NO. 333 -- 103179
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 2003
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------
AMENDMENT NO. 1 TO
FORM S-11
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
---------------------------
HOLMES FINANCING (NO. 7) PLC
(Exact name of Registrant 1 as specified in its charter)
ABBEY NATIONAL HOUSE, 2 TRITON SQUARE, REGENTS PLACE,
LONDON NW1 3AN, UNITED KINGDOM, (011-44) (0) 870 607-6000
(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
(Name, address and phone number of Registrant 1's agent for service)
HOLMES FUNDING LIMITED
(Exact name of Registrant 2 as specified in its charter)
ABBEY NATIONAL HOUSE, 2 TRITON SQUARE, REGENTS PLACE,
LONDON NW1 3AN, UNITED KINGDOM, (011-44) (0) 870 607-6000
(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
(Name, address and phone number of Registrant 2's agent for service)
HOLMES TRUSTEES LIMITED
(Exact name of Registrant 3 as specified in its charter)
ABBEY NATIONAL HOUSE, 2 TRITON SQUARE, REGENTS PLACE,
LONDON NW1 3AN, UNITED KINGDOM, (011-44) (0) 870 607-6000
(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
(Name, address and phone number of Registrant 3's agent for service)
---------------------------
Copies to:
Carole Jones
Abbey National Legal Services Marc Hutchinson, Esq. Thomas Jones, Esq.
Genesis House Slaughter and May Allen & Overy
301-349 Midsummer Blvd. One Bunhill Row One New Change
Milton Keynes MK9 2JE, UK London EC1Y 8YY, UK London EC4M 9QQ, UK
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. [box]
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. [box]
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. [box]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [box]
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CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT BEING OFFERING PRICE AGGREGATE
TITLE OF SECURITIES BEING REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1)
- ---------------------------------------------------------------------- ---------------- -------------- ----------------
$[750,000,000] series 1 class A Floating Rate notes due April 2004 $[750,000,000] 100% $[750,000,000]
$[22,500,000] series 1 class B Floating Rate notes due July 2040 $[22,500,000] 100% $[22,500,000]
$[38,250,000] series 1 class M Floating Rate notes due July 2040 $[38,250,000] 100% $[38,250,000]
$[1,250,000,000] series 2 class A Floating Rate notes due January 2008 $[1,250,000,000] 100% $[1,250,000,000]
$[37,500,000] series 2 class B Floating Rate notes due July 2040 $[37,500,000] 100% $[37,500,000]
$[63,750,000] series 2 class M Floating Rate notes due July 2040 $[63,750,000] 100% $[63,750,000]
$[500,000,000] series 3 class A Floating Rate notes due July 2020 $[500,000,000] 100% $[500,000,000]
series 1 term AAA advance(2)
series 1 term AA advance(2)
series 1 term A advance(2)
series 2 term AAA advance(2)
series 2 term AA advance(2)
series 2 term A advance(2)
series 3 term AAA advance(2)
Funding interest in the mortgages trust(2)
AMOUNT OF
REGISTRATION
TITLE OF SECURITIES BEING REGISTERED FEE(3)
- ---------------------------------------------------------------------- -------------
$[750,000,000] series 1 class A Floating Rate notes due April 2004 $[65,670.00]
$[22,500,000] series 1 class B Floating Rate notes due July 2040 $[1,975.09]
$[38,250,000] series 1 class M Floating Rate notes due July 2040 $[3,354.17]
$[1,250,000,000] series 2 class A Floating Rate notes due January 2008 $[112,780.00]
$[37,500,000] series 2 class B Floating Rate notes due July 2040 $[3,395.05]
$[63,750,000] series 2 class M Floating Rate notes due July 2040 $[5,763.44]
$[500,000,000] series 3 class A Floating Rate notes due July 2020 $[40,450.00]
series 1 term AAA advance(2)
series 1 term AA advance(2)
series 1 term A advance(2)
series 2 term AAA advance(2)
series 2 term AA advance(2)
series 2 term A advance(2)
series 3 term AAA advance(2)
Funding interest in the mortgages trust(2)
(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. Holmes Trustees
Limited is the registrant for the Funding interest in the mortgages trust
and is holding the Funding interest in the mortgages trust on behalf of
Holmes Funding Limited. The Funding interest in the mortgages trust will be
the primary source of payment on the term advances listed. Holmes Funding
Limited is the registrant for those term advances and is issuing those term
advances to Holmes Financing (No. 7) PLC. Those term advances will be the
primary source of payments on the series 1 notes, the series 2 notes and
the series 3 notes respectively. Holmes Financing (No. 7) PLC is the
registrant for the series 1 notes, the series 2 notes and the series 3
notes.
(3) [The total registration fee is $233.387.75. $149,454 has already been
paid].
-----------------------------
THE REGISTRANTS HEREBY AMEND THE 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.
HOLMES FINANCING (NO. 7) PLC
Issuer (Incorporated in England and Wales with limited liability, registered
number 4645659)
ABBEY NATIONAL PLC
Seller, servicer, cash manager and account bank
PRINCIPAL AMOUNT OF
PRICE TO ISSUER NOTES AND SCHEDULED
PUBLIC PER PROCEEDS TO ISSUER REDEMPTION
CLASS INTEREST NOTE PER CLASS DATES MATURITY DATE
series 1 class A [__% margin over one-month 100% [$750,000,000] [January 2004 and April 2004] [April 2004]
USD -- LIBOR]
series 1 class B [__% margin over three-month 100% [$22,500,000] --- [July 2040]
USD -- LIBOR]
series 1 class M [__% margin over three-month 100% [$38,250,000] --- [July 2040]
USD -- LIBOR]
series 2 class A [__% margin over three-month 100% [$1,250,000,000] [January 2006] [January 2008]
USD -- LIBOR]
series 2 class B [__% margin over three-month 100% [$37,500,000] --- [July 2040]
USD -- LIBOR]
series 2 class M [__% margin over three-month 100% [$63,750,000] --- [July 2040]
USD -- LIBOR]
series 3 class A [__% margin over three-month 100% [$500,000,000] [January 2007 and April 2007] [July 2020]
USD -- LIBOR]
* The principal asset from which Holmes Financing (No. 7) PLC will make
payments on the notes is an intercompany loan to an affiliated company
called Holmes Funding Limited.
* The principal asset from which Holmes Funding Limited will make payments
on the intercompany loan is its interest in a master trust over a pool of
residential mortgage loans held by Holmes Trustees Limited.
* The residential mortgage loans were originated by Abbey National plc and
are secured over properties located in England, Wales and Scotland. The
transaction documents are governed principally by the laws of England.
* Holmes Holdings Limited, the parent of Holmes Financing (No. 7) PLC and
Holmes Funding Limited, is also the parent of six previous issuers, which
have previously issued notes as referred to in this document. Holmes
Financing (No. 7) PLC and these previous issuers will share the security
granted by Holmes Funding Limited to secure its obligations to all of
them under their respective intercompany loans.
* Subject to conditions described further in this prospectus, Holmes
Holdings Limited may establish new issuers which will issue new notes
that are secured ultimately over the same property as the notes and may
rank equally or ahead of the notes issued by the issuer.
PLEASE CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 33 IN THIS
PROSPECTUS.
A note is not a deposit and neither the notes nor the underlying receivables
are insured or guaranteed by any United Kingdom or United States governmental
agency.
THE NOTES OFFERED IN THIS PROSPECTUS WILL BE OBLIGATIONS OF THE ISSUER ONLY.
THE NOTES WILL NOT BE OBLIGATIONS OF ABBEY NATIONAL PLC OR ANY OF ITS
AFFILIATES OR ANY OF THE UNDERWRITERS.
Application has been made to the UK Listing Authority for each class of the
notes offered by this prospectus to be admitted to the official list maintained
by the UK Listing Authority and to the London Stock Exchange plc for each class
of the notes offered by this prospectus to be admitted to trading on the London
Stock Exchange.
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 OFFENCE.
ARRANGERS AND UNDERWRITERS
JPMORGAN SCHRODER SALOMON SMITH BARNEY
CO-UNDERWRITERS FOR THE CLASS A ISSUER NOTES
CREDIT SUISSE FIRST BOSTON DEUTSCHE BANK LEHMAN BROTHERS MORGAN STANLEY
Preliminary Prospectus dated 5th March, 2003
The information in this prospectus is not complete and may be amended. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
TABLE OF CONTENTS
DEFINED TERMS.............................................................................. 3
SUMMARY OF PROSPECTUS...................................................................... 4
RISK FACTORS............................................................................... 33
US DOLLAR PRESENTATION..................................................................... 60
THE ISSUER................................................................................. 61
USE OF PROCEEDS............................................................................ 63
THE ABBEY NATIONAL GROUP................................................................... 64
FUNDING.................................................................................... 66
THE MORTGAGES TRUSTEE...................................................................... 70
HOLDINGS................................................................................... 72
PECOH LIMITED.............................................................................. 74
THE ISSUER SWAP PROVIDERS.................................................................. 75
DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS INTERCOMPANY LOANS 76
THE LOANS.................................................................................. 92
THE SERVICER............................................................................... 116
THE SERVICING AGREEMENT.................................................................... 121
ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY......................................... 126
THE MORTGAGES TRUST........................................................................ 134
THE ISSUER INTERCOMPANY LOAN AGREEMENT..................................................... 148
SECURITY FOR FUNDING'S OBLIGATIONS......................................................... 155
SECURITY FOR THE ISSUER'S OBLIGATIONS...................................................... 161
CASHFLOWS.................................................................................. 167
CREDIT STRUCTURE........................................................................... 191
THE SWAP AGREEMENTS........................................................................ 203
CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING...................................... 210
CASH MANAGEMENT FOR THE ISSUER............................................................. 213
DESCRIPTION OF THE ISSUER TRUST DEED....................................................... 215
THE ISSUER NOTES AND THE GLOBAL ISSUER NOTES............................................... 217
TERMS AND CONDITIONS OF THE OFFERED ISSUER NOTES........................................... 223
RATINGS OF THE ISSUER NOTES................................................................ 239
MATURITY AND PREPAYMENT CONSIDERATIONS..................................................... 240
MATERIAL LEGAL ASPECTS OF THE LOANS........................................................ 241
UNITED KINGDOM TAXATION.................................................................... 245
UNITED STATES TAXATION..................................................................... 248
ERISA CONSIDERATIONS....................................................................... 251
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES...................................... 253
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS.............................................. 254
EXPERTS.................................................................................... 254
LEGAL MATTERS.............................................................................. 254
UNDERWRITING............................................................................... 255
REPORTS TO NOTEHOLDERS..................................................................... 258
WHERE INVESTORS CAN FIND MORE INFORMATION.................................................. 259
LISTING AND GENERAL INFORMATION............................................................ 259
GLOSSARY................................................................................... 262
ANNEX A.................................................................................... 302
INDEX OF APPENDICES........................................................................ 308
2
DEFINED TERMS
The principal and technical terms used in this prospectus have the meanings
set forth in the glossary, unless otherwise defined where they appear in the
text.
References in this document to "WE" or "US" mean the issuer and references
to "YOU" mean potential investors in the issuer notes.
Because this transaction is connected, by virtue of its structure, with
several previous transactions and because it may be connected with future
transactions, it is necessary in this prospectus to refer to any or all of
these transactions. In respect of notes, term advances, intercompany loans or
other terms derived from or related to them, we use the word "previous" when
referring to the previous transactions, "ISSUER" when referring to the present
transaction, "CURRENT" when referring to both the previous transactions and the
present transaction, "NEW" when referring to future transactions and "ANY" or
"ALL" when referring to any or all of the previous transactions, the present
transaction and future transactions. For example, the "ISSUER NOTES" are the
notes issued by Holmes Financing (No. 7) PLC and the "PREVIOUS NOTES" are the
notes issued by Holmes Financing (No. 1) PLC, Holmes Financing (No. 2) PLC,
Holmes Financing (No. 3) PLC, Holmes Financing (No. 4) PLC, Holmes Financing
(No. 5) PLC and Holmes Financing (No. 6) PLC.
Schroder is a trademark of Schroder Holdings plc and is used under licence by
Salomon Brothers International Limited.
3
SUMMARY OF PROSPECTUS
The information on pages 4 to 31, inclusive, is a summary of the principal
features of the issuer notes, including the loans and the issuer transaction
documents that will generate the income for the issuer to make payments on the
issuer notes. This summary does not contain all of the information that you
should consider before investing in the issuer notes. You should read the
entire prospectus carefully, especially the risks of investing in the issuer
notes discussed under "RISK FACTORS".
OVERVIEW OF THE TRANSACTION
The following is a brief overview of the transaction and is further
illustrated by the "STRUCTURAL DIAGRAM OF THE SECURITISATION BY THE ISSUER"
(the numbers in the diagram refer to the numbered paragraphs in this section).
(1) On 26th July, 2000 and on several subsequent dates, the seller
assigned the trust property to the mortgages trustee pursuant to a
mortgage sale agreement and retained an interest for itself in the
trust property, as further described in "-- ASSIGNMENT OF THE
LOANS". On the closing date, the trust property will consist of the
portfolio, which will include the loans, their related security,
any accrued interest on the loans and other amounts derived from
the loans and their related security. The loans will be residential
mortgage loans originated by Abbey National plc and secured over
properties located in England, Wales and Scotland.
(2) The mortgages trustee holds the trust property on trust for the
benefit of the seller and Funding pursuant to a mortgages trust
deed entered into on 25th July, 2000 (as subsequently amended). 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) The mortgages trustee distributes interest payments on the loans
and allocates losses in relation to the 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 may
fluctuate as described in "THE MORTGAGES TRUST". The mortgages
trustee distributes principal payments on the loans to the seller
and Funding according to the shares that each of them has in the
trust property and a series of rules as described in "THE MORTGAGES
TRUST".
(4) Funding will use the proceeds of an issuer intercompany loan on the
closing date to pay the seller for an addition to Funding's
existing share of the trust property, thereby increasing Funding's
share of the trust property, resulting in a corresponding decrease
in the seller's share of the trust property. If Funding has any
excess income remaining after paying all other amounts due to the
other parties to the transaction and to any other person, then it
will also pay that extra income to the seller as an additional
payment for Funding's increased share of the trust property.
(5) Funding will use a portion of the amounts received from its share
in the trust property to meet its obligations to pay interest and
principal due to the issuer under the issuer intercompany loan.
Funding's obligations to the issuer under the issuer intercompany
loan will be secured under the Funding deed of charge by, among
other things, Funding's share of the trust property.
(6) The issuer's obligations to pay principal and interest on the
issuer notes will be funded primarily from the payments of
principal and interest received by it from Funding under the issuer
intercompany loan. The issuer's primary asset will be the rights
and interests arising to it under the issuer intercompany loan
agreement. Neither the issuer nor the noteholders will have any
direct interest in the trust property, although the issuer will
have a shared security interest under the Funding deed of charge in
Funding's share of the trust property.
4
(7) The issuer will sell the issuer notes to investors and then lend
the proceeds to Funding under the issuer intercompany loan.
(8) These items and their function in the transaction structure are
described later in this prospectus. They are included in the
following diagram so that investors can refer back to see where
they fit into the structure.
5
STRUCTURAL DIAGRAM OF THE SECURITISATION BY THE ISSUER
[ LOGO Diagram of Structure of Securitisation of Structure ]
6
DIAGRAM OF OWNERSHIP STRUCTURE
[ LOGO Diagram of Structure of Ownership ]
This diagram illustrates the ownership structure of the principal parties to
the transaction, as follows:
* Each of the mortgages trustee, Funding, the issuer, the previous
issuers and the post-enforcement call option holder is a wholly
owned subsidiary of Holmes Holdings Limited.
* The entire issued share capital of Holdings is held on trust by a
professional trust company, not affiliated with the seller, under
the terms of a discretionary trust for the benefit of one or more
charities. Any profits received by Holdings, after payment of the
costs and expenses of Holdings, will be paid for the benefit of
nurses in the United Kingdom and for other charitable purposes
selected at the discretion of the professional trust company. The
payments on your issuer notes will not be affected by this
arrangement.
* Abbey National plc has no ownership interest in any of the entities
in the diagram. This should ensure, among other things, that the
ownership structure and its impact on investors are not linked to
the credit of Abbey National plc, and that Abbey National plc has
no obligation to support the transaction financially, although
Abbey National plc may still have a connection with the transaction
for other reasons (such as acting as servicer of the loans and as a
beneficiary under the mortgages trust).
* The previous issuers are Holmes Financing (No. 1) PLC, Holmes
Financing (No. 2) PLC, Holmes Financing (No. 3) PLC, Holmes
Financing (No. 4) PLC, Holmes Financing (No. 5) PLC and Holmes
Financing (No. 6) PLC, all of which are wholly owned subsidiaries
of Holdings. The previous issuers issued notes to investors and
loaned the proceeds of those issues to Funding pursuant to separate
intercompany loan agreements in separate transactions between 26th
July, 2000 and 7th November, 2002. See "-- THE PREVIOUS ISSUERS AND
NEW ISSUERS". The issuer notes offered pursuant to this prospectus
rank behind, equally or ahead of the previous notes, as further
described under "-- THE PREVIOUS ISSUERS AND NEW ISSUERS". The
issuer and the previous issuers will share in the security granted
by Funding for its respective obligations to them under their
respective intercompany loans.
* Holdings may establish new issuers that issue new notes that may
rank behind, equally or ahead of the issuer notes, depending on the
ratings of the new notes as described under "-- THE PREVIOUS
ISSUERS, NEW ISSUERS AND FUNDING 2". Any new issuer established
after the closing date will be a wholly owned subsidiary of
Holdings.
7
* Holdings may establish a new entity ("FUNDING 2"), which may in the
future issue new notes from time to time and (subject to the
agreement of the seller and Funding) use the proceeds to make a
payment to the seller to acquire an interest in the trust property
rather than lending the proceeds to Funding. Funding 2 would be a
wholly owned subsidiary of Holdings as described in "--- THE
PREVIOUS ISSUERS, NEW ISSUERS AND FUNDING 2".
* In certain circumstances (including when new issuers are
established or Funding 2 becomes a beneficiary under the mortgages
trust) the security trustee may or will be obliged to consent to
modifications being made to some of the issuer transaction
documents. Your consent will not be obtained in relation to those
modifications.
SUMMARY OF THE ISSUER NOTES
In addition to the notes offered by this prospectus, the issuer will also
issue the series 3 class B issuer notes, the series 3 class M issuer notes, the
series 4 class A issuer notes, the series 4 class B issuer notes and the series
4 class M issuer notes. These additional issuer notes will be secured over the
same property as the notes offered by this prospectus. These additional issuer
notes have not been and will not be registered in the United States and are not
being offered by this prospectus. However, the term "ISSUER NOTES" when used in
this prospectus includes all of the series 1 issuer notes, the series 2 issuer
notes, the series 3 issuer notes and the series 4 issuer notes, some features
of which are summarised in this section.
Some series of issuer notes will be paid ahead of others, regardless of the
ranking of the issuer notes. In particular, some payments on some series of
class B issuer notes and class M issuer notes will be paid before some series
of class A issuer notes, as described in "-- THE ISSUER NOTES -- PAYMENT AND
RANKING OF THE ISSUER NOTES".
8
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CLASS OF ISSUER NOTES
SERIES 1 SERIES 1 SERIES 1 SERIES 2
CLASS A CLASS B CLASS M CLASS A
--------------------------- ------------------- ------------------- --------------------
Principal amount: $[750,000,000] $[22,500,000] $[38,250,000] $[1,250,000,000]
Credit enhancement: Subordination of Subordination of The reserve funds Subordination of
the class B issuer the class M issuer the class B issuer
notes, the class M notes and the notes, the class M
issuer notes and reserve funds issuer notes and the
the reserve funds reserve funds
Interest rate: One-month USD- Three-month USD- Three-month USD- Three-month USD-
LIBOR + margin LIBOR + margin LIBOR + margin LIBOR + margin
Margin: __% p.a. __% p.a. __% p.a. __% p.a.
Until interest payment date April 2004 April 2008 April 2008 January 2008
falling in:
And thereafter: N/A __% p.a. __% p.a. N/A
Scheduled redemption January 2004 and April 2004 N/A N/A January 2006
date(s):
Interest accrual method: Actual/360 Actual/360 Actual/360 Actual/360
Interest payment dates:
For the series 1 class A issuer notes, monthly in arrear on the interest payment date
falling in each consecutive month. For the other series 1 issuer notes and for all of the
series 2 issuer notes, quarterly in arrear on the interest payment dates falling in
January, April, July and October of each year. If a trigger event occurs or the issuer
security is enforced prior to the interest payment date falling in April 2004, interest and
principal due and payable on the series 1 class A issuer notes will be payable quarterly in
arrear on the interest payment dates falling in January, April, July and October, as
applicable.
