nor additional interest shall be
deferred beyond the final maturity date of the relevant class of notes when such
amounts will be due and payable, at which point, if the issuer has not received
sufficient interest payments from Funding under the intercompany loan to pay
interest on the class B notes and/or the class C notes, as the case may be, then
noteholders may never receive all interest amounts payable on those classes of
notes.
Payments of interest due on a payment date in respect of the class A notes
will not be deferred. In the event of the delivery of a class A note enforcement
notice (as described in number 9), the amount of interest that was due but not
paid on any payment date will itself bear interest at the applicable rate until
both the unpaid interest and the interest on that interest are paid.
The rate of interest applicable to the offered notes for each interest
period will be determined by the agent bank on the following basis:
(1) on the interest determination date for each class of the offered
notes, the agent bank will determine the offered quotation to leading
banks for US dollar deposits for a period equal to the relevant
interest period. This will be determined by reference to the display
as quoted on the Dow Jones/ Telerate Monitor at Telerate Page No.
3750. If the Telerate Page No. 3750 stops providing these quotations,
the replacement page for the purposes of displaying this information
will be used. If the replacement page stops displaying the
information, another service as determined by the issuer (with the
approval of the note trustee, in its sole discretion) will be used. In
each of these cases, the determination will be made as at or about
11:00 a.m., London time, on that date. This is called the "SCREEN
RATE" for the respective classes of the offered notes. The "INTEREST
DETERMINATION DATE" for the offered notes means the second London
business day before the first day of an interest period;
(2) if, on any interest determination date, the screen rate is
unavailable, the agent bank will:
o request the principal London office of each of four major banks -
the reference banks - in the London interbank market to provide
the agent bank with its offered quotation to leading banks of the
equivalent of the screen rate on that interest determination date
in an amount that represents a single transaction in that market
at that time; and
o calculate the arithmetic mean, rounded upwards to five decimal
places, of those quotations;
(3) if on any interest determination date the screen rate is unavailable
and only two or three of the reference banks provide offered
quotations, the relevant rate for that interest period will be the
arithmetic mean of the quotations as calculated in (2); and
(4) if fewer than two reference banks provide quotations, the agent bank
will consult with the note trustee and the issuer for the purpose of
agreeing a total of two banks to provide such quotations and the
relevant rate for that interest period will be the
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arithmetic mean of the quotations as calculated in (2). If no such
banks are agreed or such banks do not provide a quotation then the
relevant rate for that interest period will be the rate in effect for
the immediately preceding interest period for which (1) or (2) was
applicable (taking account of any relevant change in margin).
The rate of interest for each interest period for the:
o series 1 class A1 notes will be the sum of 0.11% per annum up to and
including the payment date in January 2008 and thereafter 0.22% per
annum and the screen rate or rate calculated to replace the screen
rate;
o series 1 class A2 notes will be the sum of 0.18% per annum up to and
including the payment date in January 2008 and thereafter 0.36% per
annum and the screen rate or rate calculated to replace the screen
rate;
o series 1 class B notes will be the sum of 0.37% per annum up to and
including the payment date in January 2008 and thereafter 0.74% per
annum and the screen rate or rate calculated to replace the screen
rate;
o series 1 class C notes will be the sum of 1.25% per annum up to and
including the payment date in January 2008 and thereafter 2.25% per
annum and the screen rate or rate calculated to replace the screen
rate.
The agent bank will, as soon as practicable after 11:00 a.m. (London time)
on each interest determination date, calculate the amount of interest payable on
each offered note for that interest period. The amount of interest will be
calculated by applying the rate of interest for that interest period to the
principal amount outstanding of that note during that interest period and, in
the case of the offered notes, multiplying the product by the actual number of
days in that interest period divided by 360 and rounding to the nearest US
dollars 0.01, half a cent being rounded upwards.
The rates and amounts determined by the agent bank will be notified to the
issuer, the issuer cash manager, the note trustee and the paying agents. The
agent bank will also notify such rates and amount, to each stock exchange on
which the notes are listed and to the relevant class of noteholders in
accordance with number 14 as soon as possible.
If the agent bank fails to make a required determination or calculation as
described, the note trustee will make this determination or calculation as it
shall in its sole discretion deem fair and reasonable or as described in this
number 4. If this happens, the determination or calculation will be deemed to
have been made by the agent bank.
The issuer, the issuer cash manager, the note trustee, the reference banks,
the agent bank and the noteholders will be bound by the determinations properly
made as described above.
The agent bank will ensure that there will be four reference banks with
offices in London and an agent bank while there are notes outstanding.
5. REDEMPTION, PURCHASE AND CANCELLATION
(A) FINAL REDEMPTION
If the offered notes have not previously been redeemed in full as described
in this number 5, the issuer will redeem each class of notes at their then
principal amount outstanding together with all accrued interest on the final
maturity date in respect of such class of notes.
(B) MANDATORY REDEMPTION OF THE NOTES IN PART
On each payment date, other than a payment date on which the notes are to
be redeemed under numbers 5(A), (D) or (E), the issuer shall repay principal in
respect of the notes in accordance with and subject to the relevant issuer
priority of payments applicable to the issuer on such payment date and then only
to the extent of issuer
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available principal receipts on such payment date in the manner described in and
subject to the issuer cash management agreement and/or, as applicable, the
issuer deed of charge. See "CASHFLOWS - DISTRIBUTION OF ISSUER AVAILABLE
PRINCIPAL RECEIPTS".
(C) NOTE PRINCIPAL PAYMENTS, PRINCIPAL AMOUNT OUTSTANDING AND POOL FACTOR
On the distribution date immediately preceding each payment date (the "NOTE
DETERMINATION DATE"), the issuer or the issuer cash manager will determine the
following:
o the amount of each principal payment payable on each offered note,
called the "NOTE PRINCIPAL PAYMENT";
o the principal amount outstanding of each offered note of that class on
the note determination date which is the principal amount outstanding
of that offered note as at the closing date less the aggregate of all
note principal payments that have been paid in respect of that note;
and
o the fraction, or pool factor, obtained by dividing the principal
amount outstanding of each offered note by the original principal
amount outstanding of each note as at the closing date.
The issuer will notify the amounts and dates determined to the agent bank,
paying agents, note trustee, the registrar and each stock exchange on which the
notes are listed and the agent bank shall publish such amounts and dates in
accordance with number 14 by no later than the business day after the relevant
payment date or as soon as reasonably practicable thereafter in the case of
individual note certificates.
If the issuer or 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 the issuer.
If this happens, the issuer, the issuer cash manager and the noteholders will be
bound by the determinations made.
(D) OPTIONAL REDEMPTION IN FULL
The issuer may by giving not less than thirty and not more than sixty days
prior notice to the note trustee and the noteholders redeem all (but not some
only) of the notes specified below at the principal amount outstanding together
with any accrued interest on the following dates:
o the payment date falling in January 2008 and on any payment date
thereafter. This gives the issuer the option to redeem the notes after
the January 2008 step-up date for interest;
o any payment date on which the aggregate principal amount outstanding
of the notes is less than 10% of the aggregate principal amount
outstanding of the notes as at the closing date.
The issuer may only redeem the notes as described above if it has prior to
the date of such redemption provided to the note trustee a certificate to the
effect that it will have funds available to it to make the required payment of
principal and interest due in respect of the notes on the relevant payment date,
including any amounts required to be paid in priority to or in the same priority
as the notes outstanding in accordance with the issuer cash management
agreement, and the note trustee is satisfied in accordance with the transaction
documents that such funds are available.
(E) OPTIONAL REDEMPTION FOR TAX AND OTHER REASONS
If the issuer satisfies the note trustee that on the next payment date
either:
(i) the issuer would be required to withhold or deduct from amounts due on
the notes, any amount on account of any present or future taxes or
duties or governmental charges; or
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(ii) Funding would be required to withhold or deduct from amounts due on
the intercompany loan, any amount on account of any present or future
taxes or duties or governmental charges, and
(iii) such obligation of the issuer or Funding, as the case may be, cannot
be avoided by the issuer or Funding, as the case may be, taking
reasonable measures available to it,
then the issuer 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 the issuer 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 the issuer is unable to arrange a substitution as described above, then
the issuer may, by giving not less than thirty and not more than sixty days'
prior notice to the note trustee and the noteholders, redeem all (but not some
only) of the series 1 notes at their principal amount outstanding together with
any accrued interest on the next following payment date, provided that, prior to
giving any such notice, the issuer shall deliver to the note trustee (1) a
certificate signed by two directors of the issuer 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 the issuer has 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. The issuer may only redeem the
notes as described above if the note trustee is satisfied in accordance with the
transaction documents that the issuer will have funds available to it to make
the required payment of principal and interest due in respect of the notes on
the relevant payment date, including any amounts required to be paid in priority
to or in the same priority as the notes outstanding in accordance with the
issuer pre-enforcement priority of payments.
In addition to the foregoing, if at any time it becomes unlawful for the
issuer to make, fund or allow to remain outstanding the intercompany loan, then
the issuer may require Funding upon giving not more than 60 nor less than 30
days' (or such shorter period as may be required under any relevant law) prior
written notice to the issuer and the note trustee, to prepay the intercompany
loan on any payment date subject to and in accordance with the provisions of the
intercompany loan agreement to the extent necessary to cure such illegality.
Such monies received by the issuer shall be used to prepay the notes in full on
that payment date.
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 offered notes are subject to any applicable fiscal or
other laws and regulations. Noteholders will not be charged commissions or
expenses on these payments.
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If the due date for payment of any amount on the offered notes is not a
business day in the place it is presented, noteholders will not be entitled to
payment of the amount due in that place until the next business day in that
place 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 an offered note, the registrar
will endorse on that offered global note certificate a statement indicating the
amount and date of that payment.
If a noteholder holds individual note certificates with respect to offered
notes, payments of principal and interest on an offered note (except in the case
of a final payment that pays off the entire principal on the offered note) will
be made by US dollar check and mailed to the noteholder at the address shown in
the register. In the case of final redemption, payment will be made only when
the offered note certificate is surrendered. If the noteholder makes an
application to the registrar, payments can instead be made by transfer to a bank
account.
If payment of principal on an offered note is improperly withheld or
refused, the interest which continues to accrue will still be payable in
accordance with the usual procedures.
The issuer 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 the issuer does this it must ensure that it maintains a
paying agent in London, a paying agent in New York and a registrar. The issuer
will ensure that at least 30 days' notice of any change in the paying agents,
registrar or transfer agent or their specified offices is given to noteholders
in accordance with number 14.
Subject as described earlier in relation to the deferral of interest, if
payment of interest on a note is not paid for any other reason when due and
payable, the unpaid interest will itself bear interest at the applicable rate
until both the unpaid interest and the interest on that interest are paid.
7. PRESCRIPTION
Claims against the issuer for payment of interest and principal on
redemption will become void if the relevant note certificates are not
surrendered for payment within the time limit for payment. That time limit is
ten years from the due date of such notes. If there is a delay in the paying
agents or, as applicable, the note trustee, receiving the funds, then the due
date, for the purposes of this time limit, is the date on which it notifies you,
in accordance with number 14, that it has received the relevant payment.
8. TAXATION
Payments of interest and principal will be made without making any
withholding or deduction for any tax unless a withholding or deduction is
required by any applicable law. If a withholding or deduction for tax is made,
the issuer or the relevant paying agent will account to the relevant authority
for the amount so withheld or deducted. Neither the issuer nor any paying agent
is required to make any additional payments to noteholders for such withholding
or deduction.
9. EVENTS OF DEFAULT
(A) Class a Noteholders
The note trustee in its absolute discretion may give notice to the issuer
of a class A note event of default (as defined below) in respect of the class A
notes (a "CLASS A NOTE ENFORCEMENT NOTICE"), and shall give such notice if it is
indemnified to its satisfaction and it is:
o requested to do so in writing by the holders of at least one quarter
of the aggregate principal amount outstanding of the class A notes; or
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o directed to do so by an extraordinary resolution passed at a meeting
of the class A noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS A NOTE EVENT OF DEFAULT":
o the issuer fails to pay for a period of seven business days any amount
of principal on the class A notes when such payment is due and payable
in accordance with the conditions or the issuer fails to pay for a
period of fifteen business days any amount of interest on the class A
notes when such payment is due and payable in accordance with the
conditions; or
o the issuer fails to perform or observe any of its other obligations
under the class A notes, 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 the issuer
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 class A noteholders; or
o except for the purposes of an amalgamation or restructuring as
described in the point immediately following, the issuer ceases or
threatens to cease carrying on all or a substantial part of its
business or the issuer 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
o an order is made or an effective resolution is passed for the winding
up of the issuer 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 class A noteholders; or
o proceedings are otherwise initiated against the issuer under any
applicable liquidation, insolvency, composition, reorganization or
other similar laws (including, but not limited to, presentation of a
petition for an administration order) 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, or an
administration order being granted or an administrative receiver or
other receiver, liquidator or other similar official being appointed
in relation to the issuer or in relation to the whole or any
substantial part of the undertaking or assets of the issuer, or an
encumbrancer taking possession of the whole or any substantial part of
the undertaking or assets of the issuer, 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 issuer and such possession or process (as the case may be) not
being discharged or not otherwise ceasing to apply within 30 days, or
the issuer 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 its creditors generally; or
o if an intercompany loan enforcement notice is served in respect of any
intercompany loan agreement while any of the class A notes are
outstanding.
(B) CLASS B NOTEHOLDERS
The terms described in this number 9(B) will have no effect so long as any
of the class A notes are outstanding. Subject to that occurrence, 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 (a "CLASS B NOTE
ENFORCEMENT NOTICE"), and shall give such notice if it is indemnified to its
satisfaction and it is:
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o requested to do so in writing by the holders of at least one quarter
of the aggregate principal amount outstanding of the class B notes; or
o directed to do so by an extraordinary resolution passed at a meeting
of the class B noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS B NOTE EVENT OF DEFAULT":
o the issuer fails to pay for a period of seven business days any amount
of principal on the class B notes when such payment is due and payable
in accordance with the conditions or the issuer fails to pay for a
period of fifteen business days any amount of interest on the class B
notes when such payment is due and payable in accordance with the
conditions;
o the occurrence of any of the events in number 9(A) described above but
so that any reference to the class A notes and the class A noteholders
shall be read as references to the class B notes and the class B
noteholders.
(C) CLASS C NOTEHOLDERS
The terms described in this number 9(C) will have no effect so long as any
of the class A notes or the class B notes are outstanding. Subject to that
occurrence, 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
(a "CLASS C NOTE ENFORCEMENT NOTICE"), and shall give such notice if it is
indemnified to its satisfaction and it is:
o requested to do so in writing by the holders of at least one quarter
of the aggregate principal amount outstanding of the class C notes; or
o directed to do so by an extraordinary resolution passed at a meeting
of the class C noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS C NOTE EVENT OF DEFAULT":
o the issuer fails to pay for a period of seven business days any amount
of principal on the class C notes when such payment is due and payable
in accordance with the conditions or the issuer fails to pay for a
period of fifteen business days any amount of interest on the class C
notes when such payment is due and payable in accordance with the
conditions;
o the occurrence of any of the events in number 9(A) described above but
so that any reference to the class A notes and the class A noteholders
shall be read as references to the class C notes and the class C
noteholders.
The security created under the issuer deed of charge will become
enforceable on the occurrence of a class A note event of default, a class B note
event of default or, as the case may be, a class C note event of default.
A class A note enforcement notice, a class B note enforcement notice and a
class C note enforcement notice are alone or together referred to in this
prospectus as a "NOTE ENFORCEMENT NOTICE". A note enforcement notice is a
written notice from the note trustee to the issuer and the security trustee
declaring the notes to be immediately due and payable. When it is given, all
notes will become immediately due and payable at their principal amount
outstanding together with accrued interest without further action or formality.
10. ENFORCEMENT OF NOTES
The note trustee may, at its discretion and without notice at any time and
from time to time, take such steps and institute such proceedings against the
issuer or any other person as it may think fit to enforce the provisions of the
notes, the trust deed, the issuer deed of charge or any of the other transaction
documents. The note trustee may, at its
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discretion and without notice, at any time after the issuer security has become
enforceable, take such steps as it may think fit to enforce the issuer security.
The note trustee shall not be bound to take any such proceedings or steps
unless:
o (subject in all cases to restrictions contained in the trust deed or, as
the case may be, the issuer deed of charge to protect the interests of any
higher ranking class of noteholders) it shall have been so directed by an
extraordinary resolution (as described in number 11) of the class A
noteholders, the class B noteholders or the class C noteholders or so
requested in writing by the holders of at least 25% in principal amount
outstanding of the class A notes, the class B notes or the class C notes
(as the case may be); and
o it shall have been indemnified to its satisfaction.
Amounts available for distribution after enforcement of the issuer security
shall be distributed in accordance with the terms of the issuer deed of charge.
No noteholder may institute any proceedings against the issuer to enforce
its rights under or in respect of the notes or the trust deed unless (1) the
note trustee has become bound to institute proceedings and has failed to do so
within 30 days of becoming so bound and (2) such failure is continuing; provided
that, notwithstanding the foregoing and notwithstanding any other provision of
the trust deed, the right of any noteholder to receive payment of principal of
and interest on its notes on or after the due date for such principal or
interest, or to institute suit for the enforcement of payment of that principal
or interest, may not be impaired or affected without the consent of that
noteholder. In addition, no class B noteholder or class C noteholder will be
entitled to commence proceedings for the winding up or administration of the
issuer unless there are no outstanding notes of a class with higher priority, or
if notes of a class with higher priority are outstanding, there is consent of
noteholders of at least 25% of the aggregate principal amount of the class or
classes of notes outstanding (as defined in the trust deed) with higher
priority.
In the event that (a) the issuer security is enforced and the proceeds of
that enforcement (such proceeds having been distributed) are insufficient, after
payment of all other claims ranking in priority, to pay in full any amount due
on the notes and any claims ranking equally with such claims, or (b) within 20
days following the final maturity date of the latest maturing note the note
trustee certifies that there is no further amount outstanding under the related
intercompany loan, the noteholders are required and the note trustee is required
on their behalf, at the request of GPCH Limited, to transfer or (as the case may
be) to procure the transfer of all of the notes to GPCH Limited pursuant to the
option granted by the note trustee to GPCH Limited. The option is granted to
acquire all of the notes plus accrued interest on the notes. This is called the
post enforcement call option. The noteholders will not be paid for that
transfer. Each noteholder acknowledges that the note trustee has the authority
and the power to bind it in accordance with the terms and conditions set out in
the post enforcement call option and, by subscribing for or acquiring the notes,
it agrees to be bound in this way.
11. MEETINGS OF NOTEHOLDERS, MODIFICATIONS AND WAIVER
(1) MEETINGS OF NOTEHOLDERS
The trust deed contains provisions for convening meetings of each class of
noteholders to consider any matter affecting their interests, including the
sanctioning by extraordinary resolution of a modification of any provision of
the terms and conditions of the notes or the provisions of any of the
transaction documents.
In respect of the class A notes the trust deed provides that:
o a single meeting of the holders of all series of the class A notes may
be held whether or not there is a conflict of interest between the
holders of such series of the class A notes; there shall be no
provision for meetings of the holders of one series only of the class
A notes; and
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o as the class A notes are not all denominated in the same currency, the
principal amount outstanding of any class A note denominated in US
dollars or euro shall be converted into sterling at the dollar
currency swap rate or the euro currency swap rate, as the case may be.
In respect of the class B notes the trust deed provides that:
o a single meeting of the holders of all series of the class B notes may
be held whether or not there is a conflict of interest between the
holders of such series of the class B notes; there shall be no
provision for meetings of the holders of one series only of the class
B notes; and
o as the class B notes are not all denominated in the same currency, the
principal amount outstanding of any class B note denominated in US
dollars or euro shall be converted into sterling at the dollar
currency swap rate or the euro currency swap rate, as the case may be.
In respect of the class C notes the trust deed provides that:
o a single meeting of the holders of all series of the class C notes may
be held whether or not there is a conflict of interest between the
holders of such series of the class C notes; there shall be no
provision for meetings of the holders of one series only of the class
C notes; and
o as the class C notes are not all denominated in the same currency, the
principal amount outstanding of any class C note denominated in US
dollars or euro shall be converted into sterling at the dollar
currency swap rate or the euro currency swap rate, as the case may be.
Subject as provided in the following paragraph, the quorum for any meeting
of the noteholders of any class convened to consider an extraordinary resolution
will be two or more persons holding or representing not less than half of the
aggregate principal amount outstanding of the notes of that class or, at any
adjourned meeting, two or more persons representing noteholders of that class,
whatever the total principal amount of the outstanding notes so represented.
Certain terms including the alteration of the amount, rate or timing of
payments on the notes, the currency of payment, the priority of payments or the
quorum or majority required in relation to these terms, require a quorum for
passing an extraordinary resolution of two or more persons holding or
representing in total not less than three quarters of the total principal amount
outstanding of the notes of that class or, at any adjourned meeting, at least
one quarter of the total principal amount of the notes outstanding of such
class. These modifications are called "BASIC TERMS MODIFICATIONS".
A resolution signed by or on behalf of all the noteholders of the relevant
class who for the time being are entitled to receive notice of a meeting under
the second issuer trust deed shall for all purposes be as valid and effective as
an extraordinary resolution passed at a meeting of such class of noteholders.
Subject as provided below in relation to an extraordinary resolution
concerning a basic terms modification, no extraordinary resolution of the class
B noteholders shall take effect while any class A notes remain outstanding
unless sanctioned by an extraordinary resolution of the class A noteholders, or
the note trustee is of the opinion that it would not be materially prejudicial
to the interests of the class A noteholders.
Subject as provided below in relation to an extraordinary resolution
concerning a basic terms modification, no extraordinary resolution of the class
C noteholders shall take effect while any class A notes or class B notes remain
outstanding unless sanctioned by an extraordinary resolution of the class A
noteholders and an extraordinary resolution of the class B noteholders, or the
note trustee is of the opinion that it would not be materially prejudicial to
the interests of the class A noteholders and the class B noteholders.
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Furthermore, an extraordinary resolution of the class A noteholders
concerning a basic terms modification will not be effective unless it is also
sanctioned by extraordinary resolutions of the class B noteholders and the class
C noteholders. An extraordinary resolution of the class B noteholders concerning
a basic terms modification will not be effective unless it is also sanctioned by
extraordinary resolutions of the class A noteholders and the class C
noteholders. An extraordinary resolution of the class C noteholders concerning a
basic terms modification will not be effective unless it is also sanctioned by
extraordinary resolutions of the class A noteholders and the class B
noteholders.
For the avoidance of doubt (in the context of deciding material prejudice
in respect of the above provisions relating to the class A notes, the class B
notes and the class C notes), if the note trustee considers in its sole opinion
that the noteholders of the same class of one or more series are materially
prejudiced, the note trustee will not be able to sanction the meeting of the
noteholders of the lower class itself, and will instead require an extraordinary
resolution of the noteholders of the higher class to be passed by means of a
meeting in order for the extraordinary resolution of the noteholders of the
lower class to be valid and effective.
(2) MODIFICATIONS AND WAIVER
The note trustee may agree, without the consent of the relevant class of
noteholders, (1) to any modification (other than a basic terms modification) of,
or to the waiver or authorization of any breach or proposed breach of, the terms
and conditions of the notes or any of the transaction documents which is not, in
the opinion of the note trustee, materially prejudicial to the interests of the
relevant class or classes of noteholders or (2) 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.
For the avoidance of doubt (in the context of deciding material prejudice
in respect of the above provisions), if the note trustee considers in its sole
opinion that the noteholders of the same class of one or more series to which
the modification or waiver relates are materially prejudiced, the note trustee
will not be able to sanction such modification or waiver itself, and will
instead require an extraordinary resolution of the noteholders of the notes of
such class outstanding to be passed by means of a meeting. In accordance with
the general provisions contained herein, such extraordinary resolution must also
be ratified by the noteholders of the notes of the higher class or classes in
order for the extraordinary resolution which seeks approval of the modification
or waiver to be valid and effective.
Any of these modifications, authorizations or waivers will be binding on
the noteholders and, unless the note trustee agrees otherwise, shall be promptly
notified to the noteholders and the rating agencies in accordance with number 14
as soon as practicable thereafter.
Where the note trustee is required in connection with the exercise of its
powers to have regard to the interests of the noteholders of one class of any
series, it shall have regard to the interests of such noteholders as a class. In
particular, the note trustee shall not have regard to, or be liable for, the
consequences of such exercise for individual noteholders resulting from their
being domiciled or resident in or connected with any particular territory. In
connection with any such exercise, the note trustee shall not be entitled to
require, and no noteholder shall be entitled to claim, from the issuer or any
other person, any indemnification or payment in respect of any tax consequence
of any such exercise upon individual noteholders.
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12. INDEMNIFICATION OF THE NOTE TRUSTEE
The note trustee is entitled to be indemnified and relieved from
responsibility in certain circumstances, including provisions, among others,
relieving them from taking enforcement proceedings unless indemnified to its
satisfaction. The note trustee is also entitled to be paid its costs and
expenses in priority to any interest payments to noteholders.
The note trustee and its related companies are entitled to enter into
business transactions with the issuer, Northern Rock plc or related companies of
either of them and to act as note trustee for the holders of any new notes and
for any person who is a party to any transaction document or whose obligations
are comprised in the issuer security or any of their subsidiary or associated
companies, without accounting for any profit resulting from those transactions.
The note trustee will not be responsible for any loss or liability suffered
as a result of any assets in the issuer security being uninsured or inadequately
insured or being held by clearing operations or their operators or by
intermediaries on behalf of the note trustee.
Furthermore, the note trustee will be relieved of liability for making
searches or other inquiries in relation to the assets comprising the issuer
security. The note trustee does not have any responsibility in relation to the
legality and the enforceability of the trust arrangements and the related issuer
security. The note trustee will not be obliged to take any action which might
result in its incurring personal liabilities. The note trustee is not obliged to
monitor or investigate the performance of any other person under the issuer
related documents or the documents relating to the 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.
The note trustee will not be responsible for any deficiency which 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 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 issuer's, registrar's and paying agent's
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, the issuer will deliver a replacement global note certificate to the
registered holder upon satisfactory evidence and surrender of any defaced or
mutilated global note certificate. Replacement will only be made upon payment of
the expenses for a replacement and compliance with the issuer's, registrar's and
paying agents' reasonable requests as to evidence and indemnity.
14. NOTICE TO NOTEHOLDERS
Notices to noteholders will be 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. Any such notice shall have been deemed to have been
given on the fourth day after the date of mailing. In addition, so long as
amounts are outstanding on the series 1 notes, notices to noteholders will be
published on the date of such mailing in a daily newspaper of general
circulation in New York (which is expected to be The New York Times) or, if such
publication is not practicable, in a leading English language daily newspaper
having general circulation in the United States; provided that if, at any time,
the issuer procures
237
that the information concerned in such notice shall appear on a page of the
Reuters screen, or any other medium for electronic display of data as may be
previously approved in writing by the note trustee and notified to noteholders
(in each case a "RELEVANT SCREEN"), publication in the newspapers set out above
or such other newspaper or newspapers shall not be required with respect to such
information, provided however, that in the case that any notes are listed on the
Official List of the UK Listing Authority and admitted to trading by the London
Stock Exchange plc, notices of noteholder meetings shall continue to be
published as set forth above. Any such notice shall be deemed to have been given
on the date of such publication or, if published more than once or on different
dates, on the first date on which publication shall have been made in the
newspaper or newspapers in which (or on the relevant screen on which)
publication is required.
So long as any notes are represented by global note certificates, and such
global note certificates are held by or on behalf of DTC, Euroclear,
Clearstream, Luxembourg or any other clearing system (an "ALTERNATIVE CLEARING
SYSTEM"), notices to holders of the notes represented by such global note
certificates may be given by delivery of the relevant notice to DTC, Euroclear,
Clearstream, Luxembourg or (as the case may be) such alternative clearing
system. Any notice delivered to DTC, Euroclear, Clearstream, Luxembourg or (as
the case may be) such alternative clearing system shall be deemed to have been
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 class or category of noteholders 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. GOVERNING LAW
The transaction documents and the notes are governed by English law, except
for those provisions in which security is taken over property situated in
Jersey, to which Jersey law shall apply. 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. The issuer and the
other parties to the transaction documents irrevocably submit to the
non-exclusive jurisdiction of the courts of England.
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RATINGS OF THE SERIES 1 NOTES
The series 1 notes are expected to be issued with the following ratings
assigned by Moody's, Standard & Poor's and Fitch. A rating is not a
recommendation to buy, sell or hold securities and may be subject to revision,
suspension or withdrawal at any time by the assigning rating organization if, in
its judgement, circumstances (including, without limitation, a reduction in the
credit rating of the mortgages trustee GIC provider and/or the Funding GIC
providers and/or the swap providers) in the future so warrant.
CLASS OF NOTES EXPECTED RATINGS
- -------------- ---------------------------------------------------
STANDARD &
MOODY'S POOR'S FITCH
------- ----------- -----
Series 1 class A1 Aaa AAA AAA
Series 1 class A2 Aaa AAA AAA
Series 1 class B Aa3 AA AA
Series 1 class C Baa2 BBB BBB
The ratings assigned to each class of the series 1 notes address the
likelihood of full and timely payment to you of all payments of interest on each
payment date under those classes of notes. The ratings also address the
likelihood of ultimate payment of principal on the final maturity date of each
class of notes. The ratings do not address the likely actual rate of prepayments
on the mortgage loans. The rate of prepayments, if different than originally
anticipated, could adversely affect the yield realized on your notes.
Assignment of the expected ratings to the notes of each class will be a
condition to issue of the series 1 notes.
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MATURITY AND REPAYMENT CONSIDERATIONS
The average lives of the series 1 notes cannot be stated, because the
actual rate of repayment of the mortgage loans and redemption of the mortgages
and a number of other relevant factors are unknown. Calculations of the possible
average lives of the series 1 notes can be made, however, based on certain
assumptions. The assumptions used to calculate the possible average lives of the
series 1 notes in the following table are that:
(1) each class of notes is repaid in full by its final maturity date;
(2) neither the issuer security nor the Funding security has been
enforced;
(3) the seller assigns to the mortgages trustee sufficient new mortgage
loans and their related security in the period up to and including
the payment date falling in January 2008 so that on any date the
aggregate current balance of mortgage loans in the mortgages trust
is not less than an amount equal to the product of 1.10 and the
principal amount outstanding of all notes of all issuers at such
date;
(4) no asset trigger event or non-asset trigger event occurs;
(5) no event occurs that would cause payments on the notes to be
deferred;
(6) the issuer exercises its option to redeem the notes on the payment
date falling in January 2008, and each previous issuer exercises its
option to redeem the previous notes on the step-up date relating to
such issuer;
(7) the notes are issued on September 23, 2002;
(8) each payment made by the issuer to the noteholders is paid on the
20th day of the relevant month in which such payment is payable,
regardless of whether such date is a business day;
(9) no interest or fees are paid from mortgages trustee principal
receipts, Funding 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 A2 by Moody's, A+ by
Fitch and A by Standard & Poor's.