First interest payment date: 15th April, 2003 15th July, 2003 15th July, 2003 15th July, 2003
Final maturity date: April 2004 July 2040 July 2040 January 2008
Tax treatment: Debt for United Debt for United Debt for United Debt for United
States federal States federal States federal States federal
income tax income tax income tax income tax
purposes, subject purposes, subject purposes, subject purposes, subject
to the to the to the to the
considerations considerations considerations considerations
contained in contained in contained in contained in
"UNITED STATES "UNITED STATES "UNITED STATES "UNITED STATES
TAXATION" TAXATION" TAXATION" TAXATION"
ERISA eligible: Yes, subject to the Yes, subject to the Yes, subject to the Yes, subject to the
considerations in considerations in considerations in considerations in
"ERISA "ERISA "ERISA "ERISA
CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS" CONSIDERATIONS"
Listing: UK Listing UK Listing UK Listing UK Listing
Authority and Authority and Authority and Authority and
London Stock London Stock London Stock London Stock
Exchange Exchange Exchange Exchange
ISIN: [__] [__] [__] [__]
Common code: [__] [__] [__] [__]
CUSIP number: [__] [__] [__] [__]
Expected ratings (S&P/ A-1+/P-1/F1+ AA/Aa3/AA A/A2/A AAA/Aaa/AAA
Moody's/Fitch):
------------------------------------------------
CLASS OF ISSUER NOTES
SERIES 2 SERIES 2
CLASS B CLASS M
--------------------------- -------------------
Principal amount: $[37,500,000] $[63,750,000]
Credit enhancement: Subordination of The reserve funds
the class M issuer
notes and the reserve funds
Interest rate: Three-month USD- Three-month USD-
LIBOR + margin LIBOR + margin
Margin: __% p.a. __% p.a.
Until interest payment date April 2008 April 2008
falling in:
And thereafter: __% p.a. __% p.a.
Scheduled redemption N/A N/A
date(s):
Interest accrual method: Actual/360 Actual/360
Interest payment dates:
For the series 1 class A issuer notes, monthly
in arrear on the interest payment date falling
in each consecutive month. For the other series
1 issuer notes and for all of the series 2
issuer notes, quarterly in arrear on the
interest payment dates falling in January,
April, July and October of each year. If a
trigger event occurs or the issuer security is
enforced prior to the interest payment date
falling in April 2004, interest and principal
due and payable on the series 1 class A issuer
notes will be payable quarterly in arrear on the
interest payment dates falling in January,
April, July and October, as applicable.
First interest payment date: 15th July, 2003 15th July, 2003
Final maturity date: July 2040 July 2040
Tax treatment: Debt for United Debt for United
States federal States federal
income tax income tax
purposes, subject purposes, subject
to the to the
considerations considerations
contained in contained in
"UNITED STATES "UNITED STATES
TAXATION" TAXATION"
ERISA eligible: Yes, subject to the Yes, subject to the
considerations in considerations in
"ERISA "ERISA
CONSIDERATIONS" CONSIDERATIONS"
Listing: UK Listing UK Listing
Authority and Authority and
London Stock London Stock
Exchange Exchange
ISIN: [__] [__]
Common code: [__] [__]
CUSIP number: [__] [__]
Expected ratings (S&P/ AA/Aa3/AA A/A2/A
Moody's/Fitch):
9
CLASS OF ISSUER NOTES
----------------------------------------------------------------
SERIES 3 SERIES 3
CLASS A CLASS B
------------------------------ --------------------------------
Principal amount: $[500,000,000] [GBP][15,000,000]
Credit enhancement: Subordination of the class B Subordination of the class M
issuer notes, the class M issuer notes and the reserve
issuer notes and the reserve funds
funds
Interest rate: Three-month USD-LIBOR + Three-month sterling-LIBOR +
margin margin
Margin: __%p.a. __% p.a.
Until interest payment date falling in: April 2008 April 2008
And thereafter: __% p.a. __% p.a.
Scheduled redemption date(s): January 2007 and April 2007 N/A
Interest accrual method: Actual/360 Actual/365
Interest payment dates: For all of the series 3 issuer notes, quarterly in arrear on the
interest payment dates falling in January, April, July and
October of each year.
First interest payment date: 15th July, 2003 15th July, 2003
Final maturity date: July 2020 July 2040
Tax treatment: Debt for United States federal N/A (These issuer notes are
income tax purposes, subject not being offered or sold in the
to the considerations United States)
contained in "UNITED STATES
TAXATION"
ERISA eligible: Yes, subject to the N/A (These issuer notes are
considerations in "ERISA not being offered or sold in the
CONSIDERATIONS" United States)
Listing: UK Listing Authority and UK Listing Authority and
London Stock Exchange London Stock Exchange
ISIN: [__] [__]
Common code: [__] [__]
CUSIP number: [__] N/A
Expected ratings (S&P/Moody's/Fitch): AAA/Aaa/AAA AA/Aa3/AA
CLASS OF ISSUER NOTES
--------------------------------
SERIES 3
CLASS M
--------------------------------
Principal amount: [GBP][20,000,000]
Credit enhancement: The reserve funds
Interest rate: Three-month sterling-LIBOR +
margin
Margin: __% p.a.
Until interest payment date falling in: April 2008
And thereafter: __% p.a.
Scheduled redemption date(s): N/A
Interest accrual method: Actual/365
Interest payment dates: For all of the series 3 issuer
notes, quarterly in arrear on
the interest payment dates
falling in January, April, July
and October of each year.
First interest payment date: 15th July, 2003
Final maturity date: July 2040
Tax treatment: N/A (These issuer notes are
not being offered or sold in the
United States)
ERISA eligible: N/A (These issuer notes are
not being offered or sold in the
United States)
Listing: UK Listing Authority and
London Stock Exchange
ISIN: [__]
Common code: [__]
CUSIP number: N/A
Expected ratings (S&P/Moody's/Fitch): A/A2/A
10
CLASS OF ISSUER NOTES
----------------------------------------------------------------------------------
CLASS OF ISSUER NOTES SERIES 4 SERIES 4
CLASS A1 CLASS A2
---------------------------------------------- ----------------------------------
Principal amount: [e][500,000,000] [GBP][250,000,000]
Credit enhancement: Subordination of the class Subordination of the class
B issuer notes, the class M B issuer notes, the class M
issuer notes and the issuer notes and the reserve funds
reserve funds
Interest rate: Three-month EURIBOR + margin Three-month sterling-
LIBOR + margin
Margin: __% p.a. __% p.a.
Until interest payment date April 2008 April 2008
falling in:
And thereafter: __% p.a. __% p.a.
Scheduled redemption N/A N/A
date(s):
Interest accrual method: Actual/360 Actual/365
Interest payment dates: For all of the series 4 issuer notes, quarterly in arrear on the interest payment
dates falling in January, April, July and October of each year.
First interest payment date: 15th July, 2003 15th July, 2003
Final maturity date: July 2040 July 2040
Tax treatment: N/A (These issuer notes N/A (These issuer notes
are not being offered or are not being offered or
sold in the United States) sold in the United States)
ERISA N/A (These issuer notes N/A (These issuer notes
eligible: are not being offered or are not being offered or
sold in the United States) sold in the United States)
Listing: UK Listing Authority and London Stock Exchange UK Listing Authority and
London Stock Exchange
ISIN: [__] [__]
Common code: [__] [__]
CUSIP number: N/A N/A
Expected ratings (S&P/ AAA/Aaa/AAA AAA/Aaa/AAA
Moody's/Fitch):
CLASS OF ISSUER NOTES
----------------------------------------------------------------------------------------------
CLASS OF ISSUER NOTES SERIES 4 SERIES 4
CLASS B CLASS M
---------------------------------------------- ----------------------------------------------
Principal amount: [e][41,000,000] [e][56,000,000]
Credit enhancement: Subordination of the class The reserve funds
M issuer notes and the
reserve funds
Interest rate: Three-month EURIBOR + margin Three-month EURIBOR + margin
Margin: __% p.a. __% p.a.
Until interest payment date April 2008 April 2008
falling in:
And thereafter: __% p.a. __% p.a.
Scheduled redemption N/A N/A
date(s):
Interest accrual method: Actual/360 Actual/360
Interest payment dates: For all of the series 4 issuer notes, quarterly in arrear on the interest payment dates
falling in January, April, July and October of each year.
First interest payment date: 15th July, 2003 15th July, 2003
Final maturity date: July 2040 July 2040
Tax treatment: N/A (These issuer notes N/A (These issuer notes
are not being offered or are not being offered or
sold in the United States) sold in the United States)
ERISA N/A (These issuer notes N/A (These issuer notes
eligible: are not being offered or are not being offered or
sold in the United States) sold in the United States)
Listing: UK Listing Authority and London Stock Exchange UK Listing Authority and London Stock Exchange
ISIN: [__] [__]
Common code: [__] [__]
CUSIP number: N/A N/A
Expected ratings (S&P/ AA/Aa3/AA A/A2/A
Moody's/Fitch):
THE ISSUER
Holmes Financing (No. 7) PLC is a public limited company incorporated in
England and Wales. Its registered office is Abbey National House, 2 Triton
Square, Regent's Place, London NW1 3AN. The contact telephone numbers are (44)
20 7756 6302/4/5.
The issuer is a newly created special purpose company. The purpose of the
issuer is to issue the issuer notes which represent its asset-backed
obligations and to lend an amount equal to the proceeds of the issuer notes to
Funding. The issuer will not engage in any activities that are unrelated to
these purposes.
FUNDING
Holmes Funding Limited is a private limited company incorporated in England
and Wales. Its registered office is Abbey National House, 2 Triton Square,
Regent's Place, London NW1 3AN. The contact telephone numbers are (44) 20 7756
6302/4/5.
Funding is a special purpose company. Funding will borrow money from us
pursuant to the terms of the issuer intercompany loan agreement. Funding
currently owns a share of the trust property that it acquired in relation to
the previous notes issued by the previous issuers. Funding will use the money
borrowed from us to pay the seller for an increase in Funding's existing share
of the trust property (resulting in a corresponding decrease in the seller's
share of the trust property). Together, Funding and the seller are beneficially
entitled to all of the trust property. Funding 2 may also acquire a share of
the trust property in the future.
THE MORTGAGES TRUSTEE
Holmes Trustees Limited is a private limited company incorporated in England
and Wales. Its registered office is Abbey National House, 2 Triton Square,
Regent's Place, London NW1 3AN. The contact telephone numbers are (44) 20 7756
6302/4/5.
11
The mortgages trustee is a special purpose company. The purpose of the
mortgages trustee is to hold the trust property. The mortgages trustee holds
the trust property on trust for the seller and Funding and, if applicable,
Funding 2, under the terms of the mortgages trust deed.
THE SELLER, THE SERVICER, THE CASH MANAGER, THE ISSUER CASH MANAGER, THE
ACCOUNT BANK AND THE ISSUER ACCOUNT BANKS
The seller is a bank incorporated in England and Wales as a public limited
company. It is regulated by the Financial Services Authority. The seller's
current rating is AA- by Standard & Poor's, Aa3 by Moody's and AA- by Fitch.
Its registered office is Abbey National House, 2 Triton Square, Regent's Place,
London NW1 3AN. The contact telephone numbers are (44) 20 7756 6302/4/5.
The seller originated all of the loans in the portfolio according to the
lending criteria applicable at the time of origination and has assigned those
loans to the mortgages trustee under the mortgage sale agreement. The seller's
current lending criteria are described later in this prospectus.
Although the loans have been assigned to the mortgages trustee, the seller
continues to perform administration and servicing functions in respect of the
loans on behalf of the mortgages trustee and the beneficiaries, including
collecting payments under the loans and taking steps to recover arrears. The
seller may not resign as servicer unless a successor servicer has been
appointed. In addition, the servicer may be replaced by a successor servicer if
it defaults in its obligations under the servicing agreement. The seller has
delegated some of the administration and servicing functions in respect of the
loans. See "THE SERVICER AND THE SERVICING AGREEMENT -- THE SERVICING AGREEMENT
- -- ACTUAL DELEGATION BY SERVICER TO JOINT VENTURE WITH EDS".
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 of monies 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 accounts, determine the amounts of and arrange payments of monies to be
made by us and keep certain records on our behalf.
Additionally, the seller will be appointed as an issuer account bank (the
sterling account bank) to provide banking services to us, and has been
appointed as the account bank to Funding and the mortgages trustee. The other
issuer account bank (the non-sterling account bank) will be Citibank, N.A.,
London Branch.
Citibank, N.A., London Branch, as an issuer account bank, acting through its
London branch, is a national banking association organized under the National
Bank Act of 1864. Its London branch is located at 336 Strand, London WC2R 1HB.
Its telephone number is (44) (0)20 7500 5000.
Although the seller has assigned the loans to the mortgages trustee, the
seller continues to have an interest in the loans as one of the beneficiaries
of the mortgages trust under the mortgages trust deed.
THE ISSUER NOTES
CLASSES OF ISSUER NOTES
In this prospectus, we are offering the following series 1 issuer notes,
series 2 issuer notes and series 3 class A issuer notes:
* the $[750,000,000] floating rate series 1 class A issuer notes due
[April 2004];
* the $[22,500,000] floating rate series 1 class B issuer notes due
[July 2040];
* the $[38,250,000] floating rate series 1 class M issuer notes due
[July 2040];
* the $[1,250,000,000] floating rate series 2 class A issuer notes
due [January 2008];
* the $[37,500,000] floating rate series 2 class B issuer notes due
[July 2040];
* the $[63,750,000] floating rate series 2 class M issuer notes due
[July 2040]; and
* the $[500,000,000] floating rate series 3 class A issuer notes due
[July 2020].
12
In addition, we are issuing the following series 3 class B issuer notes,
series 3 class M issuer notes and series 4 issuer notes which are not being
offered by this prospectus:
* the [GBP][15,000,000] floating rate series 3 class B issuer notes
due [July 2040];
* the [GBP][20,000,000] floating rate series 3 class M issuer notes
due [July 2040];
* the [e][500,000,000] floating rate series 4 class A1 issuer notes
due [July 2040];
* the [GBP][250,000,000] floating rate series 4 class A2 issuer notes
due [July 2040];
* the [e][41,000,000] floating rate series 4 class B issuer notes due
[July 2040]; and
* the [e][56,000,000] floating rate series 4 class M issuer notes due
[July 2040];
The series 1 class A issuer notes, the series 1 class B issuer notes and the
series 1 class M issuer notes are collectively referred to as the series 1
issuer notes and the series 2 class A issuer notes, the series 2 class B issuer
notes and the series 2 class M issuer notes are collectively referred to as the
series 2 issuer notes. References to the series 3 issuer notes and the series 4
issuer notes are to be construed in an analogous manner. The series 1 class A
issuer notes, the series 2 class A issuer notes, the series 3 class A issuer
notes, the series 4 class A1 issuer notes and the series 4 class A2 issuer
notes are also collectively referred to as the class A issuer notes and
references to the class B issuer notes and the class M issuer notes are to be
construed in an analogous manner.
The series 3 issuer notes (other than the series 3 class A issuer notes) and
the series 4 issuer 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 only, in transactions exempt from the
registration requirements of the US Securities Act of 1933, as amended.
RELATIONSHIP BETWEEN THE ISSUER NOTES AND THE ISSUER INTERCOMPANY LOAN
On the closing date we will make an issuer intercompany loan to Funding from
the proceeds of the issue of the issuer notes. The issuer intercompany loan
will consist of separate issuer term advances. There will be a total of
thirteen issuer term advances -- an issuer series 1 term AAA advance, an issuer
series 1 term AA advance, an issuer series 1 term A advance, an issuer series 2
term AAA advance, an issuer series 2 term AA advance, an issuer series 2 term A
advance, an issuer series 3 term AAA advance, an issuer series 3 term AA
advance, an issuer series 3 term A advance, two issuer series 4 term AAA
advances, an issuer series 4 term AA advance and an issuer series 4 term A
advance. The proceeds of the five series of class A issuer notes will be used
to make the respective series of issuer term AAA advances to Funding, the
proceeds of the four series of the class B issuer notes will be used to make
the respective series of issuer term AA advances to Funding and the proceeds of
the four series of the class M issuer notes will be used to make the respective
series of issuer term A advances to Funding. For more information on the issuer
intercompany loan, see "-- THE ISSUER INTERCOMPANY LOAN".
We will repay the class A issuer notes principally from payments made by
Funding under the issuer term AAA advances, the class B issuer notes
principally from payments made by Funding under the issuer term AA advances and
the class M issuer notes principally from payments made by Funding under the
issuer term A advances and, for issuer notes denominated in US dollars, from
payments made by the issuer dollar currency swap providers and for issuer notes
denominated in euro, from payments made by the issuer euro currency swap
provider. If Funding does not have enough money to pay interest amounts on the
issuer intercompany loan due to liquidity problems, then it may draw money from
the Funding liquidity reserve fund. For more information on the Funding
liquidity reserve fund, see "CREDIT STRUCTURE -- FUNDING LIQUIDITY RESERVE
FUND". The ability of Funding to make payments on the issuer intercompany loan
will depend to a large extent on (a) 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 loans and the related security and (b)
the allocation of monies between the previous intercompany loans, the issuer
intercompany loan and any new intercompany loans. See "-- THE ISSUER
INTERCOMPANY LOAN".
13
OPERATIVE DOCUMENTS CONCERNING THE ISSUER NOTES
We will issue the issuer notes under the issuer trust deed. The issuer notes
will also be subject to the issuer paying agent and agent bank agreement. The
security for the issuer notes will be created under the issuer deed of charge
between ourselves, the issuer security trustee and our other secured creditors.
Operative legal provisions relating to the issuer notes will be included in the
issuer trust deed, the issuer paying agent and agent bank agreement, the issuer
deed of charge, the issuer cash management agreement and the issuer notes
themselves, each of which will be governed by English law.
PAYMENT AND RANKING OF THE ISSUER NOTES
Payments of interest and principal on the class A issuer notes of each
series will rank ahead of payments of interest and principal on the class B
issuer notes of any series and the class M issuer notes of any series and
payments of interest and principal on the class B issuer notes of each series
will rank ahead of payments of interest and principal on the class M issuer
notes of any series. For more information on the priority of payments to you,
see "CASHFLOWS" and see also "RISK FACTORS -- SUBORDINATION OF OTHER NOTE
CLASSES MAY NOT PROTECT YOU FROM ALL RISK OF LOSS".
Payments of interest and principal on the class A issuer notes of each
series rank equally (but subject to the scheduled redemption dates or permitted
redemption dates of each series of class A issuer notes). Payments of interest
and principal on the class B issuer notes of each series rank equally (but
subject to the permitted redemption dates of each series of class B issuer
notes). Payments of interest and principal on the class M issuer notes of each
series rank equally (but subject to the permitted redemption dates of each
series of class M issuer notes).
Unless an asset trigger event or a non-asset trigger event (each as
described in "THE MORTGAGES TRUST") has occurred or the issuer security or the
Funding security has been enforced (see "-- SECURITY GRANTED BY FUNDING AND THE
ISSUER"):
* the series 1 class A issuer notes will be redeemed according to the
series 1 class A redemption schedule starting on or after the
interest payment date falling in [January 2004] (as described in
"-- SCHEDULED REDEMPTION");
* the series 1 class B issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 1 class A issuer notes have
been redeemed in full;
* the series 1 class M issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 1 class B issuer notes have
been redeemed in full;
* the series 2 class A issuer notes will be redeemed in full or in
part on each interest payment date starting with the interest
payment date falling in [January 2006] (as described in "--
SCHEDULED REDEMPTION");
* the series 2 class B issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 2 class A issuer notes have
been redeemed in full;
* the series 2 class M issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 2 class B issuer notes have
been redeemed in full;
* the series 3 class A issuer notes will be redeemed in full or in
part on each interest payment date starting with the interest
payment date falling in [January 2007] (as described in "--
SCHEDULED REDEMPTION");
* the series 3 class B issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 3 class A issuer notes have
been redeemed in full;
14
* the series 3 class M issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 3 class B issuer notes have
been redeemed in full;
* the series 4 class A issuer notes will be redeemed in full or in
part on each interest payment date starting with the interest
payment date falling in April 2008;
* the series 4 class B issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 4 class A issuer notes have
been redeemed in full; and
* the series 4 class M issuer notes will be redeemed in full or in
part on each interest payment date falling on or after the interest
payment date on which all the series 4 class B issuer notes have
been redeemed in full;
Investors should note that the principal repayment schedule outlined here
could result in lower ranking issuer notes being repaid before higher ranking
issuer notes. For example, the series 1 class B issuer notes and the series 1
class M issuer notes could be repaid in full prior to principal payments being
made on the series 2 class A issuer notes. If on any interest payment date,
however, amounts are due and payable on a series of the class A issuer notes
and amounts are also due and payable on any series of the class B issuer notes
and/or the class M issuer notes, then payments of principal on the class A
issuer notes will rank ahead of payments of principal on the class B issuer
notes and the class M issuer notes, and payments of principal on the class B
issuer notes will rank ahead of payments of principal on the class M issuer
notes.
SCHEDULED REDEMPTION
If not redeemed earlier, the issuer notes will be redeemed by us on the
final maturity date of each issuer note. However, Funding will seek to
accumulate funds relating to principal payments on the issuer series 2 term AAA
advance over its cash accumulation period in order to repay that issuer term
advance as a lump sum payment to us so that we can redeem the series 2 class A
issuer notes in full on the interest payment date falling in [January 2006].
The cash accumulation period is the period of time estimated to be the number
of months prior to the relevant interest payment date necessary for Funding to
accumulate enough payments of principal on the loans to repay the issuer series
2 term AAA advance to us so that we will be able to redeem the series 2 class A
issuer notes in full on the relevant interest payment dates. The cash
accumulation period will be determined according to a formula described under
"THE MORTGAGES TRUST". To the extent that there are insufficient funds to repay
the series 2 class A issuer notes on the relevant interest payment date, the
shortfall will be repaid on subsequent interest payment dates to the extent of
principal receipts available to the issuer, until the series 2 class A issuer
notes are fully repaid.
As set out in the schedule following this paragraph, we will seek to repay
each of the series 1 class A issuer notes and the series 3 class A issuer notes
in two equal payments, in respect of each issuer note beginning on the interest
payment date falling in [January 2004 and January 2007, respectively]. The
transaction has been structured in the expectation that Funding will receive
sufficient funds under the mortgages trust on each scheduled repayment date of
each of the issuer series 1 term AAA advance and the issuer series 3 term AAA
advance in order to repay that issuer term advance to us, so that we can redeem
the issuer series 1 class A issuer notes and the series 3 class A issuer notes
on their scheduled redemption dates. Funding will seek to accumulate funds
relating to principal payments on the issuer series 1 term AAA advance and the
issuer series 3 term AAA advance over their respective scheduled amortisation
periods in order to repay that term advance on its scheduled repayment dates.
The scheduled amortisation period is 3 months, but may be extended in the
circumstances described under "THE MORTGAGES TRUST". If there are insufficient
funds on the first relevant interest payment date to redeem the series 1 class
A issuer notes and the series 3 class A issuer notes according to the
redemption schedule, then the shortfall shall be redeemed on the subsequent
interest payment date (in addition to the amount already scheduled for
redemption on the series 1 class A issuer note and the series 3 class A issuer
notes on that interest payment date) to the extent of principal receipts
available to the issuer.
15
SCHEDULED
CLASS OF ISSUER NOTES REDEMPTION DATES AMOUNT
- ----------------------------- ---------------- --------------
Series 1 class A issuer notes [January 2004] $[375,000,000]
[April 2004] $[375,000,000]
Series 3 class A issuer notes [January 2007] $[250,000,000]
[April 2007] $[250,000,000]
NO ASSURANCE CAN BE GIVEN THAT FUNDING WILL ACCUMULATE SUFFICIENT FUNDS
DURING THE CASH ACCUMULATION PERIODS OR, AS APPLICABLE, THE SCHEDULED
AMORTISATION PERIOD RELATING TO THE ISSUER SERIES 1 TERM AAA ADVANCE, THE
ISSUER SERIES 2 TERM AAA ADVANCE OR THE ISSUER SERIES 3 TERM AAA ADVANCE TO
ENABLE IT TO REPAY THE RELEVANT ISSUER TERM ADVANCE TO US SO THAT THE SERIES 1
CLASS A ISSUER NOTES, THE SERIES 2 CLASS A ISSUER NOTES OR THE SERIES 3 CLASS A
ISSUER NOTES WILL BE REDEEMED IN THEIR ENTIRETY OR, IN THE CASE OF THE SERIES 1
CLASS A ISSUER NOTES AND THE SERIES 3 CLASS A ISSUER NOTES, IN THE AMOUNTS
SPECIFIED IN THE SCHEDULE ABOVE, ON THEIR RESPECTIVE SCHEDULED REDEMPTION
DATES. SEE "RISK FACTORS -- THE YIELD TO MATURITY OF THE ISSUER NOTES MAY BE
ADVERSELY AFFECTED BY PREPAYMENTS OR REDEMPTIONS ON THE LOANS" AND "RISK
FACTORS -- OUR ABILITY TO REDEEM THE SERIES 1 CLASS A ISSUER NOTES AND/OR THE
SERIES 2 CLASS A ISSUER NOTES AND/OR THE SERIES 3 CLASS A ISSUER NOTES ON THEIR
SCHEDULED REDEMPTION DATES IS AFFECTED BY THE RATE OF PREPAYMENT ON THE LOANS".
For more information on the redemption of the issuer 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".
OPTIONAL REDEMPTION OF THE ISSUER NOTES FOR TAX AND OTHER REASONS
We may redeem (unless otherwise provided) all, but not a portion, of the
issuer notes at our option if we give not more than 60 nor less than 30 days'
notice to noteholders and the note trustee in accordance with the terms and
conditions of the issuer notes and if (a) on the interest payment date on which
such notice expires, no issuer note enforcement notice has been served in
respect of the issuer notes, and (b) we have, prior to giving such notice,
certified to the note trustee and produced evidence acceptable to the note
trustee (as specified in the issuer trust deed) that we will have the necessary
funds to pay principal and interest due in respect of the issuer notes on the
relevant interest payment date.
If we exercise this option, then we may redeem the issuer notes at their
principal amount outstanding on the following dates:
* on any interest payment date in the event of particular tax changes
affecting us or the issuer notes or the issuer intercompany loan;
* on any interest payment date in the event that it would be unlawful
for us to make, fund or allow to remain outstanding an issuer term
advance made by us under the issuer intercompany loan;
* in the case of all the issuer notes (other than the series 1 class
A issuer notes), if the new Basel Capital Accord of 1988 (as
described in the consultative document "The New Basel Capital
Accord" published in January 2001 by the Basel Committee on Banking
Supervision) has been implemented in the United Kingdom, whether by
rule of law, recommendation of best practice or by any other
regulation, provided that an issuer note enforcement notice has not
been served, on the interest payment date falling in April 2007 and
on any interest payment date thereafter; or
* in the case of all of the issuer notes (other than the series 1
class A issuer notes and the series 2 class A issuer notes) on the
interest payment date falling in April 2008 and on any interest
payment date thereafter.
16
In addition, we may redeem in the same manner:
* the series 1 issuer notes outstanding, on any interest payment date
on which the aggregate principal amount of the series 1 issuer
notes then outstanding is less than 10 per cent. of the aggregate
principal amount outstanding of the series 1 issuer notes on the
closing date;
* the series 2 issuer notes outstanding, on any interest payment date
on which the aggregate principal amount of the series 2 issuer
notes then outstanding is less than 10 per cent. of the aggregate
principal amount outstanding of the series 2 issuer notes on the
closing date;
* the series 3 issuer notes outstanding, on any interest payment date
on which the aggregate principal amount of the series 3 issuer
notes then outstanding is less than 10 per cent. of the aggregate
principal amount outstanding of the series 3 issuer notes on the
closing date; and
* the series 4 issuer notes outstanding, on any interest payment date
on which the aggregate principal amount of the series 4 issuer
notes then outstanding is less than 10 per cent. of the aggregate
principal amount outstanding of the series 4 issuer notes on the
closing date.
Any issuer 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. If we exercise our option to redeem the notes as
described in the preceding bulleted list, this will not cause the seller to
repurchase any loans and their related security in the mortgages trust at that
time.
WITHHOLDING TAX
Payments of interest and principal with respect to the issuer 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 "UNITED KINGDOM TAXATION".
THE CLOSING DATE
The issuer notes will be issued on or about __ March, 2003.
THE NOTE TRUSTEE
The Bank of New York, London Branch, is the note trustee. Its address is One
Canada Square, London E14 5AL. The note trustee will act as trustee for the
noteholders under the issuer trust deed.
THE PAYING AGENTS, AGENT BANK, REGISTRAR AND TRANSFER AGENT
JPMorgan Chase Bank, London Branch is the principal paying agent. Its
address is Trinity Tower, 9 Thomas More Street, London E1W 1YT. JPMorgan Chase
Bank, New York Branch is the US paying agent and its address is 450 West 33rd
Street, New York, NY 10001-2697. The paying agents will make payments on the
issuer notes to noteholders.
JPMorgan Chase Bank, London Branch is the agent bank. Its address is Trinity
Tower, 9 Thomas More Street, London E1W 1YT. The agent bank will calculate the
interest rate on the issuer notes.
J.P. Morgan Bank Luxembourg S.A. is the registrar and the transfer agent.
Its address is 5 rue Plaetis, L-2238 Luxembourg, Grand Duchy of Luxembourg. The
registrar will maintain a register in respect of the issuer notes.
THE LOANS
The loans in the portfolio as at the closing date comprise:
* loans which are subject to variable rates of interest set by the
seller from time to time;
17
* loans which track a variable rate of interest other than a variable
rate set by the seller (for example, a rate set at a margin above
sterling LIBOR or above rates set by the Bank of England);
* loans which are subject to fixed rates of interest, including
capped rate loans that are subject to the specified capped rate of
interest, set by reference to a pre-determined rate or series of
rates for a fixed period or periods; and
* loans known as flexible loans.
A flexible loan allows the borrower to, among other things, make larger
repayments than are due on a given payment date (which may reduce the life of
the loan) or draw further amounts under the loan. A flexible loan also allows
the borrower to make under-payments or to take payment holidays. Any drawings
under flexible loans will be funded solely by the seller. This means that the
drawings under flexible loans will be added to the trust property and will be
included in the seller's share of the trust property for the purposes of
allocating interest and principal.
Additional features of the loans in the current portfolio are described in
"THE LOANS -- CHARACTERISTICS OF THE LOANS".
In addition to the loans in the portfolio as at the closing date, the trust
property may be supplemented by the seller assigning new loans to the mortgages
trustee after the closing date.
New loans assigned to the mortgages trustee will be required to comply with
specified criteria (see "ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY --
ASSIGNMENT OF NEW LOANS AND THEIR RELATED SECURITY TO THE MORTGAGES TRUSTEE").
Any new loans assigned to the mortgages trustee will increase the total size of
the trust property, and will increase the Funding share of the trust property
to the extent only that Funding has paid for an increased share of the trust
property. To the extent that Funding does not pay for an increased share, the
seller share of the trust property will increase by a corresponding amount.
All the loans in the portfolio as at the closing date are, and any new loans
or drawings under flexible loans added to the trust property will be, secured
by first legal charges over freehold or leasehold properties located in England
or Wales or by first-ranking standard securities over heritable or long
leasehold properties located in Scotland. Some flexible loans are secured by
both a first and second legal charge or standard security in favour of the
seller.
The loans have been originated according to the seller's lending criteria
for mortgage loans applicable at the time of origination. The seller's current
lending criteria are described further in "THE LOANS -- ORIGINATION OF THE
LOANS -- LENDING CRITERIA". The seller has given warranties to the mortgages
trustee in the mortgage sale agreement that, among other things, the loans have
been originated in accordance with the seller's policy in effect at the time of
origination. If a loan or its related security does not materially comply with
these warranties, then the seller will have 20 days in which to cure the
default. If the default cannot be or is not cured within 20 days, then at
Funding's and the security trustee's direction the mortgage trustee may require
the seller to repurchase the loan or loans under the relevant mortgage account
and their related security from the mortgages trustee. If the seller does not
repurchase those loans and their related security, then the trust property will
be deemed to be reduced by an amount equal to the amount outstanding under
those loans. The size of the seller's share of the trust property will reduce
by that amount but the size of Funding's 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 LOANS
The seller assigned the portfolio to the mortgages trustee on 26th July,
2000 and on a number of subsequent dates assigned an additional portfolio of
loans, pursuant to the terms of the mortgage sale agreement. The seller may
also assign further new loans and their related security to the mortgages
trustee in order to increase or maintain the size of the trust property. The
seller may increase the size of the trust property from time to time in
relation to an issue of new notes by a new issuer, the proceeds of which are
applied ultimately to fund the assignment of the new
18
loans and their related security to the mortgages trustee, or to comply with
its obligations under the mortgage sale agreement as described under
"ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY -- ASSIGNMENT OF NEW LOANS
AND THEIR RELATED SECURITY TO THE MORTGAGES TRUSTEE".
The seller may, from time to time, change its lending criteria and any other
terms applicable to the new loans or their related security assigned to the
mortgages trustee after the closing date so that all new 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 loans, those new loans and their related security may only be assigned to
the mortgages trustee if those new loans comply with the warranties set out in
the mortgage sale agreement.
When new 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 either the seller's share of
the trust property or Funding's share of the trust property. For a description
of how adjustments are made to the seller's share and Funding's share of the
trust property, see "THE MORTGAGES TRUST".
Some fees payable by the mortgage borrowers, such as early repayment fees,
will be given back to the seller and not included in the trust property. For
more information on the mortgage sale agreement, see "ASSIGNMENT OF THE LOANS
AND THEIR RELATED SECURITY".
THE MORTGAGES TRUST
The mortgages trustee holds the trust property for both Funding and the
seller. Funding and the seller each has a joint and undivided beneficial
interest in the trust property. However, payments of interest and principal
arising from the loans in the trust property are allocated to Funding and the
seller according to Funding's share of the trust property and the seller's
share of the trust property, calculated periodically as described later in this
section. As at the date of this prospectus, the beneficiaries of the trust are
Funding and the seller only. At a later date, Funding 2 may become a
beneficiary of the trust (subject to the agreement of the seller and Funding).
On the closing date, the trust property will be made up of the loans in the
portfolio as at that date and their related security and any income generated
by the loans or their related security. The trust property also includes any
money in the mortgages trustee guaranteed investment contract, or GIC, account
and in any other bank account or bank accounts held by the mortgages trustee
(as agreed by the mortgages trustee, Funding, the seller and the security
trustee) from time to time, called the alternative accounts. 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 alternative accounts are accounts into which payments by
some mortgage borrowers are paid initially. Amounts on deposit in the
alternative accounts are swept into the mortgages trustee GIC account on a
regular basis but in any event no later than the next London business day after
they are deposited in the relevant alternative account.
In addition, drawings under flexible loans, and any new loans and their
related security that the seller assigns to the mortgages trustee after the
closing date, will be part of the trust property, unless they are repurchased
by the seller. The seller will be solely responsible for funding drawings under
flexible loans. The composition of the trust property will fluctuate as
drawings under flexible loans and new loans are added and as the loans that are
already part of the trust property are repaid or mature or default or are
repurchased by the seller.
The aggregate outstanding principal balance of the loans in the trust
property on the closing date will be approximately [[GBP]24,000,000,000].
Funding's share of the trust property will be recalculated on the closing
date in accordance with the formula described in "THE MORTGAGES TRUST --
FUNDING SHARE OF TRUST PROPERTY" and "THE MORTGAGES TRUST -- SELLER SHARE OF
TRUST PROPERTY". Funding's share of the trust property on the previous
distribution date (10th February, 2003) was [GBP]13,633,717,000 and Funding
will be acquiring a further interest in the trust property on the closing date
in an amount equal to [[GBP]2,378,042,000]. Funding's share of the trust
property will be adjusted on the closing date to take account of principal
receipts on the loans then due and payable to it and its share of any losses
that have been incurred on the loans.
19
The seller's share of trust property on the closing date will be an amount
equal to the aggregate outstanding principal balance of the loans in the trust
property less Funding's share of the trust property.
The actual amounts of Funding's share and the seller's share of the trust
property as at the closing date will not be determined until the day before the
closing date which will be after the date of this prospectus.
Income from the trust property is distributed at least monthly to Funding
and the seller on each distribution date. A distribution date is the eighth day
of each month after the closing date (or if not a London business day, the next
succeeding London business day) and any other day during a month that Funding
acquires a further interest in the trust property. On each of these
distribution dates, Funding's share and the seller's share of the trust
property, and the percentage of the total to which each relates, are
recalculated to take into account:
* principal payments on the loans distributed to Funding and/or the
seller since the last distribution date (in general, a principal
payment made to a party reduces that party's share of the trust
property);
* any drawings under flexible loans since the last distribution date
(these will be funded by the seller and, in general, the seller's
share of the trust property will increase accordingly);
* any increase in Funding's share of the trust property acquired
since the last distribution date and any corresponding decrease in
the seller's share (which happens when Funding receives additional
funds under a new intercompany loan from a new issuer and which, in
general, increases Funding's share of the trust property);
* the assignment of any new loans to the mortgages trustee 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 consideration for all or
a portion of that assignment);
* any decrease in the interest charging balance of a flexible loan
due to a borrower making overpayments (which reduces the
outstanding balance of the relevant flexible loan at that time)
(see "THE MORTGAGES TRUST -- FLUCTUATION OF THE SELLER'S SHARE/
FUNDING'S SHARE OF THE TRUST PROPERTY"); and
* any increase in the interest charging balance of a flexible loan
due to a borrower taking a payment holiday or making an
underpayment (which increases the share of Funding and the seller
in the trust property unless the seller has made a payment to
Funding to increase its share of the trust property (see "THE
MORTGAGES TRUST -- ACQUISITION BY THE SELLER OF A FURTHER INTEREST
IN THE TRUST PROPERTY")).
On each distribution date, income (but not principal) from the trust
property is distributed to Funding and losses on the loans are allocated to
Funding, in each case in proportion to Funding's percentage of the trust
property calculated on the previous distribution date. Similarly, income (but
not principal) and losses from the trust property are distributed or, in the
case of losses, allocated to the seller in accordance with the seller's
percentage of the trust property calculated on the previous distribution date.
Whether the mortgages trustee distributes principal received on the loans to
Funding depends on a number of factors. In general, Funding receives payment of
principal in the following circumstances:
* when Funding is accumulating principal during a cash accumulation
period to repay the issuer series 2 term AAA advance under the
issuer intercompany loan so that we can redeem the series 2 class A
issuer notes (in which case principal receipts on the loans will be
allocated and paid to Funding first);
* when Funding is scheduled to make repayments on an issuer term
advance (other than the issuer series 2 term AAA advance) or to
accumulate funds in order to amortise the issuer series 1 term AAA
advance or the issuer series 3 term AAA advance (in which case
principal receipts on the loans in general will be paid to Funding
based on the
20
Funding share percentage of the principal receipts and the fraction
that the issuer intercompany loan bears to all current intercompany
loans then outstanding (see "THE MORTGAGES TRUST -- MORTGAGES TRUST
ALLOCATION AND DISTRIBUTION OF PRINCIPAL RECEIPTS PRIOR TO THE
OCCURRENCE OF A TRIGGER EVENT"));
* when, in relation to previous term advances and any new term
advances, Funding is either accumulating principal during a cash
accumulation period or a scheduled amortisation period or is
scheduled to make principal repayments (in which case principal
receipts will be paid to Funding based on the nature of those
previous term advances and/or new term advances and the terms of
the mortgages trust deed);
* when a non-asset trigger event has occurred and an asset trigger
event has not occurred (in which case principal receipts on the
loans will be allocated and paid to Funding first); or
* when an asset trigger event has occurred or the security granted by
Funding to the security trustee has been enforced (in which case
principal receipts on the loans will be paid to Funding in
proportion to its share of the trust property).
For more information on the mortgages trust, the cash accumulation period,
the scheduled amortisation period and the distribution of principal receipts on
the loans, including a description of when a non-asset trigger event or an
asset trigger event will occur, see "THE MORTGAGES TRUST".
THE ISSUER INTERCOMPANY LOAN
On the closing date, we will lend an amount in sterling equal to the
proceeds of the issue of the issuer notes to Funding. Funding will pay the
proceeds of this issuer intercompany loan to the seller as consideration for an
increase in Funding's existing share of the trust property (resulting in a
corresponding decrease in the seller's existing share of the trust property).
As described in "-- THE ISSUER NOTES -- RELATIONSHIP BETWEEN THE ISSUER
NOTES AND THE ISSUER INTERCOMPANY LOAN", the issuer intercompany loan will be
split into separate term advances to match the underlying series and classes of
issuer notes: the issuer term AAA advances, matching the issue of the class A
issuer notes of each series; the issuer term AA advances, matching the issue of
the class B issuer notes of each series and the issuer term A advances,
matching the issue of the class M issuer notes of each series. Together these
advances are referred to in this prospectus as the issuer term advances.
The issuer term AAA advances reflect the rating expected to be assigned to
the class A issuer notes by the rating agencies (being, in the case of the
series 1 class A issuer notes, A-1+ by Standard & Poor's, P-1 by Moody's and
F1+ by Fitch and, in the case of the series 2 class A issuer notes, the series
3 class A issuer notes and the series 4 class A issuer notes, AAA by Standard &
Poor's, Aaa by Moody's and AAA by Fitch). The issuer term AA advances reflect
the rating expected to be assigned to the class B issuer notes by the rating
agencies (being AA by Standard & Poor's, Aa3 by Moody's and AA by Fitch). The
issuer term A advances reflect the rating expected to be assigned to the class
M issuer notes by the rating agencies (being A by Standard & Poor's, A2 by
Moody's and A by Fitch).
Funding will repay the issuer intercompany loan from payments received from
Funding's share of the trust property. We will make payments of interest and
principal on the issuer notes primarily from payments of interest and principal
made by Funding under the issuer intercompany loan. As further described in
"THE MORTGAGES TRUST", under the terms of the issuer intercompany loan
agreement, prior to the occurrence of a trigger event or enforcement of the
security granted by Funding, Funding is required to:
* repay the issuer series 1 term AAA advance beginning on the
interest payment date falling in [January 2004], but to the extent
that there are insufficient funds to repay the issuer series 1 term
AAA advance on the first relevant interest payment date to repay
that issuer series 1 term AAA advance according to the repayment
schedule, then the shortfall shall be repaid on the subsequent
interest payment date to the extent of principal receipts available
to Funding for that purpose;
21
* repay the issuer series 1 term AA advance to the extent of
principal receipts available to Funding for that purpose on each
interest payment date on or after the interest payment date on
which the issuer series 1 term AAA advance has been fully repaid;
* repay the issuer series 1 term A advance to the extent of principal
receipts available to Funding for that purpose on each interest
payment date on or after the interest payment date on which the
issuer series 1 term AA advance has been fully repaid;
* repay the issuer series 2 term AAA advance on the interest payment
date falling in [January 2006], but to the extent there are
insufficient funds to repay the issuer series 2 term AAA advance on
that interest payment date, the shortfall shall be repaid on
subsequent interest payment dates to the extent of principal
receipts available to Funding for that purpose, until the issuer
series 2 term AAA advance is fully repaid;
* repay the issuer series 2 term AA advance to the extent of
principal receipts available to Funding for that purpose on each
interest payment date on or after the interest payment date on
which the issuer series 2 term AAA advance has been fully repaid;
* repay the issuer series 2 term A advance to the extent of principal
receipts available to Funding for that purpose on each interest
payment date on or after the interest payment date on which the
issuer series 2 term AA advance has been fully repaid;
* repay the issuer series 3 term AAA advance beginning on the
interest payment date falling in [January 2007], but to the extent
that there are insufficient funds to repay the issuer series 3 term
AAA advance on that interest payment date, the shortfall shall be
repaid on subsequent interest payment dates to the extent of
principal receipts available to Funding for that purpose, until the
issuer series 3 term AAA advance is fully repaid;
* repay the issuer series 3 term AA advance to the extent of
principal receipts available to Funding for that purpose on each
interest payment date on or after the interest payment date on
which the issuer series 3 term AAA advance has been fully repaid;
* repay the issuer series 3 term A advance to the extent of principal
receipts available to Funding for that purpose on each interest
payment date on or after the interest payment date on which the
issuer series 3 term AA advance has been fully repaid;
* repay the issuer series 4 term AAA advances to the extent of
principal receipts available to Funding for that purpose on each
interest payment date on or after the interest payment date on
which the issuer series 3 term A advance has been fully repaid;
* repay the issuer series 4 term AA advance to the extent of
principal receipts available to Funding for that purpose on each
interest payment date on or after the interest payment date on
which the issuer series 4 term AAA advances have been fully repaid;
and
* repay the issuer series 4 term A advance to the extent of principal
receipts available to Funding for that purpose on each interest
payment date on or after the interest payment date on which the
issuer series 4 term AA advance has been fully repaid.