Assumptions (1), (6), (7) and (8) reflect the issuer's current
expectations, although no assurance can be given that repayment of the notes
will occur as described. Assumptions (2) through (5) and (9) through (11) relate
to unpredictable circumstances.
Based upon the foregoing assumptions, the approximate average lives of the
series 1 notes, at various constant payment rates for the mortgage loans, would
be as follows:
POSSIBLE AVERAGE POSSIBLE AVERAGE POSSIBLE AVERAGE POSSIBLE AVERAGE
CONSTANT PAYMENT LIFE OF THE SERIES 1 LIFE OF THE SERIES 1 LIFE OF THE SERIES 1 LIFE OF THE SERIES 1
RATE (% PER ANNUM) CLASS A1 NOTES CLASS A2 NOTES CLASS B NOTES CLASS C NOTES
- ------------------ -------------------- -------------------- -------------------- --------------------
(YEARS) (YEARS) (YEARS) (YEARS)
-------------------- -------------------- -------------------- --------------------
5% 1.50 5.06 5.33 5.33
10% 0.81 4.04 5.33 5.33
15% 0.69 3.46 5.33 5.33
20% 0.69 3.43 5.14 5.16
25% 0.69 3.43 5.14 5.16
30% 0.69 3.43 5.14 5.16
35% 0.69 3.43 5.14 5.16
The average lives of the notes are subject to factors largely outside the
control of the issuer and consequently no assurance can be given that these
assumptions and estimates are realistic and they must therefore be viewed with
considerable caution. For more information relating to the risks involved in the
use of these estimated average lives, see "RISK FACTORS - THE YIELD TO MATURITY
OF THE NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENTS OR REDEMPTIONS ON THE
MORTGAGE LOANS OR REPURCHASES OF MORTGAGE LOANS BY THE SELLER".
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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 residential property and mortgages. It is a brief summary and not an
exhaustive analysis of the relevant law.
GENERAL
The parties to a mortgage are the mortgagor, who is the borrower and
homeowner and who grants the mortgage over its property, and the mortgagee, who
is the lender. Each mortgage loan is secured by a mortgage on the property (the
mortgaged property). Since the most common form of creating a mortgage on
residential property, namely, by means of a legal charge by deed, means that a
mortgagor does not cease to be the owner of the property, generally a mortgagor
will be free to create further mortgages on the mortgaged property (subject to
any restrictions imposed by the mortgagee in the mortgage deed). Each mortgage
loan to be assigned to the mortgages trustee will be secured by a mortgage which
has a first ranking priority over all other mortgages secured on the mortgaged
property and over all unsecured creditors of the borrower, except in respect of
certain statutory rights, such as the rights of the Inland Revenue, which are
granted statutory priority. There are two forms of title to land in England and
Wales: registered and unregistered. Both systems of title can include both
freehold and leasehold estates.
REGISTERED TITLE
Title to registered land is registered at H.M. Land Registry. The
registrar allocates a unique title number. Consequently if there are freehold
and leasehold registered interests then there will be more than one register of
title and more than one title number to a particular property. Each individual
register consists of three parts: the property register, the proprietorship
register and the charges register.
The property register describes the land and the type of estate, freehold
or leasehold. In some instances it may also refer to third party rights that
burden the property although these may also be mentioned in the charges register
as practice varies between the various District Land Registries around the
country.
The proprietorship register details the following:
* The class of registered title. There are three classes of registered
title for freehold and four classes for leasehold. The most common
title (and the best grade of title available) is title absolute. A
person registered with title absolute owns the estate in the land
free from all interests other than those entered on the register,
those classified as overriding interests or minor interests
(referred to below) and (in the case of leasehold land) all express
and implied covenants, obligations and liabilities imposed by the
lease or incidental to the land.
* 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 H.M. Land Registry
indicating the location of the related land (the "FILED PLAN"). However, the
filed plan is not conclusive as to matters such as the location of boundaries.
The Land Registration Act 1925 provides that some interests in land will
bind the land even though they are not capable of registration at H.M. Land
Registry. These fall into two categories:
* Overriding interests; and
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* Minor interests (which are relevant only as between the landowner
and the beneficiary of those interests).
Title to registered land is established by the register and evidenced by a
land or (in the case of land which is subject to a registered mortgage or
charge) charge certificate containing official copies of the entries on the
register relating to that land. The land certificate or charge certificate
relating to a first mortgage will also contain a copy of the filed plan. The
land certificate is normally in the possession of the estate owner where the
property is not mortgaged. If the property is mortgaged H.M. Land Registry
retains the land certificate and a charge certificate is issued which is usually
held by the mortgagee.
UNREGISTERED TITLE
All land in England and Wales is now subject to compulsory registration on
the happening of any of a number of trigger events. The most common trigger
event is a sale of the land, but since April 1998 the triggers have also
included the creation of a first priority legal mortgage over unregistered land.
However, an increasingly small but still significant proportion of land in
England and Wales (typically where the land has been in the same ownership for a
number of years) is still unregistered. Title to unregistered land is proved by
establishing a chain of documentary evidence to title going back at least 15
years. Where the land is affected by third party rights, some of those rights or
interests, including a legal mortgage where the mortgagee has taken possession
of the title deeds, can be proved by documentary evidence or by proof of
continuous exercise of the rights for a prescribed period and do not require
registration. However, other interests, including equitable charges, must be
registered at H.M. Land Charges Registry in order to be effective against a
subsequent purchaser or mortgagee of the land.
TAKING SECURITY OVER LAND
A legal mortgage of registered land may only be effected once the charge
has been registered with H.M. Land Registry. Prior to registration, it will take
effect only as an equitable mortgage or charge. An equitable mortgage of
registered land (including legal mortgages prior to registration) is only
protected by registration. If protected by registration, the equitable mortgage
will take priority over all subsequent mortgages. If not so protected, a later
purchaser or mortgagee of a legal interest will generally take the land free of
the earlier unregistered equitable mortgage. Where land is registered therefore,
a mortgagee must register its mortgage at H.M. Land Registry in order to secure
priority over any subsequent mortgagee. Priority of mortgages (whether legal or
equitable) over registered land is generally governed by the date of
registration of the mortgage rather than the date of creation. However, a
prospective mortgagee is able to obtain a priority period within which to
register its mortgage. If the mortgagee submits a proper application for
registration during this period, its interest will take priority over any
application for registration of any interest which is received by H.M. Land
Registry during this priority period.
In the system of unregistered land, the mortgagee protects its interest by
retaining possession of the title deeds to the mortgaged property. Without the
title deeds to the mortgaged property, the borrower is unable to establish the
necessary chain of ownership, and is therefore prevented from dealing with its
land without the consent of the mortgagee. Priority of mortgages over
unregistered land depends on a number of factors including, whether the
mortgagee has taken possession of the title deeds, whether the interest is
registerable and whether it has been registered at H.M. Land Charges Registry
and the date of creation of the charge. Generally speaking where all else is
equal between two competing mortgages, the priority will be determined by the
date of creation of the charge.
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THE SELLER AS MORTGAGEE
The sale to the mortgages trustee of the mortgage loans together with
their related security will take effect in equity only and the mortgages trustee
will not apply to H.M. Land Registry or H.M. Land Charges Registry to register
or record its equitable interest in the mortgages. The consequences of this are
explained in the section "RISK FACTORS - THERE MAY BE RISKS ASSOCIATED WITH THE
FACT THAT THE MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGE LOANS AND
THEIR RELATED SECURITY, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES".
ENFORCEMENT OF MORTGAGES
If a borrower breaches the mortgage conditions of its mortgage loan, the
mortgage loan generally provides that all monies under the mortgage loan will
become immediately due and payable. The mortgagee would then be entitled to
recover all outstanding principal, interest and fees under the covenant of the
borrower contained expressly or impliedly in the mortgage deed to pay or repay
those amounts. In addition, the mortgagee would then be entitled to enforce its
mortgage in relation to the defaulted mortgage loan. Enforcement may occur in a
number of ways, including the following:
* 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 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.
* 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.
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,
243
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.
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MATERIAL UNITED KINGDOM TAX CONSEQUENCES
The following section summarizes the material UK tax consequences of the
purchase, ownership and disposition of the notes based on current law and
practice in the UK. Sidley Austin Brown & Wood, UK tax advisers to the issuer
("UK TAX COUNSEL"), has prepared and reviewed this summary and the opinions of
UK tax counsel are contained in this summary. The summary assumes that the final
documentation conforms with the description in the prospectus. The summary also
assumes that the representations made by each of Funding and the issuer,
respectively, to UK tax counsel that the profit in Funding's profit and loss
account will not exceed 0.01% of the Funding available revenue receipts and that
the profit in the issuer's profit and loss account will not exceed 0.01% of the
interest on the intercompany loan are correct. It further assumes that all
payments made pursuant to the final documentation are calculated on arms' length
terms. The summary does not purport to be a complete analysis of all tax
considerations of the purchase, ownership and disposition of the notes. It
relates to the position of persons who are the absolute beneficial owners of
notes such as individuals, partnerships and non-financial trade corporate
entities, and may not apply to certain classes of persons such as financial
trade corporate entities (such as banks, securities dealers and securities
brokers), investment managers, insurance companies, pension funds and UK unit
investment trusts. UK tax counsel suggests that you consider consulting your own
tax adviser if you are uncertain of your current tax position.
TAXATION OF US RESIDENTS
As discussed in more detail under "- WITHHOLDING TAX" below, UK tax
counsel is of the opinion that a noteholder who is resident in the US for US tax
purposes may obtain payment of interest on his notes without deduction of UK tax
if and for so long as the notes are listed on a "RECOGNISED STOCK EXCHANGE". If
the notes cease to be listed on a recognised stock exchange, an amount must be
withheld on account of UK income tax at the lower rate (currently 20%), subject
to any direction to the contrary from the Inland Revenue in respect of such
relief as may be available pursuant to the provisions of an applicable double
taxation treaty.
Residents of the US are generally not subject to tax in the UK on payments
on the notes under the double taxation treaty between the US and the UK
currently in force, subject to completion of administrative formalities, except
where the notes are effectively connected with a permanent establishment or a
fixed base of the noteholder situated in the UK or the noteholder is exempt from
tax in respect of income on the notes in the US and the noteholder sells or
makes a contract to sell the holding from which such income is derived within
three months of the date on which the noteholder acquired the holding.
A new double taxation treaty has been negotiated between the UK and the
US, the relevant provisions of which will apply to payments on the notes made on
or after the first day of the second month following the date on which the new
treaty enters into force. The new double taxation treaty must be ratified by
both the UK Parliament and the US Senate before it can enter into force, and it
is not known when these procedures will be completed. The new double taxation
treaty does not contain the specific exception referred to in the previous
paragraph in respect of a noteholder that is exempt from tax. However, the
benefit of the new double taxation treaty is excluded in respect of any interest
paid under, or as part of, a conduit arrangement and is also subject to
comprehensive limitation on benefits provisions.
In addition, UK tax counsel is of the opinion that, as discussed in more
detail under "- DIRECT ASSESSMENT OF NON-UK RESIDENT HOLDERS OF NOTES TO UK TAX
ON INTEREST" below, a noteholder who is resident in the US for US tax purposes
and who is not resident in the UK for UK tax purposes will not be subject to UK
tax (other than any withholding tax, as regards which see above) in respect of
any payments on the notes unless they are held by or for a trade, profession or
vocation carried on by him through a branch or agency in the UK.
245
It is the opinion of UK tax counsel that US resident noteholders will not
be liable to UK tax in respect of a disposal of the notes provided they are not
within the charge to UK corporation tax and (i) are not resident or ordinarily
resident in the UK, or (ii) do not carry on a trade, profession or vocation in
the UK through a branch or agency in connection with which interest is received
or to which the notes are attributable.
It is the opinion of UK tax counsel that, as discussed in more detail
below under "- UK TAXATION OF FUNDING AND THE ISSUER", Funding and the issuer
will generally be subject to UK corporation tax, currently at a rate of 30%, on
the profit reflected in their respective profit and loss accounts as increased
by the amounts of any non-deductible expenses or losses.
It is the opinion of UK tax counsel that, as discussed in more detail
below under "- UK TAXATION OF THE MORTGAGES TRUSTEE", the mortgages trustee will
have no liability to UK tax in relation to amounts which it receives on behalf
of Funding or the seller under the mortgages trust.
Except as described in the preceding paragraphs (and as further developed
in the corresponding opinions below), UK tax counsel will render no opinions
relating to the notes, the parties to the transaction, or any aspects of the
transaction.
WITHHOLDING TAX
For so long as the notes are and continue to be listed on a "RECOGNISED
STOCK EXCHANGE" within the meaning of section 841 of the Income and Corporation
Taxes Act 1988 (the London Stock Exchange plc is such a recognised stock
exchange for this purpose) interest payments on each of the notes will be
treated as a "PAYMENT OF INTEREST ON A QUOTED EUROBOND" within the meaning of
section 349 of the Income and Corporation Taxes Act 1988. Under an Inland
Revenue interpretation, securities will be regarded as listed on a recognised
stock exchange if they are listed by a competent authority in a country which is
a member state of the European Union or which is part of the European Economic
Area and are admitted to trading on a recognised stock exchange in that country.
In these circumstances, payments of interest on the notes may be made without
withholding or deduction for or on account of UK income tax irrespective of
whether the notes are in global form or in definitive form.
If the notes cease to be listed on a recognised stock exchange, an amount
must be withheld on account of UK income tax at the lower rate (currently 20%),
subject to any direction to the contrary from the Inland Revenue in respect of
such relief as may be available pursuant to the provisions of an applicable
double taxation treaty or in circumstances where the exemption for payments
between certain companies contained in section 349A of the Income and
Corporation Taxes Act 1988 applies.
On December 13, 2001, the EU Ecofin Council reached agreement on the text
of a proposed EU Savings Directive. Under the proposed EU Savings Directive,
subject to a number of important conditions being met, EU Member States are
required to provide to the tax authorities of another Member State details of
payments of interest or other similar income paid by an entity/person within its
jurisdiction to an individual resident in another Member State, subject to the
right of certain Member States to opt instead for a withholding system during a
specified transitional period. The text of the proposed EU Savings Directive is
not yet final, and may be subject to further amendment and/or clarification.
Payments of interest and principal with respect to the notes will be
subject to any applicable withholding taxes and the issuer will not be obliged
to pay additional amounts in relation thereto.
246
DIRECT ASSESSMENT OF NON-UK RESIDENT HOLDERS OF 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 withholding,
subject to any direction to the contrary from the Inland Revenue in respect of
such relief as may be available pursuant to the provisions of an applicable
double taxation treaty.
However, interest with a UK source received without deduction or
withholding on account of UK tax will not be chargeable to UK tax in the hands
of a noteholder (other than certain trustees) who is not resident for tax
purposes in the UK unless that noteholder carries on a trade, profession or
vocation in the UK through a branch or agency in connection with which the
interest is received or to which the notes are attributable. There are
exemptions for interest received by certain categories of agent (such as some
brokers and investment managers).
Where interest has been paid under deduction of UK income tax, noteholders
who are not resident in the UK may be able to recover all or part of the tax
deducted if there is an appropriate provision under an applicable double
taxation treaty.
TAXATION OF RETURNS: COMPANIES WITHIN THE CHARGE TO UK CORPORATION TAX
In general, noteholders which are within the charge to UK corporation tax
in respect of notes will be charged to tax and obtain relief as income on all
returns on and fluctuations in value of the notes broadly in accordance with
their statutory accounting treatment.
For holders of series 1 notes or series 2 notes, within the charge to UK
corporation tax (other than authorized unit trusts and investment trusts), these
notes will be qualifying assets for the purposes of the taxation of foreign
exchange gains and losses. Any changes in the sterling value of these notes as a
result of changes in the sterling/US dollar exchange rate or sterling/euro
exchange rate, as appropriate, during each accounting period in which such a
holder holds these notes will generally be taxed or relieved by reference to the
holder's accounting treatment of the notes.
TAXATION OF RETURNS: OTHER NOTEHOLDERS
Noteholders who are not within the charge to UK corporation tax and who
are resident or ordinarily resident in the UK for tax purposes or who carry on a
trade, profession or vocation in the UK through a branch or agency in connection
with which interest on the notes is received or to which the notes are
attributable will generally be liable to UK tax on the amount of any interest
received in respect of the notes.
As the series 1 notes are denominated in US dollars and the series 2 notes
are denominated in euro, the series 1 notes and the series 2 notes will not be
regarded by the Inland Revenue as constituting "QUALIFYING CORPORATE BONDS"
within the meaning of Section 117 of the Taxation of Chargeable Gains Act 1992.
Accordingly, a disposal of any of these notes may give rise to a chargeable gain
or an allowable loss for the purposes of the UK taxation of chargeable gains.
It is expected that the series 3 notes will be regarded by the Inland
Revenue as constituting "QUALIFYING CORPORATE BONDS" within the meaning of
Section 117 of the Taxation of Chargeable Gains Act 1992. Accordingly, a
disposal of any of these notes is not expected to give rise to a chargeable gain
or an allowable loss for the purposes of the UK taxation of chargeable gains.
There are provisions to prevent any particular gain (or loss) from being
charged (or relieved) at the same time under these provisions and also under the
provisions of the "ACCRUED INCOME SCHEME" described below.
247
ACCRUED INCOME SCHEME
On a disposal of notes by a noteholder, any interest which has accrued
since the last payment date may be chargeable to tax as income under the rules
of the "ACCRUED INCOME SCHEME" if that noteholder is resident or ordinarily
resident in the UK or carries on a trade in the UK through a branch or agency to
which the notes are attributable.
STAMP DUTY AND STAMP DUTY RESERVE TAX
No UK stamp duty or stamp duty reserve tax is payable on the issue or
transfer of the offered notes, whether such offered note is in global or
definitive form.
UK TAXATION OF FUNDING AND THE ISSUER
It is the opinion of UK tax counsel that Funding and the issuer will
generally be subject to UK corporation tax, currently at a rate of 30%, on the
profit reflected in their respective profit and loss accounts as increased by
the amounts of any non-deductible expenses or losses. Examples of non-deductible
expenses and losses include general provisions for bad debts. In respect of
Funding, the profit in the profit and loss account will not exceed 0.01% of the
Funding available revenue receipts. In respect of the issuer, the profit in the
profit and loss account will not exceed 0.01% of the interest on the
intercompany loan. Any liability to UK corporation tax will be paid out of the
available revenue receipts of Funding and the issuer, respectively.
UK TAXATION OF THE MORTGAGES TRUSTEE
It is the opinion of UK tax counsel that the mortgages trustee will have
no liability to UK tax in respect of any income, profit or gain arising under
these arrangements. Accordingly, the mortgages trustee will have no liability to
UK tax in relation to amounts which it receives on behalf of Funding or the
seller under the mortgages trust.
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MATERIAL UNITED STATES TAX CONSEQUENCES
GENERAL
The following section summarizes the material federal income tax
consequences of the purchase, ownership and disposition of the series 1 class A1
notes, series 1 class A2 notes, series 1 class B notes and series 1 class C
notes (the "US NOTES") that may be relevant to a noteholder that is a "UNITED
STATES PERSON" (as defined later in this section) or that otherwise is subject
to US federal income taxation on a net income basis in respect of a US note (any
such United States person or holder, a "US HOLDER"). In general, the summary
assumes that a holder acquires a US note at original issuance and holds such
note as a capital asset. It does not purport to be a comprehensive description
of all the tax considerations that may be relevant to a decision to purchase the
US notes. In particular, it does not discuss special tax considerations that may
apply to certain types of taxpayers, including dealers in stocks, securities or
notional principal contracts; traders in securities electing to mark to market;
banks, savings and loan associations and similar financial institutions;
taxpayers whose functional currency is other than the US dollar; taxpayers that
hold a US note as part of a hedge or straddle or a conversion transaction,
within the meaning of section 1258 of the US Internal Revenue Code of 1986, as
amended (the "CODE"); and subsequent purchasers of US notes. In addition, this
summary does not describe any tax consequences arising under the laws of any
taxing jurisdiction other than the US federal government.
This summary is based on the US tax laws, regulations, rulings and
decisions in effect or available on the effective date of the Registration
Statement. All of the foregoing are subject to change, and any change may apply
retroactively and could affect the continued validity of this summary.
Sidley Austin Brown & Wood LLP, US tax advisers to the issuer ("US TAX
COUNSEL"), has prepared and reviewed this summary of material US federal income
tax consequences. As described under " - TAX STATUS OF THE ISSUER, FUNDING,
MORTGAGES TRUSTEE AND MORTGAGES TRUST", US tax counsel is of the opinion that
the mortgages trustee acting as trustee of the mortgages trust, Funding, and the
issuer will not be subject to US federal income tax as a result of their
contemplated activities. As described further under " - CHARACTERIZATION OF THE
US NOTES", US tax counsel is also of the opinion that, although there is no
authority on the treatment of instruments substantially similar to the US notes,
and while not free from doubt, the US notes will be treated as debt for US
federal income tax purposes. Except as described in the two preceding sentences
(and set forth in the corresponding opinions), US tax counsel will render no
opinions relating to the notes or the parties to the transaction.
An opinion of US tax counsel is not binding on the US Internal Revenue
Service (the "IRS") or the courts, and no rulings will be sought from the IRS on
any of the issues discussed in this section. Accordingly, the issuer suggests
that persons considering the purchase of US notes consult their own tax advisors
as to the US federal income tax consequences of the purchase, ownership and
disposition of the US notes, including the possible application of state, local,
non-US or other tax laws, and other US tax issues affecting the transaction.
As used in this section the term "UNITED STATES PERSON" means an
individual who is a citizen or resident of the United States, 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, and any estate or trust the income of
which is subject to taxation in the United States regardless of source.
TAX STATUS OF THE ISSUER, FUNDING, MORTGAGES TRUSTEE AND MORTGAGES TRUST
Under the transactional documents, each of the issuer, Funding, 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
249
from sources within the United States as determined under US federal income tax
principles, and not to hold any mortgaged property if doing so would cause it to
be engaged or deemed to be engaged in a trade or business within the United
States as determined under US federal income tax principles. US tax counsel is
of the opinion that, assuming compliance with the transaction documents, none of
the issuer, Funding or the mortgages trustee acting in its capacity as trustee
of the mortgages trust will be subject to US federal income tax. No elections
will be made to treat the issuer, Funding, or the mortgage trust or any of their
assets as a REMIC or a FASIT (two types of securitization vehicles having a
special tax status under the Code).
CHARACTERIZATION OF THE US NOTES
Although there is no authority regarding the treatment of instruments that
are substantially similar to the US notes, and while not free from doubt, it is
the opinion of US tax counsel that the US notes will be treated as debt for US
federal income tax purposes. The issuer intends to treat the US notes as
indebtedness of the issuer for all purposes, including US tax purposes. The
discussion in the next section assumes this result.
The US notes will not be qualifying real property mortgage loans in the
hands of domestic savings and loan associations, real estate investment trusts,
or REMICs under sections 7701(a)(19)(C), 856(c)(5)(A) or 860G(a)(3) of the Code,
respectively.
TAXATION OF US HOLDERS OF THE US NOTES
Qualified Stated Interest and Original Issue Discount. The issuer intends
to treat interest on the series 1 notes as "QUALIFIED STATED INTEREST" under
United States Treasury regulations relating to original issue discount
(hereafter the "OID REGULATIONS"). As a consequence, discount on the series 1
notes arising from an issuance at less than par will only be required to be
accrued under the OID regulations if such discount exceeds a statutorily defined
de minimis amount. Qualified stated interest, which generally must be
unconditionally payable at least annually, is taxed under a holder's normal
method of accounting. De minimis OID is included in income on a PRO RATA basis
as principal payments are made on the series 1 notes.
It is possible that interest on the series 1 notes could be treated as OID
because such interest is subject to deferral in certain limited circumstances. A
US holder of a series 1 note issued with OID must include OID in income over the
term of the series 1 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 series 1 notes and accordingly, the issuer intends to assume that the series
1 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.
As an alternative to the above treatments, US holders may elect to include
in gross income all interest with respect to the series 1 notes, including
stated interest, acquisition discount, OID, de minimis OID, market discount, de
minimis market discount, and unstated interest, as adjusted by any amortizable
bond premium or acquisition premium, using the constant yield method described
above.
Sales and Retirement. In general, a US holder of a US note will have a
basis in such note equal to the cost of the note to such holder, and reduced by
any payments thereon other than payments of stated interest. Upon a sale or
exchange of the note, a US holder
250
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 Series 1 Notes. The proper
characterization of the arrangement involving the issuer and the holders of the
series 1 notes is not clear because there is no authority on transactions
comparable to that contemplated herein. The issuer intends to treat the series 1
notes as debt of the issuer for all US federal income tax purposes. Prospective
investors should consult their own tax advisors with respect to the potential
impact of an alternative characterization of the series 1 notes for US tax
purposes.
One possible alternative characterization is that the IRS could assert
that the series 1 class C notes or any other class of notes should be treated as
equity in the issuer for US federal income tax purposes. If the series 1 class C
notes or any other class of notes were treated as equity, US holders of such
notes would be treated as owning equity in a passive foreign investment company
("PFIC") which, depending on the level of ownership of such US holder and
certain other factors, might also constitute an interest in a controlled foreign
corporation for such US holder. This would have certain timing and character
consequences for US holders and could require certain elections and disclosures
that would need to be made shortly after acquisition to avoid potentially
adverse US tax consequences.
If the issuer was treated as a PFIC, unless a US holder makes a "QEF
ELECTION" or "MARK TO MARKET ELECTION", a US holder will be subject to a special
tax regime (i) in respect of gains realized on the sale or other disposition of
its series 1 notes, and (ii) in respect of distributions on its series 1 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 series 1 notes disposed of during the
same taxable year in which such series 1 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 series 1 notes pay interest at a
floating rate, it is possible that a US holder will receive "EXCESS
DISTRIBUTIONS" as a result of fluctuations in the rate of LIBOR over the term of
the series 1 notes. In general, under the PFIC rules, a US holder will be
required to allocate such excess distributions and any gain realized on a sale
of its series 1 notes to each day during the US holder's holding period for the
series 1 notes, and will be taxable at the highest rate of taxation applicable
to the series 1 notes for the year to which the excess distribution or gain is
allocable (without regard to the US holder'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).
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 series
1 notes to a US holder must be reported to the IRS, unless the US holder is an
exempt recipient or establishes an exemption. With
251
respect to non-US persons investing in the series 1 notes, to ensure they
qualify for an exemption, the paying agent will require such beneficial holder
to provide a statement from the individual or corporation that:
* is signed under penalties of perjury by the beneficial owner of the
note,
* certifies that such owner is not a US holder, 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 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 must provide
the certification from each of its partners or beneficiaries along with certain
additional information. Certain securities clearing organizations, and other
entities who are not beneficial owners, may be able to provide a signed
statement to the paying agent. However, in such case, the signed statement may
require a copy of the beneficial owner's W-8BEN (or the substitute form).
In addition, upon the sale of a note to (or through) a broker, the broker
must report the sale and backup withholding on the entire purchase price, unless
(i) the broker determines that the seller is a corporation or other exempt
recipient, (ii) the seller certifies (as described above) that such seller is a
non-US holder and certain other conditions are met or (iii) the broker has the
taxpayer identification number of the recipient properly certified as correct.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's US federal income tax provided the required information is
furnished to the IRS.
Prospective investors should consult their own tax advisors with respect
to the foregoing withholding tax requirements.
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MATERIAL JERSEY (CHANNEL ISLANDS) TAX CONSIDERATIONS
TAX STATUS OF THE MORTGAGES TRUSTEE AND THE MORTGAGES TRUST
It is the opinion of Jersey (Channels 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.
TAX STATUS OF FUNDING
Funding has "EXEMPT COMPANY" status within the meaning of Article 123A of
the Income Tax (Jersey) Law, 1961, as amended, for the calendar year ending
December 31, 2002. Funding will be required to pay an annual exempt company
charge (currently (pound)600) in respect of each calendar year during which it
wishes to retain exempt company status. The retention of exempt company status
is conditional upon the exempt company charge being paid, Funding disclosing its
beneficial ownership within the required time limits and the Comptroller of
Income Tax in Jersey being satisfied that no Jersey resident has a beneficial
interest in Funding, except as permitted by concessions granted by the
Comptroller of Income Tax. As at the date of this prospectus no Jersey resident
person has or is anticipated to have any beneficial interest in Funding, and
therefore such concessions are not expected to be relied upon.
As an exempt company, Funding will not be liable to Jersey income tax
other than on Jersey source income (except bank deposit interest on Jersey bank
accounts). It is the opinion of Jersey (Channel Islands) tax counsel that, for
so long as Funding is an exempt company, payments in respect of the intercompany
loan will not be subject to Jersey taxation and no withholding in respect of
taxation will be required on such payments to the issuer under the intercompany
loan.
It is the opinion of Jersey (Channel Islands) tax counsel that the income
of Funding will not be Jersey source income insofar as the income of Funding
arises only from the mortgages trust property and that property is either
situated outside Jersey or is interest on bank or building society deposits in
Jersey.
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ERISA CONSIDERATIONS
The series 1 notes are eligible for purchase by employee benefit plans and
other plans subject to the US Employee Retirement Income Security Act of 1974,
as amended ("ERISA") and/or the provisions of Section 4975 of the Code and by
governmental plans that are subject to state, local or other federal law of the
United States that is substantially similar to ERISA or Section 4975 of the
Code, subject to consideration of the issues described in this section. ERISA
imposes certain requirements on "EMPLOYEE BENEFIT PLANS" (as defined in Section
3(3) of ERISA) subject to ERISA, including entities such as collective
investment funds and separate accounts whose underlying assets include the
assets of such plans (collectively, "ERISA PLANS") and on those persons who are
fiduciaries with respect to ERISA Plans. Investments by ERISA Plans are subject
to ERISA's general fiduciary requirements, including the requirements of
investment prudence and diversification and the requirement that an ERISA Plan's
investments be made in accordance with the documents governing the Plan. The
prudence of a particular investment must be determined by the responsible
fiduciary of an ERISA Plan by taking into account the ERISA Plan's particular
circumstances and all of the facts and circumstances of the investment
including, but not limited to, the matters discussed under "RISK FACTORS" and
the fact that in the future there may be no market in which such fiduciary will
be able to sell or otherwise dispose of the notes.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those plans that
are not subject to ERISA but which are subject to Section 4975 of the Code, such
as individual retirement accounts (together with ERISA Plans, the "PLANS")) and
certain persons (referred to as "PARTIES IN INTEREST" or "DISQUALIFIED PERSONS")
having certain relationships to such Plans, unless a statutory or administrative
exemption is applicable to the transaction. A party in interest or disqualified
person who engages in a prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code.