22
The repayment schedule for the issuer series 1 term AAA advance, the issuer
series 2 term AAA advance and the issuer series 3 term AAA advance is as
follows:
SCHEDULED
ISSUER TERM ADVANCE REPAYMENT DATES AMOUNT
- -------------------------------- --------------- ------------------
issuer series 1 term AAA advance January 2004 [GBP][236,890,000]
April 2004 [GBP][236,890,000]
issuer series 2 term AAA advance January 2006 [GBP][789,640,000]
issuer series 3 term AAA advance January 2007 [GBP][157,928,000]
April 2007 [GBP][157,928,000]
During the cash accumulation period for the issuer series 2 term AAA
advance, no principal repayments will be made in respect of the issuer series 4
term AAA advance, any of the issuer term AA advances or any of the issuer term
A advances. If, however, Funding is in a cash accumulation period for a
previous bullet term advance under a previous intercompany loan agreement or
for a new bullet term advance under a new intercompany loan agreement, then
Funding will continue to make principal repayments in respect of the issuer
term AAA advances, the issuer term AA advances and the issuer term A advances
(or other pass-through term advances of the issuer) of each series due and
payable under the issuer intercompany loan based on the amount of principal
receipts paid by the mortgages trustee to Funding on each distribution date and
the share of those which is allocable to the issuer intercompany loan (see
"CASHFLOWS -- RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND
FUNDING PRINCIPAL RECEIPTS"). This means that payments on the issuer term AAA
advances, the issuer term AA advances and the issuer term A advances under the
issuer intercompany loan, even though they may have a lower term advance rating
than the relevant bullet term advance under another intercompany loan, should
not be affected by the cash accumulation period under the previous intercompany
loans or under a new intercompany loan.
During the cash accumulation period for the issuer series 2 term AAA
advance, Funding will continue to make principal repayments on the term
advances made under the previous intercompany loans and/or any new intercompany
loans if those term advances are then due and payable.
When principal amounts are due and payable on the issuer series 2 term AAA
advance, and principal amounts are also due and payable on any of the previous
term AA advances or the previous term BBB advances, then Funding will continue
to make principal repayments on those previous term AA or previous term BBB
advances, based on the amount of principal receipts paid by the mortgages
trustee to Funding on each distribution date and the portion thereof which is
allocable to the previous intercompany loans. The same rule will apply
analogously in respect of any new term AAA advance which is not a new bullet
term advance, the issuer term AA advances and the issuer term A advances (see
"CASHFLOWS -- RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND
FUNDING PRINCIPAL RECEIPTS").
Whether Funding will have sufficient funds to repay the issuer series 1 term
AAA advance, the issuer series 2 term AAA advanceand the issuer series 3 term
AAA advances on the dates described in this section will depend on a number of
factors (see "RISK FACTORS -- THE YIELD TO MATURITY OF THE ISSUER NOTES MAY BE
ADVERSELY AFFECTED BY PREPAYMENTS OR REDEMPTIONS ON THE LOANS" and "OUR ABILITY
TO REDEEM THE SERIES 1 CLASS A ISSUER NOTES AND/OR THE SERIES 2 CLASS A ISSUER
NOTES AND/OR THE SERIES 3 CLASS A ISSUER NOTES ON THEIR SCHEDULED REDEMPTION
DATES IS AFFECTED BY THE RATE OF PREPAYMENT ON THE LOANS").
The circumstances under which we can take action against Funding if it does
not make a repayment under the issuer intercompany loan are limited. In
particular, it will not be an event of default in respect of the issuer
intercompany loan if Funding does not repay amounts due in respect of the
issuer intercompany loan where Funding does not have the money to make the
relevant repayment. For more information on the issuer intercompany loan, see
"THE ISSUER INTERCOMPANY LOAN AGREEMENT".
23
THE SECURITY TRUSTEE
JPMorgan Chase Bank, London Branch, is the security trustee. Its address is
Trinity Tower, 9 Thomas More Street, London E1W 1YT.
THE ISSUER SECURITY TRUSTEE
The Bank of New York, London Branch, is the issuer security trustee. Its
address is One Canada Square, London E14 5AL.
SECURITY GRANTED BY FUNDING AND THE ISSUER
To secure its obligations to us under the issuer intercompany loan and to
Funding's other secured creditors, Funding entered into a deed of charge on
26th July, 2000. On 29th November, 2000, Funding entered into a first deed of
accession with Holmes Financing (No. 2) PLC and the other parties who entered
into the original deed of charge on 26th July, 2000. On 23rd May, 2001, Funding
entered into a second deed of accession with Holmes Financing (No. 3) PLC and
the other parties who entered into the first deed of accession on 29th
November, 2000. On 5th July, 2001, Funding entered into a third deed of
accession with Holmes Financing (No. 4) PLC and the other parties who entered
into the second deed of accession on 23rd May, 2001. On 8th November, 2001,
Funding entered into a fourth deed of accession with Holmes Financing (No. 5)
PLC and the other parties who entered into the third deed of accession on 5th
July, 2001. On 7th November, 2002, Funding entered into an amended and restated
Funding deed of charge with Holmes Financing (No. 6) PLC and the other parties
who entered into the previous deeds of accession. On the closing date, Funding
will also enter into a deed of accession with us and the parties who entered
into the amended and restated Funding deed of charge. Together, the amended and
restated deed of charge and the deed of accession are referred to as the
Funding deed of charge. Pursuant to the Funding deed of charge, Funding grants
security over all of its assets in favour of the security trustee. Besides
ourselves, Funding's secured creditors on the closing date are the previous
issuers (in relation to the previous intercompany loans), the Funding swap
provider, the cash manager, the Funding liquidity facility provider, the
account bank, the corporate services provider, the security trustee, the
previous start-up loan provider, the start-up loan provider and the seller. On
the closing date, the security trustee will hold that security for the benefit
of the secured creditors of Funding, including us. This means that Funding's
obligations to us under the issuer intercompany loan and to the other secured
creditors will be secured over the same assets. Except in very limited
circumstances, only the security trustee is 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 post-enforcement
priority of payments, see "CASHFLOWS".
To secure our obligations to the noteholders and to our other secured
creditors, we will grant security over all of our assets in favour of the
issuer security trustee. Our secured creditors are the issuer security trustee,
the note trustee, the noteholders, the agent bank, the issuer cash manager, the
issuer account banks, the paying agents, the issuer dollar currency swap
providers, the issuer euro currency swap provider and the corporate services
provider. The issuer security trustee will hold that security for the benefit
of our secured creditors, including the noteholders. This means that our
obligations to our other secured creditors will be secured over the same assets
that secure our obligations under the issuer notes. Except in very limited
circumstances, only the issuer security trustee will be entitled to enforce the
security granted by us. 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 Funding swap provider is Abbey National Treasury Services. Its
registered office is Abbey National House, 2 Triton Square, Regent's Place,
London NW1 3AN. The issuer dollar currency swap provider for the series 1
issuer notes is [__] and its office is at [__]; for the series 2
24
issuer notes is [__] and its office is at [__]; and for the series 3 class A
issuer notes is [__] and its office is at [__]. The issuer euro currency swap
provider for the series 4 class A1 issuer notes, the series 4 class B issuer
notes and the series 4 class M issuer notes is [__] and its office is at [__].
The Funding swap provider has entered into the Funding swap agreement with
Funding, which is a master agreement (including a schedule and a confirmation)
under which the Funding swap has been documented. The issuer dollar currency
swap providers will enter into the issuer dollar currency swap agreements,
which are master agreements (each including a schedule and a confirmation) with
us. The issuer euro currency swap provider will enter into the issuer euro
currency swap agreements, which are master agreements (each including a
schedule and a confirmation) with us.
SWAP AGREEMENTS
Borrowers make payments under the loans in pounds sterling. Some of the
loans carry variable rates of interest, some of the loans pay interest at a
fixed or capped rate or rates of interest and some of the loans pay interest
which tracks an interest rate other than the variable rate set by Abbey
National plc or the mortgages trustee (for example the interest rate may be set
at a margin above sterling LIBOR or above rates set by the Bank of England).
These interest rates do not necessarily match the floating rate of interest
payable on the issuer intercompany loan and accordingly, Funding has entered
into the Funding swap agreement with the Funding swap provider.
Under the Funding swap, Funding makes quarterly payments to the Funding swap
provider based on the weighted average of the average variable rate from
several UK mortgage lenders and the different rates of interest payable on the
tracker rate loans and fixed rate loans (including capped rate loans that are
subject to the specified capped rate of interest) and the Funding swap provider
makes quarterly payments to Funding based on the floating rates of interest
payable on the intercompany loans outstanding at that time.
Payments made by the mortgages trustee to Funding under the mortgages trust
deed, payments made by Funding to us under the issuer intercompany loan and any
drawings under the Funding liquidity reserve fund will be made in pounds
sterling. To enable us to make payments on the interest payment dates in
respect of each of the series 1 issuer notes, the series 2 issuer notes and the
series 3 class A issuer notes in US dollars, we will enter into the issuer
dollar currency swap agreements with the issuer dollar currency swap providers.
Under the issuer dollar currency swaps, we will pay to the issuer dollar
currency swap providers the sterling amounts received on the issuer series 1
term advances, the issuer series 2 term advances and the issuer series 3 class
A term advance and the issuer dollar currency swap providers will pay to us
amounts in US dollars that are equal to the amounts to be paid on the relevant
classes of the series 1 issuer notes, the series 2 issuer notes and the series
3 class A issuer notes.
To enable us to make payments on the series 4 class A1 issuer notes, the
series 4 class B issuer notes and the series 4 class M issuer notes (the "EURO
ISSUER NOTES") in euro, we will enter into the issuer euro currency swap
agreements with the issuer euro currency swap provider. Under the issuer euro
currency swaps, we will pay to the issuer euro currency swap provider the
sterling amounts received on the issuer series 4 class A1 term AAA advance, the
issuer series 4 term AA advance and the issuer series 4 term A advance and the
issuer euro currency swap provider will pay to us amounts in euro that are
equal to the amounts to be paid on the euro issuer notes.
The issuer intercompany loan will pay interest at a floating rate of
interest in sterling calculated by reference to the London inter-bank offer
rate for three-month sterling deposits in effect on the relevant interest
determination date, also called sterling LIBOR, plus a margin for each issuer
term advance.
25
ISSUER POST-ENFORCEMENT CALL OPTION AGREEMENT
The issuer post-enforcement call option agreement will be entered into
between the issuer security trustee, as agent for the class B noteholders and
the class M noteholders, the issuer and a subsidiary of Holdings called PECOH
Limited. The terms of the option will require, upon exercise of the option by
PECOH Limited, the transfer to PECOH Limited of all of the class B issuer notes
and/or all of the class M issuer notes, as the case may be. The class B
noteholders and the class M noteholders will be bound by the terms of the class
B issuer notes and the class M issuer notes, respectively, to transfer the
issuer notes to PECOH Limited in these circumstances. Neither the class B
noteholders nor the class M noteholders will be paid for that transfer.
However, as the post-enforcement call option can be exercised only after the
issuer security trustee has enforced the security granted by us under the
issuer deed of charge and determined that there are no further assets available
to pay amounts due and owing to the class B noteholders and/or the class M
noteholders, as the case may be, the exercise of the post-enforcement call
option will not further disadvantage the economic position of those
noteholders. In addition, exercise of the post-enforcement call option and
delivery by the class B noteholders and/or the class M noteholders of the class
B issuer notes and/or the class M issuer notes, respectively, to PECOH Limited
will not extinguish any other rights or claims other than the rights to payment
of interest and repayment of principal under the class B issuer notes and/or
the class M issuer notes that such class B noteholders and/or class M
noteholders may have against us.
RATING OF THE ISSUER NOTES
The series 1 class A issuer notes are expected to be assigned an A-1+ rating
by Standard & Poor's, a P-1 rating by Moody's and a F1+ rating by Fitch. The
series 2 class A issuer notes, the series 3 class A issuer notes and the series
4 class A issuer notes are expected to be assigned an AAA rating by Standard &
Poor's, an Aaa rating by Moody's and an AAA rating by Fitch. The class B issuer
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 class M issuer notes are
expected to be assigned an A rating by Standard & Poor's, an A2 rating by
Moody's and an A rating by Fitch.
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 organisation if, in its judgment, circumstances in the future
so warrant.
Together Standard & Poor's, Moody's and Fitch comprise the rating agencies,
which is to be understood to include any further or replacement rating agency
appointed by us with the approval of the note trustee to give a credit rating
to the issuer notes or any class of the issuer notes.
LISTING
Application has been made to the UK Listing Authority for each class of the
issuer notes to be admitted to the official list of the UK Listing Authority.
Application will also be made to the London Stock Exchange for each class of
the issuer notes to be admitted to trading on the London Stock Exchange.
THE PREVIOUS ISSUERS, NEW ISSUERS AND FUNDING 2
The previous issuers, each of which is a wholly owned subsidiary of
Holdings, issued the previous notes and from those issue proceeds made the
previous intercompany loans to Funding as follows:
* Holmes Financing (No. 1) PLC, on 26th July, 2000;
* Holmes Financing (No. 2) PLC, on 29th November, 2000;
* Holmes Financing (No. 3) PLC, on 23rd May, 2001;
* Holmes Financing (No. 4) PLC, on 5th July, 2001;
* Holmes Financing (No. 5) PLC, on 8th November, 2001; and
* Holmes Financing (No. 6) PLC, on 7th November, 2002.
26
Funding's obligations under these previous intercompany loans are secured by
the same security that secures the issuer intercompany loan. In addition, it is
expected that in the future, subject to satisfaction of certain conditions,
Holdings may establish additional wholly owned subsidiary companies to issue
new notes to investors. One of these conditions is that the ratings of your
issuer notes will not be downgraded 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 a new intercompany loan to do one or more of the following:
* pay the seller for new loans and their related security to be
assigned to the mortgages trustee, which will result in an increase
in Funding's share of the trust property;
* pay the seller for an increase in Funding's share of the trust
property (as under this transaction) (resulting in a corresponding
decrease in the seller's share of the trust property);
* refinance an intercompany loan or intercompany loans outstanding at
that time, which will not result in a change in the size of
Funding's share of the trust property. In these circumstances,
Funding will use the proceeds of the new intercompany loan to repay
an intercompany loan outstanding at that time, which the relevant
issuer will, provided that the terms of the relevant notes then
permit such optional redemption, use to repay the relevant
noteholders. If our issuer intercompany loan to Funding is
refinanced in these circumstances, you could be repaid early; and/
or
* to use a part of the proceeds to make a deposit in one or more of
the reserve funds.
Regardless of which of these uses of proceeds is selected, the previous
notes, your issuer notes and any new notes will all be secured ultimately over
Funding's share of the trust property and will be subject to the ranking
described in the following paragraphs.
Funding will apply amounts it receives from the trust property to pay
amounts it owes under the previous term advances, the issuer term advances and
new term advances without distinguishing when the share in the trust property
was acquired or when the relevant term advance was made. Funding's obligations
to pay interest and principal to us on the issuer term advances and to the
previous issuers or new issuers on their respective previous term advances or
new term advances will rank either equal with, ahead of or after each other,
primarily depending on the relative designated rating of each previous term
advance, issuer term advance and new term advance. The rating of a previous
term advance, issuer term advance or new term advance will be the rating
assigned by the rating agencies to the previous notes, the issuer notes or the
new notes, which are used to fund the relevant term advance, on their date of
issue. Funding will pay interest and (subject to their respective scheduled
repayment dates and the rules for application of principal receipts described
in "CASHFLOWS -- RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS
AND FUNDING PRINCIPAL RECEIPTS") principal first on the previous term advances,
the issuer term advances and the new term advances with the highest rating, and
thereafter on the previous term advances, the issuer term advances and the new
term advances with the next highest rating, and so on down to the previous term
advances, the issuer term advances and the new term advances with the lowest
rating. Accordingly, any term advance in relation to previous notes or new
notes that have an AAA rating will rank equally with Funding's payments of
interest and (subject to their respective scheduled repayment dates and the
rules referred to in this paragraph) principal on the issuer term AAA advances
and will rank ahead of Funding's payments of interest and principal on the
issuer term AA advances and the issuer term A advances. Payment of principal on
the previous term BB advance in respect of the previous intercompany loan from
Holmes Financing (No. 4) PLC is treated differently and will depend on Funding
having sufficient Funding available revenue receipts therefor after meeting its
other obligations (including its obligation to fully fund the reserve funds)
and/or there being excess amounts standing to the credit of the reserve funds
on an interest payment date falling in or after July 2006.
27
It should be noted, however, that although a previous term advance, issuer
term advance and any new term advance may rank equally, principal payments may
be made earlier on the previous term advances, new term advances or the issuer
term advances, as the case may be, depending on their scheduled repayment and
final repayment dates. Further, as described in "CASHFLOWS -- RULES FOR
APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND FUNDING PRINCIPAL
RECEIPTS", in some circumstances, Funding will continue to make payments on
term advances due and payable under each of the issuer intercompany loan and
the previous intercompany loans, irrespective of term advance rating. More
specifically, if amounts are due and payable on any of the pass-through term
advances made under the previous intercompany loans which have a term advance
rating of AA or BBB, and at the same time amounts are due and payable on the
pass-through term advance made under the issuer intercompany loan which has a
term advance rating of AAA, then Funding will allocate principal receipts
available to it to each of the previous issuers and the issuer based on the
outstanding principal balance of each of their respective intercompany loans.
You should also note that during a cash accumulation period for any bullet
term advance under an intercompany loan (for example, the issuer intercompany
loan), Funding will continue to make principal repayments in respect of amounts
due and payable in respect of pass-through term advances and scheduled
amortisation term advances under other intercompany loans (for example, one of
the previous intercompany loans), based on the outstanding principal balance of
each of those intercompany loans.
If Funding enters into a new intercompany loan agreement the terms of the
Funding swap agreement provide that the notional amount of the Funding swap
will be increased in order to address the potential mismatch between variable,
tracker and fixed rates of interest paid by borrowers on the loans and the
floating rate of interest paid by Funding on the intercompany loans outstanding
at that time (including the new intercompany loan), as described further in
"THE SWAP AGREEMENTS". The various margins on the fixed, floating and tracker
elements of the Funding swap will vary depending on the nature of the loans
constituting the trust property from time to time.
As Funding enters into new intercompany loan agreements, it will, if
required, simultaneously enter into new start-up loan agreements with a new
start-up loan provider which will provide for the costs and expenses of the
issue of the new notes and, if required by the rating agencies, for extra
amounts to be credited to one or both reserve funds.
Pursuant to its obligations under the Listing Rules of the UK Listing
Authority, if a new issuer is established to issue new notes, then the issuer
will notify or procure that notice is given of that new issue.
Holdings may establish a new entity, Funding 2, which may, in the future,
issue new notes from time to time and (subject to the agreement of the seller
and Funding) use the proceeds to make a payment to the seller to acquire an
interest in the trust property rather than lending the proceeds to Funding.
Funding 2 would be a wholly owned subsidiary of Holdings. In that event,
Funding 2 would become a beneficiary of the mortgages trust subject to the
satisfaction of certain conditions (see "RISK FACTORS -- HOLDINGS MAY ESTABLISH
ANOTHER COMPANY, FUNDING 2, WHICH MAY BECOME AN ADDITIONAL BENEFICIARY UNDER
THE MORTGAGES TRUST").