The seller, the issuer, the administrator, the mortgages trustee, Funding
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 series 1 notes is acquired or held by a
Plan with respect to which the issuer, the administrator, the mortgages trustee,
Funding 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 series 1 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
254
section 406 of ERISA or section 4975 of the Code (or, in the case of a
governmental plan, any substantially similar federal, state or local law of the
United States) for which an exemption is not available.
In addition, the US Department of Labor has promulgated a regulation, 29
C.F.R. Section 2510.3-101 (the "PLAN ASSET REGULATION"), describing what
constitutes the assets of a Plan with respect to the Plan's investment in an
entity for purposes of certain provisions of ERISA, including the fiduciary
responsibility provisions of Title I of ERISA, and Section 4975 of the Code.
Under the Plan Asset Regulation, if a Plan invests in an "EQUITY INTEREST" of an
entity that is neither a "PUBLICLY-OFFERED SECURITY" nor a security issued by an
investment company registered under the 1940 Act, the Plan's assets include both
the equity interest and an undivided interest in each of the entity's underlying
assets, unless one of the exceptions to such treatment described in the Plan
Asset Regulation applies. Under the Plan Asset Regulation, a security which is
in debt form may be considered an "EQUITY INTEREST" if it has "SUBSTANTIAL
EQUITY FEATURES". If the issuer were deemed under the Plan Asset Regulation to
hold plan assets by reason of a Plan's investment in any of the series 1 notes,
series 2 notes or series 3 notes, such plan assets would include an undivided
interest in the assets held by the issuer and transactions by the issuer would
be subject to the fiduciary responsibility provisions of Title I of ERISA and
the prohibited transaction provisions of ERISA and Section 4975 of the Code.
Investors should note that concerns in respect of the foregoing may be magnified
here, particularly in the case of the series 1 class C notes. In addition, in
analyzing these issues with their own counsel, prospective purchasers of notes
should consider, among other things, that, although special tax counsel has
concluded that the notes are debt for federal income tax purposes, see "MATERIAL
UNITED STATES TAX CONSEQUENCES", it is not clear whether the debt would be
treated for tax purposes as issued by the issuer. If the underlying assets of
the issuer are deemed to be Plan assets, the obligations and other
responsibilities of Plan sponsors, Plan fiduciaries and Plan administrators, and
of parties in interest and disqualified persons, under parts 1 and 4 of subtitle
B of title I of ERISA and section 4975 of the Code, as applicable, may be
expanded, and there may be an increase in their liability under these and other
provisions of ERISA and the Code (except to the extent (if any) that a favorable
statutory or administrative exemption or exception applies). In addition,
various providers of fiduciary or other services to the issuer, and any other
parties with authority or control with respect to the issuer, could be deemed to
be Plan fiduciaries or otherwise parties in interest or disqualified persons by
virtue of their provision of such services.
Any insurance company proposing to purchase any of the series 1 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 series 1 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
255
not result in a non-exempt prohibited transaction and will satisfy the other
requirements of ERISA and the Code (or, in the case of a governmental plan, any
substantially similar state, local or other federal law).
The sale of any notes to a Plan is in no respect a representation by the
seller, the issuer, the administrator, the mortgages trustee, Funding 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.
256
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES
The issuer is a UK public company incorporated with limited liability in
England and Wales.
Any final and conclusive judgment of any New York State or United States
Federal Court sitting in the Borough of Manhattan in the City of New York having
jurisdiction recognized by England or Wales in respect of an obligation of the
issuer in respect of the notes for a fixed sum of money and which has not been
stayed or satisfied in full, would be enforceable by action against the issuer
in the courts of England and Wales without a re-examination of the merits of the
issues determined by the proceedings in the New York State or United States
Federal Court.
This will be the case unless the following occurs:
* 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 issuer expressly submits to the non-exclusive jurisdiction of the
courts of England for the purpose of any suit, action or proceedings arising out
of this offering. A judgment by a court may be given in some cases only in
sterling.
All of the directors and executive officers of the issuer reside outside
the United States. Substantially all of the assets of all or many of such
persons are located outside the United States. As a result, it may not be
possible for the noteholders to effect service of process within the United
States upon such persons with respect to matters arising under the federal
securities laws of the United States or to enforce against them judgments
obtained in United States courts predicated upon the civil liability provisions
of such laws.
The issuer has been advised by Sidley Austin Brown & Wood, its English
counsel, that there is doubt as to the enforceability in England and Wales, in
original actions or in actions for enforcement of judgments of United States
courts, of civil liabilities predicated upon the Federal securities laws of the
United States based on the restrictions referred to above.
257
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.
EXPERTS
The financial statements of Granite Finance Funding Limited for the period
from February 14, 2001 to December 31, 2001 and for the period from January 1,
2002 to June 30, 2002 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers, independent accountants, given
on the authority of that firm as experts in auditing and accounting.
The balance sheet of Granite Mortgages 02-2 plc as at September 9, 2002
included in this prospectus has been so included in reliance on the report of
PricewaterhouseCoopers, independent accountants, given on the authority of that
firm as experts in auditing and accounting.
PricewaterhouseCoopers has given and not withdrawn their consent to the
inclusion of their reports on the balance sheet and financial statements of
Granite Mortgages 02-2 plc and Granite Finance Funding Limited respectively, as
set out in the prospectus, and has authorized the contents of such references
for the purposes of Article 6(1)(e) of the Financial Services and Markets Act
2000 (Official Listing of Securities) Regulations 2001.
LEGAL MATTERS
Certain matters of English law and United States law regarding the notes,
including matters relating to the validity of the issuance of the notes, will be
passed upon for the issuer by Sidley Austin Brown & Wood, London. Certain
matters of United States law regarding matters of United States federal income
tax law with respect to the series 1 notes will be passed upon for the issuer by
Sidley Austin Brown & Wood LLP, New York. Certain matters of English law and
United States law will be passed upon for the underwriters by Allen & Overy,
London.
Certain matters of Jersey (Channel Islands) law regarding the mortgages
trustee and Funding will be passed upon for the mortgages trustee and Funding,
respectively, by Mourant du Feu & Jeune, London.
258
UNDERWRITING
UNITED STATES
The issuer has agreed to sell, and Salomon Smith Barney Inc. and J.P.
Morgan Securities Inc. (the "LEAD UNDERWRITERS") and the other underwriters for
the series 1 notes listed in the following table have agreed to purchase, the
principal amount of those notes listed in that table (also called the "OFFERED
NOTES"). The terms of these purchases are governed by an underwriting agreement
among the issuer, the lead underwriters and the underwriters. The underwriters
or affiliates of certain of the underwriters have also agreed to pay and
subscribe for the other classes of notes not being offered pursuant to this
prospectus on the closing date.
PRINCIPAL AMOUNT OF THE
UNDERWRITERS OF THE SERIES 1 CLASS A1 NOTES SERIES 1 CLASS A1 NOTES
- ------------------------------------------- -----------------------
Salomon Smith Barney Inc. USD 296,500,000
J.P. Morgan Securities Inc. USD 296,500,000
Lehman Brothers Inc. USD 19,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD 19,000,000
UBS Warburg USD 19,000,000
----------------------
Total USD 650,000,000
======================
PRINCIPAL AMOUNT OF THE
UNDERWRITERS OF THE SERIES 1 CLASS A2 NOTES SERIES 1 CLASS A2 NOTES
- ------------------------------------------- -----------------------
Salomon Smith Barney Inc. USD 525,500,000
J.P. Morgan Securities Inc. USD 525,500,000
Lehman Brothers Inc. USD 33,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated USD 33,000,000
UBS Warburg USD 33,000,000
----------------------
Total USD 1,150,000,000
======================
PRINCIPAL AMOUNT OF THE
UNDERWRITERS OF THE SERIES 1 CLASS B NOTES SERIES 1 CLASS B NOTES
- ------------------------------------------ -----------------------
Salomon Smith Barney Inc. USD 30,000,000
J.P. Morgan Securities Inc. USD 30,000,000
----------------------
Total USD 60,000,000
======================
PRINCIPAL AMOUNT OF THE
UNDERWRITERS OF THE SERIES 1 CLASS C NOTES SERIES 1 CLASS C NOTES
- ------------------------------------------ -----------------------
Salomon Smith Barney Inc. USD 44,000,000
J.P. Morgan Securities Inc. USD 44,000,000
----------------------
Total USD 88,000,000
======================
The price to the public as a percentage of the principal balance of the
offered notes will be 100%.
259
The issuer has agreed to pay to the underwriters of the series 1 class A1
notes a selling commission of 0.060% of the aggregate principal amount of the
series 1 class A1 notes and a management and underwriting fee of 0.040% of the
aggregate principal amount of the series 1 class A1 notes. The issuer has also
agreed to pay to the underwriters of the series 1 class A2 notes a selling
commission of 0.090% of the aggregate principal amount of the series 1 class A2
notes and a management and underwriting fee of 0.060% of the aggregate principal
amount of the series 1 class A2 notes. The issuer has also agreed to pay to the
underwriters of the series 1 class B notes a selling commission of 0.135% of the
aggregate principal amount of the series 1 class B notes and a management and
underwriting fee of 0.090% of the aggregate principal amount of the series 1
class B notes. The issuer has also agreed to pay to the underwriters of the
series 1 class C notes a selling commission of 0.240% of the aggregate principal
amount of the series 1 class C notes and a management and underwriting fee of
0.160% of the aggregate principal amount of the series 1 class C notes.
The lead underwriters of the offered notes have advised the issuer that the
underwriters propose initially to offer the series 1 class A1 notes to the
public at the public offering price stated on the cover page of this prospectus,
and to some dealers at that price, less a concession up to 0.060% for each
series 1 class A1 note. The underwriters may allow, and those dealers may
re-allow, concessions up to 0.040% of the principal amount of the series 1 class
A1 notes to some brokers and dealers.
The lead underwriters of the offered notes have also advised the issuer
that the underwriters propose initially to offer the series 1 class A2 notes to
the public at the public offering price stated on the cover page of this
prospectus, and to some dealers at that price, less a concession up to 0.090%
for each series 1 class A2 note. The underwriters may allow, and those dealers
may re-allow, concessions up to 0.060% of the principal amount of the series 1
class A2 notes to some brokers and dealers.
The lead underwriters of the offered notes have also advised the issuer
that the underwriters propose initially to offer the series 1 class B notes to
the public at the public offering price stated on the cover page of this
prospectus, and to some dealers at that price, less a concession up to 0.135%
for each series 1 class B note. The underwriters may allow, and those dealers
may re-allow, concessions up to 0.090% of the principal amount of the series 1
class B notes to some brokers and dealers.
The lead underwriters of the offered notes have also advised the issuer
that the underwriters propose initially to offer the series 1 class C notes to
the public at the public offering price stated on the cover page of this
prospectus, and to some dealers at that price, less a concession up to 0.240%
for each series 1 class C note. The underwriters may allow, and those dealers
may re-allow, concessions up to 0.160% of the principal amount of the series 1
class C notes to some brokers and dealers.
Additional offering expenses are estimated to be approximately $2,150,000.
The issuer and Northern Rock have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the United States
Securities Act of 1933, as amended.
The underwriters may engage in over-allotment transactions (also known as
short sales), stabilizing transactions, syndicate covering transactions and
penalty bids for the notes under Regulation M under the United States Securities
Exchange Act of 1934, as amended.
* 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 offered notes in the open market after
pricing that could adversely affect investors who purchase in the
offering.
* Stabilizing transactions permit bids to purchase the notes so long
as the stabilizing bids do not exceed a specified maximum.
260
* Short covering transactions involve purchases of the 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 notes or preventing or
retarding a decline in the market price of the notes. As a result, these
transactions may cause the prices of the notes to be higher than they would
otherwise be in the absence of those transactions. Neither the issuer 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 offered notes will be registered under the United States Securities
Act of 1933, as amended. The underwriters of the offered notes have agreed that
they will sell the offered notes within the United States through their US
registered broker dealers.
The offered 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 via e-mail to persons who have given, and not
withdrawn, their prior consent to receive copies of this prospectus in that
format.
UNITED KINGDOM
Each underwriter will represent and agree that:
* it has not offered or sold, and will not offer or sell any notes to
persons in the United Kingdom prior to admission of the notes to
listing in accordance with Part VI of the Financial Services and
Markets Act 2000 (the "FSMA "), except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for purposes of their
businesses or otherwise in circumstances which have not resulted and
will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations
1995 (as amended) or the FSMA;
* it has complied and will comply with all applicable provisions of
the FSMA with respect to anything done by it in relation to the
offered notes in, from or otherwise involving the United Kingdom;
* it has only communicated or caused to be communicated and will only
communicate or cause to be communicated, in the United Kingdom, any
invitation or inducement to engage in investment activity (within
the meaning of section 21 of the FSMA) received by it in connection
with the issue or sale of any notes in circumstances in which
section 21(1) of the FSMA does not apply to the issuer; and
NETHERLANDS
Each underwriter will represent and agree that it has not, directly or
indirectly, offered or sold and will not, directly or indirectly, offer or sell
in the Netherlands any notes other than to persons who trade or invest in
securities in the conduct of a profession or business (which includes banks,
stockbrokers, insurance companies, pension funds, other institutional investors
and finance companies and treasury departments of large enterprises).
ITALY
Each underwriter will represent and agree that the offering of the notes
has not been cleared by CONSOB (the Italian Securities Exchange Commission)
pursuant to Italian securities legislation and, accordingly, no notes may be
offered, sold or delivered, nor may copies of this prospectus or of any other
document relating to the notes be distributed in the Republic of Italy, except:
261
(i) to professional investors (OPERATORI QUALIFICATI), as defined in
Article 31, second paragraph, of CONSOB Regulation No. 11522 of July
1, 1998, as amended; or
(ii) in circumstances which are exempted from the rules on solicitation of
investments pursuant to Article 100 of Legislative Decree No. 58 of
February 24, 1998 (the "FINANCIAL SERVICES ACT") and Article 33, first
paragraph, of CONSOB Regulation No. 11971 of May 14, 1999, as amended;
or
(iii) to an Italian resident who submits an unsolicited offer to purchase
the notes.
In addition, each underwriter will represent and agree that any offer, sale
or delivery of the notes or distribution of copies of this prospectus or any
other document relating to the 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 September
1, 1993 (the "BANKING ACT"); and
(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.
GENERAL
The underwriters have represented and agreed that they have complied and
will comply with all applicable laws and regulations in force in any
jurisdiction in which they purchase, offer, sell or deliver offered notes or
possess them or distribute the prospectus and will obtain any consent, approval
or permission required by them for the purchase, offer, sale or delivery by them
of offered notes under the laws and regulations in force in any jurisdiction to
which they are subject or in which they make such purchases, offers, sales or
deliveries and the issuer shall have no responsibility for them. Furthermore,
they will not directly or indirectly offer, sell or deliver any offered 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 offered
notes by it will be made on the same terms.
Neither the issuer nor the underwriters represent that offered notes may
at any time lawfully be sold in compliance with any application, registration or
other requirements in any jurisdiction, or pursuant to any exemption available
thereunder, or assume any responsibility for facilitating such sale.
The underwriters will, unless prohibited by applicable law, furnish to
each person to whom they offer or sell offered notes a copy of the prospectus 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 offered notes to which the prospectus relates.
This prospectus may be used by Salomon Smith Barney Inc. and J.P. Morgan
Securities Inc. for offers and sales related to market-making transactions in
the offered notes. Salomon Smith Barney Inc. and J.P. Morgan Securities Inc. may
act as principal or agent in these transactions. These sales will be made at
prices relating to prevailing market prices at the time of sale. Neither Salomon
Smith Barney Inc. nor J.P. Morgan Securities Inc. has any obligation to make a
market in the offered notes, and any market- making may be discontinued at any
time without notice. Salomon Smith Barney Inc. and J.P. Morgan Securities Inc.
are among the underwriters participating in the initial distribution of the
offered notes.
262
REPORTS TO NOTEHOLDERS
The administrator will prepare quarterly and annual reports that will
contain information about the notes. The financial information contained in the
reports will not be prepared in accordance with generally accepted accounting
principles of any jurisdiction. The reports will be sent to Cede & Co. and
Citivic, as applicable, as the holder of the notes, unless and until individual
note certificates are issued. Reports will not be sent to investors by the
administrator.
WHERE INVESTORS CAN FIND MORE INFORMATION
The issuer has filed a registration statement with the SEC for the offered
notes. This prospectus is one portion of the registration statement, which also
includes additional information.
The administrator will file with the SEC all required periodic and special
SEC reports and other information about the offered notes.
Investors may read and copy any reports, statements or other information
filed at the SEC's public reference room in Washington, D.C. and may receive
copies of these documents upon writing to the SEC and paying a duplicating fee.
Investors can call the SEC at 1 800 732 0330 for further information on the
operation of the public reference room. The SEC filings are also available to
the public on the SEC's Internet site at http://www.sec.gov.
263
LISTING AND GENERAL INFORMATION
AUTHORIZATION
The issue of the notes was authorized by resolution of the board of
directors of the issuer passed on or about September 9, 2002.
LISTING OF NOTES
Application has been made to the Financial Services Authority in its
capacity as competent authority for the purposes of Part VI of the Financial
Services and Markets Act 2000 for the notes to be admitted to the official list
maintained by the UK Listing Authority. Application has also been made to the
London Stock Exchange plc for each class of the notes to be admitted to trading
by the London Stock Exchange plc. It is expected that listing of the notes on
the official list of the UK Listing Authority and the admission to trading of
the notes by the London Stock Exchange plc will be granted on or around
September 24, 2002, subject only to the issue of the notes in global form and
assignment of the expected ratings of the notes by the rating agencies.
This prospectus comprises listing particulars prepared in compliance with
the listing rules made under Section 74 of the Financial Services and Markets
Act 2000 by the UK Listing Authority. Copies have been delivered to the
Registrar of Companies in England and Wales for registration in accordance with
Section 83 of that Act.
The issuer and the directors of the issuer, whose names appear on page 63
of this prospectus, accept responsibility for the information contained in this
prospectus. To the best of the knowledge and belief of the issuer and the
directors of the issuer (who have taken all reasonable care to ensure that such
is the case), the information contained in this prospectus is in accordance with
the facts and does not omit anything likely to affect the import of such
information. The issuer and the directors of the issuer accept responsibility
accordingly.
CLEARING AND SETTLEMENT
Transactions will normally be effected for settlement in US dollars (in
respect of the series 1 notes), euro (in respect of the series 2 notes) and
sterling (in respect of the series 3 notes) 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 series 1 notes have been 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 1 class A1 38741RAA2 US38741RAA23 015401761
series 1 class A2 38741RAB0 US38741RAB06 015401800
series 1 class B 38741RAC8 US38741RAC88 015401826
series 1 class C 38741RAD6 US38741RAD61 015401834
LITIGATION
None of the issuer, Funding, Holdings, the post-enforcement call option
holder or the mortgages trustee is or has been involved since its incorporation
in any legal or arbitration proceedings which may have, or have had since its
incorporation, a significant effect upon the financial position of the issuer,
Funding, Holdings, the post-enforcement call option holder or the mortgages
trustee (as the case may be) nor, so far as the issuer, Funding, Holdings, the
post-enforcement call option holder or the mortgages trustee (respectively) is
aware, are any such legal or arbitration proceedings pending or threatened.
264
ACCOUNTS
No statutory or non-statutory accounts within the meaning of Section
240(5) of the Companies Act 1985 in respect of any financial year of the issuer
have been prepared. So long as the notes are listed on the official list of the
UK Listing Authority and are trading by the London Stock Exchange plc the most
recently published audited annual accounts of the issuer from time to time shall
be available at the specified office of the UK principal paying agent in London.
The issuer does not publish interim accounts.
Since the date of its incorporation, the issuer has not entered into any
contracts or arrangements not being in the ordinary course of business other
than the underwriting agreement and the subscription agreement.
SIGNIFICANT OR MATERIAL CHANGE
Other than as described in this prospectus, since the date of
incorporation of the issuer (July 11, 2002), the date of incorporation of
Funding (February 14, 2001), 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 issuer, Funding, Holdings, the post-enforcement call option
holder or the mortgages trustee; and
* no significant change in the financial or trading position of the
issuer, Funding, Holdings, the post-enforcement call option holder
or the mortgages trustee.
DOCUMENTS AVAILABLE
Copies of the following documents may be inspected at the offices of
Sidley Austin Brown & Wood, 1 Threadneedle Street, London EC2R 8AW during usual
business hours, on any weekday (public holidays excepted) for 14 days from the
date of this prospectus:
(A) the Memorandum and Articles of Association of each of the issuer,
Funding, Holdings, the mortgages trustee and the post-enforcement
call option holder;
(B) the balance sheet of the issuer as at September 9, 2002 and the
independent accountants' report thereon;
(C) the financial statements of Funding for the period ended December
31, 2001 and for the period from January 1, 2002 to June 30, 2002
and the independent accountants' reports thereon;
(D) prior to the closing date, drafts (subject to minor amendment), and
after the closing date, copies, of the following documents:
* the underwriting agreement;
* the intercompany loan agreement;
* the mortgages trust deed;
* the mortgage sale agreement;
* the issuer deed of charge;
* the Funding deed of charge;
* the deed(s) of accession to the Funding deed of charge;
* the basis rate swap agreement;
* the dollar currency swap agreements;
* the euro currency swap agreements;
* the trust deed;
* the paying agent and agent bank agreement;
265
* the administration agreement;
* the cash management agreement;
* the issuer cash management agreement;
* the Funding guaranteed investment contract;
* the Funding (Granite 02-2) guaranteed investment contract;
* the mortgages trustee guaranteed investment contract;
* the post-enforcement call option agreement;
* the bank account agreement;
* the Funding (Granite 02-2) bank account agreement;
* the issuer bank account agreement;
* the collection bank agreement;
* the master definitions schedule;
* the start-up loan agreement;
* the corporate services agreement;
* any other deeds of accession or supplemental deeds relating to any
such documents;
* documents relating to the issuance of the previous notes to the
previous issuers; and
(E) independent accountant's consent letter.
266
Glossary
All of the defined terms that are used in this prospectus are defined in
the following glossary. These terms are defined as follows:
"$", "US$", "US dollars" and The lawful currency for the time being of the United States
"dollars" of America
"e" or "euro" The currency of the Member States of the European Union
that adopt the single currency in accordance with the Treaty
of Rome of March 25, 1957, establishing the European
Community, as amended from time to time
"[pound]", "sterling" or The lawful currency for the time being of the United
"pounds sterling" Kingdom of Great Britain and Northern Ireland
"account bank" In respect of the issuer, Citibank, N.A., in respect of
Funding, Lloyds TSB Bank plc, and in respect of the
mortgages trustee, Lloyds TSB Bank plc Jersey
International Branch
"accrued amounts" Any principal, interest and expenses accrued as at the
closing date on the mortgage loans
"accrued interest" In respect of a mortgage loan as at any date (the "relevant
date"), the aggregate of all interest accrued but not yet due
and payable on that mortgage loan from (and including) the
monthly payment date immediately preceding the relevant
date until (but excluding) the relevant date
"additional assigned Any mortgage loan which is assigned by the seller to the
mortgage loan" mortgages trustee on the 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
"additional assigned The portfolio of additional mortgage loans, their related
mortgage portfolio" security, accrued interest and other amounts derived from
such additional mortgage loans that the seller will assign to
the mortgages trustee on the closing date
"additional mortgage loan" Any mortgage loan which the seller anticipates assigning to
the mortgages trustee on the 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
267
"additional mortgage The portfolio of additional mortgage loans, their related
portfolio" security, accrued interest and other amounts derived from
such additional mortgage loans that the seller anticipates
assigning to the mortgages trustee on the closing date
"additional trust property" The additional assigned mortgage portfolio assigned to the
mortgages trustee by the seller on the closing date,
including the additional assigned mortgage loans and their
related security, the rights under the MIG policies and the
other seller arranged insurance policies, but excluding any
early repayment charges which are reassigned to the seller
"administration agreement" The agreement dated March 26, 2001, as amended from
time to time, among the administrator, the mortgages
trustee, the security trustee, Funding and the seller under
which the administrator has agreed to administer the
mortgage loans and their related security comprised in the
mortgage portfolio, as described further in "The
administration agreement"
"administration fee" The fee payable by the mortgages trustee to the
administrator on each distribution date in payment for the
administering of the mortgage loans by the administrator.