UNITED KINGDOM TAX STATUS
Subject to important qualifications and conditions set out under "UNITED
KINGDOM TAXATION", including as to final documentation and assumptions,
Slaughter and May, our UK tax advisers, are of the opinion that:
* no UK withholding tax will be required on interest payments to any
holder of the issuer notes provided that the issuer notes are
listed on a recognised stock exchange, which includes the London
Stock Exchange;
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* 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 in connection with which the payments are received will not be
subject to UK taxation in respect of payment of principal and
interest on the issuer notes;
* no UK stamp duty or stamp duty reserve tax is payable on the issue
or transfer of the global issuer notes or on the issue or transfer
of an issuer note in definitive form;
* Funding and the issuer will generally be subject to UK corporation
tax, currently at a rate of 30 per cent., 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 seller has confirmed to Slaughter
and May that the profit in the profit and loss account will not
exceed 0.01 per cent. of the Funding available revenue receipts. In
respect of the issuer, the seller has confirmed to Slaughter and
May that the profit in the profit and loss account will not exceed
0.02 per cent. of the interest on the issuer term advances under
the issuer intercompany loan. We refer you to the risk factor "TAX
PAYABLE BY FUNDING OR THE ISSUER MAY ADVERSELY AFFECT OUR ABILITY
TO MAKE PAYMENTS ON THE ISSUER NOTES"; and
* the mortgages trustee will have no liability to UK tax in respect
of any income, profit or gain arising under these arrangements
apart from a liability to UK corporation tax on amounts, such as
trustee fees and expenses, which are paid to the mortgages trustee
for its own benefit. 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
In the opinion of Cleary, Gottlieb, Steen & Hamilton, our US tax advisers,
the series 1 issuer notes, the series 2 issuer notes and the series 3 class A
issuer notes will be treated as debt for US federal income tax purposes. We
intend to treat these classes of issuer notes as debt of the issuer. The US
Internal Revenue Service could seek to recharacterise these classes of issuer
notes as an ownership interest in the related debt of Funding. In that case, a
US holder of a class of issuer notes generally would be treated as holding
Funding debt and a currency swap, which may be integrated as a synthetic debt
instrument having the characteristics of the applicable class of issuer notes
and substantially the same tax treatment as if the class of issuer notes were
characterised as debt of the issuer. See "UNITED STATES TAXATION -- US ISSUER
NOTES AS DEBT OF FUNDING".
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.
ELIGIBILITY OF NOTES FOR PURCHASE BY MONEY MARKET FUNDS
The series 1 class A issuer notes will be eligible for purchase by money
market funds under Rule 2a-7 under the United States Investment Company Act of
1940, as amended.
ERISA CONSIDERATIONS FOR INVESTORS
The series 1 issuer notes, the series 2 issuer notes and the series 3 class
A issuer notes are 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 herein under "ERISA
CONSIDERATIONS". Each purchaser of any such issuer notes (and all subsequent
transferees thereof) will be deemed to have represented and warranted that its
purchase, holding and disposition of such issuer 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
29
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 issuer notes satisfies
the prudence, investment diversification and other applicable requirements of
those provisions.
FEES
The following table sets out the on-going fees to be paid by the issuer, the
previous issuers, Funding and the mortgages trustee to transaction parties.
PRIORITY IN
TYPE OF FEE AMOUNT OF FEE CASHFLOW FREQUENCY
- --------------------------------- ---------------------- ------------------- -----------------
Servicing fee 0.12 per cent. per Ahead of all Each
year of Funding's revenue amounts distribution date
share of trust payable to Funding
property by the mortgages
trustee
Funding cash management fee [GBP]117,500 each year Ahead of all senior Each interest
issuer term payment date
advances
Holmes Financing (No. 1) PLC cash Estimated [GBP]124,550 Ahead of all senior Each interest
management fee and corporate each year outstanding payment date
expenses previous notes of
Holmes Financing
(No. 1) PLC
Holmes Financing (No. 2) PLC cash Estimated [GBP]124,550 Ahead of all senior Each interest
management fee and corporate each year outstanding payment date
expenses previous notes of
Holmes Financing
(No. 2) PLC
Holmes Financing (No. 3) PLC cash Estimated [GBP]124,550 Ahead of all senior Each interest
management fee and corporate each year outstanding payment date
expenses previous notes of
Holmes Financing
(No. 3) PLC
Holmes Financing (No. 4) PLC cash Estimated [GBP]124,550 Ahead of all senior Each interest
management fee and corporate each year outstanding payment date
expenses previous notes of
Holmes Financing
(No. 4) PLC
Holmes Financing (No. 5) PLC cash Estimated [GBP]124,550 Ahead of all senior Each interest
management fee and corporate each year outstanding payment date
expenses previous notes of
Holmes Financing
(No. 5) PLC
30
PRIORITY IN
TYPE OF FEE AMOUNT OF FEE CASHFLOW FREQUENCY
- ---------------------------------------- ----------------------- -------------------- -----------------
Holmes Financing (No. 6) PLC cash Estimated Ahead of all senior Each interest
management fee and corporate [GBP]124,550 each outstanding payment date
expenses year previous notes of
Holmes Financing
(No. 6) PLC
Issuer cash management fee Estimated Ahead of all senior Each interest
[GBP]117,500 each outstanding issuer payment date
year notes
Corporate expenses of the mortgages Estimated [GBP]7,050 Ahead of all Each
trustee each year revenue amounts distribution date
payable to Funding
by the mortgages
trustee
Corporate expenses of Funding Estimated Ahead of all senior Each interest
[GBP]21,737.50 each issuer term payment date
year advances
Corporate expenses of the issuer Estimated [GBP]7,050 Ahead of all senior Each interest
each year outstanding issuer payment date
notes
Commitment fee under the Funding 0.10 per cent. of Ahead of all senior Each interest
liquidity facility undrawn amount issuer term payment date
under Funding advances
liquidity facility from
time to time
Commitment fee under the Holmes 0.10 per cent. of Ahead of all senior Each interest
Financing (No. 1) PLC liquidity facility undrawn amount outstanding payment date
under previous previous notes of
issuer liquidity Holmes Financing
facility from time to (No. 1) PLC
time
Commitment fee under the Holmes 0.12 per cent. of Ahead of all senior Each interest
Financing (No. 2) PLC liquidity facility undrawn amount outstanding payment date
under previous previous notes of
issuer liquidity Holmes Financing
facility from time to (No. 2) PLC
time
Commitment fee under the Holmes 0.14 per cent. up to Ahead of all senior Each interest
Financing (No. 3) PLC liquidity facility but excluding the outstanding payment date
interest payment previous notes of
date in October Holmes Financing
2006 and thereafter (No. 3) PLC
0.28 per cent. of
undrawn amount
under previous
issuer liquidity
facility from time to
time
31
PRIORITY IN
TYPE OF FEE AMOUNT OF FEE CASHFLOW FREQUENCY
- ---------------------------------------- ----------------------- -------------------- -----------------
Commitment fee under the Holmes 0.14 per cent. up to Ahead of all senior Each interest
Financing (No. 4) PLC liquidity facility but excluding the outstanding payment date
interest payment previous notes of
date in October Holmes Financing
2006 and thereafter (No. 4) PLC
0.28 per cent. of
undrawn amount
under previous
issuer liquidity
facility from time to
time
Commitment fee under the Holmes 0.14 per cent. up to Ahead of all senior Each interest
Financing (No. 5) PLC liquidity facility but excluding the outstanding payment date
interest payment previous notes of
date in October Holmes Financing
2006 and thereafter (No. 5) PLC
0.28 per cent. of
undrawn amount
under previous
issuer liquidity
facility from time to
time
Commitment fee under the Holmes 0.14 per cent. up to Ahead of all senior Each interest
Financing (No. 6) PLC liquidity facility but excluding the outstanding payment date
interest payment previous notes of
date in April 2008 Holmes Financing
and thereafter 0.28 (No. 6) PLC
per cent. of undrawn
amount under
previous issuer
liquidity facility from
time to time
Fee payable by Funding to the security $5,000 per annum Ahead of all senior Each interest
trustee issuer term payment date
advances
Fee payable by the issuer to the issuer $6,000 per annum Ahead of all senior Each interest
security trustee and the note trustee outstanding issuer payment date
notes
Each of the fees set out in the preceding table (other than under previous
issuer liquidity facilities) is, where applicable, inclusive of value added
tax, which is currently assessed at 17.5 per cent. The fees will be subject to
adjustment if the applicable rate of value added tax changes.
32
RISK FACTORS
This section describes the principal risk factors associated with an
investment in the issuer notes. If you are considering purchasing our issuer
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.
YOU CANNOT RELY ON ANY PERSON OTHER THAN US TO MAKE PAYMENTS ON THE ISSUER
NOTES
The issuer notes will not represent an obligation or be the responsibility
of any of Abbey National plc or any of its affiliates, J.P. Morgan Securities
Inc., J.P. Morgan Securities Ltd., the other managers, Salomon Smith Barney
Inc., Salomon Brothers International Limited., or any of their respective
affiliates, the other underwriters, the previous issuers, the mortgages
trustee, the security trustee, the issuer security trustee, the note trustee or
any other party to the transaction other than us.
WE HAVE A LIMITED SET OF RESOURCES AVAILABLE TO US TO MAKE PAYMENTS ON THE
ISSUER NOTES
Our ability to make payments of principal and interest on the issuer notes
and to pay our operating and administrative expenses will depend primarily on
the funds being received under the issuer intercompany loan. In addition, we
will rely on the issuer dollar currency swaps and the issuer euro currency
swaps to provide payments on the issuer notes denominated in US dollars and
euro, respectively.
If Funding is unable to pay in full on any interest payment date (a) the
interest on any term advance, (b) the operating and administrative expenses and/
or (c) the principal payments in respect of the previous issuer series 1 term
AAA advance made by Holmes Financing (No. 6) PLC and the issuer series 1 term
AAA advance on their maturity dates, respectively, and in the event that the
seller suffers a certain ratings downgrade, Funding may draw money from the
Funding liquidity reserves fund (See "CREDIT STRUCTURE").
We will not have any other significant sources of funds available to meet
our obligations under the issuer notes and/or any other payments ranking in
priority to the issuer notes.
FUNDING IS NOT OBLIGED TO MAKE PAYMENTS ON THE ISSUER TERM ADVANCES IF IT DOES
NOT HAVE ENOUGH MONEY TO DO SO, WHICH COULD ADVERSELY AFFECT PAYMENTS ON THE
ISSUER NOTES
Funding's ability to pay amounts due on the issuer term advances will depend
upon:
* Funding receiving enough funds from the Funding share percentage of
the revenue and principal receipts on the loans included in the
mortgages trust on or before each interest payment date;
* Funding receiving the required funds from the Funding swap
provider;
* the amount of funds credited to the reserve funds (as described in
"CREDIT STRUCTURE -- FIRST RESERVE FUND" and "CREDIT STRUCTURE --
SECOND RESERVE FUND");
* Funding making drawings as permitted under the Funding liquidity
facility (as described in "CREDIT STRUCTURE -- FUNDING LIQUIDITY
FACILITY"); and
* the allocation of funds between the previous term advances, the
issuer term advances and any new term advances (as described in
"CASHFLOWS").
According to the terms of the mortgages trust deed, the mortgages trustee is
obliged to pay to Funding the Funding share percentage of revenue receipts on
the loans by crediting those amounts to the Funding GIC account on each
distribution date. The mortgages trustee is obliged to pay to Funding principal
receipts on the loans by crediting those amounts to the Funding GIC account as
and when required pursuant to the terms of the mortgages trust deed.
Funding will be obliged to pay revenue receipts due to us under the issuer
intercompany loan only to the extent that it has revenue receipts left over
after making payments ranking in priority to us, such as payments of certain
fees and expenses of Funding and payments on certain higher ranking previous
term advances under the previous intercompany loans.
33
Funding will be obliged to pay principal receipts due to us under the issuer
intercompany loan only to the extent that it has principal receipts available
for that purpose after repaying amounts ranking in priority to us (including
repaying certain higher ranking previous term advances), as described in
"CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO
ENFORCEMENT OF THE FUNDING SECURITY OR THE OCCURRENCE OF A TRIGGER EVENT OR
ENFORCEMENT OF THE ISSUER SECURITY -- RULES FOR APPLICATION OF FUNDING
AVAILABLE PRINCIPAL RECEIPTS AND FUNDING PRINCIPAL RECEIPTS" and "DESCRIPTION
OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS INTERCOMPANY
LOANS".
If there is a shortfall between the amounts payable by Funding to us under
the issuer intercompany loan agreement and the amounts payable by us on the
issuer notes, you may, depending on what other sources of funds are available
to us and to Funding, not receive the full amount of interest and/or principal
which would otherwise be due and payable on the issuer notes.
FAILURE BY FUNDING TO MEET ITS OBLIGATIONS UNDER THE ISSUER INTERCOMPANY LOAN
AGREEMENT WOULD ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
If Funding does not make payments due and payable on the issuer intercompany
loan, then we may not have enough money to make payments on the issuer notes,
and in addition we will have only limited recourse to the assets of Funding. If
Funding does not pay amounts under the issuer intercompany loan because it does
not have enough money available, those amounts will be deemed not to be due and
payable, so there will not be an event of default under the issuer intercompany
loan, and we will not have recourse to the assets of Funding in that instance.
ON THE FINAL REPAYMENT DATE OF THE ISSUER INTERCOMPANY LOAN ANY OUTSTANDING
AMOUNTS IN RESPECT OF THE ISSUER TERM AA ADVANCES AND THE ISSUER TERM A
ADVANCES WILL BE EXTINGUISHED, WHICH WOULD CAUSE A LOSS ON ANY CLASS B ISSUER
NOTES AND ANY CLASS M ISSUER NOTES STILL OUTSTANDING
The transaction has been structured in the expectation that on the final
repayment date of the issuer intercompany loan in July 2040, the interest and
principal due and payable on the issuer term AA advances and the issuer term A
advances will be in an amount equal to the sum available to pay all outstanding
interest and/or principal (including interest and/or principal deferred and
unpaid) on the issuer term AA advances and the issuer term A advances (after
paying amounts of a higher order of priority as required by the Funding
priority of payments).
If there is a shortfall between the amount available to pay such interest
and/or principal and the amount required to pay all outstanding interest and/or
principal on the issuer term AA advances and the issuer term A advances, then
the shortfall will be deemed to be not due and payable under the issuer
intercompany loan agreement and we will not have any claim against Funding for
the shortfall.
If there is such a shortfall in interest and/or principal payments under the
issuer intercompany loan agreement, you may not receive the full amount of
interest and/or principal which would otherwise be due and payable on the class
B issuer notes or the class M issuer notes outstanding.
ENFORCEMENT OF THE ISSUER SECURITY IS THE ONLY REMEDY FOR A DEFAULT IN THE
ISSUER'S OBLIGATIONS, AND THE PROCEEDS OF THAT ENFORCEMENT MAY NOT BE ENOUGH TO
MAKE PAYMENTS ON THE ISSUER NOTES
The only remedy for recovering amounts on the issuer notes is through the
enforcement of the issuer security. We have no recourse to the assets of
Funding unless Funding has also defaulted on its obligations under the issuer
intercompany loan and the Funding security has been enforced.
If the security created as required by the issuer deed of charge is
enforced, the proceeds of enforcement may be insufficient to pay all principal
and interest due on the issuer notes.
34
THE TRANSACTION HAS BEEN STRUCTURED IN THE EXPECTATION THAT THE SERIES 1 ISSUER
NOTES WILL BE REDEEMED BEFORE THE SERIES 2 ISSUER NOTES, THE SERIES 2 ISSUER
NOTES WILL BE REDEEMED BEFORE THE SERIES 3 ISSUER NOTES AND THE SERIES 3 ISSUER
NOTES WILL BE REDEEMED BEFORE THE SERIES 4 ISSUER NOTES
The transaction has been structured in the expectation that:
* the series 1 issuer notes will be redeemed in full prior to the
redemption of the series 2 issuer notes, the series 3 issuer notes
and the series 4 issuer notes;
* the series 2 issuer notes will be redeemed in full prior to the
redemption of the series 3 issuer notes and the series 4 issuer
notes; and
* the series 3 issuer notes will be redeemed in full prior to the
redemption of the series 4 issuer notes;
This means, among other things, that the series 1 class B issuer notes and
the series 1 class M issuer notes are expected to be redeemed before the series
2 class A issuer notes, the series 3 class A issuer notes and the series 4
class A issuer notes, even though the series 2 class A issuer notes, the series
3 class A issuer notes and the series 4 class A issuer notes have a higher
rating than the series 1 class B issuer notes and the series 1 class M issuer
notes.
If the issuer does not exercise its option to redeem the issuer notes (other
than the series 1 class A issuer notes and the series 2 class A issuer notes)
on the interest payment date falling in April 2008, then the transaction has
been structured in the expectation that the series 2 class A issuer notes will
be redeemed in full before the series 3 class A issuer notes and that the
series 3 class A issuer notes will be redeemed in full before the series 4
issuer notes.
However, there is no assurance that the series 1 issuer notes will be
redeemed in full before the series 2 issuer notes, the series 3 issuer notes
and the series 4 issuer notes or that the series 2 issuer notes will be
redeemed in full before the series 3 issuer notes and the series 4 issuer notes
or that the series 3 issuer notes will be redeemed in full before the series 4
issuer notes. In each case, redemption of the issuer notes is ultimately
dependent on, among other things, repayment and redemptions on the loans and on
the term advance rating of the issuer term advances. Further, if on any
interest payment date, amounts are due and payable in respect of the class A
issuer notes of any series and amounts are due and payable in respect of the
class B issuer notes of any series and/or the class M issuer notes of any
series, then payments of principal will be made on the class A issuer notes in
priority to payments of principal on the class B issuer notes and the class M
issuer notes. Similarly, if on any interest payment date, amounts are payable
in respect of the class B issuer notes of any series and the class M issuer
notes of any series, then payments of principal will be made on the class B
issuer notes in priority to payments of principal on the class M issuer notes.
See "-- SUBORDINATION OF OTHER NOTE CLASSES MAY NOT PROTECT YOU FROM ALL RISK
OF LOSS".
THERE MAY BE CONFLICTS BETWEEN YOUR INTERESTS AND THE INTERESTS OF ANY OF OUR
OTHER SECURED CREDITORS, AND THE INTERESTS OF THOSE SECURED CREDITORS MAY
PREVAIL OVER YOUR INTERESTS
The issuer deed of charge requires the issuer security trustee to consider
the interests of each of the issuer secured creditors in the exercise of all of
its powers, trusts, authorities, duties and discretions, but requires the
issuer security trustee, in the event of a conflict between your interests and
the interests of any of the other issuer secured creditors, to consider only
your interests, except in the event of a proposed waiver of any breach of the
provisions of the issuer transaction documents or a proposed modification to
any of the issuer transaction documents. In these circumstances, the issuer
security trustee is required to consider whether the proposed waiver or
modification would be materially prejudicial to the interests of an issuer swap
provider and, if so, it is required to get its or their written consent to the
proposed waiver or modification.
The issuer security trustee may agree to matters it considers necessary
which would not be materially prejudicial to you, as long as the interests of
the issuer swap providers would not be materially prejudiced by these matters
and they have given their consent in writing to these matters.
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THERE MAY BE A CONFLICT BETWEEN THE INTERESTS OF THE HOLDERS OF CLASS A ISSUER
NOTES, THE HOLDERS OF CLASS B ISSUER NOTES AND THE HOLDERS OF CLASS M ISSUER
NOTES AND THE INTERESTS OF OTHER CLASSES OF NOTEHOLDERS MAY PREVAIL OVER YOUR
INTERESTS
The issuer trust deed and the terms of the issuer notes will provide that
the note trustee and the issuer security trustee are to have regard to the
interests of the holders of all the classes of issuer notes. There may be
circumstances, however, where the interests of one class of the noteholders
conflicts with the interests of another class or classes of the noteholders.
The issuer trust deed and the terms of the issuer notes will provide that
where, in the opinion of the note trustee or the issuer security trustee, there
is such a conflict, then:
* the note trustee or the issuer security 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 the class M noteholders on
the other hand; and
* the note trustee or the issuer security trustee is to have regard
only to the interests of the class B noteholders in the event of a
conflict between the interests of the class B noteholders on the
one hand and the class M noteholders on the other hand.
THERE MAY BE A CONFLICT BETWEEN THE INTERESTS OF THE HOLDERS OF EACH SERIES OF
THE CLASS A ISSUER NOTES, THE HOLDERS OF EACH SERIES OF THE CLASS B ISSUER
NOTES AND THE HOLDERS OF EACH SERIES OF THE CLASS M ISSUER NOTES, AND THE
INTERESTS OF OTHER SERIES OF NOTEHOLDERS MAY PREVAIL OVER YOUR INTERESTS
There may also be circumstances where the interests of the class A
noteholders of one series of the issuer notes conflict with the interests of
the class A noteholders of another series of the issuer notes or there may be
circumstances where the interests of the class B noteholders of one series of
the issuer notes conflict with the interests of the class B noteholders of
another series of the issuer notes or where the interests of the class M
noteholders of one series of the issuer notes conflict with the interests of
the class M noteholders of another series of the issuer notes.
The issuer trust deed and the terms of the issuer notes will provide that
where, in the opinion of the note trustee or the issuer security trustee, there
is such a conflict, then a resolution directing the note trustee or, as
applicable, the issuer security trustee to take any action must be passed at
separate meetings of the holders of each series of the class A issuer notes,
or, as applicable, each series of the class B issuer notes and each series of
the class M issuer notes. A resolution may only be passed at a single meeting
of the noteholders of each series of the relevant class if the note trustee or,
as applicable, the issuer security trustee is satisfied that there is no
conflict between them.
Similar provisions will apply in relation to requests in writing from
holders of a specified percentage of the principal amount outstanding of the
issuer notes of each class within each series (the principal amount outstanding
being converted into sterling for the purposes of making the calculation). You
should note that as a result of repayments of principal first to the series 1
issuer notes, then to the series 2 issuer notes, then to the series 3 issuer
notes and then to the series 4 issuer notes, the principal amount outstanding
of each series of the issuer notes will change after the closing date.
HOLDINGS MAY ESTABLISH ANOTHER COMPANY, FUNDING 2, WHICH MAY BECOME AN
ADDITIONAL BENEFICIARY UNDER THE MORTGAGES TRUST
Holdings may establish a new entity, Funding 2, which may issue new notes
from time to time and use the proceeds to make a payment to the seller to
acquire an interest in the trust property rather than lending the proceeds to
Funding, subject to the agreement of the seller and Funding, as existing
beneficiaries of the mortgages trust. If Funding 2 becomes a beneficiary of the
mortgages trust then the percentage shares of Funding and the seller in the
trust property may decrease. The introduction of Funding 2 will not cause a
reduction in the principal amount of
36
assets backing the issuer notes. The security trustee will only be entitled to
consent to any modifications to the transaction documents caused by the
introduction of Funding 2, if it is satisfied that such modifications would not
adversely affect the then current ratings of the notes.
If Funding 2 becomes a beneficiary of the mortgages trust then the seller,
Funding and Funding 2 would each have a joint and undivided interest in the
trust property but their entitlement to the proceeds from the trust property
would be in proportion to their respective shares of the trust property. On
each distribution date the mortgages trustee would distribute interest and
principal receipts to one, two or all three beneficiaries, depending on the
terms of the mortgages trust.
It is anticipated that Funding 2 would issue notes directly to investors
from time to time backed by its share of the trust property. You would not have
a direct or indirect interest in Funding 2's share of the trust property.
Amendments would be made to a number of the issuer transaction documents as
a result of the inclusion of Funding 2 as a beneficiary of the mortgages trust.
In particular (but without limitation), amendments would be made to:
* the mortgage sale agreement to enable the purchase by Funding 2 of
interests in the trust property;
* the mortgages trust deed (i) to establish Funding 2 as a
beneficiary of the trust, (ii) to enable changes in Funding 2's
share of the trust property from time to time and (iii) to regulate
the distribution of interest and principal receipts in the trust
property to Funding 2 and the other beneficiaries; and
* the cash management agreement to regulate the application of monies
to Funding 2.
There may be conflicts of interest between Funding and Funding 2, in which
case it is expected that the mortgages trustee would follow the directions
given by the relevant beneficiary that has the largest share of the trust
property at that time. The interests of Funding may not prevail, which may
adversely affect your interests.
IF FUNDING ENTERS INTO NEW INTERCOMPANY LOAN AGREEMENTS, THEN THE NEW TERM
ADVANCES MAY RANK AHEAD OF ISSUER TERM ADVANCES AS TO PAYMENT, AND ACCORDINGLY
NEW NOTES MAY RANK AHEAD OF ISSUER NOTES AS TO PAYMENT
It is likely that Holdings will establish new issuers to issue new notes to
investors. The proceeds of each new issue 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 to:
* pay the seller for new loans and their related security to be
assigned to the mortgages trustee;
* pay the seller for a part of the seller's share of the trust
property to be assigned to Funding;
* refinance an intercompany loan or intercompany loans outstanding at
that time (and if our issuer intercompany loan to Funding is
refinanced, you could be repaid early); and/or
* deposit some of those proceeds in one or more of the reserve funds.
The order in which Funding pays principal and interest to us on the issuer
term advances and to any new issuer on the new term advances will depend
primarily on the designated ratings of those term advances. In general, term
advances with the highest term advance rating will be paid ahead of lower rated
term advances, subject to their relative scheduled repayment dates. For
example, Funding will pay interest due on the issuer term AAA advances
proportionally and equally with the interest due on any new term AAA advances
and ahead of payments of interest due on any term advance with a lower term
advance rating than AAA (including, for the avoidance of doubt, any issuer term
AA advance and any issuer term A advance). Similarly, Funding will, in general,
repay principal amounts due on the issuer term advances and any new term
advances in accordance with their respective term advance ratings, subject to
their relative scheduled
37
repayment dates. For example, principal repayments due on an issuer term AAA
advance generally will be made before principal repayments due on a new term AA
advance. This principle is subject to a number of exceptions, however, which
are designed primarily to provide some protection that scheduled repayments of
principal on the issuer term advances will not materially affect payments of
principal on the previous term advances and in turn would not be materially
affected by payments of principal on any new term advances. Exceptions also
apply to the repayment of principal on the previous term BB advance made by
Holmes Financing (No. 4) PLC. These exceptions are described in "CASHFLOWS --
DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF
THE FUNDING SECURITY OR THE OCCURRENCE OF A TRIGGER EVENT OR ENFORCEMENT OF THE
ISSUER SECURITY -- RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL
RECEIPTS AND FUNDING PRINCIPAL RECEIPTS".
The term advance ratings designated to the issuer term advances on the
closing date will not change even if the ratings assigned to the corresponding
classes of issuer notes change.
The current payment and security priorities of the issuer notes relative to
each other as set out in the issuer deed of charge and the issuer cash
management agreement will not be affected as a result of an issue of new notes
by a new issuer, because the new issue will be separately documented. However,
Funding may be required to repay to a new issuer amounts owing under a new term
advance ahead of or in the same order of priority as amounts owing to us on the
issuer term advances, depending on the term advance rating, the scheduled
repayment date of that new term advance and other rules regarding the repayment
of principal by Funding, as described in "CASHFLOWS -- DISTRIBUTION OF FUNDING
AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY OR
THE OCCURRENCE OF A TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER SECURITY --
RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND FUNDING
PRINCIPAL RECEIPTS". If this is the case, then the relevant new noteholders
will be paid before you.
If Holdings 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, the criteria for the assignment
of new loans to the mortgages trustee and the amount available to be drawn
under the Funding liquidity facility) 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 cashflow available to pay amounts due on
your issuer notes.
Before issuing new notes, however, a new issuer will be required to satisfy
a number of conditions, including:
* obtaining a written confirmation from each of the rating agencies
that the then current ratings of the notes outstanding at that
time, and the implicit ratings of the term advances outstanding at
that time, will not be adversely affected because of the new issue;
* that no event of default under any of the intercompany loan
agreements outstanding at that time has occurred which has not been
remedied or waived and no event of default will occur as a result
of the issue of the new notes; and
* that no principal deficiency is recorded on the principal
deficiency ledger in relation to the term advances outstanding at
that time.
FUNDING HAS ENTERED INTO THE PREVIOUS INTERCOMPANY LOAN AGREEMENTS WITH THE
PREVIOUS ISSUERS, AND SOME OF THE PREVIOUS TERM ADVANCES IN THOSE PREVIOUS
INTERCOMPANY LOANS RANK AHEAD OF SOME OF THE ISSUER TERM ADVANCES IN THE ISSUER
INTERCOMPANY LOAN AS TO PAYMENT, AND ACCORDINGLY SOME OF THE NOTES ISSUED BY
THE PREVIOUS ISSUERS RANK AHEAD OF SOME OF THE ISSUER NOTES AS TO PAYMENT
The previous issuers issued previous notes to investors, the proceeds of
which were used by the previous issuers to make the previous intercompany loans
to Funding. Funding used the proceeds of the previous intercompany loan from
Holmes Financing (No. 1) PLC to pay the seller
38
for loans and their related security assigned to the mortgages trustee which
comprised its original share of the trust property. Funding used the proceeds
of the previous intercompany loans from Holmes Financing (No. 2) PLC and Holmes
Financing (No. 4) PLC to pay the seller for an increase in Funding's share of
the trust property (resulting in a corresponding decrease in the seller's share
of the trust property). Funding used the proceeds of the previous intercompany
loans from Holmes Financing (No. 3) PLC, Holmes Financing (No. 5) PLC and
Holmes Financing (No. 6) PLC to pay the seller for loans and their related
security assigned to the mortgages trustee which constituted an increase in
Funding's existing share of the trust property.
The order in which Funding pays principal and interest to us on the issuer
term advances and to the previous issuers on the previous term advances depends
primarily on the designated ratings of those term advances. See "DESCRIPTION OF
THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS INTERCOMPANY LOANS".
In general, term advances with the highest term advance rating will be paid
ahead of lower rated term advances subject to their relative scheduled
repayment dates. For example, Funding will pay interest due on the issuer term
AAA advances proportionally and equally with the interest due on any previous
term AAA advances and ahead of payments of interest due on any term advance
with a lower term advance rating than AAA (including, for the avoidance of
doubt, any term AA advance, term A advance, term BBB advance or term BB
advance). Similarly, Funding will, in general, repay principal amounts due on
the issuer term advances and the previous term advances in accordance with
their respective term advance ratings. For example, principal repayments due on
an issuer term AAA advance generally will be made before principal repayments
due on a previous term AA advance. This principle is subject to a number of
exceptions, however, which are designed primarily to provide some protection
that scheduled repayments of principal on the issuer term advances will not
materially affect payments of principal on the previous term advances and on
new term advances and in turn would not be materially affected by payments of
principal on the previous term advances and any new term advances. Exceptions
also apply to the repayment of principal on the previous term BB advance made
by Holmes Financing (No. 4) PLC, which is not repaid out of Funding principal
receipts. These exceptions are described in "CASHFLOWS -- DISTRIBUTION OF
FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING
SECURITY OR THE OCCURRENCE OF A TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER
SECURITY -- RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND
FUNDING PRINCIPAL RECEIPTS".
The term advance ratings designated to the previous term advances on the
previous closing dates will not change even if the ratings assigned to the
corresponding classes of previous notes change.
The current payment and security priorities of the issuer notes relative to
each other as set out in the issuer deed of charge and the issuer cash
management agreement are not affected as a result of the issues of previous
notes by the previous issuers, because the previous issues were separately
documented. However, Funding may be required to repay to the previous issuers
amounts which are owing under one or more previous term advances ahead of or in
the same order of priority as amounts owing to us on the issuer term advances,
depending on the term advance rating, the scheduled repayment date of that
previous term advance and other rules regarding the repayment of principal by
Funding, as described in "CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE
PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY OR THE
OCCURRENCE OF A TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER SECURITY -- RULES
FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND FUNDING PRINCIPAL
RECEIPTS". If this is the case, then the relevant previous noteholders will be
paid before you.
NEW ISSUERS AND NEW START-UP LOAN PROVIDERS WILL SHARE IN THE SAME SECURITY
GRANTED BY FUNDING TO THE ISSUER, AND THIS MAY ADVERSELY AFFECT PAYMENTS ON THE
ISSUER NOTES
If Funding enters into a new intercompany loan agreement, then if required
it will also enter into a new start-up loan agreement with new start-up loan
providers and the security trustee. If required by the rating agencies, Funding
will use part of the proceeds of the new start-up loan to fund further one or
both of the existing reserve funds.
39
The new issuer and any new start-up loan provider will become party to the
Funding deed of charge and will be entitled to share in the security granted by
Funding for our benefit (and the benefit of the other Funding secured
creditors) under the Funding deed of charge. In addition, the liabilities owed
to the Funding liquidity facility provider and the Funding swap provider which
are secured by the Funding deed of charge may increase each time that Funding
enters into a new intercompany loan agreement. These factors could ultimately
cause a reduction in the payments you receive on your issuer notes.
THE PREVIOUS ISSUERS, THE FUNDING SWAP PROVIDER AND THE START-UP LOAN PROVIDER
ALREADY SHARE IN THE SECURITY BEING GRANTED BY FUNDING TO THE ISSUER, WHICH MAY
ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
Funding has entered into the previous intercompany loan agreements and it
has also entered into six start-up loan agreements with the start-up loan
provider and the security trustee. Funding used part of the proceeds of these
start-up loans to fund the first reserve fund.
The previous issuers and the start-up loan provider are already party to the
Funding deed of charge and are entitled to share in the security granted by
Funding for the benefit of the Funding secured creditors (including, as from
the closing date, us) under the Funding deed of charge. In addition, the
liabilities owed to the Funding liquidity facility provider and the Funding
swap provider which are secured by the Funding deed of charge may increase each
time that Funding enters into a new intercompany loan agreement. These factors
could ultimately cause a reduction in the payments you receive on your issuer
notes.
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
ISSUER NOTES
The security trustee will exercise its rights under the Funding deed of
charge only in accordance with directions given by the issuers (which could be
one or more of us, the previous issuers and, if Funding enters into new
intercompany loans, any new issuer) that have the highest-ranking outstanding
term advances at that time, provided that the security trustee is indemnified
to its satisfaction.
If the security trustee receives conflicting directions, it will follow the
directions given by the relevant issuers representing the largest principal
amount outstanding of relevant term advances. If we are not in the group
representing that largest principal amount, then our interests may not prevail.
This could ultimately cause a reduction in the payments you receive on your
issuer notes.
AS NEW LOANS ARE ASSIGNED TO THE MORTGAGES TRUSTEE, THE CHARACTERISTICS OF THE
TRUST PROPERTY MAY CHANGE FROM THOSE EXISTING AT THE CLOSING DATE, AND THOSE
CHANGES MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
There is no guarantee that any new loans assigned to the mortgages trustee
will have the same characteristics as the loans in the portfolio as at the
closing date. In particular, new loans may have different payment
characteristics than the loans in the portfolio as at the closing date. The
ultimate effect of this could be to delay or reduce the payments you receive on
the issuer notes. However, the new loans will be required to meet the criteria
described in "ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY". These
criteria may be modified after the closing date and your consent to such
modifications will not be obtained provided that the security trustee is
satisfied that the then current ratings of the issuer notes will not be
adversely affected by the proposed modifications.
THE YIELD TO MATURITY OF THE ISSUER NOTES MAY BE ADVERSELY AFFECTED BY
PREPAYMENTS OR REDEMPTIONS ON THE LOANS
The yield to maturity of the issuer notes of each class will depend mostly
on (a) the amount and timing of payment of principal on the loans and (b) the
price paid by the noteholders of each class of issuer notes.
40
The yield to maturity of the issuer notes of each class may be adversely
affected by a higher or lower than anticipated rate of prepayments on the
loans. The factors affecting the rate of prepayment on the loans are described
in "-- OUR ABILITY TO REDEEM THE SERIES 1 CLASS A ISSUER NOTES AND/OR THE
SERIES 2 CLASS A ISSUER NOTES AND/OR THE SERIES 3 CLASS A ISSUER NOTES ON THEIR
SCHEDULED REDEMPTION DATES IS AFFECTED BY THE RATE OF PREPAYMENT ON THE LOANS"
and "--THE OCCURRENCE OF TRIGGER EVENTS AND ENFORCEMENT OF THE ISSUER SECURITY
MAY ADVERSELY AFFECT THE SCHEDULED REDEMPTION DATES OF THE SERIES 1 CLASS A
ISSUER NOTES, SERIES 2 CLASS A ISSUER NOTES AND/OR SERIES 3 CLASS A ISSUER
NOTES".
No assurance can be given that Funding will accumulate sufficient funds
during the scheduled amortisation period relating to the issuer series 1 term
AAA advance or the issuer series 3 term AAA advance to enable it to repay those
term advances to us so that the series 1 class A issuer notes or the series 3
class A issuer notes are amortised and redeemed in full on their scheduled
redemption dates. However the transaction has been structured in expectation
that the series 1 class A issuer notes and the series 3 class A issuer notes
will be redeemed by their final maturity dates being the interest payment dates
falling in April 2004 and July 2020, respectively.
No assurance can be given that Funding will accumulate sufficient funds
during the cash accumulation period relating to the issuer series 2 term AAA
advance to enable it to repay that issuer term advance to us so that the series
2 class A issuer notes will be redeemed in their entirety on their scheduled
redemption date.
During the cash accumulation period for the issuer series 2 term AAA
advance, no repayments of principal will be made on the issuer series 4 term
AAA advances, the issuer term AA advances or the issuer term A advances. This
means that there will be no corresponding repayments of principal on the series
4 class A issuer notes, the class B issuer notes or the class M issuer notes.
The extent to which sufficient funds are saved by Funding during a cash
accumulation period or a scheduled amortisation period or received by it from
its share in the mortgages trust on a scheduled repayment date will depend on
whether the actual principal prepayment rate of the loans is the same as the
assumed principal prepayment rate. If Funding is not able to save enough money
during a cash accumulation period or a scheduled amortisation period or does
not receive enough money from its share in the mortgages trust on a scheduled
repayment date to repay the relevant issuer term AAA advance (and if it is
unable to make a drawing on the Funding liquidity facility or the first reserve
fund to make good the shortfall) so that we can redeem the class A issuer notes
of the corresponding series on their respective scheduled redemption date(s),
then Funding will be required to pay to us on those scheduled redemption dates
only the amount that it has actually saved or received. Any shortfall will be
deferred and paid on subsequent interest payment dates when Funding has money
available to make the payment (other than in the case of the amount payable on
the second scheduled repayment date for the series 1 class A issuer notes, in
respect of which there will be no deferring of any shortfall to the subsequent
interest payment date). In these circumstances, there may be a variation in the
yield to maturity of the relevant class of issuer notes.
OUR ABILITY TO REDEEM THE SERIES 1 CLASS A ISSUER NOTES AND/OR THE SERIES 2
CLASS A ISSUER NOTES AND/OR THE SERIES 3 CLASS A ISSUER NOTES ON THEIR
SCHEDULED REDEMPTION DATES IS AFFECTED BY THE RATE OF PREPAYMENT ON THE LOANS
The rate of prepayment of 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 loans may
be due to borrowers refinancing their loans and sales of properties by
borrowers (either voluntarily or as a result of enforcement action taken). In
addition, if the seller is required to repurchase a loan or loans under a
mortgage account and their related security because, for example, one of the
loans does not comply with the loan warranties in the mortgage sale agreement,
then the payment received by the mortgages trustee will have the same effect as
41
a prepayment of all of the loans under the mortgage account. 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
portfolio may experience.
Variation in the rate of prepayments of principal on the loans may affect
each class of issuer notes differently depending upon amounts already repaid by
Funding to us under the issuer intercompany loan and whether a trigger event
has occurred, or a loan is subject to a product switch or a further advance or
the security granted by us under the issuer deed of charge has been enforced.
If prepayments on the loans occur less frequently than anticipated, then there
may not be sufficient funds available to redeem the series 1 class A issuer
notes and/or the series 2 class A issuer notes and/or the series 3 class A
issuer notes in full on their respective scheduled redemption dates.
THE SELLER MAY CHANGE THE LENDING CRITERIA RELATING TO LOANS THAT ARE
SUBSEQUENTLY ASSIGNED TO THE MORTGAGES TRUSTEE, WHICH COULD AFFECT THE
CHARACTERISTICS OF THE TRUST PROPERTY AND WHICH MAY ADVERSELY AFFECT PAYMENTS
ON THE ISSUER NOTES
Each of the loans was originated in accordance with the seller's lending
criteria at the time of origination. The current lending criteria are set out
in the section "THE LOANS -- CHARACTERISTICS OF THE 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 loans and new related security to the mortgages trustee,
the seller will warrant that those new loans and new related security were
originated in accordance with the seller's lending criteria 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 loan at the time of its origination may not be or have been
the same as those set out in the section "THE LOANS -- CHARACTERISTICS OF THE
LOANS -- LENDING CRITERIA".
If new 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 the issuer notes.
THE SELLER HAS INTRODUCED PROCEDURES RELATING TO INVESTIGATIONS AND SEARCHES
FOR REMORTGAGES WHICH COULD AFFECT THE CHARACTERISTICS OF THE TRUST PROPERTY
AND WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
The seller no longer requires a solicitor or licensed or qualified
conveyancer to conduct a full investigation of the title to a property in all
cases. Where the borrower is remortgaging there will be a more limited form of
investigation of title for properties located in England, Wales and Scotland,
in particular in the case of registered land in England and Wales (e.g.
confirming that the borrower is the registered proprietor of the property and
the description of the property corresponds with the entries on H.M. Land
Registry's register) and confirming such other matters as are required by a
reasonable, prudent mortgage lender. Properties which have undergone such a
limited investigation may be subject to matters which would have been revealed
by a full investigation of title and which may have been remedied or, if
incapable of remedy, may have resulted in the properties not being accepted as
security for a loan had such matters been revealed. The introduction of loans
secured by such properties into the trust property could result in a change of
the characteristics of the trust property. This could lead to a delay or a
reduction in the payments received on the issuer notes.
THE TIMING AND AMOUNT OF PAYMENTS ON THE LOANS COULD BE AFFECTED BY VARIOUS
FACTORS WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
The loans are affected by credit, liquidity and interest rate risks. Various
factors influence mortgage delinquency rates, prepayment rates, repossession
frequency and the ultimate payment of interest and principal, such as 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
42
policies. Other factors in borrowers' individual, personal or financial
circumstances may affect the ability of borrowers to repay 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 loans.
In addition, the ability of a borrower to sell a property given as security
for a loan at a price sufficient to repay the amounts outstanding under the
loan will depend upon a number of factors, including the availability of buyers
for that property, the value of that property and property values in general at
the time.
The principal source of income for repayment of the issuer notes by us is
the issuer intercompany loan. The principal source of income for repayment by
Funding of the issuer intercompany loan is its interest in the loans held on
trust by the mortgages trustee for Funding and the seller. If the timing and
payment of the loans is adversely affected by any of the risks described in
this section, then the payments on the issuer notes could be reduced or
delayed.
THE OCCURRENCE OF TRIGGER EVENTS AND ENFORCEMENT OF THE ISSUER SECURITY MAY
ADVERSELY AFFECT THE TIMING OF THE SCHEDULED REDEMPTION OF THE SERIES 1 CLASS A
ISSUER NOTES, SERIES 2 CLASS A ISSUER NOTES AND/OR SERIES 3 CLASS A ISSUER
NOTES
If no trigger event has occurred and the issuer security has not been
enforced, then payments of principal will not occur on the series 1 class A
issuer notes, series 2 class A issuer notes and/or series 3 class A issuer
notes before their respective scheduled redemption dates.