The administration fee equals 0.12% per annum (inclusive
of VAT) on the amount of the Funding share of the trust
property as determined on that distribution date in respect
of the then current trust calculation period, but is payable on
each distribution date only to the extent that the mortgages
trustee has sufficient funds available to pay that amount in
accordance with the mortgages trust allocation of revenue
receipts
"administration procedures" The administration, arrears and enforcement policies and
procedures forming part of the seller's policy from time to
time or, at any time when the administrator is not also the
seller, the policies and procedures from time to time which
would be adopted by a reasonable, prudent mortgage
lender
"administrator" Northern Rock or such other person as may from time to
time be appointed as administrator of the mortgage portfolio
under the administration agreement
"administrator termination Has the meaning given to it on page 124
event"
"agent bank" Citibank, N.A, acting through its office at 5 Carmelite Street,
London EC4Y 0PA, or such other person for the time being
acting as agent bank under the paying agent and agent
bank agreement
"alternative insurance Requirements which vary the insurance provisions of the
requirements" mortgage conditions
"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
"asset trigger event" Has the meaning given to it on page 146
"assignment date" The date of assignment of any new mortgage portfolio to
the mortgages trustee
268
"authorized investments" (a) sterling gilt-edged securities; and
(b) sterling demand or time deposits, certificates of
deposit and short-term debt obligations (including
commercial paper) (which may include deposits into
any account which earns a rate of interest related to
LIBOR) provided that in all cases these investments
have a maturity date of 90 days or less and mature on
or before the next following payment date or, in relation
to any mortgages trustee bank account, the next
following distribution date and the short-term
unsecured, unguaranteed and unsubordinated debt
obligations of the issuing or guaranteeing entity or the
entity with which the demand or time deposits are
made (being an authorized institution under the FSMA)
are rated at least equal to A-1+ by Standard & Poor's,
P-1 by Moody's and F1+ by Fitch or which are
otherwise acceptable to the rating agencies (if they are
notified in advance) to maintain the then current rating
of the notes
"authorized underpayment" Has the meaning given to it on page 90
"bank account agreement" The agreement dated March 26, 2001, as amended from
time to time, among the account bank, the mortgages
trustee, Funding and the security trustee which governs the
operation of the mortgages trustee bank accounts and the
Funding bank accounts (other than the Funding (Issuer)
GIC Accounts)
"Bank of England base rate" The Bank of England's official dealing rate (the repo rate) as
set by the UK Monetary Policy Committee, and in the event
that this rate ceases to exist or becomes inappropriate as
an index for the base rate pledge, such alternative rate or
index, which is not controlled by the seller, that the seller
considers to be the most appropriate in the circumstances
"Barclays" Barclays Bank plc, acting through its office at City Group
Office, Percy Street, Newcastle upon Tyne NE99 1JP
"Barclays collection The account of the administrator held at Barclays as may be
account" utilized from time to time for the purpose of collecting
amounts which are paid to the seller on the mortgage loans
and/or the related security
"base rate pledge" Has the meaning given to it on page 88
"basic terms modifications" Has the meaning given to it on page 235
"basis rate swap" The swap documented under the basis rate swap
agreement, as described further under "The swap
agreements -- The basis rate swap"
"basis rate swap agreement" The ISDA master agreement, schedule and confirmation
thereto to be entered into on or before the closing date, as
amended from time to time, among the issuer, the basis
rate swap provider and the note trustee, which includes any
additional and/or replacement basis rate swap agreement
entered into by the issuer from time to time in connection
with the notes
269
"basis rate swap provider" Northern Rock and/or, as applicable, any other basis rate
swap provider appointed from time to time in accordance
with the transaction documents
"basis rate swap provider The occurrence of an event of default or a downgrade
default" termination event (as defined in the relevant basis rate
swap agreement) where the basis rate swap provider is the
defaulting party or the affected party (as defined in the
relevant basis rate swap agreement)
"beneficiaries" Both Funding and the seller together as beneficiaries of the
mortgages trust
"benefit plan investors" An investor in a pension, profit-sharing or other employee
benefit plan, as well as individual retirement accounts and
certain types of Keogh Plans, as described further in
"ERISA considerations"
"borrower" For each mortgage loan, the person or persons who is or
are named and defined as such in the relevant mortgage
deed, or the other person or persons (other than a
guarantor) who shall become legally obligated to comply
with the borrower's obligations under the related mortgage
"business day" A day that is a London business day, a New York business
day and a TARGET business day
"calendar year" A year from the beginning of January 1 to the end of
December 31
"capital balance" For any mortgage loan at any date, the principal balance of
that mortgage loan to which the seller applies the relevant
interest rate at which interest on that mortgage loan accrues
"capital payment" Has the meaning given to it on page 85
"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 interest" For any mortgage loan at any date, interest which is
overdue in respect of that mortgage loan and which as at
that date has been added to the capital balance of that
mortgage loan in accordance with the mortgage conditions
or otherwise by arrangement with the relevant borrower
(excluding for the avoidance of doubt any arrears of interest
which have not been so capitalized on that date)
"capped rate mortgage Mortgage loans that are subject to a maximum rate of
loans" interest and charge interest at the lesser of the seller's
standard variable rate or the specified capped rate
"cash management The cash management agreement dated March 26, 2001,
agreement" as amended from time to time, among the cash manager,
the mortgages trustee, Funding and the security trustee, as
described further in "Cash management for the
mortgages trustee and Funding"
270
"cash manager" Northern Rock or such other person or persons for the time
being acting, under the cash management agreement, as
agent for the mortgages trustee, Funding and (following
enforcement of the Funding security) the security trustee for
the purposes of, inter alia, managing all cash transactions
and maintaining certain ledgers on behalf of the mortgages
trustee, Funding and (following enforcement of the Funding
security) the security trustee
"cash re-draw" Has the meaning given to it on page 91
"cashback" An amount agreed by the seller to be paid to the relevant
borrower on the completion of the relevant mortgage loan
"Citibank, N.A." Citibank, N.A., acting through its office at 5 Carmelite
Street, London EC4Y 0PA
"classes" Any of the series 1 class A1 notes, the series 1 class A2
notes, the series 1 class B notes, the series 1 class C notes,
the series 2 class A notes, the series 2 class B notes, the
series 2 class C notes, the series 3 class A notes, the series
3 class B notes and the series 3 class C notes
"class A notes" The series 1 class A1 notes, the series 1 class A2 notes, the
series 2 class A notes and the series 3 class A notes and, in
relation to any previous issuer or any new issuer, such
previous notes or new notes as may be identified as such
for that issuer
"class A noteholders" The holders of the class A notes
"class A principal deficiency For any issuer, the sub-ledger of the issuer principal
sub ledger" deficiency ledger of that issuer corresponding to the class A
notes issued by that issuer
"class B notes" The series 1 class B notes, the series 2 class B notes and
the series 3 class B notes and, in relation to the previous
issuers or any new issuer, such previous notes or new
notes as may be identified for that issuer
"class B noteholders" The holders of the class B notes
"class B principal deficiency For any issuer, the sub-ledger of the issuer principal
sub ledger" deficiency ledger of that issuer corresponding to the class B
notes issued by that issuer
"class C notes" The series 1 class C notes, the series 2 class C notes and
the series 3 class C notes and, in relation to the previous
issuers or any new issuer, such previous notes or new
notes as may be identified for that issuer
"class C noteholders" The holders of the class C notes
"class C principal deficiency For any issuer, the sub-ledger of the issuer principal
sub ledger" deficiency ledger of that issuer corresponding to the class C
notes issued by that issuer
"clearing agency" An agency registered under the provisions of section 17A of
the Exchange Act
"clearing corporation" A corporation within the meaning of the New York Uniform
Commercial Code
"Clearstream, Luxembourg" Clearstream Banking, societe anonyme
"closing date" On or about September 23, 2002
271
"CML" The Council of Mortgage Lenders, of which the seller is a
member
"Code" United States Internal Revenue Code of 1986, as amended
"collection account" The Barclays collection account, the Lloyds TSB collection
account and each other account in the name of the
administrator which is from time to time used for the
purpose of collecting, directly or indirectly, monies due in
respect of mortgage loans and/or the related security
"collection banks" Barclays Bank plc acting through its branch at Percy Street,
Newcastle upon Tyne NE99 1JP and Lloyds TSB Bank plc
acting through its branch at City Office, Bailey Drive,
Gillingham Business Park, Kent ME8 0LS and each other
bank as may be appointed as such under and in
accordance with the transaction documents
"collection bank agreement" The agreement dated March 26, 2001, as amended from
time to time, among the mortgages trustee, Funding, the
seller, the administrator, the security trustee and the
collection banks
"combination mortgage A mortgage loan that combines the features of a repayment
loan" mortgage loan and an interest-only loan in that only part of
the principal of the mortgage loan will be repaid by way of
monthly payments
"contribution" The consideration in the form of cash provided to the
mortgages trustee by any beneficiary in respect of the share
of that beneficiary in the trust property under the mortgages
trust deed, being any of an initial contribution, a further
contribution or a deferred contribution
"controlled amortization On any payment date before the occurrence of a trigger
amount" event or the enforcement of the issuer security in respect of
any issuer:
(a) for any note or class of notes issued by an issuer which
is a controlled amortization note or class of such notes,
the maximum aggregate principal amount which may
be repaid by such issuer to the relevant noteholder or
noteholders of such class on that payment date in
accordance with the relevant note; or
(b) for an intercompany loan, the maximum aggregate
principal amount which may be repaid by Funding to
an issuer in respect of the related intercompany loan
on that payment date (which will be equal to the
aggregate of the controlled amortization amounts due
on that payment date under the notes issued by such
issuer)
"controlled amortization Any note where, before the occurrence of a trigger event or
note" the enforcement of the issuer security, the conditions of that
note impose a limit on the amount of principal which may be
repaid by the issuer of such note to the relevant noteholder
for that note on any payment date. All of the notes issued by
the issuer and the previous issuers are controlled
amortization notes
"core terms" The main subject matter of the contract
272
"corporate services With respect to any issuer, the corporate services
agreement" agreement, as amended from time to time, entered into on
or before the closing date of the issue of the relevant notes
among, inter alios, the corporate services provider,
Holdings, the post enforcement call option holder and such
issuer, for the provision by the corporate services provider
of certain corporate services, and with respect to Funding
and the mortgages trustee, the corporate services
agreement entered into on March 26, 2001, as amended
from time to time, among, inter alios, the corporate services
provider, Funding and the mortgages trustee for the
provision by the corporate services provider of certain
corporate services
"corporate services With respect to the issuer, Law Debenture Corporate
provider" Services Limited, and with respect to Funding, Mourant &
Co. Capital (SPV) Limited, and with respect to the
mortgages trustee, Mourant & Co. Limited, or any other
person or persons for the time being acting as corporate
services provider under the corporate services agreement
"CPR" or "constant payment Unless otherwise defined in this prospectus, represents a
rate" constant rate of scheduled and unscheduled repayments on
the mortgage loans in the mortgage portfolio each month
relative to the aggregate principal amount outstanding of
those mortgage loans
"crystallize" When a floating charge becomes a fixed charge
"currency rate swap Either of the dollar currency swap provider and/or the euro
provider" currency swap provider
"currency swap agreements" The dollar currency swap agreements and the euro
currency swap agreements
"currency swap provider The occurrence of an event of default (as defined in the
default" relevant swap agreement) where the related currency swap
provider is the defaulting party
"currency swaps" The dollar currency swaps and the euro currency swaps
"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 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
273
(4) any other amount (other than unpaid interest) which is
due or accrued (whether or not due) and which has not
been paid by the relevant borrower and has not been
capitalized in accordance with the relevant mortgage
conditions or with the relevant borrower's consent but
which is secured or intended to be secured by that
mortgage loan
as at the end of the London business day immediately
preceding that given date less any repayment or payment of
any of the foregoing made on or before the end of the
London business day immediately preceding that given date
and excluding any retentions made but not released and
any further advances committed to be made but not made
by the end of the London business day immediately
preceding that given date
"current Funding share" The amount of trust property beneficially owned by Funding
from time to time, as described further in "The mortgages
trust"
"current Funding share The percentage share of Funding's interest in the trust
percentage" property from time to time, as described further in "The
mortgages trust"
"current seller share" The amount of trust property beneficially owned by the
seller from time to time, as described further in "The
mortgages trust"
"current seller share The percentage share of the seller's interest in the trust
percentage" property from time to time, as described further in "The
mortgages trust"
"cut-off date" July 31, 2002
"cut-off date mortgage As of the cut-off date, the existing mortgage portfolio
portfolio" combined with the additional mortgage portfolio
"deferred contribution" The consideration in the form of cash payable by Funding to
the mortgages trustee from time to time in respect of the
Funding share of the trust property pursuant to and in
accordance with the mortgages trust deed and/or the
Funding deed of charge, which contribution will fund the
payment to the seller by the mortgages trustee of the
deferred purchase price payable by the mortgages trustee
to the seller from time to time pursuant to and in accordance
with the mortgage sale agreement
"deferred purchase price" That portion of the purchase price for the initial mortgage
portfolio and of the purchase price (if any) of any other
mortgage portfolio assigned to the mortgages trustee which
was not paid to the seller on the initial closing date or (in the
case of any other mortgage portfolio) the relevant
assignment date and which is to be paid by the mortgages
trustee from time to time to the seller from deferred
contributions received by the mortgages trustee from
Funding and otherwise in accordance with the mortgage
sale agreement
"direct debit" A payment made directly by a borrower from its bank
account to a collection account
274
"distribution date" The London business day determined by the cash manager
falling no later than 6 business days after each trust
determination date
"dollar currency swap The ISDA master agreements, schedules and confirmations
agreements" relating to the dollar currency swaps entered into on the
closing date, as amended from time to time, among the
issuer, the dollar currency swap provider and the note
trustee and includes any additional and/or replacement
dollar currency swap agreement entered into by the issuer
from time to time in connection with the notes
"dollar currency swap CDC IXIS Capital Markets and/or, as applicable, any other dollar
provider" currency swap provider appointed from time to time in accordance
with the transaction documents
"dollar currency swap The occurrence of an event of default or a downgrade
provider default" termination event (as defined in the relevant dollar currency
swap agreement) where the dollar currency swap provider
is the defaulting party or the affected party (as defined in the
relevant dollar currency swap agreement)
"dollar currency swap rate" The rate at which dollars are converted to sterling or, as the
case may be, sterling is converted to dollars under the
relevant dollar currency swap
"dollar currency swaps" The sterling-dollar currency swaps which enable the issuer
to receive and pay amounts under the intercompany loan in
sterling and to receive and pay amounts under the series 1
notes in dollars, as described further in "The swap
agreements -- The dollar currency swaps"
"early repayment charge" Any charge or fee for which the mortgage conditions
applicable to a mortgage loan require the relevant borrower
to pay in the event that all or part of that mortgage loan is
repaid before a certain date, including repayment of any
cashback
"encumbrance" Has the same meaning as "security interest"
"enforcement procedures" The procedures for the enforcement of mortgages
undertaken by the administrator from time to time in
accordance with the administration procedures
"ERISA" The United States Employee Retirement Income Security
Act of 1974, as amended. See further "ERISA
considerations"
"EURIBOR" EURIBOR will be determined by the agent bank on the
following basis:
(1) on the applicable interest determination date the agent
bank will determine the offered quotation to leading
banks for deposits in euro for a period equal to the
relevant interest period.
This will be determined by reference to the display as
quoted on the Dow Jones/Telerate Screen No. 248. If
the Dow Jones/Telerate Screen No. 248 stops
providing these quotations, the replacement service for
the purposes of displaying this information will be
used. If the replacement service stops displaying the
information, another page as determined by the issuer
with the approval of the note trustee will be used.
275
In each of these cases, the determination will be made
as at or about 11:00 a.m., Brussels time, on that date.
This is called the screen rate for the series 2 notes;
(2) if, on any of these interest determination dates, the
screen rate is unavailable, the agent bank will:
o request the principal London office of each of the
reference banks to provide the agent bank with its
offered quotation to prime banks for euro deposits
of the equivalent amount, and for a time equal to
the relevant interest period, in the Eurozone inter-
bank market as at or about 11:00 a.m. (Brussels
time); and
o calculate the arithmetic mean, rounded upwards
to five decimal places, of those quotations;
(3) if on any of these interest determination dates the
screen rate is unavailable and only two or three of the
reference banks provide offered quotations, the
relevant rate for that interest period will be the
arithmetic mean of the quotations as calculated in (2);
and
(4) if fewer than two reference banks provide quotations,
the agent bank will consult with the note trustee and
the issuer for the purpose of agreeing a total of two
banks to provide these quotations and the relevant rate
for that interest period will be the arithmetic mean of
the quotations as calculated in (2). If none of these
banks agree, then the relevant rate for that interest
period will be the rate in effect for the last preceding
interest period for which (1) or (2) was applicable
"euro currency swap The ISDA master agreements, schedules and confirmations
agreements" relating to the euro currency swaps entered into on the
closing date, as amended from time to time, between the
issuer, the euro currency swap provider and the note
trustee, and includes any additional and/or replacement
euro currency swap agreement entered into by the issuer
from time to time in connection with the notes
"euro currency swap CDC IXIS Capital Markets and/or, as applicable, any other euro
provider" currency swap provider appointed from time to time in accordance
with the transaction documents
"euro currency swap The occurrence of an event of default or a downgrade
provider default" termination event (as defined in the relevant euro currency
swap agreement) where the euro currency swap provider is
the defaulting party or the affected party (as defined in the
relevant euro currency swap agreement)
"euro currency swap rate" The rate at which euro are converted to sterling or, as the
case may be, sterling is converted to euro, under the
relevant euro currency swap
"euro currency swaps" The sterling-euro currency swaps which enable the issuer
to receive and pay amounts under the intercompany loan in
sterling and to receive and pay amounts under the series 2
notes in euro, as described further in "The swap
agreements -- The euro currency swaps"
276
"Euroclear" Euroclear Bank S.A./N.V., as operator of the Euroclear
System
"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 an intercompany loan agreement, the occurrence of
an event of default under the terms and conditions of
that intercompany loan
"Exchange Act" The United States Securities Exchange Act of 1934, as
amended
"existing borrowers re-fix At any date, the fixed rate then being offered to those of the
rate" seller's existing borrowers who at that date are seeking to
fix the rate of interest payable under their existing fixed rate
mortgage loans
"existing mortgage loans" The mortgage loans in the existing mortgage loan portfolio
"existing mortgage portfolio" The initial mortgage portfolio and the further mortgage
portfolios as it is constituted as of any date of determination
prior to the closing date, taking account of, among other
things, amortization of mortgage loans in that portfolio and
the addition and/or removal of any mortgage loans to or
from that portfolio since March 26, 2001
"final deferred contribution" An amount equal to the aggregate amount standing to the
credit of the Funding bank accounts (including any account
established by Funding for the purpose of any issuer
reserve fund and/or any issuer liquidity reserve fund of any
issuer) after making any payments ranking in priority,
subject to and in accordance with the relevant Funding
priority of payments
"final maturity date" For the series 1 class A1 notes, means the payment date
falling in January 2017;
For the series 1 class A2 notes, means the payment date
falling in January 2043;
For the series 1 class B notes, means the payment date
falling in January 2043;
For the series 1 class C notes, means the payment date
falling in January 2043;
For the series 2 class A notes, means the payment date
falling in January 2043;
For the series 2 class B notes, means the payment date
falling in January 2043;
For the series 2 class C notes, means the payment date
falling in January 2043;
For the series 3 class A notes, means the payment date
falling in January 2043;
For the series 3 class B notes, means the payment date
falling in January 2043; and
For the series 3 class C notes, means the payment date
falling in January 2043;
277
and, in relation to any series and class of notes of a
previous issuer or a new issuer, such final maturity date as
may be identified as such for that series and class of notes
of that issuer
"final repayment date" For the intercompany loan, the payment date falling in April
2042, and for the intercompany loan made by the first
issuer, the payment date falling in January 2041 and for the
intercompany loan made by the second issuer, the payment
date falling in October 2041, and for the intercompany loan
made by the third issuer, the payment date falling in April
2042
"first issuer" Granite Mortgages 01-1 plc
"first issuer notes" The notes issued by the first issuer on March 26, 2001
"first issuer intercompany The intercompany loan entered into on March 26, 2001
loan" between the first issuer and Funding
"Fitch" Fitch Ratings Ltd., including any successor to its ratings
business
"fixed rate mortgage loan" A mortgage loan which is subject to a fixed rate of interest
set by reference to a predetermined rate or series of rates
for a fixed period or periods
"fixed rate period" For any fixed rate mortgage loan or other mortgage loan
offered with a fixed rate, the period agreed between the
borrower and the seller as set out under the mortgage
conditions, during which the interest rate applicable to that
mortgage loan will remain fixed and after which the
borrower may be entitled to apply for a new fixed rate of
interest
"fixed security" A form of security which means that the chargor is not
allowed to deal with the assets subject to the charge without
the consent of the chargee
"flexible capped rate Flexible mortgage loans with the same basic features as a
mortgage loans" Together mortgage loan (other than allowing the borrower
to obtain an unsecured loan) which are subject to a
maximum rate of interest for a specified period of time, and
at the expiration of that period are generally subject to the
seller's standard variable rate
"flexible fixed rate mortgage Flexible mortgage loans with the same basic features as a
loans" Together mortgage loan (other than allowing the borrower
to obtain an unsecured loan) which are subject to a fixed
rate of interest for a specified period of time, and at the
expiration of that period are generally subject to the seller's
standard variable rate
"flexible mortgage loan" A type of mortgage loan product that typically incorporates
features that give the borrower options (which may be
subject to certain conditions) to, among other things, make
further drawings on the mortgage loan account, and/or to
overpay or underpay interest and principal in a given month
and/or to take a payment holiday. The types of flexible
mortgage loan products currently offered by the seller are
described under "The mortgage loans -- Characteristics
of the mortgage loans -- Flexible mortgage loans"
278
"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" Granite Finance Funding Limited
"Funding available principal Has the meaning given to it on page 166
receipts"
"Funding available revenue Has the meaning given to it on page 158
receipts"
"Funding bank accounts" The Funding GIC account, the Funding (Granite 02-2) GIC
account, the Funding (Granite 02-1) GIC account, the
Funding (Granite 01-2) GIC account, the Funding (Granite
01-1) GIC account and the Funding transaction account, as
further described in "Funding's bank accounts" and each
other bank account (if any) opened in the name of Funding
"Funding charged property" The property, assets and undertaking of Funding which
from time to time are or are expressed to be mortgaged,
charged, assigned, pledged or otherwise encumbered to, or
in favor of the security trustee for itself and for the Funding
secured creditors under the Funding deed of charge
"Funding deed of charge" The deed of charge entered into on March 26, 2001, as
amended from time to time, among Funding, the security
trustee, and the Funding secured creditors as at the closing
date including any deeds of accession or supplements
thereto
"Funding GIC account" The account in the name of Funding held at the account
bank and maintained subject to the terms of the Funding
guaranteed investment contract, the bank account
agreement and the Funding deed of charge, or any
additional or replacement account as may for the time being
be in place with the prior consent of the security trustee
"Funding GIC provider" Lloyds TSB Bank plc acting through its office at Treasury
Division, 25 Monument Street, London EC3R 8BQ or any
other person or persons as are for the time being the
Funding GIC provider under the Funding guaranteed
investment contract and any Funding (Issuer) guaranteed
investment contract
"Funding (Granite 01-1) The agreement entered into on March 26, 2001, as
bank account agreement" amended from time to time, among the account bank,
Funding and others which governs the operation of the
Funding (Granite 01-1) GIC account
"Funding (Granite 01-1) The account in the name of Funding into which is deposited
GIC Account" amounts in respect of the related issuer reserve fund and
the issuer liquidity reserve fund, if any, established for the
benefit of the first issuer, which account is held at the
account bank and maintained subject to the terms of the
related Funding (Granite 01-1) guaranteed investment
contract, the related Funding (Granite 01-1) bank account
279
agreement and the Funding deed of charge, or any
additional or replacement account as may for the time being
be in place with the prior consent of the security trustee
"Funding (Granite 01-1) The guaranteed investment contract entered into with
guaranteed investment respect to the first issuer among Funding, the Funding GIC
contract" provider and others, as amended from time to time, under
which the Funding GIC provider agrees to pay Funding a
guaranteed rate of interest on the balance from time to time
of the Funding (Granite 01-1) GIC account
"Funding (Granite 01-2) The agreement entered into on September 28, 2001, as
bank account agreement" amended from time to time, among the account bank,
Funding and others which governs the operation of the
Funding (Granite 01-2) GIC account
"Funding (Granite 01-2) The account in the name of Funding into which will be
GIC Account" deposited amounts in respect of the related issuer reserve
fund and the issuer liquidity reserve fund, if any, established
for the benefit of the second issuer, which account is held at
the account bank and maintained subject to the terms of the
related Funding (Granite 01-2) guaranteed investment
contract, the related Funding (Granite 01-2) bank account
agreement and the Funding deed of charge, or any
additional or replacement account as may for the time being
be in place with the prior consent of the security trustee
"Funding (Granite 01-2) The guaranteed investment contract entered into with
guaranteed investment respect to the second issuer among Funding, the Funding
contract" GIC provider and others, as amended from time to time,
under which the Funding GIC provider agrees to pay
Funding a guaranteed rate of interest on the balance from
time to time of the Funding (Granite 01-2) GIC account
"Funding (Granite 02-1) The agreement entered into on the closing date, as
bank account agreement" amended from time to time, among the account bank,
Funding and others which governs the operation of the
Funding (Granite 02-1) GIC account
"Funding (Granite 02-1) The account in the name of Funding into which is deposited
GIC Account" amounts in respect of the related issuer reserve fund and
the issuer liquidity reserve fund, if any, established for the
benefit of Granite Mortgages 02-1 plc, which account is held
at the account bank and maintained subject to the terms of
the related Funding (Granite 02-1) guaranteed investment
contract, the related Funding (Granite 02-1) bank account
agreement and the Funding deed of charge, or any
additional or replacement account as may for the time being
be in place with the prior consent of the security trustee
"Funding (Granite 02-1) The guaranteed investment contract entered into with
guaranteed investment respect to Granite Mortgages 02-1 plc among Funding, the
contract" Funding GIC provider and others under which the Funding
GIC provider agrees to pay Funding a guaranteed rate of
interest on the balance from time to time of the Funding
(Granite 02-1) GIC account
"Funding (Granite 02-2) The agreement entered into on September 23, 2002, as
bank account agreement" amended from time to time, among the account bank,
Funding and others which governs the operation of the
Funding (Granite 02-2) GIC account
280
"Funding (Granite 02-2) The account in the name of Funding into which is deposited
GIC Account" amounts in respect of the related issuer reserve fund and
the issuer liquidity reserve fund, if any, established for the
benefit of the issuer, which account is held at the account
bank and maintained subject to the terms of the related
Funding (Granite 02-2) guaranteed investment contract, the
related Funding (Granite 02-2) bank account agreement
and the Funding deed of charge, or any additional or
replacement account as may for the time being be in place
with the prior consent of the security trustee
"Funding (Granite 02-2) The guaranteed investment contract entered into with
guaranteed investment respect to the issuer among Funding, the Funding GIC
contract" provider and others, as amended from time to time, under
which the Funding GIC provider agrees to pay Funding a
guaranteed rate of interest on the balance from time to time
of the Funding (Granite 02-2) GIC account
"Funding guaranteed The guaranteed investment contract entered into on March
investment contract" 26, 2001, as amended from time to time, among Funding,
the Funding GIC provider and others under which the
Funding GIC provider agrees to pay Funding a guaranteed
rate of interest on the balance from time to time of the
Funding GIC account
"Funding (Issuer) bank In respect of any issuer, the agreement, as amended from
account agreement" time to time, entered into among the account bank, Funding
and others which governs the operation of the Funding
(Issuer) GIC account for that issuer
"Funding (Issuer) GIC In respect of any issuer, the account in the name of Funding
account" and identified by reference to the related issuer into which
will be deposited amounts in respect of the related issuer
reserve fund and the issuer liquidity reserve fund, if any,
which account is held at the account bank and maintained
subject to the terms of the related Funding (Issuer)
guaranteed investment contract, the related Funding
(Issuer) bank account agreement and the Funding deed of
charge, or any additional or replacement account as may for
the time being be in place with the prior consent of the
security trustee
"Funding (Issuer) guaranteed In respect of any issuer, the guaranteed investment contract
investment contract" entered into with respect to that issuer, each among
Funding, the Funding GIC provider and others under which
the Funding GIC provider agrees to pay Funding a
guaranteed rate of interest on the balance from time to time
of the Funding (Issuer) GIC account for the related issuer
"Funding post-enforcement The provisions and the order of priority set out in a schedule
priority of payments" to the Funding deed of charge in which Funding available
revenue receipts, Funding available principal receipts and
all other monies, income, receipts and recoveries of
Funding or the security trustee or any receiver of Funding
and the proceeds of enforcement of the Funding security
are to be applied following service of an intercompany loan
enforcement notice or otherwise following an enforcement
of the Funding security, as described in "Cashflows --
281
Distribution of Funding available principal receipts and
Funding available revenue receipts following
enforcement of the Funding security"
"Funding pre-enforcement The provisions and the order of priority of payments set out
principal priority of in a schedule to the Funding deed of charge in which
payments" Funding available principal receipts will be applied until
enforcement of the Funding security, which is as described
in "Cashflows -- Distribution of Funding available
principal receipts prior to enforcement of the Funding
security"
"Funding pre-enforcement The provisions and the order of priority of payments set out
revenue priority of in a schedule to the Funding deed of charge in which
payments" Funding available revenue receipts will be applied until
enforcement of the Funding security, which is as described
in "Cashflows -- Distribution of Funding available
revenue receipts"
"Funding principal ledger" The ledger on which receipts and payments of Funding
principal receipts will be recorded by the cash manager
"Funding principal receipts" The principal receipts paid by the mortgages trustee to
Funding on each distribution date
"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 fund" The reserve fund established in the name of Funding on
March 26, 2001 up to an amount not exceeding the Funding
reserve required amount as further described in "Credit
structure -- Funding reserve fund"
"Funding reserve ledger" The ledger maintained by the cash manager in the name of
Funding to record the amount credited to the Funding
reserve fund on the initial closing date, and subsequent
withdrawals from and deposits into the Funding reserve
fund
"Funding reserve required As of any date of determination an amount calculated in
amount" accordance with the formula set out on page 184
"Funding revenue ledger" The ledger on which the cash manager records all monies
received and paid out by Funding during an interest period
other than the Funding principal receipts
"Funding secured creditors" The security trustee (and any receiver of Funding appointed
under the Funding deed of charge), the issuer, the previous
issuers, the corporate services provider in respect of
Funding, the account bank, the Funding GIC provider, the
mortgages trustee, the start-up loan provider, the cash
manager and any new Funding secured creditor who
accedes to the Funding deed of charge from time to time
under a deed of accession or supplemental deed
"Funding security" The mortgages, charges, assignments, pledges and/or any
other security created by Funding under or pursuant to the
Funding deed of charge in favor of the security trustee for
the benefit of the Funding secured creditors
"Funding share" The current Funding share of the trust property calculated in
accordance with the formula set out on pages 138, 139 and
140
282
"Funding share percentage" The current Funding share percentage of the trust property
calculated in accordance with the formula set out on pages
138, 139 and 140
"Funding share/seller share The ledger maintained by the cash manager, on behalf of
ledger" the mortgages trustee and the beneficiaries, to record the
current Funding share, the current Funding share
percentage, the current seller share and the current seller
share percentage of the trust property
"Funding transaction The account in the name of Funding held with the account
account" bank and maintained subject to the terms of the bank
account agreement and the Funding deed of charge, or any
additional or replacement account as may, for the time
being, be in place with the prior consent of the security
trustee
"Funding transaction Each of the following documents:
documents"
(a) the mortgages trust deed;
(b) the mortgage sale agreement;
(c) the administration agreement;
(d) the Funding deed of charge;
(e) the corporate services agreement;
(f) the bank account agreement;
(g) each Funding (Issuer) bank account agreement;
(h) Funding (Issuer) guaranteed investment contracts;
(i) the Funding guaranteed investment contract;
(j) the cash management agreement;
(k) the start-up loan agreements;
(l) the collection bank agreement;
(m) the intercompany loan agreement;
(n) each previous intercompany loan agreement;
(o) each new intercompany loan agreement to be entered
into by Funding; and
(p) each other deed, document, agreement, instrument or
certificate entered into or to be entered into by Funding
under or in connection with any of the documents set
out in paragraphs (a) through (o) above or the
transactions contemplated in them
"further advance" For any mortgage loan, any advance of further money to the
relevant borrower following the making of the initial advance
of monies under the mortgage and which is secured by the
same mortgage, excluding the amount of any retention in
respect of the initial advance and excluding any re-draw in
respect of any flexible mortgage loan
"further contribution" The consideration in the form of cash payable by any
beneficiary to the mortgages trustee to increase the
Funding share or, as the case may be, the seller share of
the trust property pursuant to and in accordance with the
terms of the mortgages trust deed, but excluding any initial
contribution or deferred contribution paid by Funding
283
"further mortgage loan" Any mortgage loan which was assigned by the seller to the
mortgages trustee on September 28, 2001 or on March 20,
2002 under the terms of the mortgage sale agreement and
referenced by its mortgage loan identifier number and
comprising the aggregate of all principal sums, interest,
costs, charges, expenses and other monies (including all
further advances) due or owing with respect to that
mortgage loan under the relevant mortgage conditions by a
borrower on the security of a mortgage from time to time
outstanding or, as the context may require, the borrower's
obligations in respect of the same
"further mortgage portfolios" The portfolios of further mortgage loans, their related
security, accrued interest and other amounts derived from
such further mortgage loans that the seller assigned to the
mortgages trustee on September 28, 2001 and on March
20, 2002
"global note certificates" The note certificates representing the notes in global form
"group" The seller and its subsidiaries
"Holdings" Granite Finance Holdings Limited
"ICTA" The Income and Corporation Tax Act 1988
"in arrears" For a mortgage account, occurs when one or more monthly
payments on that mortgage account have become due and
unpaid by a borrower
"individual note certificates" The note certificates representing the notes in definitive
form
"initial closing date" March 26, 2001
"initial contribution" The consideration in the form of cash payable by Funding to
the mortgages trustee in respect of the Funding share of the
trust property pursuant to and in accordance with the
mortgages trust deed, which contribution is to fund the
payment to the seller by the mortgages trustee of (and is
equal to) the initial purchase price in respect of the initial
mortgage portfolio or, as the case may be, the further
mortgage portfolio, the additional assigned mortgage
portfolio or (if any is payable) any new mortgage portfolio
assigned to the mortgages trustee and is to be funded from
the proceeds of the intercompany loan, each previous
intercompany loan or any new intercompany loan, as the
case may be
"initial mortgage loans" The portfolio of residential first mortgage loans and their
related security assigned by the seller to the mortgages
trustee on March 26, 2001 under the mortgage sale
agreement
"initial mortgage portfolio" The portfolio of initial mortgage loans, the mortgages and
related security, any accrued interest and any other
amounts, proceeds, powers, rights, benefits and interests
derived from the initial mortgage loans and/or the related
security, in each case assigned by the seller to the
mortgages trustee on March 26, 2001 under the mortgage
sale agreement
"initial mortgages" The mortgages contained in the initial mortgage portfolio
284
"initial purchase price" That portion of the purchase price paid by the mortgages
trustee to the seller on the initial closing date in
consideration for the assignment to the mortgages trustee
of the initial mortgage portfolio or that portion of the
purchase price (if any) payable by the mortgages trustee to
the seller on the relevant assignment date in consideration
for the assignment to the mortgages trustee of the further
mortgage portfolio, the additional assigned mortgage
portfolio or any new mortgage portfolio, in each case in
accordance with the provisions of the mortgage sale
agreement
"initial trust property" The sum of [pound]100 that the corporate services provider
settled on trust and held on trust absolutely as to both
capital and income by the mortgages trustee for the benefit
of the beneficiaries
"insolvency event" For the seller, the administrator, the cash manager or the
issuer cash manager (each, for the purposes of this
definition, a "relevant entity"):
(a) an order is made or an effective resolution passed for
the winding up of the relevant entity (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,
administration, reorganization (other than a
reorganization where the relevant entity is
solvent) or other similar laws, except where these
proceedings are being contested in good faith; or
(ii) an administrative or other receiver, administrator
or other similar official is appointed in relation to
the whole or any substantial part of the
undertaking or assets of the relevant entity; or
(iii) a distress, execution or diligence or other process
is enforced upon the whole or any substantial part
of the undertaking or assets of the relevant entity
and in any of the foregoing cases it is not
discharged within 30 London business days; or
(iv) if the relevant entity initiates or consents to
judicial proceedings relating to itself under any
applicable liquidation, administration, insolvency,
285
reorganization or other similar laws or makes a
conveyance or assignment for the benefit of its
creditors generally; and
in respect of Funding or the issuer (each, for the purposes
of this definition, a "relevant entity") means:
(a) except for the purposes of an amalgamation or
restructuring as described in 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 (except for the
purposes of or pursuant to an amalgamation,
restructuring or merger previously approved by the
note trustee or the security trustee, as the case may
be, or as approved in writing by an extraordinary
resolution (as defined in the trust deed) of the class A
noteholders); or
(c) (i) proceedings are otherwise initiated against the
relevant entity under any applicable liquidation,
insolvency, composition, reorganization or other
similar laws (including, but not limited to,
presentation of a petition for an administration
order) 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 or the security trustee (as the case may
be), being disputed in good faith with a
reasonable prospect of success; or
(ii) an administration order being granted or an
administrative receiver or other receiver,
liquidator or other similar official being appointed
in relation to the relevant entity or in relation to the
whole or any substantial part of the undertaking or
assets of the relevant entity; or
(iii) an encumbrancer taking possession of the whole
or any substantial part of the undertaking or
assets of the relevant entity, or a distress,
execution, diligence or other process being levied
or enforced upon or sued out against the whole or
any substantial part of the undertaking or assets
of the relevant entity and such possession or
process (as the case may be) not being
discharged or not otherwise ceasing to apply
within 30 days; or
286
(iv) the relevant entity 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 its
creditors generally
"intercompany loan" The loan made by the issuer to Funding on the closing date
under the intercompany loan agreement (or, if the context
requires, a previous intercompany loan made by a previous
issuer to Funding or any new intercompany loan made by
any new issuer under any new intercompany loan
agreement)
"intercompany loan The intercompany loan agreement to be entered into on the
agreement" closing date, as amended from time to time, between,
among others, Funding, the issuer and the note trustee (or,
if the context requires, the previous intercompany
agreement entered into on March 26, 2001, as amended
from time to time, between, among others, Funding, the first
issuer and the note trustee, the previous intercompany loan
agreement entered into on September 28, 2001 as
amended from time to time, between Funding, the second
issuer and the note trustee, the previous intercompany loan
agreement entered into on March 20, 2002 as amended
from time to time, between Funding, the third issuer and the
note trustee and any new intercompany loan agreement
entered into from time to time between, among others,
Funding, a new issuer and the note trustee)
"intercompany loan The intercompany loan agreement, each previous
agreements" intercompany loan agreement and any new intercompany
loan agreements
"intercompany loan An enforcement notice served by the security trustee on
enforcement notice" Funding for the enforcement of the Funding security
following the occurrence of an intercompany loan event of
default
"intercompany loan event of An event of default under the intercompany loan agreement
default" and/or under any previous intercompany loan agreement
and/or under any new intercompany loan agreement
"intercompany loan ledger" A ledger maintained by the cash manager to record
payments of interest and fees and repayments of principal
made under the intercompany loan, each previous
intercompany loan or any new intercompany loan
"interest determination date" (a) in respect of the series 1 notes means the date which
is two London business days before the first day of the
interest period for which the rate will apply;
(b) in respect of the series 2 notes, means the date which
is two TARGET business days before the first day of
the interest period for which the rate will apply; and
(c) in respect of the series 3 notes means, in respect of
the first interest period, the closing date, and in respect
of subsequent interest periods, the first day of the
interest period for which the rate will apply
287
"interest period" In relation to the notes and any payment date, the period
from (and including) the immediately preceding payment
date (or in respect of the first interest period, the closing
date) to (but excluding) the next following (or first) payment
date
"interim calculation period" Has the meanings given to it on page 138
"investment plan" For an interest-only loan, a repayment mechanism selected
by the borrower to ensure that there are sufficient funds to
redeem the full principal of a mortgage loan at maturity
"ISA" An individual savings account within the Individual Savings
Account Regulations 1998 (as amended) and which
shelters investments in the account from income Tax or
capital gains tax
"issuer" Granite Mortgages 02-2 plc and/or, if the context specifically
requires, any previous issuer and/or any new issuer
"issuer account bank" Citibank, N.A. situated at 5 Carmelite Street, London EC4Y
0PA or any other authorized entity as the issuer may
choose with the prior written approval of the note trustee
"issuer allocable principal Has the meaning given to it on page 166
receipts"
"issuer allocable revenue Has the meaning given to it on page 158
receipts"
"issuer arrears test" Has the meaning given to it on page 171
"issuer available principal Has the meaning given to it on page 178
receipts"
"issuer available revenue Has the meaning given to it on page 162
receipts"
"issuer bank account The bank account agreement to be entered into on or about
agreement" the closing date, as amended from time to time, among the
issuer, the issuer cash manager, the issuer account bank
and the note trustee
"issuer cash management The issuer cash management agreement to be entered into
agreement" on or about the closing date, as amended from time to time,
among the issuer cash manager, the issuer and the note
trustee, as described further in "Cash management for the
issuer"
"issuer cash manager" Northern Rock or such other person or persons for the time
being acting, under the issuer cash management
agreement, as agent for the issuer and (following
enforcement of the issuer security) the note trustee for the
purposes of, inter alia, managing all cash transactions and
maintaining certain ledgers on behalf of the issuer and
(following enforcement of the issuer security) the note
trustee
"issuer deed of charge" The deed of charge to be entered into on the closing date,
as amended from time to time, between, among others, the
issuer and the note trustee, under which the issuer charges
the issuer security in favor of the issuer secured creditors,
as described further in "Security for the issuer's
obligations"
288
"issuer liquidity reserve The liquidity reserve fund in Funding's name which Funding
fund" 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) and, if the context so requires, any liquidity
reserve fund required to be established by Funding with
respect to any other issuer. The issuer liquidity reserve
fund, if any, will be funded up to the issuer liquidity reserve
required amount
"issuer liquidity reserve A ledger maintained by the cash manager to record the
ledger" balance from time to time of the issuer liquidity reserve
fund, if any and, if the context so requires, any ledger
maintained by Funding with respect to the issuer liquidity
reserve fund of any other issuer
"issuer liquidity reserve Has the meaning given to it on page 185
required amount"
"issuer post-enforcement The provisions and the order of priority set out in a schedule
priority of payments" to the issuer deed of charge in which all issuer available
revenue receipts, issuer available principal receipts and all
other monies, income, receipts and recoveries of the issuer
or the note trustee or any receiver of the issuer security are
to be applied following service of a note enforcement notice
or otherwise following an enforcement of the issuer security
which on the closing date will be as described in
"Cashflows -- Distribution of issuer available principal
receipts and issuer available revenue receipts
following enforcement of the issuer security"
"issuer pre-enforcement The provisions and the order of priority of payments set out
principal priority of in a schedule to the issuer cash management agreement in
payments" which the issuer available principal receipts will be applied
until enforcement of the issuer security, which on the
closing date will be as described in "Cashflows --
Distribution of issuer available principal receipts prior
to enforcement of the issuer security and/or
occurrence of a trigger event"
"issuer pre-enforcement The provisions and the order of priority of payments set out
revenue priority of in a schedule to the issuer cash management agreement in
payments" which the issuer available revenue receipts will be applied
until enforcement of the issuer security, which on the
closing date will be as described in "Cashflows --
Distribution of issuer available revenue receipts prior
to enforcement of the issuer security"
"issuer principal deficiency The ledger maintained by the issuer cash manager in the
ledger" name of the issuer which will be established on the closing
date and will be sub-divided into sub ledgers corresponding
to the classes of notes issued by the issuer in order to
record losses allocated to the intercompany loan of the
issuer which are to be applied to the notes or the application
of issuer available principal receipts of the issuer in paying
interest on the notes and certain amounts ranking in priority
thereto in accordance with the issuer pre-enforcement
revenue priority of payments or the application by Funding
of issuer allocable principal receipts of the issuer to fund or
289
replenish any issuer liquidity reserve fund (if any) of the
issuer and, if the context so requires, any such ledger
maintained with respect to any other issuer)
"issuer priority of payments" A relevant issuer pre-enforcement revenue priority of
payments, the issuer pre-enforcement principal priority of
payments and the issuer post-enforcement priority of
payments
"issuer reserve fund" A reserve fund established in the name of Funding on the
closing date up to an amount not exceeding the issuer
reserve required amount, as further described in "Credit
structure-issuer reserve fund"
"issuer reserve fund ledger" A ledger maintained by the cash manager in the name of
Funding to record the balance from time to time of the
issuer reserve fund
"issuer reserve required An amount equal to [pound]39,000,000 in respect of the issuer
amount" reserve fund, [pound]20,000,000 in respect of the issuer reserve
fund of each of the first issuer and the second issuer,
[pound]34,372,240 in respect of the issuer reserve fund of the
third issuer and, in respect of any new issuer, such amount
as may be acceptable to the rating agencies at the relevant
time
"issuer reserve requirement" Has the meaning given to it on page 171
"issuer secured creditors" The note trustee (and any receiver appointed under the
issuer deed of charge), the swap providers, the corporate
services provider in respect of the issuer, the issuer account
bank, the issuer cash manager, the paying agents, the
agent bank, the transfer agent, the registrar and the
noteholders
"issuer security" The mortgages, charges, assignments, pledges and/or any
other security created by the issuer under the issuer deed of
charge in favor of the note trustee for the benefit of the
issuer secured creditors
"issuer swap default" The occurrence of an event of default (as defined in the
relevant swap agreement) where the issuer is the defaulting
party (as defined in the relevant swap agreement)
"issuer transaction account" The day to day bank accounts of the issuer, held with the
issuer account bank and comprising the issuer transaction
dollar account, the issuer transaction euro account and the
issuer transaction sterling account as at the closing date or
that may be opened, with the prior approval of the note
trustee, after the closing date
"lending criteria" The lending criteria of the seller, or that other criteria as
would be acceptable to a reasonable, prudent mortgage
lender
"LIBOR" The London Interbank Offered Rate for deposits in the
relevant currency, as determined by the agent bank on the
following basis:
(1) on the applicable interest determination date the agent
bank will determine the offered quotation to leading
banks for deposits in the relevant currency for a period
equal to the relevant period.
290
This will be determined by reference to the display as
quoted on the Dow Jones/Telerate Page No. 3750. If
the Dow Jones/Telerate Page No. 3750 stops
providing these quotations, the replacement page for
the purposes of displaying this information will be
used. If the replacement page stops displaying the
information, another service as determined by the
issuer with the approval of the note trustee will be
used.
In each of these cases, the determination will be made
as at or about 11:00 a.m., London time, on that date.
This is called the screen rate.
(2) if on any of these interest determination dates the
screen rate is unavailable, the agent bank will:
request the principal London office of each of the
reference banks to provide the agent bank with its
offered quotation to leading banks for deposits in the
relevant currency of the equivalent amount, and for a
time equal to the relevant period, in the London inter-
bank market as at or about 11:00 a.m. (London time); and
calculate the arithmetic mean, rounded upwards to five
decimal places, of those quotations;
(3) if on any of these interest determination dates the
screen rate is unavailable and only two or three of the
reference banks provide offered quotations, the
relevant rate for that period will be the arithmetic mean
of the quotations as calculated in (2); and
(4) if fewer than two reference banks provide quotations,
the agent bank will consult with the note trustee and
the issuer for the purpose of agreeing a total of two
banks to provide these quotations and the relevant rate
for that period will be the arithmetic mean of the
quotations as calculated in (2). If none of these banks
agree, then the relevant rate for that period will be the
rate in effect for the last preceding interest period for
which (1) or (2) was applicable
"Lloyds TSB" Lloyds TSB Bank plc acting through its office at City Office,
Bailey Drive, Gillingham Business Park, Kent ME8 0LS,
England
"Lloyds TSB collection The account of the administrator held at Lloyds TSB as may
account" be utilized from time to time for the purpose of collecting
amounts which are paid to the seller on the mortgage loans
and/or the related security
"London business day" A day (other than a Saturday or Sunday or public holiday)
on which banks are generally open for business in London
"London Stock Exchange" London Stock Exchange plc
"losses" The realized losses experienced on the mortgage loans in
the mortgage portfolio
"losses ledger" The ledger created and maintained by the cash manager
under the cash management agreement to record the
losses on the mortgage portfolio
291
"LTV ratio" or "loan-to-value In respect of any mortgage loan assigned to the mortgages
ratio" trust, the ratio of the outstanding balance of such mortgage
loan to the value of the mortgaged property securing such
mortgage loan; and in respect of the seller's decision as to
whether to make a mortgage loan to a prospective borrower
and for purposes of determining whether a MIG policy is
necessary in connection with a mortgage loan, the ratio of
the outstanding balance of such mortgage loan to the lower
of the purchase price or valuation of the mortgaged property
securing such mortgage loan as determined by the relevant
valuation by the seller
"LTV tests" Two tests which assign a credit enhancement value (i) to
each mortgage loan in the mortgage portfolio based on its
current LTV ratio and the amount of mortgage indemnity
cover on that mortgage loan, and (ii) calculated to include
any related unsecured portion of a mortgage loan in respect
of the Together product based on its current LTV ratio and
the amount of mortgage indemnity cover on that mortgage
loan. The weighted average credit enhancement value for
the mortgage portfolio is then determined
"managers" Salomon Brothers International Limited, J.P. Morgan
Securities Ltd., Barclays Bank PLC, Bank Brussels Lambert
S.A., Deutsche Bank AG London and UBS AG, acting
through its business group UBS Warburg
"master definitions Together, the master definitions schedule dated March 26,
schedule" 2001, as amended from time to time, and the issuer master
definitions schedule to be dated the closing date, as
amended from time to time, which are schedules of
definitions used in the transaction documents
"MIG policies" The mortgage indemnity guarantee policies on the
mortgage loans which are intended to cover losses which
may be incurred following repossession and sale of a
mortgaged property from a borrower, and which currently
are issued by NORMIC
"minimum seller share" An amount included in the seller share which is calculated in
accordance with the mortgages trust deed and which, as at
the closing date, is approximately [pound]174,665,735 as further
described in "The mortgages trust"
"monthly payment" For any mortgage loan, the amount a borrower is required
to pay on a monthly payment date
"monthly payment date" For any mortgage loan, the date in each month on which the
relevant borrower is required to make a payment of interest
and, if applicable, principal, for that mortgage loan, as
required by the applicable mortgage conditions
"Moody's" Moody's Investors Services Limited and any successor to
its rating business
"mortgage" For any mortgage loan, the charge by way of legal
mortgage which secures the repayment of that mortgage
loan including the mortgage conditions applicable to it
"mortgage account" As the context requires, either (1) all mortgage loans
secured on the same mortgaged property and thereby
forming a single mortgage account or (2) an account
maintained by the administrator in respect of a particular
292
mortgage loan to record all amounts due in respect of that
mortgage loan (whether by way of principal, interest or
otherwise) and all amounts received in respect thereof
"mortgage conditions" For any mortgage loan, the terms and conditions applicable
to that mortgage loan and its related security as set out in
the relevant seller's "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 and any permitted replacement
mortgage loan which is assigned by the seller to the
mortgages trustee from time to time under the terms of the
mortgage sale agreement and referenced by its mortgage
loan identifier number and comprising the aggregate of all
principal sums, interest, costs, charges, expenses and
other monies (including all further advances) due or owing
with respect to that mortgage loan (or permitted
replacement mortgage loan, as applicable) under the
relevant mortgage conditions by a borrower on the security
of a mortgage from time to time outstanding or, as the
context may require, the borrower's obligations in respect of
the same
"mortgage loan files" For each mortgage loan, the file or files (including files kept
in microfiche format or similar electronic data retrieval
system) containing correspondence between the borrower
and the seller and including the mortgage documentation
applicable to that mortgage loan, each letter of offer for that
mortgage loan and other relevant documents
"mortgage portfolio" The combined existing mortgage portfolio and the additional
assigned mortgage portfolio following the assignment of
additional assigned mortgage loans to the mortgages
trustee on the closing date, as it is constituted as of any
date of determination following the closing date, 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 from the closing
date
"mortgage related securities" As defined in the United States Secondary Mortgage
Markets Enhancement Act 1984, as amended
"mortgage sale agreement" The mortgage sale agreement entered into on March 26,
2001, as amended from time to time, among the seller, the
mortgages trustee, Funding and the security trustee
regarding the assignment of the mortgage portfolio to the
mortgages trustee including any documents ancillary
thereto, and as further described in "Assignment of the
mortgage loans and their related security"
293
"mortgaged property" For any mortgage loan, the freehold or leasehold property in
England and Wales and all rights and security attached or
appurtenant or related thereto and all buildings and fixtures
on the property which are subject to the mortgage securing
repayment of that mortgage loan
"mortgagee" For any mortgage loan, the person for the time being who is
entitled to exercise the rights of the mortgagee under the
relevant mortgage securing repayment of that mortgage
loan
"mortgages trust" The bare trust of the trust property as to both capital and
income, held by the mortgages trustee on trust absolutely
for Funding (as to the Funding share) and the seller (as to
the seller share) under the mortgages trust deed so that
each beneficiary has an undivided beneficial interest in it
"mortgages trust deed" The mortgages trust deed entered into on March 26, 2001,
as amended from time to time, among the mortgages
trustee, Funding, the seller and the corporate services
provider
"mortgages trustee" Granite Finance Trustees Limited
"mortgages trustee available Has the meaning given to it on page 144
revenue receipts"
"mortgages trustee bank The mortgages trustee GIC account and the mortgages
accounts" trustee transaction account
"mortgages trustee GIC The account in the name of the mortgages trustee held at
account" the account bank and maintained subject to the terms of the
mortgages trustee guaranteed investment contract and the
bank account agreement or any additional or replacement
account as may for the time being be in place with the prior
consent of the Funding, the seller and the security trustee
"mortgages trustee GIC Lloyds TSB Bank plc Jersey International Branch acting
provider" through its office at 4 Bond Street, St. Helier, Jersey JE4
8ZE or any other person or persons as are for the time
being the GIC provider under the mortgages trustee
guaranteed investment contract
"mortgages trustee The guaranteed investment contract entered into on March
guaranteed investment 26, 2001, as amended from time to time, among the
contract" mortgages trustee, the mortgages trustee GIC provider and
others under which the mortgages trustee GIC provider has
agreed to pay the mortgages trustee a guaranteed rate of
interest on the balance of the mortgages trustee GIC
account"
"mortgages trustee principal The order in which the cash manager applies principal
priority of payments" receipts on the mortgage loans on each distribution date to
each of Funding and the seller, as set out in "The
mortgages trust"
"mortgages trustee principal On any distribution date, the principal receipts received by
receipts" the mortgages trustee in the immediately preceding trust
calculation period which may be distributed by the
mortgages trustee
"mortgages trustee revenue The order in which the cash manager applies the mortgages
priority of payments" trustee available revenue receipts on each distribution date,
as set out in "The mortgages trust"
294
"mortgages trustee The account in the name of the mortgages trustee held at
transaction account" 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 intercompany loan A new intercompany loan agreement entered into between
agreement" Funding and a new issuer in relation to a new intercompany
loan
"new intercompany loans" Intercompany loans made to Funding by new issuers under
new intercompany loan agreements
"new issuer" A new wholly-owned subsidiary of Funding that is not
established as at the closing date and which, if established,
will issue new notes and make a new intercompany loan to
Funding
"new mortgage loans" Mortgage loans, other than the mortgage loans assigned on
or before the closing date, which the seller may assign, from
time to time, to the mortgages trustee under the terms of the
mortgage sale agreement
"new mortgage portfolio" Any portfolio of new mortgage loans, the mortgages and
new related security, any accrued interest and any other
amounts, proceeds, powers, rights, benefits and interests
derived from the new mortgage loans and/or the new
related security, in each case which are to be assigned by
the seller to the mortgages trustee after the closing 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 notes" The notes issued by the new issuers to investors
"new related security" The security for the new mortgage loans (including the
mortgages) which the seller may assign to the mortgages
trustee under the mortgage sale agreement
"new trust property" As at any assignment date after the closing date, any and
all new mortgage portfolios assigned by the seller to the
mortgages trustee on an assignment date, or as at any
distribution date, any and all new mortgage portfolios
assigned by the seller to the mortgages trustee during the
immediately preceding trust calculation period
"New York business day" A day (other than a Saturday or a Sunday or public holiday)
on which banks are generally open for business in the city of
New York
"non-asset trigger event" Has the meaning given to it on page 146
"non-cash re-draw" An authorized underpayment or a payment holiday under a
flexible mortgage loan included in the mortgages trust,
which will result in the seller being required to pay to the
mortgages trustee an amount equal to the unpaid interest
associated with that authorized underpayment or payment
holiday
"non-performing mortgage A mortgage loan that is in arrears and for which the related
loan" borrower has not made any payment within any of the three
consecutive calendar months prior to the date of
determination
"NORMIC" Northern Rock Mortgage Indemnity Company Limited
295
"Northern Rock" Northern Rock plc
"note certificates" The global note certificates and the individual note
certificates
"note enforcement notice" An enforcement notice served by the note trustee for the
enforcement of the issuer security following a note event of
default under the notes
"note event of default" An event of default under the provisions of the notes
"note principal payment" The amount of each principal payment payable on each
note
"note trustee" The Bank of New York, acting through its office at One
Canada Square, 48th Floor, London E14 5AL, or such other
person for the time being acting as note trustee under the
trust deed
"noteholders" For the issuer, the holders of the class A notes, the class B
notes and/or the class C notes of any series or, for any
previous issuer or any new issuer, the holders for the time
being of the notes issued by such previous issuer or new
issuer, as the case may be
"notes" Includes all of the class A notes, the class B notes and the
class C notes or, in relation to any previous issuer or any
new issuer, the notes issued by such previous issuer or new
issuer, as the case may be
"notice" In case of notice being given to the noteholders, a notice
duly given in accordance with the relevant conditions set
forth in the notes
"NRG" Northern Rock (Guernsey) Limited
"offer conditions" The terms and conditions applicable to a specific mortgage
loan as set out in the relevant offer letter to the borrower
"offered notes" The series 1 notes offered by this prospectus
"OFT" Office of Fair Trading
"outstanding amount" Following enforcement of a mortgage loan, the amount
outstanding on the payment of that loan after deducting
money received under the applicable MIG policy
"outstanding principal For any note, the unpaid principal amount of that note, and
balance" for any intercompany loan, the unpaid principal balance of
that intercompany loan
"overpayments ledger" The ledger created and maintained by the cash manager to
record overpayments received by the mortgages trustee on
the mortgage loans
"paying agent and agent The paying agent and agent bank agreement entered into
bank agreement" on or about the closing date, as amended from time to time,
among the issuer, the principal paying agent, the paying
agents, the transfer agent, the registrar and the agent bank
"paying agents" The principal paying agent and the US paying agent
296
"payment date" In relation to the notes, the 20th day of January, April, July
and October in each year, beginning in January 2003 or, if
such day is not a business day, the next succeeding
business day
"payment holiday" Has the meaning given to it on page 90
"permitted product switch" The exchange by a borrower of its then current mortgage
loan product for a different mortgage loan product offered
by the seller, which may be made only if the new mortgage
loan for which the prior mortgage loan is to be exchanged is
a permitted replacement mortgage loan
"permitted replacement Has the meaning given to it on page 130
mortgage loan"
"pension plan" A financial plan arranged by a borrower to provide for that
borrower's expenses during retirement
"post-enforcement call The agreement entered into on or about the closing date, as
option agreement" amended from time to time, under which the note trustee
agrees on behalf of the noteholders, that in specified
circumstances, GPCH Limited may call for the notes to be
transferred to it
"post-enforcement call GPCH Limited
option holder"
"previous intercompany Each of the intercompany loans made by the previous
loan" issuers to Funding on or subsequent to the initial closing
date (but prior to the closing date), as amended from time to
time, under the relevant previous intercompany loan
agreement, as described under "Description of the
previous issuers, the previous notes and the previous
intercompany loans"
"previous intercompany loan Each of the intercompany loan agreements entered into on
agreement" or subsequent to the initial closing date (but prior to the
closing date), as amended from time to time, among others,
Funding, the applicable previous issuer and such previous
issuer's note trustee
"previous issuers" Each of the first issuer, the second issuer and the third
issuer, as described under "Description of the previous
issuers, the previous notes and the previous
intercompany loans"
"previous notes" The notes issued by the previous issuers, as described
under "Description of the previous issuers, the
previous notes and the previous intercompany loans"
"previous start-up loan Each of the start-up loan agreements entered into on or
agreements" subsequent to the initial closing date (but prior to the closing
date), as amended from time to time, between Funding, the
start-up loan provider and the security trustee
"principal amount For each class of notes and as of any date of determination,
outstanding" the initial principal amount of such class of notes less (in
each case) the aggregate amount of all principal payments
in respect of such notes that have been paid since the
closing date and on or prior to that determination date
297
"principal ledger" The ledger maintained by the cash manager on behalf of
the mortgages trustee under the cash management
agreement to record principal receipts on the mortgage
loans and payments of principal from the mortgages trustee
GIC account to Funding and the seller on each distribution
date. Together the principal ledger and the revenue ledger
reflect the aggregate of all amounts of cash standing to the
credit of the mortgages trustee in the mortgages trustee
bank accounts
"principal paying agent" Citibank, N.A., acting through its office at 5 Carmelite
Street, London EC4Y 0PA, or such other person for the time
being acting as principal paying agent under the paying
agent and agent bank agreement
"principal receipts" Any payment in respect of principal received in respect of
any mortgage loan, whether as all or part of a monthly
payment, on redemption (including partial redemption), on
enforcement or on the disposal of that mortgage loan or
otherwise (including payments pursuant to any insurance
policy) and which may include the amount of any
overpayment in respect of any non-flexible mortgage loan,
but only to the extent permitted by the mortgages trust
deed, and which may also include the amount of any further
contribution made by Funding from time to time
"product switch" Any variation in the mortgage conditions (other than a
permitted product switch) applicable to any mortgage loan
which may be offered by the seller or (in limited
circumstances) the administrator from time to time
"properties in possession The insurance policy issued by AXA General Insurance
policy" Limited which provides the seller with rebuilding insurance
when the seller takes possession of a property from a