If a trigger event occurs or the issuer security is enforced prior to the
scheduled redemption dates for the series 1 class A issuer notes, series 2
class A issuer notes and/or series 3 class A issuer notes, then the relevant
classes of issuer notes outstanding will not be repaid on their scheduled
redemption dates but will be repaid on each interest payment date from monies
received from Funding on the issuer term AAA advances of the corresponding
series as described in the following three risk factors.
If an asset trigger event occurs, any series 1 class A issuer notes, series
2 class A issuer notes, and/or series 3 class A issuer notes then outstanding
will not be repaid on their scheduled redemption dates.
When an asset trigger event has occurred, the mortgages trustee will
distribute principal receipts on the loans to Funding and the seller
proportionally and equally based on their percentage shares of the trust
property (that is, the Funding share percentage and the seller share
percentage). When an asset trigger event has occurred, Funding will repay:
first, the issuer term AAA advances and the previous term AAA advances of
each series proportionally and equally, until all of those term AAA
advances are fully repaid;
then, the issuer term AA advances and the previous term AA advances of
each series proportionally and equally, until all of those term AA
advances are fully repaid;
then, the issuer term A advances of each series proportionally and
equally, until all of those term A advances are fully repaid.
This order of priority of payments may change if Funding enters into new
intercompany loan agreements. If an asset trigger event occurs, any series 1
class A issuer notes, series 2 class A issuer notes and/or series 3 class A
issuer notes then outstanding will not be repaid on their scheduled redemption
dates, and there is also a risk that they will not be repaid by their final
maturity dates.
IF A NON-ASSET TRIGGER EVENT OCCURS, ANY SERIES 1 CLASS A ISSUER NOTES, SERIES
2 CLASS A ISSUER NOTES AND/OR SERIES 3 CLASS A ISSUER NOTES THEN OUTSTANDING
WILL NOT BE REPAID ON THEIR SCHEDULED REDEMPTION DATES
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. When a non-asset trigger event has occurred,
Funding will repay:
43
first, the previous series 1 term AAA advance made by Holmes Financing
(No. 6) PLC until that previous series 1 term AAA advance is fully
repaid;
then, the issuer series 1 term AAA advance until that issuer series 1
term AAA advance is fully repaid;
then, the previous series 1 term AAA advance made by Holmes Financing
(No. 1) PLC until that previous series 1 term AAA advance is fully
repaid;
then, the previous series 2 term AAA advances made by Holmes Financing
(No. 5) PLC until all of those previous term AAA advances are fully
repaid;
then, the previous series 2 term AAA advance made by Holmes Financing
(No. 3) PLC until that previous series 2 term AAA advance is fully
repaid;
then, the previous series 2 term AAA advance made by Holmes Financing
(No. 1) PLC until that previous series 2 term AAA advance is fully
repaid;
then, the issuer series 2 term AAA advance until that issuer series 2
term AAA advance is fully repaid;
then, the previous series 2 term AAA advance made by Holmes Financing
(No. 6) PLC until that previous series 2 term AAA advance is fully
repaid;
then, the previous series 2 term AAA advance made by Holmes Financing
(No. 4) PLC until that previous series 2 term AAA advance is fully
repaid;
then, the previous series 3A1 term AAA advance made by Holmes Financing
(No. 5) PLC until that previous series 3A1 term AAA advance is fully
repaid;
then, in no order of priority between them but in proportion to the
respective amounts due, the previous series 3 term AAA advance and the
previous series 4 term AAA advances made by Holmes Financing (No. 6) PLC
and the previous series 4 term AAA advance made by Holmes Financing (No.
4) PLC, until all of those term AAA advances are fully repaid;
then, the previous series 3 term AAA advance made by Holmes Financing
(No. 1) PLC until that previous series 3 term AAA advance is fully
repaid;
then, the previous series 4 term AAA advance made by Holmes Financing
(No. 1) PLC until that previous series 4 term AAA advance is fully
repaid;
then, the previous series 1 term AAA advance made by Holmes Financing
(No. 4) PLC until that previous series 1 term AAA advance is fully
repaid;
then, the previous series 2 term AAA advance made by Holmes Financing
(No. 2) PLC until that previous series 2 term AAA advance is fully
repaid;
then, the issuer series 3 term AAA advance until that issuer series 3
term AAA advance is fully repaid;
then, the previous series 3 term AAA advance made by Holmes Financing
(No. 2) PLC until that previous series 3 term AAA advance is fully
repaid;
then, in no order of priority between them but in proportion to the
respective amounts due, the previous series 4 term AAA advance made by
Holmes Financing (No. 2) PLC, the previous series 3 term AAA advance made
by Holmes Financing (No. 3) PLC, the previous series 3 term AAA advance
made by Holmes Financing (No. 4) PLC, the previous series 3A2 term AAA
advance made by Holmes Financing (No. 5) PLC, the previous series 5 term
AAA advance made by Holmes Financing (No. 6) PLC and the issuer series 4
term AAA advances, until all of those term AAA advances are fully repaid;
then, the issuer term AA advances and the previous term AA advances, in
no order of priority between them but in proportion to the respective
amounts due, until all of those term AA advances are fully repaid;
then, the issuer term A advances, in no order of priority between them
but in proportion to the respective amounts due, until all of those
issuer term A advances are fully repaid; and
44
finally, the previous term BBB advances, in no order of priority between
them but in proportion to the respective amounts due, until all of those
term BBB advances are fully repaid.
This order of priority of payments will change if Funding enters into new
intercompany loan agreements. If a non-asset trigger event occurs, any series 1
class A issuer notes, series 2 class A issuer notes and/or series 3 class A
issuer notes then outstanding will not be repaid on their scheduled redemption
dates.
IF THE ISSUER SECURITY IS ENFORCED, ANY SERIES 1 CLASS A ISSUER NOTES, SERIES 2
CLASS A ISSUER NOTES AND/OR SERIES 3 CLASS A ISSUER NOTES THEN OUTSTANDING WILL
NOT BE REPAID ON THEIR SCHEDULED REDEMPTION DATES
If the issuer security is enforced, then the mortgages trustee will
distribute funds in the manner described in "CASHFLOWS". In these
circumstances, any series 1 class A issuer notes, series 2 class A issuer notes
and/or series 3 class A issuer notes then outstanding will not be repaid on
their scheduled redemption dates and there is also a risk that those class A
issuer notes may not be repaid by their final maturity dates.
LOANS SUBJECT TO PRODUCT SWITCHES AND FURTHER ADVANCES WILL BE REPURCHASED BY
THE SELLER FROM THE MORTGAGES TRUSTEE, WHICH WILL AFFECT THE PREPAYMENT RATE OF
THE LOANS, AND THIS MAY AFFECT THE YIELD TO MATURITY OF THE ISSUER NOTES
If a loan is subject to a product switch or a further advance, then the
seller will be required to repurchase the loan or loans under the relevant
mortgage account and their related security from the mortgages trustee at a
price equal to the outstanding principal balance of those loans together with
any arrears of interest and accrued and unpaid interest and expenses to the
date of purchase.
A loan will be subject to a product switch if the borrower and the seller
agree on or the servicer offers a variation in the financial terms and
conditions applicable to the relevant borrower's loan, other than:
* any variation agreed with a borrower to control or manage arrears
on the loan;
* any variation in the maturity date of the loan unless, this
intercompany loan or any of the previous intercompany loans
outstanding, are extended beyond July 2038;
* any variation imposed by statute;
* any variation of the principal available and/or the rate of
interest payable in respect of the loan where that rate is offered
to the borrowers of more than 10 per cent. by outstanding principal
amount of loans in the trust property in any interest period; or
* any variation in the frequency with which the interest payable in
respect of the loan is applied.
A loan will be subject to a further advance if an existing borrower requests
a further amount to be lent to him or her under the mortgage in circumstances
where the seller has a discretion to, and does, grant that request. A drawing
under a flexible loan will not constitute a further advance.
The yield to maturity of the issuer notes may be affected by the repurchase
of loans subject to product switches and further advances.
RATINGS ASSIGNED TO THE ISSUER NOTES MAY BE LOWERED OR WITHDRAWN AFTER YOU
PURCHASE THE ISSUER NOTES, WHICH MAY LOWER THE MARKET VALUE OF THE ISSUER NOTES
The ratings assigned to each class of issuer notes address the likelihood of
full and timely payment to you of all payments of interest on each interest
payment date under those classes of issuer notes. The ratings also address the
likelihood of (in the case of Standard & Poor's and Fitch) "timely", or (in the
case of Moody's) "ultimate", payment of principal on the final maturity date of
each class of issuer notes. The expected ratings of each class of issuer notes
on the closing date are set out in "RATINGS OF THE ISSUER NOTES". Any rating
agency may lower its rating or withdraw its rating if, in the sole judgment of
the rating agency, the credit quality of the issuer
45
notes has declined or is in question. If any rating assigned to the issuer
notes is lowered or withdrawn, the market value of the issuer notes may be
reduced and, in the case of the series 1 class A issuer notes, such issuer
notes may no longer be eligible for investment by money market funds. See "--
CERTAIN EVENTS MAY AFFECT THE ELIGIBILITY OF THE SERIES 1 CLASS A ISSUER NOTES
FOR INVESTMENT BY MONEY MARKET FUNDS".
A change to the ratings assigned to each class of issuer notes will not
affect the term advance ratings assigned to each issuer term advance under the
issuer intercompany loan.
SUBORDINATION OF OTHER NOTE CLASSES MAY NOT PROTECT YOU FROM ALL RISK OF LOSS
The class B issuer notes and the class M issuer notes are subordinated in
right of payment of interest to the class A issuer notes. The class M issuer
notes are subordinated in right of payment of interest to the class B issuer
notes. However, as described in "-- THE TRANSACTION HAS BEEN STRUCTURED IN THE
EXPECTATION THAT THE SERIES 1 ISSUER NOTES WILL BE REDEEMED BEFORE THE SERIES 2
ISSUER NOTES", the transaction has been structured in the expectation that the
series 1 issuer notes will be repaid in full prior to the redemption of the
series 2 class A issuer notes, the series 2 class A issuer notes will be repaid
in full prior to the redemption of the series 3 class A issuer notes and the
series 3 class A issuer notes will be repaid in full prior to the redemption of
the series 4 class A issuer notes.
Accordingly, there is no assurance that these subordination rules will
protect the holders of class A issuer notes, the holders of class B issuer
notes or the holders of class M issuer notes (where applicable) from all risk
of loss.
PRINCIPAL PAYMENTS ON THE CLASS B ISSUER NOTES AND THE CLASS M ISSUER NOTES
WILL BE DEFERRED IN SOME CIRCUMSTANCES
Principal repayments on the issuer term AA advances and/or the issuer term A
advances will be deferred in the following circumstances:
* if a principal loss has been recorded on the principal deficiency
ledger in respect of any term AA advances or any term A advances or
any term BBB advances; or
* if the first reserve fund has been debited on or prior to the
relevant interest payment date for the purposes of curing a
principal deficiency in respect of any term AA advances or any term
A advances or any term BBB advances and the first reserve fund has
not been replenished by a corresponding amount on the relevant
interest payment date; or
* if, as at the relevant interest payment date, the total outstanding
principal balance of loans in the mortgages trust, in respect of
which the aggregate amount in arrears is more than three times the
monthly payment then due, is more than five per cent. of the total
outstanding principal balance of loans in the mortgages trust.
In these circumstances, the issuer term A advances and, as applicable, the
issuer term AA advances will not be entitled to principal repayments until the
relevant circumstance as described in this risk factor has been remedied (if
ever).
This means that payments of principal on the class M issuer notes of all
series and, as applicable, the class B issuer notes of all series will be
deferred until the earlier of the time when the relevant circumstance described
in this risk factor has been remedied (if ever) and the maturity date of the
relevant issuer notes.
SERIES 2 ISSUER NOTES, SERIES 3 ISSUER NOTES AND SERIES 4 ISSUER NOTES MAY BE
SUBJECT TO RISK IF THE TRUST PROPERTY DETERIORATES AFTER REPAYMENT OF THE
SERIES 1 ISSUER NOTES
If the loans comprising the trust property do not perform as expected at any
time after the repayment in full of the series 1 issuer notes, then the series
2 issuer notes, the series 3 issuer notes and/or the series 4 issuer notes may
not be repaid in full.
46
In addition, if the issuer does not exercise its option to redeem the issuer
notes (other than the series 1 class A issuer notes and the series 2 class A
issuer notes) on the interest payment date falling in [April 2008], then the
transaction has been structured in the expectation that the series 3 class A
issuer notes will be repaid in full before the series 4 class A issuer notes.
In this case, if the loans comprising the trust property do not perform as
expected at any time after the repayment in full of the series 3 class A issuer
notes, the series 4 class A issuer notes may not be repaid in full.
This risk will not affect the series 1 noteholders.
YOU MAY NOT BE ABLE TO SELL THE ISSUER NOTES
There currently is no secondary market for the issuer notes. The
underwriters expect, but are not obliged, to make a market in the issuer notes.
If no secondary market develops, you may not be able to sell the issuer notes
prior to maturity. We cannot offer any assurance that a secondary market will
develop or, if one does develop, that it will continue.
IF WE FAIL TO MAKE TIMELY PAYMENTS OF AMOUNTS DUE UNDER AN ISSUER DOLLAR
CURRENCY SWAP, THEN YOU MAY BE SUBJECT TO EXCHANGE RATE RISKS ON THE SERIES 1
ISSUER NOTES, THE SERIES 2 ISSUER NOTES AND THE SERIES 3 CLASS A ISSUER NOTES
Investors will pay for the series 1 issuer notes, the series 2 issuer notes
and the series 3 class A issuer notes in US dollars, but the issuer term
advances to be made by us to Funding and repayments of principal and payments
of interest by Funding to us under the issuer intercompany loan will be in
sterling.
To hedge our currency exchange rate exposure, including the interest rate
exposure connected with that currency exposure, and to address the difference
in periodicity between the interest payment dates in relation to the series 1
class A issuer notes which occur monthly until the occurrence of a trigger
event or the enforcement of the issuer security and the interest payment dates
in relation to the issuer series 1 term AAA advance which occur quarterly, on
the closing date we will enter into the issuer dollar currency swaps for the
series 1 issuer notes, the series 2 issuer notes and the series 3 class A
issuer notes with the issuer dollar currency swap providers (see "THE SWAP
AGREEMENTS -- THE ISSUER DOLLAR CURRENCY SWAPS").
If we fail to make timely payments of amounts due under an issuer dollar
currency swap, then we will have defaulted under that issuer dollar currency
swap. The issuer dollar currency swap providers are obliged only to make
payments under the issuer dollar currency swaps as long as we make payments
under them. If the issuer dollar currency swap providers are not obliged to
make payments, or if an issuer dollar currency swap provider defaults in its
obligations to make payments of amounts in US dollars equal to the full amount
to be paid by it on the payment dates under the relevant issuer dollar currency
swap (which are the same dates as the interest payment dates in respect of the
issuer notes), 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 issuer dollar currency swap is entered into, we may have
insufficient funds to make payments due on the issuer notes of any class and
any series that are then outstanding.
THERE MAY BE A DELAY IN PAYMENT OF INTEREST ON SERIES 1 CLASS A ISSUER NOTES ON
THE OCCURRENCE OF A TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER SECURITY
After the occurrence of a trigger event or enforcement of the issuer
security, the interest payments on the series 1 class A issuer notes will no
longer be payable monthly, but will be payable quarterly. In these
circumstances a noteholder will not receive interest under the series 1 class A
issuer notes on the expected payment dates.
47
IF THE MORTGAGES TRUSTEE GIC PROVIDER OR THE FUNDING GIC PROVIDER CEASES TO
SATISFY CERTAIN CRITERIA, THEN THE MORTGAGES TRUSTEE GIC ACCOUNT OR THE FUNDING
GIC ACCOUNT WOULD HAVE TO BE TRANSFERRED TO ANOTHER GIC PROVIDER UNDER TERMS
THAT MAY NOT BE AS FAVOURABLE AS THOSE OFFERED BY THE CURRENT GIC PROVIDERS
The mortgages trustee GIC provider and the Funding GIC provider are required
to satisfy certain criteria (including certain criteria and/or permissions set
or required by the Financial Services Authority, or FSA, from time to time) in
order to continue to receive deposits in the mortgages trustee GIC account and
the Funding GIC account respectively. If either the mortgages trustee GIC
provider or the Funding GIC provider ceases to satisfy that criteria, then the
relevant account would need to be transferred to another entity which does
satisfy that criteria. In these circumstances, the new GIC provider may not
offer a GIC on terms as favourable as those provided by the mortgages trustee
GIC provider or the Funding GIC provider.
TERMINATION PAYMENTS ON THE ISSUER SWAPS OR THE ISSUER SWAPS MAY ADVERSELY
AFFECT THE FUNDS AVAILABLE TO MAKE PAYMENTS ON THE ISSUER NOTES
If any of the issuer swaps terminates, we may as a result be obliged to pay
a termination payment to the relevant issuer swap provider. The amount of the
termination payment will be based on the cost of entering into a replacement
issuer swap. Under the issuer intercompany loan agreement, Funding will be
required to pay us an amount equal to any termination payment due from us to
the relevant issuer 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 our issuer swaps or to make subsequent
payments to you in respect of the relevant series and class of issuer notes.
Nor can we give you any assurance that we will be able to enter into a
replacement swap or, if one is entered into, that the credit rating of the
replacement issuer swap provider will be sufficiently high to prevent a
downgrading of the then current ratings of the issuer notes by the rating
agencies.
Except where the relevant issuer swap provider has caused the relevant
issuer swap to terminate by its own default, any termination payment due from
us will rank equally not only with payments due to the holders of the series
and class of issuer notes to which the relevant swap relates but also with
payments due to the holders of any other series and class of issuer notes which
rank equally with the series and class of issuer notes to which the relevant
swap relates. Any additional amounts required to be paid by us following
termination of the relevant issuer swap, (including any extra costs incurred
(for example, from entering into "spot" currency or interest rate swaps) if we
cannot immediately enter into a replacement swap) will also rank equally not
only with payments due to the holders of the series and class of issuer notes
to which the relevant issuer swap relates but also with payments due to the
holder of any other series and class of issuer notes which rank equally with
the series and class of issuer notes to which the relevant issuer swap relates.
Furthermore, any termination payment or additional payment or additional
amounts required to be paid by us following termination of an issuer swap will
rank ahead of payments due to the holders of any series and class of issuer
notes which ranks below the series and class of issuer notes to which the
relevant issuer swap relates. Therefore, if we are obliged to make a
termination payment to the relevant issuer swap provider or to pay any other
additional amount as a result of the termination of the relevant issuer swap,
this may affect the funds which we have available to make payments on the
issuer notes of any class and any series.
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
ISSUER NOTES
Under the previous intercompany loan agreements, Funding is required to make
payments to the previous issuers in respect of the previous issuers'
obligations to make payments to their respective own security trustee, note
trustee, agent bank, paying agents, liquidity facility provider, cash manager,
corporate services provider and account bank and to other third parties to whom
48
the previous issuers owe money. These payments rank in priority to amounts due
by Funding to us on the issuer term advances. For further information regarding
Funding's payment obligations to the previous issuers, see "CASHFLOWS".
Funding's obligations to make the payments described in the preceding
paragraph to the previous issuers may affect Funding's ability to make payments
to us under the issuer intercompany loan agreement. This in turn may affect our
ability to make payments on the issuer notes.
We rely on third parties to perform services in relation to the issuer
notes, 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 issuer notes. For example, the
issuer swap providers have agreed to provide their respective issuer 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 issuer notes. In the event that any of these
parties were to fail to perform their obligations under the respective
agreements to which they are a party, you may be adversely affected.
WE MAY BE UNABLE TO PAY, IN FULL OR AT ALL, INTEREST DUE ON THE ISSUER NOTES IF
THERE IS AN INCOME OR PRINCIPAL DEFICIENCY
If, on any interest payment date, revenue receipts available to Funding
(including the reserve funds) are insufficient to enable Funding to pay
interest on previous term advances, issuer term advances and any new term
advances and other expenses of Funding ranking higher in seniority to interest
due on these term advances, then Funding may use principal receipts on the
loans received by it in the mortgages trust to make up the shortfall.
Funding will use principal receipts that would have been applied to repay
the term advances with the lowest term advance rating to pay interest on those
other term advances and senior expenses described in the preceding paragraph
where there is a shortfall of monies to pay those amounts. At the closing date,
the relevant term advances with the lowest term advance rating include the
issuer term A advances. If Funding uses principal to repay interest and senior
expenses in this manner, there will be less principal available to repay the
issuer term A advances.
Funding will be obliged to keep a ledger that records any principal applied
to pay interest and senior expenses. When the amount recorded on the ledger is
equal to the principal amount outstanding of the term A advances, then Funding
will use principal receipts that would have been applied to repay the term
advance with the next lowest ranking term advance rating to pay interest on the
term advances and senior expenses where there is a shortfall of money to pay
those amounts. At the closing date, the term advances with the next lowest term
advance rating include the issuer term AA advances. When the amount recorded on
the principal deficiency ledger exceeds the principal amount outstanding on the
term AA advances, Funding will use principal receipts that would have been
applied to repay the term AAA advances to pay those amounts. During the term of
the transaction, however, it is expected that any principal deficiencies of
this sort will be recouped from subsequent excess revenue receipts and amounts
standing to the credit of the first reserve fund. The revenue receipts and the
first reserve fund monies will be applied first to cover any principal
deficiency in respect of the term advances with the highest term advance rating
(at the closing date, these include the issuer term AAA advances), and then the
term advances with the next highest-ranking term advance rating (at the closing
date, these include the issuer term AA advances), and so on down to the term
advances with the lowest term advance rating.