default borrower
"prospectus" This prospectus dated September 12, 2002 relating to the issue
of the series 1 notes
"rating" Any rating assigned by the rating agencies to the notes or
new notes
"rating agencies" Moody's, Standard & Poor's and Fitch
"real property" Freehold or leasehold property in England and Wales, and
any estate or interest therein, and any reference to "real
property" includes a reference to all rights and security
from time to time attached, appurtenant or related thereto
and all buildings and fixtures from time to time thereon
"reasonable, prudent A reasonably prudent prime residential mortgage lender
mortgage lender" lending to borrowers in England and Wales who generally
satisfy the lending criteria of traditional sources of
residential mortgage capital
"receiver" A receiver appointed by the note trustee under the issuer
deed of charge and/or the security trustee under the
Funding deed of charge
"recognised stock Has the meaning given to it on page 246
exchange"
"record date" The fifteenth day before the due date for any payment on
the notes
"re-draw" Either a cash re-draw or a non-cash re-draw
298
"re-draws ledger" The ledger maintained by the cash manager in the name of
the mortgages trustee under the cash management
agreement to record re-draws on flexible mortgage loans
from time to time and will be sub-divided into two sub
ledgers to record cash re-draws and non-cash re-draws
"reference banks" At the closing date, the London office of each of the
following banks: ABN Amro Bank NV, Barclays Bank plc,
Citibank, N.A. and The Royal Bank of Scotland plc
"re-fixed mortgage loan" As at any given date, a mortgage loan which on or before
that date had been a fixed rate mortgage loan but the fixed
period had come to an end, but as at or before that given
date, the interest charged under that mortgage loan was
again fixed for another fixed period by the seller or the
administrator, as the case may be (following an election by
the borrower) in accordance with the original terms of the
fixed rate mortgage loan
"register" The register of noteholders kept by the registrar and which
records the identity of each noteholder and the number of
notes which each noteholder owns
"registered land" Land, title to which is registered at H.M. Land Registry
"registrar" Citibank, N.A., acting through its office at 5 Carmelite
Street, London EC4Y 0PA
"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 issuers" The issuer, the previous issuers and any new issuers, as
the case may be
"repayment mortgage loan" A mortgage loan for which the borrower is under an
obligation to the mortgagee to make monthly payments of
principal so that the whole principal (in addition to interest)
is repaid by the stated maturity date for that mortgage loan
"revenue ledger" The ledger created and maintained by the cash manager on
behalf of the mortgages trustee under the cash
management agreement to record revenue receipts on the
mortgage loans and interest from the mortgages trustee
bank accounts and payments of revenue receipts from the
mortgages trustee GIC account to Funding and the seller on
each distribution date. Together the revenue ledger and the
principal ledger reflect the aggregate of all amounts of cash
standing to the credit of the mortgages trustee bank
accounts
"revenue receipts" Any payment received in respect of any mortgage loan,
whether as all or part of a monthly payment, on redemption
(including partial redemption), on enforcement or on the
disposal of that mortgage loan or otherwise (including
payments pursuant to any insurance policy) which in any
such case is not a principal receipt
"revenue shortfall" The deficiency of Funding available revenue receipts on a
payment date over the amounts due by Funding under the
Funding pre-enforcement revenue priority of payments, and
299
the deficiency of issuer allocable revenue receipts on a
payment date over the amounts due by that issuer under
the issuer pre-enforcement revenue priority of payments, as
the context requires
"SEC" The United States Securities and Exchange Commission
"second issuer" Granite Mortgages 01-2 plc
"second issuer inter The intercompany loan entered into on September 28, 2001
company loan" between the second issuer and Funding
"second issuer notes" The notes issued by the second issuer on September 28,
2001
"Securities Act" The United States Securities Act of 1933, as amended
"security interest" or Any mortgage or sub mortgage, standard security, charge
"encumbrance" or sub charge (whether legal or equitable), encumbrance,
pledge, lien, hypothecation, assignment by way of security
or other security interest or title retention arrangement and
any agreement, trust or arrangement having substantially
the same economic or financial effect as any of the
foregoing (other than a lien arising in the ordinary course of
business or by operation of law)
"security power of attorney The power of attorney granted by Funding in favor of the
for Funding" security trustee on the closing date
"security trustee" The Bank of New York, acting through its office at One
Canada Square, 48th Floor, London E14 5AL, or any other
persons and all other persons for the time being acting as
the security trustee or security trustees under the Funding
deed of charge
"seller" Northern Rock plc
"seller share" The current seller share of the trust property calculated in
accordance with the formula set out on pages 142 and 143
"seller share percentage" The current seller share percentage of the trust property
calculated in accordance with the formula set out on pages
142 and 143
"senior expenses" Amounts ranking in priority to interest due on the notes
"series 1 class A notes" The series 1 class A1 notes and the series 1 class A2 notes
"series 1 class A1 dollar The dollar currency swap with respect to the series 1 class
currency swap" A1 notes
"series 1 class A1 dollar CDC IXIS Capital Markets, and/or, as applicable, any other entity
currency swap provider" appointed from time to time in accordance with the transaction documents
"series 1 class A1 notes" The $650,000,000 series 1 class A1 floating rate notes
due January 2017
"series 1 class A2 dollar The dollar currency swap with respect to the series 1 class
currency swap" A2 notes
"series 1 class A2 dollar CDC IXIS Capital Markets, and/or, as applicable, any other entity
currency swap provider" appointed from time to time in accordance with the transaction documents
"series 1 class A2 notes" The $1,150,000,000 series 1 class A2 floating rate notes
due January 2043
"series 1 class B dollar The dollar currency swap with respect to the series 1 class
currency swap" B notes
"series 1 class B dollar CDC IXIS Capital Markets, and/or, as applicable, any other entity
currency swap provider" appointed from time to time in accordance with the transaction documents
"series 1 class B notes" The $60,000,000 series 1 class B floating rate notes due
January 2043
300
"series 1 class C dollar The dollar currency swap with respect to the series 1 class
currency swap" C notes
"series 1 class C dollar CDC IXIS Capital Markets, and/or, as applicable, any other entity
currency swap provider" appointed from time to time in accordance with the transaction documents
"series 1 class C notes" The $88,000,000 series 1 class C floating rate notes due
January 2043
"series 1 notes" The series 1 class A1 notes, the series 1 class A2 notes, the
series 1 class B notes and the series 1 class C notes
"series 2 class A notes" The (euro)1,100,000,000 series 2 class A floating rate notes
due January 2043
"series 2 class A euro The euro currency swap with respect to the series 2 class A
currency swap" notes
"series 2 class A euro CDC IXIS Capital Markets, and/or, as applicable, any other entity
currency swap provider" appointed from time to time in accordance with the transaction documents
"series 2 class B euro The euro currency swap with respect to the series 2 class B
currency swap" notes
"series 2 class B euro CDC IXIS Capital Markets, and/or, as applicable, any other entity
currency swap provider" appointed from time to time in accordance with the transaction documents
"series 2 class B notes" The (euro)41,000,000 series 2 class B floating rate notes due
January 2043
"series 2 class C euro The euro currency swap with respect to the series 2 class C
currency swap" notes
"series 2 class C euro CDC IXIS Capital Markets, and/or, as applicable, any other entity
currency swap provider" appointed from time to time in accordance with the transaction documents
"series 2 class C notes" The (euro)53,000,000 series 2 class C floating rate notes due
January 2043
"series 2 notes" The series 2 class A notes, the series 2 class B notes and
the series 2 class C notes
"series 3 class A notes" The [pound]665,000,000 series 3 class A floating rate notes due
January 2043
"series 3 class B notes" The [pound]25,000,000 series 3 class B floating rate notes due
January 2043
"series 3 class C notes" The [pound]33,000,000 series 3 class C floating rate notes due
January 2043
"series 3 notes" The series 3 class A notes, the series 3 class B notes and
the series 3 class C notes
"S&P" and "Standard & Standard & Poor's Rating Services, a division of The
Poor's" McGraw-Hill Companies, Inc., and any successor to its
ratings business
301
"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
"shared issuer principal Has the meaning given to it on page 168
receipts"
"shared issuer revenue Has the meaning given to it on page 159
receipts"
"significant" When we discuss ERISA considerations, a benefit plan
investors' equity participation in the issuer would not be
significant if, immediately after the most recent acquisition
of any equity interest in the issuer, less than 25% of the
value of each class of equity interests in the issuer --
excluding interests held by Funding -- is held by benefit plan
investors
"special distribution" A payment made by the mortgages trustee to the seller as a
distribution from the mortgages trust of principal receipts
held by the mortgages trustee in respect of any further
contribution paid by Funding to the mortgages trustee,
which payment may be made on any date, including any
payment date, as further described under "The mortgages
trust -- Increasing the Funding share of the trust
property"
"special repayment notes" Means, in relation to the second issuer, the [pound]10,000,000
series 2 class D floating rate notes issued by the second
issuer, in relation to the third issuer, the [pound]15,000,000 series
2 class D notes issued by the third issuer and, in relation to
any other issuer, means any series and/or class of notes
issued by such issuer that are either:
(a) interest only notes; or
(b) notes, the outstanding principal balance of which is to
be repaid solely from issuer available revenue
receipts;
and that are designated as special repayment notes
"specified minimum rate" The rate specified in the offer conditions
"standard variable rate" The Northern Rock standard variable rate and/or the
standard variable rate applicable to mortgage loans within
the mortgages trust, as applicable
"standard variable rate A mortgage loan which is subject to the standard variable
mortgage loan" rate
"start-up loan" or "start-up Each loan made by the start-up loan provider to Funding
loans" under each start-up loan agreement, and collectively, the
"start-up loans"
"start-up loan agreement" The agreement entered into on or about the closing date, as
amended from time to time, between Funding, the start-up
loan provider and the security trustee relating to the
provision of the start-up loan to Funding or, in relation to any
other issuer, the start-up loan agreement (if any) entered
302
into by Funding, the relevant start-up loan provider and the
security trustee on or about the closing date for such
issuer's notes
"start-up loan provider" Northern Rock, in its capacity as provider of the start-up
loans, or such other person who provides a start-up loan to
Funding pursuant to a start-up loan agreement
"step-up date" The payment date in respect of an issuer on which the
interest rate on the notes issued by such issuer increases
by a pre-determined amount following the payment made
by such issuer on such payment date, which date in respect
of the issuer is the payment date occurring in January 2008,
which date in respect of the first issuer is the payment date
occurring in January 2008, which date in respect of the
second issuer is the payment date occurring in October
2006 and which date in respect of the third issuer is the
payment date occurring in April 2007
"subordinated principal test" Has the meaning given to it on page 171
"subscription agreement" The subscription agreement relating to the sale of the series
2 notes and the series 3 notes, expected to be dated on or
about September 12, 2002, among the issuer, Funding, the mortgages
trustee, Salomon Brothers International, J.P. Morgan
Securities, Ltd. and the other managers
"subsidiary" A subsidiary within the meaning of Section 736 of the United
Kingdom Companies Act 1985, and unless the context
otherwise requires, a subsidiary undertaking within the
meaning of section 258 of the United Kingdom Companies
Act 1985
"swap agreements" The basis rate swap agreement, the dollar currency swap
agreements and the euro currency swap agreements
"swap early termination A circumstance in which a swap agreement can be
event" terminated before its scheduled termination date
"swap provider default" The occurrence of either a currency swap provider default
or a basis rate swap provider default
"swap providers" Each of the basis rate swap provider, the dollar currency
swap provider and the euro currency swap provider, or any
one of them as the context requires
"swap replacement payment" An amount received by the issuer from a replacement swap
provider upon entry by the issuer into an agreement with
such replacement swap provider replacing a swap
agreement which has terminated following the occurrence
of a downgrade termination event
"TARGET business day" A day on which the Trans-European Automated Real-time
Gross settlement Express Transfer (TARGET) System is
open
"Telerate Page No. 3750" or The display designated as Page 3750 or 248, as applicable,
"Telerate Page No. 248" on the Dow Jones/Telerate Service (or any other page that
may replace the relevant Telerate Screen number on that
service, or any other service that may be nominated by the
British Bankers' Association (including the Reuters Screen)
as the information vendor for the purposes of displaying
British Bankers' Association Interest Settlement Rates for
deposits in the currency concerned)
303
"third issuer" Granite Mortgages 02-1 plc
"third issuer intercompany The intercompany loan entered into on March 20, 2002
loan" between the third issuer and Funding
"third issuer notes" The notes issued by the third issuer on March 20, 2002
"third party amounts" Has the meaning given to it on page 144
"title deeds" For each mortgage loan and its related security and the
mortgaged property relating to it, all conveyancing deeds
and documents which make up the title to the mortgaged
property and the security for the mortgage loan and all
searches and inquiries undertaken in connection with the
grant by the borrower of the related mortgage
"Together Connections A type of flexible mortgage loan, the primary characteristics
mortgage loan" of which are described on page 83
"Together mortgage loan" A type of flexible mortgage loan which allows the borrower
to obtain an additional unsecured loan and, in some cases,
a credit card, neither of which is secured by the mortgage
relating to the mortgage loan
"tracker rate mortgage loan" A loan where interest is linked to a variable interest rate
other than the standard variable rate; for example, the rate
on a tracker rate mortgage loan may be set at a margin
above sterling LIBOR or above rates set by the Bank of
England
"transaction documents" The documents listed in "Listing and general
information" and any new intercompany loan agreements,
new swap agreements and other documents relating to new
issues of notes by new issuers
"transfer agent" Citibank, N.A., acting through its office at 5 Carmelite
Street, London EC4Y 0PA and/or any other person for the
time being acting as transfer agent under the paying agent
and agent bank agreement
"transfer of equity" A transfer of the equitable and legal title by co-owners to
one of the proprietors of a mortgaged property where the
transferee remains a party to the original mortgage or
enters into a new mortgage over the relevant mortgaged
property in favor of the seller
"trigger event" An asset trigger event and/or a non-asset trigger event
"trust calculation period" The period from (and including) the first day of each
calendar month to (and including) the last day of the same
calendar month
"trust deed" The trust deed entered into on or about the closing date, as
amended from time to time, between the issuer and the
note trustee constituting the notes, as further described in
"Description of the trust deed"
"trust determination date" The first day (or, if not a London business day, the next
succeeding London business day) of each calendar month
"trust property" Has the meaning given to it on page 136
"UK Listing Authority" The Financial Services Authority in its capacity as
competent authority under Part VI of the Financial Services
and Markets Act 2000
"UK tax counsel" Sidley Austin Brown & Wood, London
304
"unauthorized In relation to any flexible mortgage loan has the meaning
underpayment" given to it on page 90
"underpayment" A situation where a borrower makes a monthly payment on
its mortgage loan which is less than the required monthly
payment for that month
"underwriters" Salomon Smith Barney Inc., J.P. Morgan Securities Inc.,
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and UBS Warburg
"underwriting agreement" The underwriting agreement relating to the sale of the
series 1 notes, expected to be dated on or about September
12, 2002, among the issuer, Funding, the mortgages trustee,
Salomon Smith Barney Inc., J.P. Morgan Securities Inc.
and the other underwriters
"United Kingdom" The United Kingdom of Great Britain and Northern Ireland
"United States holder" A beneficial owner of notes who is a "United States
person"
"United States person" (a) a citizen or resident of the United States;
(b) a domestic partnership;
(c) a domestic corporation;
(d) any estate (other than a foreign estate); and
(e) any trust if: (1) a court within the United States is able
to exercise primary supervision over the administration
of the trust; and (2) one or more United States
fiduciaries have the authority to control all substantial
decisions of the trust
"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, title to which is not registered at H.M. Land Registry
"US paying agent" Citibank, N.A., acting through its office at 14th Floor Zone 3,
111 Wall Street, New York, New York 10043
"US tax counsel" Sidley Austin Brown & Wood LLP
"valuation fee" A fee incurred by borrowers as a result of the seller or
administrator obtaining a valuation of the mortgaged
property
"variable mortgage rate" The rate of interest which determines the amount of interest
payable each month on a variable rate mortgage loan
"variable rate mortgage A mortgage loan where the interest rate payable by the
loan" borrower varies in accordance with a specified variable rate
"VAT" Value added tax
"WAFF" On any date, the weighted average foreclosure frequency
for the mortgage portfolio as calculated by the administrator
on that date in accordance with the calculations for the initial
mortgage portfolio or as agreed by the administrator and the
rating agencies from time to time
305
"WALS" On any date, the weighted average loss severity for the
mortgage portfolio as calculated by the administrator on that
date in accordance with the calculations for the initial
mortgage portfolio or as agreed by the administrator and the
rating agencies from time to time
"we" and "us" The issuer
"weighted average Funding Has the meanings given to it under "The mortgages trust
share percentage" -- Weighted average Funding share percentage"
"weighted average seller Has the meanings given to it under "The mortgages trust
share percentage" -- Weighted average seller share percentage"
"withholding tax" A tax levied under UK law, as further described in "Material
United Kingdom tax consequences"
306
INDEX OF APPENDICES
The following appendices contain the text of the independent accountants'
reports on each of the issuer and Funding received by the directors of the
issuer and Funding, respectively, from the independent accountants to the issuer
and Funding being, in each case, PricewaterhouseCoopers. These appendices
constitute an integral part of this prospectus. The balance sheets attached as
appendices B, F and L and the financial statements attached as appendices E, G,
H, I, K, M, N, and O do not comprise the statutory accounts of either the issuer
or Funding. No statutory accounts have been prepared or delivered to the
Registrar of Companies on behalf of the issuer in England and Wales since its
incorporation. The first statutory accounts of the issuer will be drawn up to
December 31, 2003. The first statutory accounts of Funding were prepared and
drawn up from the date of incorporation to December 31, 2001 and filed with the
Registrar of Companies in England and Wales in July 2002. The accounting
reference date for each of the issuer and Funding will be the last day of
December and further statutory accounts will be drawn up to December 31 and
annually on the last day of December thereafter.
During the period from incorporation on July 11, 2002 until September 9,
2002, the issuer had not traded, and did not have any receipts or payments apart
from the subscriptions referred to in "THE issuer". Consequently during this
period, the issuer has neither made a profit nor loss and no profit and loss
account nor cashflow statement has been prepared.
INDEX OF APPENDICES
Appendix A Report of Independent Accountants for Granite Mortgages 02-2 plc
Appendix B Balance Sheet as at September 9, 2002 of Granite Mortgages 02-2
plc
Appendix C Notes to the Balance Sheet of Granite Mortgages 02-2 plc as at
September 9, 2002
Appendix D Report of Independent Accountants for Granite Finance Funding
Limited with respect to the financial statements of Granite Finance Funding
Limited for the period from January 1, 2002 to June 30, 2002
Appendix E Consolidated statement of income for the period from January 1,
2002 to June 30, 2002 of Granite Finance Funding Limited
Appendix F Consolidated Balance Sheet as at June 30, 2002 of Granite
Finance Funding Limited
Appendix G Consolidated statement of changes in shareholders' equity for
the period from January 1, 2002 to June 30, 2002 of Granite Finance Funding
Limited
Appendix H Consolidated statement of cash flows for the period from January
1, 2002 to June 30, 2002 of Granite Finance Funding Limited
Appendix I Notes to the financial statements of Granite Finance Funding
Limited for the period from January 1, 2002 to June 30, 2002
Appendix J Report of Independent Accountants for Granite Finance Funding
Limited with respect to the financial statements of Granite Finance Funding
Limited for the period from February 14, 2001 to December 31, 2001
Appendix K Consolidated statement of income for the period from February
14, 2001 to December 31, 2001 of Granite Finance Funding Limited
Appendix L Consolidated Balance Sheet as at December 31, 2001 of Granite
Finance Funding Limited
Appendix M Consolidated statement of changes in shareholders' equity for
the period from February 14, 2001 to December 31, 2001 of Granite Finance
Funding Limited
Appendix N Consolidated statement of cash flows for the period from
February 14, 2001 to December 31, 2001 of Granite Finance Funding Limited
Appendix O Notes to the financial statements of Granite Finance Funding
Limited for the period from February 14, 2001 to December 31, 2001
307
APPENDIX A
REPORT OF INDEPENDENT ACCOUNTANTS
"To the Board of Directors and Shareholder of Granite Mortgages 02-2 plc
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Granite Mortgages 02-2 plc (the
"COMPANY") at September 9, 2002 in conformity with accounting principles
generally accepted in the United States of America. The balance sheet is the
responsibility of the Company's management; our responsibility is to express an
opinion on the balance sheet based on our audit. We conducted our audit of the
balance sheet in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers
Newcastle upon Tyne, England
September 12, 2002"
308
APPENDIX B
GRANITE MORTGAGES 02-2 PLC
BALANCE SHEET AS AT SEPTEMBER 9, 2002
SEPTEMBER 9,
2002
NOTE (POUND)
---- ---------------
ASSETS
Cash 12,500
------
TOTAL ASSETS 12,500
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Common Stock (authorized 50,000 shares, (pound)1 par value,
issued and outstanding 50,000 shares comprising 0
fully paid and 50,000 partly paid to (pound)0.25 each) 3 50,000
Less receivable from shareholders 3 (37,500)
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 12,500
======
The notes on the following page form an integral part of this
financial statement.
309
APPENDIX C
GRANITE MORTGAGES 02-2 PLC
NOTES TO THE BALANCE SHEET AS AT SEPTEMBER 9, 2002
1 ACCOUNTING POLICIES
The financial information for Granite Mortgages 02-2 plc (the "COMPANY")
set out in the balance sheet has been prepared under the historical cost
convention and in accordance with accounting principles generally accepted in
the United States of America and in pounds sterling ((pound)), the Company's
operating currency. The financial statements are reported in accordance with
generally accepted accounting principles in the United States (US GAAP) due to
the Group's annual reporting requirements under the United States Securities
Exchange Act of 1934, as amended (Securities Exchange Act). The statutory
accounting records of the Group are prepared and maintained under generally
accepted accounting principles in the United Kingdom (UK GAAP).
2 NATURE OF OPERATIONS
The Company was incorporated as a public limited company registered in
England and Wales on July 11, 2002 under the name of Granite Mortgages 02-2 plc.
The principal purpose of the Company is to invest the proceeds of the
issuance and sale of asset-backed notes. The Company has, at the date of this
report, yet to commence trading.
3 SHARE CAPITAL
The Company was incorporated with authorized capital of (pound)50,000
comprising 50,000 ordinary shares Of (pound)1 each.
On August 5, 2002, 50,000 ordinary shares were issued each of which was
partly paid to (pound)12,500.
4 ULTIMATE HOLDING COMPANY
As at September 9, 2002, the ultimate holding company of the Company was
The Law Debenture Intermediary Corporation plc, a company registered in England
and Wales. The Law Debenture Intermediary Corporation plc holds all of the
beneficial interest in the issued shares of Granite Finance Holdings Limited, a
company registered in England and Wales (which holds all of the beneficial
interest in the issued shares of Granite Finance Funding Limited, and which, in
turn, holds all of the beneficial interest in the issued shares of the Company)
on a discretionary trust for charitable purposes.
310
APPENDIX D
REPORT OF INDEPENDENT ACCOUNTANTS
"To the Board of Directors and Shareholders of Granite Finance Funding
Limited
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, consolidated statement of changes in
shareholders' equity and consolidated statement of cash flows present fairly, in
all material respects, the financial position of Granite Finance Funding Limited
and its subsidiaries (the "GROUP") at June 30, 2002 and at December 31, 2001 and
the results of its operations and its cash flows for the period from January 1,
2002 to June 30, 2002 and from February 14, 2001, the date of incorporation of
Granite Finance Funding Limited, to June 30, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Group's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers
Newcastle upon Tyne, England
September 12, 2002"
311
APPENDIX E
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD FROM JANUARY 1, 2002 TO JUNE 30,
2002
6 MONTHS 5 MONTHS
ENDED ENDED
JUNE 30 JUNE 30
2002 2001
NOTE (POUND)'000 (POUND)'000
---- ----------- -----------
OTHER REVENUE
Other income 1,318 246
Interest income 3 102,029 27,907
------- ------
TOTAL OTHER REVENUE - CONTINUING OPERATIONS 103,347 28,153
======= ======
COSTS AND EXPENSES
Administration expenses (2,487) (468)
Interest expense 4 (91,292) (27,684)
------- ------
TOTAL COSTS AND EXPENSES - CONTINUING
OPERATIONS (93,779) (28,152)
NET INCOME 5 9,568 1
======= ======
TAX ON NET INCOME (5) 0
------- ------
NET RETAINED INCOME 9,563 1
======= ======
The notes on the following pages form an integral part of these
consolidated financial statements.
312
APPENDIX F
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 2002
JUNE 30 DECEMBER 31
2002 2001
NOTE (POUND)'000 (POUND)'000
---- ----------- -----------
ASSETS
CURRENT ASSETS
Cash at bank 343,935 185,562
Accounts receivable 6 38,679 23,528
--------- ---------
TOTAL CURRENT ASSETS 382,614 209,090
========= =========
INVESTMENTS AND OTHER ASSETS
Advance to Granite Finance Trustees Limited 7 4,862,282 2,765,673
--------- ---------
TOTAL INVESTMENTS AND OTHER ASSETS 4,862,282 2,765,673
========= =========
TOTAL ASSETS 5,244,896 2,974,763
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Other accounts payable and accrued expenses 8 74,095 45,209
Derivatives 14 221,780 39,796
--------- ---------
TOTAL CURRENT LIABILITIES 295,875 85,005
========= =========
LONG TERM DEBT
Start-up loan 38,718 13,618
Asset backed notes 4,895,341 2,885,645
Deferred purchase consideration 14,904 --
--------- ---------
TOTAL LONG TERM DEBT 9 4,948,963 2,899,263
========= =========
COMMON STOCK (authorized 100,000 shares of (pound)1
each, issued and outstanding, 37,500 shares of
(pound)1 each) 10 37 37
RETAINED EARNINGS 21 (9,542)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 58 (9,505)
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 5,244,896 2,974,763
========= =========
The notes on the following pages form an integral part of these
consolidated financial statements.
313
APPENDIX G
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD FROM
JANUARY 1, 2002 TO JUNE 30, 2002
6 MONTHS 5 MONTHS
ENDED ENDED
JUNE 30 JUNE 30
2002 2001
(POUND)'000 (POUND)'000
----------- -----------
Net income for the period 9,563 1
Retained (deficit)/earnings brought forward (9,542) --
--------- ---------
RETAINED EARNINGS CARRIED FORWARD 21 1
========= =========
Common stock brought forward 37 --
Shares issued in the period (12,500 ordinary
shares at (pound)1 per share) -- 13
--------- ---------
COMMON STOCK CARRIED FORWARD 37 13
========= =========
TOTAL SHAREHOLDERS' EQUITY 58 14
========= =========
The notes on the following pages form an integral part of these
consolidated financial statements.
314
APPENDIX H
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 2002 TO JUNE
30, 2002
6 MONTHS 5 MONTHS
ENDED ENDED
JUNE 30 JUNE 30
2002 2001
(POUND)'000 (POUND)'000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net retained income for the period 9,563 1
Increase in accounts receivable (11,626) (1,044)
Increase in accounts payable 28,886 26,887
Reduction in advance to Granite Finance
Trustees Limited 650 533
(Gain)/Loss on translation of foreign currency
translation (198,830) 23,014
Increase/(Decrease) in deferred consideration 14,904 (15,421)
Unrealized loss/(gain) on derivative 181,984 (6,475)
---------- ----------
NET CASH FROM OPERATING ACTIVITIES 25,531 27,495
========== ==========
CASH FLOWS FROM INVESTING ACTIVITIES
Payment of advance to Granite Finance Trustees
Limited (2,420,580) (1,480,000)
Proceeds from repayment of advance to Granite
Finance Trustees Limited 323,321 56,780
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (2,097,259) (1,423,220)
========== ==========
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of asset-backed notes 2,435,580 1,500,000
Repayment of asset-backed notes (227,050) --
Proceeds from start-up loan 25,100 4,717
Payment of issue costs of asset-backed notes (3,529) (3,899)
Proceeds from issue of share capital -- 13
---------- ----------
NET CASH FROM FINANCING ACTIVITIES 2,230,101 1,500,831
========== ==========
Net increase in cash and cash equivalents 158,373 105,106
Cash and cash equivalent at beginning of the period 185,562 --
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF THE
PERIOD 343,935 105,106
========== ==========
SUPPLEMENTAL CASHFLOW INFORMATION:
Interest paid 79,800 --
---------- ----------
Taxes paid -- --
---------- ----------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Deferred consideration -- 20,000
---------- ----------
Reserve fund 10,686 --
---------- ----------
The notes on the following pages form an integral part of these
consolidated financial statements.
315
APPENDIX I
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
1. GENERAL INFORMATION
Granite Finance Funding Limited (the "COMPANY") was incorporated on
February 14, 2001 as a company with limited liability and domiciled in Jersey
for the purposes of carrying on business. The Company commenced business on
March 26, 2001. Granite Finance Funding Limited and its subsidiaries, Granite
Mortgages 01-1 plc, Granite 01-2 plc and Granite Mortgages 02-1 plc,
collectively comprise the "GROUP".
The Company borrows indirectly from the Euro markets and from the domestic
US market via its subsidiaries, Granite Mortgages 01-1 plc, Granite Mortgages
01-2 plc and Granite Mortgages 02-1 plc, which are public limited companies
organized under the laws of England and Wales and are wholly-owned by the
Company. The sole businesses of Granite Mortgages 01-1 plc, Granite Mortgages
01-2 plc and Granite Mortgages 02-1 plc are the investment of the proceeds of
the issuance and sale of asset-backed notes by lending the proceeds thereof to
the Company.
The Group's capital and debt issuance proceeds are invested in the purchase
of a beneficial interest in a pool of mortgage loans and related security which
provide the funds used by the Company to pay interest and repay principal to
Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc and Granite Mortgages
02-1 plc under the intercompany loans. The pool of mortgages is owned by
beneficiaries of a trust administered by Granite Finance Trustees Limited, a
fellow subsidiary of Granite Finance Holdings Limited.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of these
consolidated financial statements are set out below:
(a) Basis of presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP") and in Pounds Sterling ("(POUND)"), the currency of the United Kingdom,
which is the Group's operating currency. The financial statements are reported
in accordance with US GAAP due to the Group's annual reporting requirements
under the United States Securities Exchange Act of 1934, as amended (the
"SECURITIES EXCHANGE ACT"). The statutory accounting records of the Group are
prepared and maintained under generally accepted accounting principles in the
United Kingdom ("UK GAAP").
(b) Consolidation
The consolidated financial statements include the accounts of Granite
Finance Funding Limited and its wholly-owned subsidiaries, Granite Mortgages
01-1 plc, Granite Mortgages 01-2 plc and Granite Mortgages 02-1 plc. All
intercompany transactions and balances have been eliminated on consolidation.
(c) Foreign currency translation
All foreign currency assets and liabilities are translated into Pounds
Sterling at the exchange rates prevailing at the end of the period. Interest
income and expense denominated in foreign currencies are translated into Pounds
Sterling at the exchange rates in force when the transaction arises. Foreign
currency investment and financing activities are economically hedged into pounds
sterling to offset exposures to fluctuating currency exchange rates. Although
these instruments offset exposures, they do not qualify
316
APPENDIX I (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
for hedge accounting under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ( "SFAS NO. 133 "). The effects of foreign currency
translation are reflected in interest expense.
(d) Derivatives
Derivative instruments comprise interest rate swaps used to offset interest
rate exposure between differing floating rates on assets and liabilities.
Additionally derivatives comprise interest rate swaps and currency swaps, and
are used by the Group to minimize interest rate exposures between fixed and
floating rates assets and liabilities and currency risk associated with its
financing activities. Although these instruments offset exposure, they do not
qualify for hedge accounting under SFAS No. 133 due to the differing and unknown
maturities of the underlying mortgage loan assets and the lack of
contemporaneous documentation requirements under SFAS No. 133. All derivatives
are recorded on the balance sheet at fair value with changes in fair value
reflected in the income statement. All derivatives are transacted simultaneously
with the purchase or issuance of the underlying funding instrument. The
derivatives are not held for trading purposes.
(e) Interest income and expense
Interest income and expense are recognized in the consolidated financial
statements on an accrual basis.
(f) Cash and cash equivalents
Cash and cash equivalents comprise amounts due from banks on demand and
dealing securities with original maturities of less than 90 days.
(g) Funding instruments
Asset-backed notes are stated at adjusted cost on the balance sheet.
Premiums/discounts are amortized to the maturity date of each issue using the
straight-line method, which is not materially different from the interest
method.
(h) Distribution policy
Distributions to shareholders and holders of capital notes are accounted
for when approved by the Board of Directors.
(i) Advance to granite finance trustees limited and related provisions
The advance to Granite Finance Trustees Limited is carried at cost, being
cash plus initial deferred consideration, of the Company's initial contributions
to Granite Finance Trustees Limited in consideration for the purchase of the
Company's beneficial interest in the mortgages trust less capital repayments
received and the Company's share of other non-cash movements in the underlying
mortgage loans comprising the mortgages trust. Specific provision for loss is
made at such time as it is determined that an impairment has occurred. As of
June 30, 2002 there was no specific provision for losses on the advance
(December 31, 2001: (pound)nil) because none of the underlying mortgage loans
were considered to be impaired.
(j) Issue costs
The portion of the direct costs associated with the issue of the notes by
Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc and Granite Mortgages
02-1 plc that are attributable to the Group are capitalized and are amortized
over the expected life of the notes.
317
APPENDIX I (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
(k) Deferred purchase consideration
Deferred purchase consideration represents amounts owed to Northern Rock
plc under the Mortgage Sale Agreement dated March 26, 2001 (as amended) to be
paid out of realized income of the Group, together with the initial deferred
consideration amount of (pound)20 million. The deferred consideration is payable
by Granite Finance Funding Limited out of future revenue cashflows to Granite
Finance Trustees Limited, who in turn will pay this to Northern Rock plc.
Deferred consideration is payable out of pre tax profits and is only payable to
the extent that adequate cashflows are generated.
(l) Use of estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingencies at the balance sheet date and the
reported amounts of revenues and expenses in the reporting period. Actual
results may differ from the estimates used in the financial statements.
3. INTEREST INCOME
6 MONTHS 5 MONTHS
ENDED ENDED
JUNE 30 JUNE 30
2002 2001
(POUND)'000 (POUND)'000
----------- -----------
Interest income on the advance to Granite Finance
Trustees Limited 95,887 26,606
Interest income on cash at bank 6,142 1,301
------- ------
Total 102,029 27,907
======= ======
4. INTEREST EXPENSE
6 MONTHS 5 MONTHS
ENDED ENDED
JUNE 30 JUNE 30
2002 2001
(POUND)'000 (POUND)'000
----------- -----------
Interest expense on the asset-backed notes 90,939 26,184
Amortization of issue costs 1,550 302
Interest expense on the start-up loan 745 80
Deferred purchase consideration 14,904 (15,421)
Foreign currency translation (gain)/loss (198,830) 23,014
Unrealized loss/(gain) on derivatives 181,984 (6,475)
-------- -------
Total 91,292 27,684
======== =======
Interest expense is comprised of interest on the asset-backed notes,
amortization of issue costs, interest on start up loans, deferred purchase
consideration payable to Granite Finance Trustees Limited, foreign currency
translation of USD and EUR denominated liabilities and derivatives which were
entered into for hedging purposes, which do not qualify for hedge accounting
under US GAAP.
5. NET INCOME
Net income is stated after charging:
318
APPENDIX I (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
6 MONTHS 5 MONTHS
ENDED ENDED
JUNE 30 JUNE 30
2002 2001
(POUND)'000 (POUND)'000
----------- -----------
Audit fees 31 9
========== ==========
The Group has no employees. No emoluments were paid to the Directors by the
Group during the period.
6. ACCOUNTS RECEIVABLE
JUNE 30 DECEMBER 31
2002 2001
(POUND)'000 (POUND)'000
----------- -----------
Accrued interest income 2,417 1,623
Issue costs 10,552 7,027
Amounts due from Granite Finance Trustees Limited 25,710 14,878
--------- --------
Total 38,679 23,528
========= ========
Other accounts receivable for the Group includes (pound)10,552,000
(December 31, 2001:(pound)7,027,000) of unamortised issue costs of which
(pound)7,179,000 (December 31, 2001: (pound)4,868,000) will be charged after
More than one year. These costs are paid by the Group in connection with the
issue of asset-backed notes.
7. ADVANCE TO GRANITE FINANCE TRUSTEES LIMITED
JUNE 30 DECEMBER 31
2002 2001
(POUND)'000 (POUND)'000
----------- -----------
Balance brought forward 2,765,673 --
Advance to Granite Finance Trustees Limited 2,420,580 2,980,000
Adjustment to initial acquired value -- 20,000
Repayment of advance to Granite Finance Trustees Limited (323,321) (233,778)
Other movement in the advance to Granite Finance Trustees
Limited (650) (549)
--------- ---------
Total 4,862,282 2,765,673
========= =========
The advance is secured by a pool of mortgage loans that have been equitably
assigned by Northern Rock plc to Granite Finance Trustees Limited, as mortgages
trustee of the mortgages trust. Granite Finance Trustees Limited uses a portion
of the interest and principal payments that it receives on the mortgage loans
held by it in trust to repay principal and interest amounts on the loan from the
Group.
The Group and Northern Rock plc are beneficially entitled to all of the
trust property in accordance with their respective shares in the trust.
The payment of interest and principal on the advance to Granite Finance
Trustees Limited is dependent upon payment of interest and principal under the
mortgage loans held by the trust administered by Granite Finance Trustees
Limited, and is therefore subject to the risk of non-payment of the mortgage
loans. All of the underlying mortgage
319
APPENDIX I (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
loans in the trust administered by Granite Finance Trustees Limited were
originated by Northern Rock plc and the following factors mitigate the risks
associated with the failure of customers to settle financial obligations:
o the use of sophisticated credit scoring systems to differentiate the
credit risk associated with residential mortgage loans;
o emphasis on next time buyers and remortgage customers relative to
first time buyers as in Northern Rock's experience customers who have
proven repayment records represent lower risk;
o geographic spread - distribution channels for new residential mortgage
lending are designed to avoid excessive reliance on any single
geographic region; and
o size of loan relative to value of the property - Northern Rock's
current policy is for at least 60% of new residential mortgage lending
to have loan to value ratios of 90% or lower.
All of the underlying mortgage assets are secured on properties in England
or Wales and hence the Group is dependent upon the state of the United Kingdom
economy and market interest rates. There can be no assurance that a weakening in
the United Kingdom economy will not have a material effect on the Group's future
performance.
8. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
JUNE 30 DECEMBER 31
2002 2001
(POUND)'000 (POUND)'000
----------- -----------
Accrued interest expense 54,438 31,878
Accruals and other accounts payable 19,657 13,331
-------- --------
Total 74,095 45,209
======== ========
9. LONG TERM DEBT
JUNE 30 DECEMBER 31
2002 2001
(POUND)'000 (POUND)'000
----------- -----------
Asset-backed notes 4,895,341 2,885,645
Start up loan 38,718 13,618
Deferred purchase consideration 14,904 --
--------- ---------
Total 4,948,963 2,899,263
========= =========
Interest payable on the start-up loans is based on 3-month LIBOR. At June
30, 2002 LIBOR was 4.19719% in relation to (pound)25.1 million of the start-up
loan, having previously fixed on March 20, 2002, and 4.16578% in relation to the
remaining start-up loans, having previously fixed on April 22, 2002. In both
cases LIBOR resets on July 22, 2002.
The payment of interest and principal on the asset-backed notes issued by
Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc and Granite Mortgages
02-1 plc is dependent upon each of those companies receiving from the Company
payment of interest and principal under the intercompany loans made to the
Company. The Company's payment of interest and principal under the intercompany
loans is dependent upon the Company receiving from Granite Finance Trustees
Limited payment of interest
320
APPENDIX I (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
and principal under the advance to Granite Finance Trustees Limited. As both
repayment of the advance and repayment of the asset-backed notes are ultimately
dependent upon payment of interest and principal under the mortgages loans held
by the trust administered by Granite Finance Trustees Limited, the advance and
the asset-backed notes are subject to the risk of non-repayment of the mortgage
loans.
(a) Asset-backed notes - Granite Mortgages 01-1 plc
MARGIN OVER MARGIN OVER
LIBOR TO LIBOR AFTER JUNE 30 DECEMBER 31
JANUARY JANUARY 2002 2001
2008 2008 (POUND)'000 (POUND)'000
----------- ----------- ----------- -----------
Series 1 Class A1 Floating Rate
Notes January 2011 0.12% pa 0.24% pa 286,440 410,516
Series 1 Class A2 Floating Rate
Notes January 2026 0.21% pa 0.42% pa 478,484 507,106
Series 1 Class B floating Rate
Notes January 2041 0.40% pa 0.80% pa 32,550 34,497
Series 1 Class C Floating Rate
Notes January 2041 1.40% pa 2.40% pa 43,942 46,572
Series 2 Class A Floating Rate
Notes January 2041 0.24% pa 0.48% pa 350,000 350,000
Series 2 Class B Floating Rate
Notes January 2041 0.40% pa 0.80% pa 10,000 10,000
Series 2 Class C Floating Rate
Notes January 2041 1.40% pa 2.40% pa 15,000 15,000
--------- ---------
Total 1,216,416 1,373,691
========= =========
The notes mature in more than 5 years, but repayments can be made before
the maturity of the notes. The notes are subject to variable rates of interest.
The Series 1 notes are denominated in US Dollars and the Series 2 notes in
Pounds Sterling. Interest is payable on the notes based on USD 3-month LIBOR for
the Series 1 notes and Sterling 3-month LIBOR for the Series 2 notes. At the
balance sheet date the rates in force were 1.94875% for USD 3-month LIBOR and
4.16578% for Sterling 3-month LIBOR.
Both USD and Sterling 3-month LIBOR re-price quarterly, and the next
re-price date after the balance sheet date was July 20, 2002.
321
APPENDIX I (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
(b) Asset-backed notes - Granite Mortgages 01-2 plc
MARGIN OVER MARGIN OVER
LIBOR TO LIBOR AFTER JUNE 30 DECEMBER 31
OCTOBER OCTOBER 2002 2001
2006 2006 (POUND)'000 (POUND)'000
----------- ----------- ----------- -----------
Series 1 Class A1 Floating Rate
Notes January 2021 0.23% pa 0.46% pa 735,629 896,924
Series 1 Class B floating Rate
Notes January 2041 0.40% pa 0.80% pa 28,318 30,012
Series 1 Class C Floating Rate
Notes January 2041 1.38% pa 2.38% pa 37,758 40,018
Series 2 Class A Floating Rate
Notes January 2041 0.25% pa 0.50% pa 500,000 500,000
Series 2 Class B Floating Rate
Notes January 2041 0.42% pa 0.84% pa 15,000 15,000
Series 2 Class C Floating Rate
Notes January 2041 1.40% pa 2.40% pa 20,000 20,000
Series 2 Class D Floating Rate
Notes January 2041 4.60% pa 5.60% pa 10,000 10,000
--------- ---------
Total 1,346,705 1,511,954
========= =========
The notes mature in more than 5 years, but repayments can be made before
the maturity of the notes. The notes are subject to variable rates of interest.
The Series 1 notes are denominated in US Dollars and the Series 2 notes in
Pounds Sterling. Interest is payable on the notes based on USD 3-month LIBOR for
the Series 1 notes and Sterling 3-month LIBOR for the Series 2 notes. At the
balance sheet date the rates in force were 4.16578% for Sterling 3-month LIBOR
and 1.94875% for USD 3-month LIBOR.
Both USD and Sterling 3-month LIBOR re-price quarterly, and the next
re-price date after the balance sheet date was July 20, 2002.
322
APPENDIX I (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
(c) Asset-backed notes - Granite Mortgages 02-1 plc
MARGIN OVER MARGIN OVER JUNE 30 DECEMBER 31
LIBOR TO LIBOR AFTER 2002 2001
APRIL 2007 APRIL 2007 (POUND)'000 (POUND)'000
----------- ----------- ----------- -----------
Series 1 Class A1 Floating Rate
Notes October 2016 0.10% pa 0.23% pa 458,435 --
Series 1 Class A2 Floating Rate
Notes July 2019 0.16% pa 0.34% pa 829,633 --
Series 1 Class B floating Rate
Notes April 2042 0.33% pa 0.72% pa 45,375 --
Series 1 Class C Floating Rate
Notes April 2042 1.43% pa 2.43% pa 62,821 --
Series 2 Class A Floating Rate
Notes April 2042 0.20% pa 0.40% pa 460,000 --
Series 2 Class B Floating Rate
Notes April 2042 1.30% pa 2.30% pa 16,200 --
Series 2 Class C Floating Rate
Notes April 2042 1.40% pa 2.40% pa 22,500 --
Series 2 Class D Floating Rate
Notes April 2042 4.50% pa 5.50% pa 15,000 --
Series 3 Class A Floating Rate
Notes April 2042 0.20% pa 0.43% pa 389,535 --
Series 3 Class B Floating Rate
Notes April 2042 0.37% pa 0.78% pa 13,699 --
Series 3 Class C Floating Rate
Notes April 2042 1.44% pa 2.44% pa 19,022 --
--------- ---------
Total 2,332,220 --
========= =========
The notes mature in more than 5 years, but repayments can be made before
the maturity of the notes. The notes are subject to variable rates of interest.
The Series 1 notes are denominated in US Dollars, the Series 2 notes in Pounds
Sterling and the Series 3 notes in Euros. Interest is payable on the notes based
on USD 3-month LIBOR for the Series 1 notes, Sterling 3-month LIBOR for the
Series 2 notes and 3-month Euribor for the Series 3 notes. At the balance sheet
date the rates in force were 4.19719% for Sterling 3-month LIBOR, 2.10125% for
USD 3-month LIBOR and 3.4220% for 3-month Euribor.
Sterling and USD 3-month LIBOR and 3-month Euribor re-price quarterly, and
the next re-price date after the balance sheet date was July 20, 2002.
323
APPENDIX I (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
10. COMMON STOCK
JUNE 30 DECEMBER 31
2002 2001
(POUND)'000 (POUND)'000
----------- -----------
AUTHORISED:
100,000 (December 31, 2001: 100,000) Ordinary
shares of (pound)1 each 37 37
====== ======
CALLED UP, ALLOTTED AND FULLY PAID SHARE CAPITAL
37,500 (December 31, 2001: 37,500) Ordinary shares of
(pound)1 each 37 37
====== ======
11. CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES
There were no outstanding capital commitments, guarantees or contingent
liabilities at June 30, 2002 (December 31, 2001: (pound) nil).
12. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to
control the other party or exercise significant influence over the other party
in making financial or operational decisions.
The Company, which is a special purpose company, is controlled by its board
of directors. The board of directors consists of three directors. Two of the
Company's three directors are provided by Mourant & Co. Capital (SPV) Limited,
the principal activity of which is providing directors and corporate management
services for special purpose companies. The third director of the Company is an
employee of Northern Rock plc. The Company pays a corporate services fee
pursuant to a corporate services agreement to Mourant & Co. Capital (SPV)
Limited in connection with its provision of corporate management services. The
fees payable to these directors for providing their services are immaterial in
the context of these consolidated financial statements and of the individual
directors.
The total amount paid by the Group to Northern Rock plc for administration
and cash management services during the 6 months ended June 30, 2002 was
(pound)200,000 (5 months from incorporation to 30 June 2001: (pound)58,000).
Northern Rock plc provides the interest rate swap in connection with the
notes issued by Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc and
Granite Mortgages 02-1 plc. Northern Rock plc is one of a number of
counterparties used by the group in the normal course of its business. Northern
Rock does not hold any capital of the Group.
The Group receives all of its income other than bank interest from Granite
Finance Trustees Limited, a fellow subsidiary of Granite Finance Holdings
Limited. During the period the Company received (pound)103.6 million of revenue
from Granite Finance Trustees Limited (5 months ended June 30, 2001 (pound)18.3
million) together with (pound)323.0 million of principal (5 months ended June
30, 2001 (pound)56.8 million). The outstanding loan balance due from Granite
Finance Trustees Limited at the period end was (pound)4,895.3 million (December
31, 2001: 2,765.7 million) with an additional (pound)25.7 million (December 31,
2001: (pound)15.0 million) due in relation to payments collected by Granite
Finance Trustees Limited not yet paid over.
324
APPENDIX I (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
13. POST BALANCE SHEET EVENTS
On July 11, 2002, Granite Finance Funding Limited subscribed for 100% of
the share capital of Granite Mortgages 02-2 plc for a consideration of
(pound)50,000 of which (pound)12,500 was paid.
14. DERIVATIVES AND FINANCIAL INSTRUMENTS
The Group enters into derivative transactions, principally interest rate
swaps and currency swaps. The purpose of these transactions is to manage the
interest rate and currency risk arising from the Group's operations and its
sources of finance.
The net profit reflected is attributable mainly to the gain on derivatives
entered into for hedging purposes. Such recognition is necessary due to
non-compliance with the requirement for contemporaneous hedge documentation
under Statement of Financial Accounting Standards No. 133 "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS NO. 133"). Because the
hedge documentation requirements were not met, the Group is required to record
the changes in the fair value of the derivatives in the income statement. Under
UK GAAP, which is the basis of preparation of the statutory accounts of the
Group, recognition in the income statement of these unrealized gains/losses on
derivatives is not required. As a result, the consolidated net income, if
measured under UK GAAP, would have reported a net income of (pound)11,000.
Interest rate risk - interest is received on the advance made by the Group
at various underlying rates. The assets are financed by securities on which
interest is payable at different variable rates. The Group's policy is to match
this interest income and expense by use of interest rate swaps.
Currency risk - all of the Group's assets and associated income are
denominated in Pounds Sterling, although some of the asset-backed notes issued
by Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc and Granite Mortgages
02-1 plc and associated interest expense are denominated in US dollars and
Euros. The Group's policy is to match this currency income and expense by the
use of currency swaps.
(a) Maturity profile of financial liabilities
JUNE 30 JUNE 30 JUNE 30
2002 2002 2002
DEBT OTHER TOTAL
SECURITIES LIABILITIES LIABILITIES
(POUND)'000 (POUND)'000 (POUND)'000
----------- ----------- -----------
Within 1 year or less or on demand -- 295,875 295,875
More than 1 year but not more than 2 years -- -- --
More than 2 years but not more than 5 years -- -- --
More than 5 years 4,895,341 53,622 4,948,963
--------- --------- ---------
Total 4,895,341 349,497 5,244,838
========= ========= =========
325
APPENDIX I (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
DECEMBER 31 DECEMBER 31 DECEMBER 31
2001 2001 2001
DEBT OTHER TOTAL
SECURITIES LIABILITIES LIABILITIES
(POUND)'000 (POUND)'000 (POUND)'000
----------- ----------- -----------
Within 1 year or less or on demand -- 85,005 85,005
More than 1 year but not more than 2 years -- -- --
More than 2 years but not more than 5 years -- -- --
More than 5 years 2,885,645 13,618 2,899,263
Total 2,885,645 98,623 2,984,268
========= ========= =========
There are no material undrawn committed borrowing facilities for the Group.
(b) Interest rate profile of financial assets and liabilities
JUNE 30
JUNE 30 JUNE 30 2002
2002 2002 NON-INTEREST
TOTAL FLOATING RATE BEARING
(POUND)'000 (POUND)'000 (POUND)'000
----------- ------------- ------------
Assets 5,224,896 5,206,217 38,679
Liabilities and shareholders' equity 5,224,896 4,934,059 310,837
========= ========= =======
DECEMBER 31
DECEMBER 31 DECEMBER 31 2001
2001 2001 NON-INTEREST
TOTAL FLOATING RATE BEARING
(POUND)'000 (POUND)'000 (POUND)'000
----------- ------------- ------------
Assets 2,974,763 2,951,235 23,528
Liabilities and shareholders' equity 2,974,763 2,899,263 75,500
Benchmark rates for determining interest payments for the floating rate
assets and liabilities are given in the note to the accounts relevant to the
financial instrument type. All floating rate assets and liabilities reprice
within 3 months.
(c) Currency profile
Taking into account the effect of derivative instruments, the Group did not
have any financial exposure to foreign exchange gains or losses on monetary
assets and monetary liabilities denominated in foreign currencies at June 30,
2002 or at December 31, 2001.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
Disclosures in the table below are in accordance with SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments ".
Fair values have been estimated using quoted marked prices where available.
Where no ready markets exist and hence quoted market prices are not available,
appropriate techniques are used to estimate fair values which take account of
the characteristics of the instruments, including the expected future cash
flows, market interest rates and prices available for similar instruments.
326
APPENDIX I (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 2002 TO
JUNE 30, 2002
JUNE 30
2002 JUNE 30 JUNE 30
CARRYING 2002 2002
AMOUNT FAIR VALUE DIFFERENCE
(POUND)'000 (POUND)'000 (POUND)'000
----------- ----------- -----------
NON-TRADING ASSETS
Cash and cash equivalents 343,935 343,935 --
Accounts receivable 38,679 38,679 --
Advance to Granite Finance Trustees Limited 4,862,282 4,862,282 --
NON-TRADING LIABILITIES
Asset-backed notes (4,895,341) (5,103,662) 208,321
Derivatives (221,780) (221,780) --
Other liabilities (127,717) (127,717) --
DECEMBER 31
2001 DECEMBER 31 DECEMBER 31
CARRYING 2001 2001
AMOUNT FAIR VALUE DIFFERENCE
(POUND)'000 (POUND)'000 (POUND)'000
----------- ----------- -----------
NON-TRADING ASSETS
Cash and cash equivalents 185,562 185,562 --
Accounts receivable 23,528 23,528 --
Advance to Granite Finance Trustees Limited 2,765,673 2,765,673 --
NON-TRADING LIABILITIES
Asset-backed notes (2,885,645) (2,892,066) 6,421
Derivatives (39,796) (39,796) --
Other liabilities (58,827) (58,827) --
The Group had no trading assets or liabilities at June 30, 2002 or June 30,
2001.
The advance to Granite Finance Trustees Limited has been valued based on
future cash flows and the movement in the derivatives. The asset-backed notes
have been valued based on third-party quotes for the trading price thereof as at
June 30, 2002.
Northern Rock plc had originally entered into fixed rate swaps with
external third parties to mitigate the interest rate risks associated with the
fixed rate mortgage loans in the mortgages trust. A blended rate was then
calculated for the swaps weighted by value in respect of the different mortgage
loan products in the mortgages trust, as each of such products carried a
different interest rate relative to each other mortgage loan product. This rate
was then applied to the fixed rate mortgage loans in the mortgages trust for the
swap between Northern Rock plc and Granite Mortgages 01-1 plc, Granite Mortgages
01-2 plc and Granite Mortgages 02-1 plc. The external swaps, which were retained
by Northern Rock plc, were revalued at market value on June 30, 2002 and the
revaluations as then applied to the swap between Northern Rock plc and Granite
Mortgages 01-1 plc, Granite Mortgages 01-2 plc and Granite Mortgages 02-1 plc to
revalue the derivative.
327
APPENDIX J
REPORT OF INDEPENDENT ACCOUNTANTS
"To the Board of Directors and Shareholders of Granite Finance Funding
Limited
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statement of income, consolidated statement of changes in
shareholders' equity and consolidated statement of cash flows present fairly, in
all material respects, the financial position of Granite Finance Funding Limited
and its subsidiaries (the "GROUP") at December 31, 2001, and the results of its
operations and its cash flows for the period from February 14, 2001, the date of
incorporation of Granite Finance Funding Limited, to December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Group's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers
Newcastle upon Tyne, England
September 12, 2002"
328
APPENDIX K
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD FROM FEBRUARY 14, 2001
(DATE OF INCORPORATION) TO DECEMBER 31, 2001
11 MONTHS
ENDED
DECEMBER 31
2001
NOTE (POUND)'000
---- -----------
OTHER REVENUE
Other income 854
Interest income 3 97,772
--------
TOTAL OTHER REVENUE - CONTINUING OPERATIONS 98,626
========
COSTS AND EXPENSES
Administration expenses (1,850)
Interest expense 4 (93,772)
Unrealized loss on derivatives (39,796)
Foreign currency translation gain 7,250
Deferred purchase consideration 20,000
--------
TOTAL COSTS AND EXPENSES - CONTINUING OPERATIONS (108,168)
========
NET LOSS BEFORE TAXATION 5 (9,542)
--------
TAX ON NET LOSS 0
--------
NET LOSS (9,542)
========
The notes on the following pages form an integral part of these
consolidated financial statements.
329
APPENDIX L
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2001
DECEMBER 31
2001
NOTE (POUND)'000
---- -----------
ASSETS
CURRENT ASSETS
Cash at bank 185,562
Accounts receivable 7 23,528
---------
TOTAL CURRENT ASSETS 209,090
=========
INVESTMENTS AND OTHER ASSETS
Advance to Granite Finance Trustees Limited 6 2,765,673
---------
TOTAL INVESTMENTS AND OTHER ASSETS 2,765,673
=========
TOTAL ASSETS 2,974,763
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Other accounts payable and accrued expenses 8 45,209
Derivatives 13 39,796
---------
TOTAL CURRENT LIABILITIES 85,005
=========
LONG TERM DEBT
Asset-backed notes 2,885,645
Start-up loan 13,618
Deferred purchase consideration --
---------
TOTAL LONG TERM DEBT 9 2,899,263
=========
COMMON STOCK (authorized 100,000 shares of
(pound)1 each, issued and outstanding, 37,500
shares of(pound)1 each) 10 37
RETAINED DEFICIT (9,542)
---------
SHAREHOLDERS' EQUITY (9,505)
=========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2,974,763
=========
The notes on the following pages form an integral part of these
consolidated financial statements.
330
APPENDIX M
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD FROM
FEBRUARY 14, 2001 (DATE OF INCORPORATION) TO DECEMBER 31, 2001
11 MONTHS
ENDED
DECEMBER 31
2001
NOTE (POUND)'000
---- -----------
Net loss for the period (9,542)
Retained earnings brought forward --
------
RETAINED DEFICIT CARRIED FORWARD (9,542)
======
Common stock brought forward --
Shares issued in the period (37,500 ordinary
shares at(pound)1 per share) 37
------
COMMON STOCK CARRIED FORWARD 37
======
TOTAL SHAREHOLDERS' EQUITY (9,505)
======
The notes on the following pages form an integral part of these
consolidated financial statements.
331
APPENDIX N
GRANITE FINANCE FUNDING LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM FEBRUARY 14, 2001 (DATE
OF INCORPORATION) TO DECEMBER 31, 2001
11 MONTHS
ENDED
DECEMBER 31
2001
NOTE (POUND)'000
---- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period (9,542)
Increase in accounts receivable (16,002)
Increase in accounts payable 45,209
Gain on translation of foreign currency translation (7,250)
Decrease in deferred consideration (20,000)
Unrealized loss on derivative 39,796
---------
NET CASH FROM OPERATING ACTIVITIES 32,211
=========
CASH FLOWS FROM INVESTING ACTIVITIES
Payment of advance to Granite Finance Trustees Limited (2,980,000)
Proceeds from repayment of advance to Granite Finance
Trustees Limited 234,327
---------
NET CASH USED IN INVESTING ACTIVITIES (2,745,673)
=========
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of asset-backed notes 3,010,000
Repayment of asset-backed notes (117,109)
Proceeds from start-up loan 13,617
Payment of issue costs of asset-backed notes (7,521)
Proceeds from issue of share capital 37
---------
NET CASH FROM FINANCING ACTIVITIES 2,899,024
=========
Net increase in cash and cash equivalents 185,562
Cash and cash equivalent at beginning of the period --
---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 185,562
=========
SUPPLEMENTAL CASHFLOW INFORMATION:
Interest paid 52,562
---------
Taxes paid --
---------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Deferred consideration 20,000
---------
Reserve fund 10,000
---------
The notes on the following pages form an integral part of these
consolidated financial statements.
332
APPENDIX O
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 14, 2001
TO DECEMBER 31, 2001
1. GENERAL INFORMATION
Granite Finance Funding Limited (the "COMPANY") was incorporated on
February 14, 2001 as a company with limited liability and domiciled in Jersey
for the purposes of carrying on business. The Company commenced business on
March 26, 2001. Granite Finance Funding Limited and its subsidiaries, Granite
Mortgages 01-1 plc, Granite Mortgages 01-2 plc and Granite Mortgages 02-1 plc,
collectively comprise the "GROUP".
The Company borrows indirectly from the Euro markets and from the domestic
US market via its subsidiaries, Granite Mortgages 01-1 plc, Granite Mortgages
01-2 plc and Granite Mortgages 02-1 plc, which are public limited companies
organized under the laws of England and Wales and are wholly-owned by the
Company. The sole businesses of Granite Mortgages 01-1 plc, Granite Mortgages
01-2 plc and Granite Mortgages 02-1 plc are investment of the proceeds of the
issuance and sale of asset-backed notes by lending the proceeds thereof to the
Company.
The Group's capital and debt issuance proceeds are invested in the purchase
of a beneficial interest in a pool of mortgage loans and related security which
provide the funds used by the Company to pay interest and repay principal to
Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc and Granite Mortgages
02-1 plc under the intercompany loans. Granite Mortgages 02-1 plc commenced
trading during March 2002. The pool of mortgages is owned by beneficiaries of a
trust administered by Granite Finance Trustees Limited, a fellow subsidiary of
Granite Finance Holdings Limited.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of these
consolidated financial statements are set out below:
(a) Basis of presentation
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("US GAAP") and in Pounds Sterling ("(POUND)"), the currency of the United
Kingdom, which is the Group's operating currency. The financial statements are
reported in accordance with US GAAP due to the Group's annual reporting
requirements under the United States Securities Exchange Act of 1934, as amended
(the "SECURITIES EXCHANGE ACT"). The statutory accounting records of the Group
are prepared and maintained under generally accepted accounting principles in
the United Kingdom ("UK GAAP").
(b) Consolidation
The consolidated financial statements include the accounts of Granite
Finance Funding Limited and its wholly-owned subsidiaries, Granite Mortgages
01-1 plc, Granite Mortgages 01-2 plc and Granite Mortgages 02-1 plc. All
intercompany transactions and balances have been eliminated on consolidation.
(c) Foreign currency translation
All foreign currency assets and liabilities are translated into Pounds
Sterling at the exchange rates prevailing at the end of the period. Interest
income and expense denominated in foreign currencies are translated into Pounds
Sterling at the exchange rates in force when the transaction arises. Foreign
currency translation effects are reflected on the face of the income statement.
Foreign currency investment and financing activities are economically hedged
into pounds sterling to offset exposures to fluctuating
333
APPENDIX O (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 14, 2001
TO DECEMBER 31, 2001
currency exchange rates. Although these instruments offset exposures they do not
qualify for hedge accounting under Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
NO. 133").
(d) Derivatives
Derivative instruments comprise interest rate swaps used to offset interest
rate exposure between differing floating rates on assets and liabilities.
Additionally derivatives comprise interest rate swaps and currency swaps, and
are used by the Group to minimize interest rate exposures between fixed and
floating rates assets and liabilities and currency risk associated with its
financing activities. Although these instruments are effective as hedges from an
economic perspective, they do not qualify for hedge accounting under SFAS No.
133 due to the differing and unknown maturities of the underlying mortgage loan
assets and the lack of contemporaneous documentation requirements under SFAS No.
133. All derivatives are recorded on the balance sheet at fair value with
changes in fair value reflected in the income statement. All derivatives are
transacted simultaneously with the purchase or issuance of the underlying
funding instrument. The derivatives are not held for trading purposes.
(e) Interest income and expense
Interest income and expense are recognized in the consolidated financial
statements on an accrual basis.
(f) Cash and cash equivalents
Cash and cash equivalents comprise amounts due from banks on demand and
dealing securities with original maturities of less than 90 days.
(g) Funding instruments
Asset-backed notes are stated at adjusted cost on the balance sheet.
Premiums/discounts are amortized to the maturity date of each issue using the
straight-line method, which is not materially different from the interest
method.
(h) Distribution policy
Distributions to shareholders and holders of capital notes are accounted
for when approved by the Board of Directors.
(i) Advance to Granite Finance Trustees Limited and related provisions
The advance to Granite Finance Trustees Limited is carried at cost, being
cash plus initial deferred consideration, of the Company's initial contributions
to Granite Finance Trustees Limited in consideration for the purchase of the
Company's beneficial interest in the mortgages trust less capital repayments
received and Funding's share of other non-cash movements in the underlying
mortgage loans comprising the mortgages trust. Specific provision for loss is
made at such time as it is determined that an impairment has occurred. As of
December 31, 2001 there was no specific provision for losses on the advance
because none of the underlying mortgage loans are considered to be impaired.
(j) Issue costs
The portion of the direct costs associated with the issue of the notes by
Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc and Granite Mortgages
02-1 plc that are attributable to the Group are capitalized and are amortized
over the expected life of the notes.
334
APPENDIX O (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 14, 2001
TO DECEMBER 31, 2001
(k) Deferred purchase consideration and mortgage premium
Deferred purchase consideration represents amounts owed to Northern Rock
plc under the Mortgage Sale Agreement dated March 26, 2001 (as amended) to be
paid out of realized income of the Group, together with the initial deferred
consideration amount of (pound)20 million. The deferred consideration is payable
by Granite Finance Funding Limited out of future revenue cashflows to Granite
Finance Trustees Limited, who in turn will pay this to Northern Rock plc.
Deferred consideration is payable out of pre tax profits and is only payable to
the extent that adequate cashflows are generated.
(l) Use of estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingencies at the balance sheet date and the
reported amounts of revenues and expenses in the reporting period. Actual
results may differ from the estimates used in the financial statements.
3. INTEREST INCOME
11 MONTHS
ENDED
DECEMBER 31
2001
(POUND)'000
-----------
Interest income on the advance to Granite Finance
Trustees Limited 92,618
Interest income on cash at bank 5,154
------
Total 97,772
======
4. INTEREST EXPENSE
11 MONTHS
ENDED
DECEMBER 31
2001
(POUND)'000
-----------
Interest expense on the asset-backed notes 92,281
Amortization of issue costs 1,192
Interest expense on the start-up loan 299
------
Total 93,772
======
335
APPENDIX O (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 14, 2001
TO DECEMBER 31, 2001
5. NET LOSS BEFORE TAXATION
Net loss before taxation is stated after charging:
11 MONTHS
ENDED
DECEMBER 31
2001
(POUND)'000
-----------
Audit fees 30
==
The Group has no employees. No emoluments were paid to the Directors by the
Group during the period.
6. ADVANCE TO GRANITE FINANCE TRUSTEES LIMITED
11 MONTHS
ENDED
DECEMBER 31
2001
(POUND)'000
------------
Balance brought forward --
Advance to Granite Finance Trustees Limited 2,980,000
Adjustment to initial acquired value 20,000
Repayment of advance to Granite Finance Trustees Limited (233,778)
Other movement in the advance to Granite
Finance Trustees Limited (549)
---------
Total 2,765,673
=========
The advance is secured by a pool of mortgage loans that have been equitably
assigned by Northern Rock plc to Granite Finance Trustees Limited, as mortgages
trustee of the mortgages trust. Granite Finance Trustees Limited uses a portion
of the interest and principal payments that it receives on the mortgage loans
held by it in trust to repay principal and interest amounts on the loan from the
Group.
The Group and Northern Rock plc are beneficially entitled to all of the
trust property in accordance with their respective shares in the trust.
The payment of interest and principal on the advance to Granite Finance
Trustees Limited is dependent upon payment of interest and principal under the
mortgage loans held by the trust administered by Granite Finance Trustees
Limited, and is therefore subject to the risk of non-payment of the mortgage
loans. All of the underlying mortgage loans in the trust administered by Granite
Finance Trustees Limited were originated by Northern Rock plc and the following
factors mitigate the risks associated with the failure of customers to settle
financial obligations:
o the use of sophisticated credit scoring systems to differentiate the
credit risk associated with residential mortgage loans;
o emphasis on next time buyers and remortgage customers relative to
first time buyers as in Northern Rock's experience customers who have
proven repayment records represent lower risk;
336
APPENDIX O (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 14, 2001
TO DECEMBER 31, 2001
o geographic spread - distribution channels for new residential mortgage
lending are designed to avoid excessive reliance on any single
geographic region; and
o size of loan relative to value of the property - Northern Rock's
current policy is for at least 60% of new residential mortgage lending
to have loan to value ratios of 90% or lower.
All of the underlying mortgage assets are secured on properties in England
or Wales and hence the Group is dependent upon the state of the United Kingdom
economy and market interest rates. There can be no assurance that a weakening in
the United Kingdom economy will not have a material effect on the Company's
future performance.
7. ACCOUNTS RECEIVABLE
DECEMBER 31
2001
(POUND)'000
-----------
Accrued interest income 1,623
Issue costs 7,027
Amounts due from Granite Finance Trustees Limited 14,878
------
Total 23,528
======
Other accounts receivable for the Group includes (pound)7,027,000 of
unamortised issue costs of which (pound)4,868,000 will be charged after more
than one year. These costs are paid by the Group in connection with the issue of
asset-backed notes.
8. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31
2001
(POUND)'000
-----------
Accrued interest expense 31,878
Accruals and other accounts payable 13,331
------
Total 45,209
======
337
APPENDIX O (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 14, 2001
TO DECEMBER 31, 2001
9. LONG TERM DEBT
DECEMBER 31
2001
(POUND)'000
------------
Asset-backed notes 2,885,645
Start up loan 13,618
Deferred purchase consideration --
---------
Total 2,899,263
=========
Interest payable on the start-up loans is based on 3-month LIBOR which
resets on January 21, 2002. At December 31, 2001 3-month LIBOR had previously
fixed at 4.4175% in relation to (pound)4.7 million of the start-up loan and had
previously fixed at 4.5089% in relation to the remaining start-up loan.
The payment of interest and principal on the asset-backed notes issued by
Granite Mortgages 01-1 plc, Granite Mortgages 01-2 plc and Granite Mortgages
02-1 plc is dependent upon each of those companies receiving from the Company
payment of interest and principal under the intercompany loans made to the
Company. The Company's payment of interest and principal under the intercompany
loan is dependent upon the Company receiving from Granite Finance Trustees
Limited payment of interest and principal under the advance to Granite Finance
Trustees Limited. As both repayment of the advance and repayment of the
asset-backed notes are ultimately dependent upon payment of interest and
principal under the mortgages loans held by the trust administered by Granite
Finance Trustees Limited, the advance and the asset-backed notes are subject to
the risk of non-repayment of the mortgage loans.
(a) Asset-backed notes - Granite Mortgages 01-1 plc
MARGIN
MARGIN OVER
OVER LIBOR
LIBOR TO AFTER DECEMBER 31
JANUARY JANUARY 2001
2008 2008 (POUND)'000
--------- --------- -----------
Series 1 Class A1 Floating Rate Notes January 2011 0.12% pa 0.24% pa 410,516
Series 1 Class A2 Floating Rate Notes January 2026 0.21% pa 0.42% pa 507,106
Series 1 Class B Floating Rate Notes January 2041 0.40% pa 0.80% pa 34,497
Series 1 Class C Floating Rate Notes January 2041 1.40% pa 2.40% pa 46,572
Series 2 Class A Floating Rate Notes January 2041 0.24% pa 0.48% pa 350,000
Series 2 Class B Floating Rate Notes January 2041 0.40% pa 0.80% pa 10,000
Series 2 Class C Floating Rate Notes January 2041 1.40% pa 2.40% pa 15,000
---------
Total 1,373,691
=========
338
APPENDIX O (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 14, 2001
TO DECEMBER 31, 2001
The notes mature in more than 5 years, but repayments can be made before
the maturity of the notes. The notes are subject to variable rates of interest.
The Series 1 notes are denominated in US Dollars and the Series 2 notes in
Pounds Sterling. Interest is payable on the notes based on USD 3-month LIBOR for
the Series 1 notes and Sterling 3-month LIBOR for the Series 2 notes. At the
balance sheet date the rates in force were 2.39% for USD 3-month LIBOR and
4.4175% for Sterling 3-month LIBOR.
Both USD and Sterling 3-month LIBOR re-price quarterly, and the next
re-price date after the balance sheet date was January 20, 2002.
(b) Asset-backed notes - Granite Mortgages 01-2 plc
MARGIN
MARGIN OVER
OVER LIBOR
LIBOR TO AFTER DECEMBER 31
OCTOBER OCTOBER 2001
2006 2006 (POUND)'000
-------- -------- ------------
Series 1 Class A1 Floating Rate Notes January 2021 0.23% pa 0.46% pa 896,924
Series 1 Class B Floating Rate Notes January 2041 0.40% pa 0.80% pa 30,012
Series 1 Class C Floating Rate Notes January 2041 1.38% pa 2.38% pa 40,018
Series 2 Class A Floating Rate Notes January 2041 0.25% pa 0.50% pa 500,000
Series 2 Class B Floating Rate Notes January 2041 0.42% pa 0.84% pa 15,000
Series 2 Class C Floating Rate Notes January 2041 1.40% pa 2.40% pa 20,000
Series 2 Class D Floating Rate Notes January 2041 4.60% pa 5.60% pa 10,000
---------
Total 1,511,954
=========
The notes mature in more than 5 years, but repayments can be made before
the maturity of the notes. The notes are subject to variable rates of interest.
The Series 1 notes are denominated in US Dollars and the Series 2 notes in
Pounds Sterling. Interest is payable on the notes based on USD 3-month LIBOR for
the Series 1 notes and Sterling 3-month LIBOR for the Series 2 notes. At the
balance sheet date the rates in force were 2.58218% for USD 3-month LIBOR and
4.5089% for Sterling 3-month LIBOR.
Both USD and Sterling 3-month LIBOR re-price quarterly, and the next
re-price date after the balance sheet date was July 20, 2002.
10. COMMON STOCK
DECEMBER 31
2001
(POUND)'000
-----------
AUTHORISED:
100,000 Ordinary shares of (pound)1 each 37
==
CALLED UP, ALLOTTED AND FULLY PAID SHARE CAPITAL
37,500 Ordinary shares of (pound)1 each 37
==
339
APPENDIX O (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 14, 2001
TO DECEMBER 31, 2001
11. CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES
There were no outstanding capital commitments, guarantees or contingent
liabilities at December 31, 2001.
12. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to
control the other party or exercise significant influence over the other party
in making financial or operational decisions.
The Company, which is a special purpose company, is controlled by its
board of directors. The board of directors consists of three directors. Two of
the Company's three directors are provided by Mourant & Co. Capital (SPV)
Limited, the principal activity of which is providing directors and corporate
management services for special purpose companies. The third director of the
Company is an employee of Northern Rock plc. The Company pays a corporate
services fee pursuant to a corporate services agreement to Mourant & Co. Capital
(SPV) Limited in connection with its provision of corporate management services.
The fees payable to these directors for providing their services are immaterial
in the context of these consolidated financial statements and of the individual
directors.
The total amount paid by the Group to Northern Rock plc for administration
and cash management services during the period ended December 31, 2001 was
(pound)72,000.
Northern Rock plc provides the interest rate swap in connection with the
notes issued by Granite Mortgages 01-1 plc and Granite Mortgages 01-2 plc.
Northern Rock plc is one of a number of counterparties used by the group in the
normal course of its business. Northern Rock does not hold any capital of the
Group.
The Company receives all of its income other than bank interest from
Granite Finance Trustees Limited. During the period the Company received
(pound)80 million of revenue from Granite Finance Trustees Limited together with
(pound)231 million of principal. The outstanding loan balance due from Granite
Finance Trustees Limited at the period end was (pound)2,766 million with an
additional (pound)15 million due in relation to payments collected by Granite
Finance Trustees Limited not yet paid over.
13. DERIVATIVES AND FINANCIAL INSTRUMENTS
The Group enters into derivative transactions, principally interest rate
swaps and currency swaps. The purpose of these transactions is to manage the
interest rate and currency risk arising from the Group's operations and its
sources of finance.
The net loss reflected is attributable to the recognition of losses on
derivatives entered into for hedging purposes. Such recognition is necessary due
to non-compliance with the requirement for contemporaneous hedge documentation
under Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS NO. 133"). Because the
hedge documentation requirements were not met, the Group is required to record
the changes in the fair value of the derivatives in the income statement. Under
UK GAAP, which is the basis of preparation of the statutory accounts of the
Group, recognition in the income statement of these unrealized losses on
derivatives would not be required. As a result, the consolidated net income, if
measured under UK GAAP, would have reported a net income of (pound)11,000.
340
APPENDIX O (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 14, 2001
TO DECEMBER 31, 2001
Interest rate risk - interest is received on the advance made by the Group
at various underlying rates. These assets are financed by securities on which
interest is payable at different variable rates. The Group's policy is to match
this interest income and expense by use of interest rate swaps.
Currency risk - all of the Group's assets and associated income are
denominated in Pounds Sterling, although some of the asset-backed notes issued
by Granite Mortgages 01-1 plc and Granite Mortgages 01-2 plc and associated
interest expense are denominated in US dollars. The Group's policy is to match
this currency income and expense by the use of currency swaps.
(a) Maturity profile of financial liabilities
DECEMBER 31 DECEMBER 31
DECEMBER 31 2001 2001
2001 DEBT OTHER TOTAL
SECURITIES LIABILITIES LIABILITIES
(POUND)'000 (POUND)'000 (POUND)'000
---------- ------------ -----------
Within 1 year or less or on demand -- 85,005 85,005
More than 1 year but not more than 2
years -- -- --
More than 2 years but not more than 5
years -- -- --
More than 5 years 2,885,645 13,618 2,899,263
--------- ------ ---------
Total 2,885,645 98,623 2,984,268
========= ====== =========
There are no material undrawn committed borrowing liabilities for the Group.
341
APPENDIX O (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 14, 2001
TO DECEMBER 31, 2001
(b) Interest rate profile of financial assets and liabilities
DECEMBER 31
DECEMBER 31 DECEMBER 31 2001
2001 2001 NON-INTEREST
TOTAL FLOATING RATE BEARING
(POUND)'000 (POUND)'000 (POUND)'000
------------ ------------- ------------
Assets 2,974,763 2,951,235 23,528
Liabilities and shareholders' equity 2,974,763 2,899,263 75,500
========= ========= ======
Benchmark rates for determining interest payments for the floating rate
assets and liabilities are given in the note to the accounts relevant to the
financial instrument type. All floating rate assets and liabilities reprice
within 3 months.
(c) Currency profile
Taking into account the effect of derivative instruments, the Group did
not have any financial exposure to foreign exchange gains or losses on monetary
assets and monetary liabilities denominated in foreign currencies at December
31, 2001.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
Disclosures in the table below are in accordance with SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments ".
Fair values have been estimated using quoted marked prices where
available. Where no ready markets exist and hence quoted market prices are not
available, appropriate techniques are used to estimate fair values which take
account of the characteristics of the instruments, including the expected future
cash flows, market interest rates and prices available for similar instruments.
DECEMBER 31 DECEMBER 31
2001 2001 DECEMBER 31
CARRYING FAIR 2001
AMOUNT VALUE DIFFERENCE
(POUND)'000 (POUND)'000 (POUND)'000
----------- ----------- -----------
NON-TRADING ASSETS
Cash and cash equivalents 185,562 185,562 --
Accounts receivable 23,528 23,528 --
Advance to Granite Finance Trustees
Limited 2,765,673 2,765,673 --
NON-TRADING LIABILITIES
Asset-backed notes (2,885,645) (2,892,066) 6,421
Other liabilities (58,827) (58,827) --
Derivatives (39,796) (39,796) --
The Group had no trading assets or liabilities at December 31, 2001.
The advance to Granite Finance Trustees Limited has been valued based on
future cash flows and the movement in the derivatives. The asset-backed notes
have been valued based on third-party quotes for the trading price thereof as at
December 31, 2001.
342
APPENDIX O (CONT'D)
GRANITE FINANCE FUNDING LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM FEBRUARY 14, 2001
TO DECEMBER 31, 2001
Northern Rock plc had originally entered into fixed rate swaps with
external third parties to mitigate the interest rate risks associated with the
fixed rate mortgage loans in the mortgages trust. A blended rate was then
calculated for the swaps weighted by value in respect of the different mortgage
loan products in the mortgages trust, as each of such products carried a
different interest rate relative to each other mortgage loan product. This rate
was then applied to the fixed rate mortgage loans in the mortgages trust for the
swap between Northern Rock plc and Granite Mortgages 01-1 plc and Granite
Mortgages 01-2 plc. The external swaps, which were retained by Northern Rock
plc, were revalued at market value on December 31, 2001 and the revaluations as
then applied to the swap between Northern Rock plc and Granite Mortgages 01-1
plc to revalue the derivative.
15. POST BALANCE SHEET EVENTS
During March 2002, the Group made a further advance of (pound)2,420
million to Granite Finance Trustees Limited, financed by an issue of
asset-backed notes by Granite Mortgages 02-1 plc.
On July 11, 2002, Granite Finance Funding Limited subscribed for 100% of
the share capital of Granite Mortgages 02-2 plc for a consideration of
(pound)50,000, of which (pound)12,500 was paid.
343
REGISTERED OFFICE OF THE ISSUER
GRANITE MORTGAGES 02-2 PLC
Fifth Floor
100 Wood Street
London EC2V 7EX
ADMINISTRATOR
NORTHERN ROCK PLC
Northern Rock House
Gosforth
Newcastle upon Tyne
NE3 4PL
NOTE TRUSTEE AND SECURITY TRUSTEE PRINCIPAL PAYING AGENT, COMMON DEPOSITARY
AND REGISTRAR
THE BANK OF NEW YORK
One Canada Square CITIBANK, N.A.
48th Floor 5 Carmelite Street
London E14 5AL London EC4Y 0PA
US PAYING AGENT AGENT BANK
CITIBANK, N.A. CITIBANK, N.A.
14th Floor Zone 3 5 Carmelite Street
111 Wall Street London EC4Y 0PA
New York, New York 10043
LEGAL ADVISERS TO THE UNDERWRITERS, THE MANAGERS, THE NOTE TRUSTEE
AND THE SECURITY TRUSTEE
as to English and US law
ALLEN & OVERY
One New Change
London EC4M 9QQ
LEGAL ADVISERS TO THE ISSUER AND THE ADMINISTRATOR
as to English and US law
SIDLEY AUSTIN BROWN & WOOD
1 Threadneedle Street
London EC2R 8AW
LEGAL ADVISERS TO FUNDING AND THE MORTGAGES TRUSTEE
as to Jersey law
MOURANT DU FEU & JEUNE
4th Floor, 35 New Bridge Street
Blackfriars
London EC4V 6BW
AUTHORIZED ADVISOR
SALOMON BROTHERS INTERNATIONAL LIMITED
Citigroup Centre
Canada Square
Canary Wharf
London E14 5LB
THROUGH AND INCLUDING DECEMBER 11, 2002, ALL DEALERS EFFECTING TRANSACTIONS IN
THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
GRANITE MORTGAGES 02-2 PLC
$650,000,000 series 1 class A1 floating rate notes due 2017
$1,150,000,000 series 1 class A2 floating rate notes due 2043
$60,000,000 series 1 class B floating rate notes due 2043
$88,000,000 series 1 class C floating rate notes due 2043
---------------
PROSPECTUS
---------------
JOINT UNDERWRITERS FOR THE SERIES 1 NOTES
SALOMON SMITH BARNEY JPMORGAN
LEHMAN BROTHERS MERRILL LYNCH & CO. UBS WARBURG
SEPTEMBER 12, 2002
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Following are the estimated expenses* (expressed in US dollars based on an
exchange rate of US$1.00=GB(pound)0.6983), other than underwriting discounts and
commissions, to be incurred in connection with the offering and distribution of
the securities being registered under this registration statement:
Securities and Exchange Commission registration fee ............... $ 179,216
Expenses of qualification under state securities laws (including
legal fees) ..................................................... $ 0
Printing and engraving expenses ................................... $ 145,000
Legal fees and expenses ........................................... $1,350,000
Accounting fees and expenses ...................................... $ 115,000
Trustee's fees and expenses ....................................... $ 7,500
Rating agency fees ................................................ $ 515,000
Miscellaneous ..................................................... $ 100,000
----------
Total ............................................................. $2,575,936
==========
- ----------
* All amounts are estimates except for the SEC registration fee
ITEM 32. SALES TO SPECIAL PARTIES
Not applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
GRANITE FINANCE 02-2 PLC (THE "ISSUER")
Subject to the provisions of the Companies Act 1985, the laws which govern
the organization of the issuer provide for every director or other officer or
auditor of the issuer to be indemnified out of the assets of the issuer against
any liability incurred by him in defending any proceedings, whether civil or
criminal, in which judgment is given in his favor or in which he is acquitted or
in connection with any application in which relief is granted to him by the
court from liability for negligence, default, breach of duty or breach of trust
in relation to the affairs of the issuer.
GRANITE FINANCE FUNDING LIMITED ("FUNDING")
Subject to the provisions of the Companies (Jersey) Law 1991, the laws
which govern the organization of Funding provide for every director or other
officer or auditor of Funding to be indemnified out of the assets of Funding
against any liability incurred by him in defending any proceedings, whether
civil or criminal, in which judgment is given in his favor or in which he is
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acquitted or in connection with any application in which relief is granted to
him by the court from liability for negligence, default, breach of duty or
breach of trust in relation to the affairs of Funding.
GRANITE FINANCE TRUSTEES LIMITED (THE "MORTGAGES TRUSTEE")
Subject to the provisions of the Companies (Jersey) Law 1991, the laws
which govern the organization of the mortgages trustee provide for every
director or other officer or auditor of the mortgages trustee to be indemnified
out of the assets of the mortgages trust against any liability incurred by him
in defending any proceedings, whether civil or criminal, in which judgment is
given in his favor or in which he is acquitted or in connection with any
application in which relief is granted to him by the court from liability for
negligence, default, breach of trust in relation to the affairs of the mortgages
trustee.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
Financial statements for Granite Finance Funding Limited dated December 31,
2001 and June 30, 2002 have been filed as part of this Registration Statement.
In addition, financial statements of Granite Mortgages 02-2 plc dated September
9, 2002 have been filed as part of this Registration Statement. There will be no
additional schedules to the financial statements.
(B) EXHIBITS:
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- ----------- ---------------------- -----------
1.1 Form of Underwriting Agreement*
3.1.1 Memorandum and Articles of Association of Granite
Mortgages 02-2 plc*
3.1.2 Memorandum and Articles of Association of Granite
Finance Funding Limited*
3.1.3 Memorandum and Articles of Association of Granite
Finance Trustees Limited*
4.1.1 Form of Second Amended Intercompany Loan Terms and Conditions*
4.1.2 Form of Issuer Intercompany Loan Confirmation*
4.2 Form of Fourth Amended and Restated Mortgages Trust Deed*
4.3 Form of Third Amended and Restated Mortgage Sale Agreement*
4.4 Form of Issuer Deed of Charge*
4.5.1 Form of Funding Deed of Charge*
4.5.2 Form of Deed of Accession to Funding Deed of Charge*
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4.6 Form of Issuer Trust Deed*
4.7 Form of Issuer Paying Agent and Agent Bank Agreement*
4.8 Form of First Amended and Restated Cash Management Agreement*
4.9 Form of Issuer Cash Management Agreement*
4.10 Form of First Amended and Restated Administration Agreement*
4.11 Form of Issuer Post-Enforcement Call Option Agreement*
5.1 Opinion of Sidley Austin Brown & Wood as to legality*
8.1 Opinion of Sidley Austin Brown & Wood as to U.S. tax matters*
8.2 Opinion of Sidley Austin Brown & Wood as to U.K. tax matters*
8.3 Opinion of Mourant du Feu & Jeune as to Jersey tax matters*
10.1 Form of Issuer Basis Rate Swap Agreement*
10.2 Form of Issuer Dollar Currency Swap Agreement*
10.3 Form of Issuer Euro Currency Swap Agreement*
10.4 Form of Issuer Start-up Loan Agreement*
10.5.1 Form of Third Amended and Restated Master Definitions Schedule*
10.5.2 Form of Issuer Master Definitions Schedule*
10.6.1 Form of Issuer Corporate Services Agreement*
10.6.2 Form of Corporate Services Agreement (Mortgage Trustee)*
10.6.3 Form of Corporate Services Agreement (Funding)*
23.1 Consent of Sidley Austin Brown & Wood (included in
Exhibits 5.1, 8.1 and 8.2)*
23.2 Consent of Mourant du Feu & Jeune (included in
Exhibit 8.3)*
23.3 Consent of Auditors **
23.4 Consent of Auditors
25.1 Statement of Eligibility of Trustee (Form T-1)*
- ---------
* previously filed with the Commission on August 30, 2002
** previously filed with the Commission on September 12, 2002
ITEM 37. UNDERTAKINGS
A. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of each of the registrants pursuant to the
foregoing provisions, or otherwise, each registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by any of the registrants of expenses incurred or paid by
a director, officer or controlling person of such registrant in the
successful defense of any action, suit or proceeding) is asserted
against any of the registrants by such director, officer or
controlling person in connection with the securities being registered,
the relevant registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether
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such indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
B. Each of the undersigned registrants hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrants pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this registration
statement or amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized on September 19, 2002
GRANITE MORTGAGES 02-2 PLC
By: L.D.C. Securitisation Director No. 1 Limited
By: /s/ CLIVE RAKESTROW
---------------------------------
Name: Clive Rakestrow
Title: Director
GRANITE FINANCE FUNDING LIMITED
By: /s/ NIGEL C. BRADLEY
-------------------------------------
Name: Nigel C. Bradley
Title: Director
GRANITE FINANCE TRUSTEES LIMITED
By: /s/ RICHARD GOUGH
-------------------------------------
Name: Richard Gough
Title: Director
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Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment thereto has been signed by the following
persons in the capacities and on the dates indicated.
GRANITE MORTGAGES 02-2 PLC
SIGNATURE TITLE DATE
- --------- ----- ----
L.D.C. SECURITISATION DIRECTOR NO. 1 LIMITED Director September 19, 2002
By: /s/ CLIVE RAKESTROW
---------------------------------
Name: Clive Rakestrow
Title: Director
L.D.C. SECURITISATION DIRECTOR NO. 2 LIMITED Director September 19, 2002
By: /s/ JULIAN MASON-JEBB
---------------------------------
Name: Julian Mason-Jebb
Title: Director
[Additional Signature Pages Follow]
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GRANITE FINANCE FUNDING LIMITED
SIGNATURE TITLE DATE
- --------- ----- ----
By: /s/ NIGEL C. BRADLEY Director September 19, 2002
---------------------------------
Name: Nigel C. Bradley
By: /s/ JONATHAN CLEMSON WALKER Director September 19, 2002
---------------------------------
Name: Jonathan Clemson Walker
[Additional Signature Pages Follow]
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GRANITE FINANCE TRUSTEES LIMITED
SIGNATURE TITLE DATE
- --------- ----- ----
By: /s/ RICHARD GOUGH Director September 19, 2002
---------------------------------
Name: Richard Gough
By: /s/ NICOLA DAVIES Director September 19, 2002
---------------------------------
Name: Nicola Davies
By: /s/ GARETH PAUL ESSEX-CATER Director September 19, 2002
---------------------------------
Name: Gareth Paul Essex-Cater
[Additional Signature Page Follows]
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SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE MORTGAGES 02-2 PLC
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Granite Mortgages 02-2
plc, has signed this registration statement or amendment thereto in New York,
New York on September 19, 2002.
By: /s/ DONALD J. PUGLISI
---------------------------------
Name: Donald J. Puglisi
Office: Managing Director
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE FINANCE FUNDING LIMITED
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Granite Finance Funding
Limited, has signed this registration statement or amendment thereto in New
York, New York on September 19, 2002.
By: /s/ DONALD J. PUGLISI
---------------------------------
Name: Donald J. Puglisi
Office: Managing Director
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
GRANITE FINANCE TRUSTEES LIMITED
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Granite Finance Trustees
Limited, has signed the registration statement or amendment thereto in New York,
New York on September 19, 2002.
By: /s/ DONALD J. PUGLISI
---------------------------------
Name: Donald J. Puglisi
Office: Managing Director
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EXHIBIT INDEX
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- ----------- ---------------------- -----------
1.1 Form of Underwriting Agreement*
3.1.1 Memorandum and Articles of Association of Granite
Mortgages 02-2 plc*
3.1.2 Memorandum and Articles of Association of Granite
Finance Funding Limited*
3.1.3 Memorandum and Articles of Association of Granite
Finance Trustees Limited*
4.1.1 Form of Second Amended Intercompany Loan Terms and Conditions
4.1.2 Form of Issuer Intercompany Loan Confirmation*
4.2 Form of Fourth Amended and Restated Mortgages Trust Deed*
4.3 Form of Third Amended and Restated Mortgage Sale Agreement*
4.4 Form of Issuer Deed of Charge*
4.5.1 Form of Funding Deed of Charge*
4.5.2 Form of Deed of Accession to Funding Deed of Charge*
4.6 Form of Issuer Trust Deed*
4.7 Form of Issuer Paying Agent and Agent Bank Agreement*
4.8 Form of First Amended and Restated Cash Management Agreement*
4.9 Form of Issuer Cash Management Agreement*
4.10 Form of First Amended and Restated Administration Agreement*
4.11 Form of Issuer Post-Enforcement Call Option Agreement*
5.1 Opinion of Sidley Austin Brown & Wood as to legality*
8.1 Opinion of Sidley Austin Brown & Wood as to U.S. tax matters*
8.2 Opinion of Sidley Austin Brown & Wood as to U.K. tax matters*
8.3 Opinion of Mourant du Feu & Jeune as to Jersey tax matters*
10.1 Form of Issuer Basis Rate Swap Agreement*
10.2 Form of Issuer Dollar Currency Swap Agreement*
10.3 Form of Issuer Euro Currency Swap Agreement*
10.4 Form of Issuer Start-up Loan Agreement*
10.5.1 Form of Third Amended and Restated Master Definitions Schedule*
10.5.2 Form of Issuer Master Definitions Schedule*
10.6.1 Form of Issuer Corporate Services Agreement*
10.6.2 Form of Corporate Services Agreement (Mortgage Trustee)*
10.6.3 Form of Corporate Services Agreement (Funding)*
23.1 Consent of Sidley Austin Brown & Wood (included in*
Exhibits 5.1, 8.1 and 8.2)
23.2 Consent of Mourant du Feu & Jeune (included in*
Exhibit 8.3)
23.3 Consent of Auditors **
23.4 Consent of Auditors
25.1 Statement of Eligibility of Trustee (Form T-1)*
- ---------
* previously filed with the Commission on August 30, 2002
** previously filed with the Commission on September 12, 2002
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