49
If there are insufficient funds available because of income or principal
deficiencies, then one or more of the following consequences may occur:
* the interest and other net income of Funding may not be sufficient,
after making the payments to be made in priority, to pay, in full
or at all, interest due on the issuer term A advances and the
issuer term AA advances;
* there may be insufficient funds to repay any of the issuer term A
advances and the issuer term AA advances prior to their final
repayment dates unless the other net income of Funding is
sufficient, after making other prior ranking payments, to reduce
any principal deficiency in respect of the issuer term A advances
and term AA advances;
* if the amount of principal deficiencies exceeds the principal
amount outstanding of any of the term advances (and the principal
deficiencies cannot be covered by the other income of Funding),
then we may not receive the full principal amount of any or all of
the issuer term advances and, accordingly, you may not receive the
full face value of the class M issuer notes, the class B issuer
notes and the class A issuer notes, as the case may be; and/or
* we may be unable to pay, in full or at all, interest due on your
issuer notes.
For more information on principal deficiencies, see "CREDIT STRUCTURE --
PRINCIPAL DEFICIENCY LEDGER".
THE SELLER SHARE OF THE TRUST PROPERTY DOES NOT PROVIDE CREDIT ENHANCEMENT FOR
THE ISSUER NOTES
Any losses from loans included in the trust property will be allocated
proportionately between Funding and the seller on each distribution date
depending on their respective shares of the trust property. The seller's share
of the trust property therefore does not provide credit enhancement for the
Funding share of the trust property or the issuer notes.
WE WILL ONLY HAVE RECOURSE TO THE SELLER IF THERE IS A BREACH OF WARRANTY OR
OTHER OBLIGATION BY THE SELLER, BUT OTHERWISE THE SELLER'S ASSETS WILL NOT BE
AVAILABLE TO US AS A SOURCE OF FUNDS TO MAKE PAYMENTS ON THE ISSUER NOTES
After an issuer intercompany loan enforcement notice under the issuer
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 realise enough money to repay amounts due and payable under the issuer
intercompany loan agreement.
We will not, and Funding and the mortgages trustee will not, have any
recourse to the seller of the loans, other than in respect of a breach of
warranty or other obligation 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 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 (a) in the case of each loan in
the portfolio, was materially untrue on the date that loan was assigned to the
mortgages trustee or (b) in the case of each new loan, is materially untrue on
the date that new loan is assigned to the mortgages trustee, then the seller
may be required by the mortgages trustee to remedy the breach within twenty
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 twenty days, the mortgages
trustee may require the seller to repurchase the loan or loans under the
relevant mortgage account and their related security together with any arrears
of interest and accrued and unpaid interest and expenses. There can be no
assurance that the seller will have the financial resources to repurchase the
loan or loans under the relevant mortgage account and their related security.
However, if the seller does not repurchase those loans and their related
security when required, then the seller's share
50
of the trust property will be deemed to be reduced by an amount equal to the
principal amount outstanding of those loans together with any arrears of
interest and accrued and unpaid interest and expenses.
Other than as described here, neither you nor 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, WHICH MAY ADVERSELY AFFECT REPAYMENTS ON THE
ISSUER NOTES
Each loan in the current portfolio is repayable either on a principal
repayment basis or an interest only basis. Of the loans in the portfolio as at
31st December, 2002, approximately 39.2 per cent. are interest only loans. For
interest only loans, because the principal is repaid in a lump sum at the
maturity of the loan, the borrower is recommended to have some repayment
mechanism such as an investment plan in place to ensure that funds will be
available to repay the principal at the end of the term. However, the seller
does not take security over these repayment mechanisms. The borrower is also
recommended to take out a life insurance policy in relation to the loan but, as
with repayment mechanisms, the seller does not take security over these life
insurance policies.
The ability of a borrower to repay the principal on an interest only loan at
maturity depends on the 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. 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 loan and a loss occurs on the loan, then this may affect repayments
of principal on the issuer notes if that loss cannot be cured by amounts
standing to the credit of the first reserve fund or the application of excess
Funding available revenue receipts.
THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE MORTGAGES TRUSTEE HAS NO
LEGAL TITLE TO THE MORTGAGES, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER
NOTES
The sale by the seller to the mortgages trustee of the English mortgages has
taken effect (and any sale of mortgages in the future will take effect) in
equity only. The sale by the seller to the mortgages trustee of the Scottish
mortgages has taken effect by a declaration of trust by the seller (and any
sale of Scottish mortgages in the future will be given effect by further
declarations of trust) by which the beneficial interest in the Scottish
mortgages is transferred to the mortgages trustee. In each case this means that
legal title to the loans in the trust property remains with the seller, but the
mortgages trustee has all the other rights and benefits relating to ownership
of each loan and its related security (which rights and benefits are subject to
the trust in favour of the beneficiaries). The mortgages trustee has the right
to demand that the seller give it legal title to the loans and the related
security in the circumstances described in "ASSIGNMENT OF THE LOANS AND THEIR
RELATED SECURITY -- LEGAL ASSIGNMENT OF THE LOANS TO THE MORTGAGES TRUSTEE".
Until then the mortgages trustee will not apply to H.M. Land Registry or the
Central Land Charges Registry to register or record its equitable interest in
the English mortgages, and cannot in any event apply to the Registers of
Scotland to register or record its beneficial interest in the Scottish
mortgages. For more information on the Scottish mortgages see "THE LOANS --
SCOTTISH LOANS" and "MATERIAL LEGAL ASPECTS OF THE LOANS -- SCOTTISH LOANS".
Because the mortgages trustee has not obtained legal title to the loans or
their related security, there are risks, as follows:
* firstly, if the seller wrongly sold a loan to another person which
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 loan, then she or he
might obtain good title to the 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 loan
and its related security and it would not be entitled to payments
by a borrower in respect of that loan. This may affect the ability
of the issuer to repay the issuer notes; and
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* 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 "-- SET-OFF RISKS
IN RELATION TO FLEXIBLE LOANS AND DELAYED CASHBACKS MAY ADVERSELY
AFFECT THE FUNDS AVAILABLE TO THE ISSUER TO REPAY THE ISSUER
NOTES") which occur in relation to transactions or deposits made
between some borrowers and the seller and the rights of borrowers
to redeem their mortgages by repaying the loan directly to the
seller. If these rights were exercised, the mortgages trustee may
receive less money than anticipated from the loans, which may
affect the ability of the issuer to repay the issuer notes.
However, 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, and the minimum seller share has been sized in an amount
expected to cover this risk (although there is no assurance that it will).
Once notice has been given to borrowers of the transfer of the loans and
their related security to the mortgages trustee, independent set-off rights
which a borrower has against the seller will crystallise and 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 loan) will not be affected by that notice.
SET-OFF RISKS IN RELATION TO FLEXIBLE LOANS AND DELAYED CASHBACKS MAY ADVERSELY
AFFECT THE FUNDS AVAILABLE TO THE ISSUER TO REPAY THE ISSUER NOTES
As described in "-- THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE
MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGES, WHICH MAY ADVERSELY
AFFECT PAYMENTS ON THE ISSUER NOTES", the seller has made, and in the future
may make, an equitable assignment of the mortgages, or in the case of Scottish
mortgages a transfer of the beneficial interest in the Scottish 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
mortgages. These set-off rights may occur if the seller fails to advance to a
borrower a drawing under a flexible loan when the borrower is entitled to draw
additional amounts under a flexible loan or if the seller fails to pay to a
borrower any delayed cashback which the seller had agreed to pay to that
borrower after completion of the relevant loan.
If the seller fails to advance the drawing or pay the delayed cashback, then
the relevant borrower may set off any damages claim arising from the seller's
breach of contract against the seller's (and, as assignee of the mortgages, the
mortgages trustee's) claim for payment of principal and/or interest under the
loan as and when it becomes due. These 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 drawing will, in many cases, be the
cost to the borrower of finding an alternative source of finance: the borrower
may obtain a 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 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 mortgage was taken out.
In respect of a delayed cashback, the claim is likely to be in an amount
equal to the amount due under the delayed cashback together with interest and
expenses and consequential losses (if any).
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 servicer will be entitled to take enforcement proceedings against the
borrower although the period of non-payment by the borrower is likely to
continue until a judgment is obtained.
52
The exercise of set-off rights by borrowers would reduce the incoming cashflow
to the mortgages trustee during the exercise. However, the amounts set-off will
be applied to reduce the seller share of the trust property only. The minimum
seller share has been sized in an amount expected to cover this risk, 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 issuer notes.
IF THE SERVICER IS REMOVED, THERE IS NO GUARANTEE THAT A SUBSTITUTE SERVICER
WOULD BE FOUND, WHICH COULD DELAY COLLECTION OF PAYMENTS ON THE LOANS AND
ULTIMATELY COULD ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
The seller has been appointed by the mortgages trustee and the beneficiaries
as servicer to service the loans. If the servicer breaches the terms of the
servicing agreement, then the mortgages trustee and the beneficiaries will be
entitled to terminate the appointment of the servicer and appoint a new
servicer in its place.
There can be no assurance that a substitute servicer would be found who
would be willing and able to service the loans on the terms of the servicing
agreement. The ability of a substitute servicer fully to perform the required
services would depend, among other things, on the information, software and
records available at the time of the appointment. Any delay or inability to
appoint a substitute servicer may affect payments on the loans and hence our
ability to make payments when due on the issuer notes.
You should note that the servicer has no obligation itself to advance
payments that borrowers fail to make in a timely fashion.
FUNDING MAY NOT RECEIVE THE BENEFIT OF ANY CLAIMS MADE ON THE BUILDINGS
INSURANCE WHICH COULD ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
The practice of the seller in relation to buildings insurance is described
under "THE LOANS -- INSURANCE POLICIES". As described in that section, no
assurance can be given that Funding will always receive the benefit of any
claims made under any applicable insurance contracts. This could reduce the
principal receipts received by Funding according to the Funding share
percentage and could adversely affect our ability to redeem the issuer notes.
You should note that buildings insurance is renewed annually.
POSSIBLE REGULATORY CHANGES BY THE OFFICE OF FAIR TRADING, THE FINANCIAL
SERVICES AUTHORITY AND ANY OTHER REGULATORY AUTHORITY MAY HAVE AN IMPACT ON THE
SELLER, THE ISSUER, THE SERVICER, AND/OR THE LOANS AND MAY ADVERSELY AFFECT OUR
ABILITY TO MAKE PAYMENTS WHEN DUE ON THE ISSUER NOTES
In the United Kingdom, the Office of Fair Trading ("OFT") is responsible for
the issue of licences under and the superintendence of the working and the
enforcement of the Consumer Credit Act 1974, related consumer credit
regulations and other consumer protection legislation. The Office of Fair
Trading may review businesses and operations, provide guidelines to follow and
take actions when necessary with regard to the mortgage market in the United
Kingdom.
The UK's Financial Services and Markets Act 2000 ("FSMA") represents a major
overhaul of financial services regulation in the UK and brings a wide range of
financial activities under a single regime of statutory-based regulation. FSMA
will be brought into effect in stages. The first stage (known as "N2") came
into effect on 1st December, 2001. The mortgage regulation will come into
effect at a later stage (known as "N3") currently expected to be in October
2004.
FSMA applies to any "regulated activity". H.M. Treasury has made the
Financial Services and Markets Act (Regulated Activities) Order 2001,
specifying that entering into and (in certain circumstances) administering a
"regulated mortgage contract" are regulated activities. In August 2002, H.M.
Treasury published its final draft Financial Services and Markets Act 2000
(Regulated Activities) (Amendment) Order, specifying that arranging and
advising on a regulated mortgage contract are also to be regulated activities.
53
The main effects will be that each entity carrying on a regulated activity will
be required to hold authorisation and permission from the FSA to carry on that
activity. Generally, each financial promotion will have to be issued or
approved by a person holding authorisation and permission from the FSA. If
requirements as to authorisation of the originator and brokers or as to
advertising are not complied with, the regulated mortgage contract will be
unenforceable against the borrower except with approval of a court.
The seller will be required to hold authorisation and permission to enter
into and to administer and where applicable, to advise on regulated mortgage
contracts. Brokers (in certain circumstances) will be required to hold
authorisation and permission to arrange and, where applicable, to advise on
regulated mortgage contracts.
In August 2002, H.M. Treasury published feedback to its third consultation
on mortgage regulation. This feedback confirms HM Treasury's intention that the
issuer and mortgages trustee will not carry on any regulated activity in
relation to regulated mortgage contracts that are administered pursuant to an
administration agreement by an entity having the required authorisation and
permission. If such administration agreement terminates, however, the issuer
and mortgages trustee will have a period of not more than one month in which to
arrange for mortgage administration to be carried out by a replacement
administrator having the required authorisation and permission.
In August 2002, the FSA published feedback to its consultation on conduct of
business rules on entering into and administering regulated mortgage contracts.
This feedback annexes near-final draft rules on certain post-origination
matters, such as product disclosure on and after origination and, where
applicable, provision of an FSA information sheet on mortgage arrears.
In August 2002, the FSA also published its consultation on arranging and
advising on regulated mortgage contracts. This consultation annexes draft rules
on certain pre-origination matters, such as financial promotions, and draft
pre-application illustrations.
The FSA is expected to consult further in the first quarter of 2003 on
issues relating to the meeting of the threshold conditions for authorisation in
relation to regulated mortgage contracts, and in the second quarter of 2003 on
conduct of business rules, with a view to publishing final rules in the second
half of 2003.
No assurance can be given that additional regulations from the Office of
Fair Trading, 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 may have a material adverse effect on the loans,
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 on
the issuer notes when due.
In September 2002, the European Commission published a proposal for a
directive of the European Parliament and of the Council on the harmonization of
the laws, regulations and administrative provisions of the member states
concerning credit for consumers and surety agreements entered into by
consumers. If the proposed directive is finalised, member states will have two
years in which to bring national implementing legislation into force. The
proposal includes (among other things) specific documentation and procedural
requirements in respect of mortgage loan origination and administration; for
example, a key requirement under the proposed directive is that each drawing
under a flexible mortgage loan, and each further advance, must be subject to
new underwriting and a new contract. Penalties for non-compliance with these
requirements will be determined by the member states, and may include provision
that credit agreements that do not comply will be unenforceable against the
borrower.
In its current form, the proposed directive will not apply to residential
mortgage loans for home purchase or home improvement, other than loans where
part of the mortgage credit is for equity release, such as a further drawing
under a flexible mortgage loan or a further advance. Additionally, the proposed
directive will not apply to residential mortgage loans originated before
national implementing legislation comes into force, with exceptions; for
example, the requirement for new underwriting will apply to any further drawing
or further advance made after national implementing legislation comes into
force. Accordingly, if implemented in its current form, the
54
proposed directive will apply to each mortgage loan that includes an equity
release component, if the mortgage loan is originated, or a further drawing or
further advance is made within that mortgage loan, after the implementation
date.
Until the final text of the directive is decided and the details of United
Kingdom implementing legislation are published, it is not certain what effect
the adoption and implementation of the directive would have on the mortgage
loan and/or the seller, the issuer and/or the servicer and their respective
businesses and operations. No assurance can be given that the finalised
directive will not adversely affect our ability to make payments in full on the
issuer notes when due.
REGULATIONS IN THE UNITED KINGDOM COULD LEAD TO SOME TERMS OF THE LOANS BEING
UNENFORCEABLE, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE ISSUER NOTES
In the United Kingdom, the Unfair Terms in Consumer Contracts Regulations
1999, as amended and the Unfair Terms in Consumer Contracts Regulations 1994
(the "REGULATIONS") apply to agreements entered into on or after 1st July, 1995
and affect all of the loans. The regulations provide that:
* a borrower may challenge a term in an agreement on the basis that
it is an "unfair" term within the regulations and therefore not
binding on the borrower; and
* the Director General of Fair Trading (as head of the Office of Fair
Trading), the FSA and any other "qualifying body" (as defined in
the regulations) may seek to prevent a business from relying on
unfair terms.
The regulations will not generally affect "core terms" which set out the
main subject- matter of the contract, such as the borrower's obligation to
repay the principal. However, they 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 (as the
servicer is permitted to do) 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 any assignee such as the mortgages
trustee, to claim repayment of the extra interest amounts paid or to set-off
the amount of the claim against the amount owing by the borrower under the
loan. Any such non-recovery, claim or set-off ultimately may adversely affect
our ability to make payments on the issuer notes.
[There is currently no formal guidance available on what the OFT considers to
be fair or unfair within the regulations for interest variation terms. The
previous OFT guidance on this point (set out in OFT 297) was withdrawn in 2001
although the guidance may apply to any interest variation made in respect of
the mortgage loans during the period the note was in force.]
In August 2002, the Law Commission and the Scottish Law Commission issued a
joint consultation LCCP No. 166/SLCDP 119 on proposals to rationalise the
Unfair Contract Terms Act 1977 and the regulations into a single piece of
legislation and a final report is expected by January 2004. The Law Commissions
have a duty under section 3 of the Law Commissions Act 1965 to keep the law
under review for a number of purposes, including its simplification. The
proposals are primarily to simplify the legislation on unfair terms. It is not
proposed that there should be any significant increase in the extent of
controls over terms in consumer contracts. Some changes are proposed, however,
such as that the legislation should not affect core terms in so far as they are
not substantially different from what the borrower should reasonably expect and
are transparent. It is too early to tell how the proposals, if enacted, would
affect the loans.
DECISIONS OF THE OMBUDSMAN COULD LEAD TO TERMS OF THE LOANS BEING CONSIDERED
UNFAIR AND SUCH TERMS BEING VARIED, WHICH MAY ADVERSELY AFFECT PAYMENTS ON THE
ISSUER NOTES
Under FSMA, the Financial Ombudsman Service is empowered to make decisions
on, among other things, complaints relating to the terms in agreements for the
provision of financial services, including loans, on the basis of what, in the
Ombudsman's opinion, would be fair and reasonable in all circumstances of the
case, taking into account, among other things, law and guidance. Such
complaints are generally decided on a case by case basis by the Financial
Ombudsman Service,
55
with reference to the particular facts of any individual case. Each case is
first adjudicated by an adjudicator. Either party to the case may appeal
against the adjudication. In the event of an appeal, the case proceeds to a
final decision by the Ombudsman.
No Financial Ombudsman Service decision against the seller has had a
material adverse effect on the issuer's ability to make payments on the issuer
notes. However, given the Financial Ombudsman Service's wide jurisdiction in
respect of fairness in the provision of financial services, it cannot be said
with certainty what effect, if any, any future decision of the Financial
Ombudsman Service may have on the issuer's ability to make payments on the
issuer notes.
TAX PAYABLE BY FUNDING OR THE ISSUER MAY ADVERSELY AFFECT OUR ABILITY TO MAKE
PAYMENTS ON THE ISSUER NOTES
As explained in "UNITED KINGDOM TAXATION", Funding and the issuer will
generally be subject to UK corporation tax, currently at a rate of 30 per cent,
on the profit reflected in their respective profit and loss accounts as
increased by the amount of any non-deductible expenses or losses. If the tax
payable by Funding or the issuer is greater than expected because, for example,
non-deductible expenses or losses are greater than expected, the funds
available to make payments on your issuer notes will be reduced and this may
adversely affect our ability to make payments on the issuer notes.
THE PROPOSED EUROPEAN DIRECTIVE ON THE TAXATION OF SAVINGS MAY ADVERSELY AFFECT
YOUR INTERESTS
On 21st January, 2003, the European Council of Economics and Finance
Ministers (ECOFIN) agreed on proposals under which, with effect from 1st
January, 2004, each Member State will be required to provide to the tax
authorities of each other Member State details of payments of interest (or
similar income) paid by a person within the first Member State's jurisdiction
to any individual resident in that other Member State, except that, for an
indefinite transitional period, Belgium, Luxembourg and Austria will instead be
required to operate a withholding tax system on such payments (the ending of
such transitional period being dependent upon the conclusion of certain other
agreements relating to information exchange with certain other countries).
Additionally, it was agreed by ECOFIN that the adoption of the proposals by the
European Union would require certain other non-Member State countries to adopt
a similar system of withholding tax on such payments. It is expected that the
final text of a Directive to implement the proposals will be decided at the
ECOFIN meeting in March 2003.
Until the final text of the directive is decided and the details of any
similar withholding systems in the relevant non-Member State countries have
been finalised, it is not certain what effect, if any, the adoption of the
directive or similar systems would have on the payment of principal or interest
in respect of the issuer notes. However, if the current proposals are
implemented, then payments of interest on the issuer notes which are made or
collected through a Member State or any other relevant country may be subject
to withholding tax which would prevent holders of the issuer notes from
receiving interest on their issuer notes in full.
YOUR INTERESTS MAY BE ADVERSELY AFFECTED IF THE UNITED KINGDOM JOINS THE
EUROPEAN MONETARY UNION
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 the issuer notes denominated
in pounds sterling may become payable in euro, (b) applicable provisions of law
may require or allow us to redenominate such issuer notes into euro and take
additional measures in respect of such issuer notes and (c) the introduction of
the euro as the lawful currency of the United Kingdom may result in the
disappearance of published or displayed rates for deposits in sterling used to
determine the rates of interest on such issuer 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 investors. It cannot be said with certainty what
effect, if any, adoption of the euro by the United Kingdom will have on
investors on the issuer notes.
56
CHANGES OF LAW MAY ADVERSELY AFFECT YOUR INTERESTS
The structure of the issue of the issuer notes and the ratings which are to
be assigned to them are based on English law and (in relation to the Scottish
loans) Scots law in effect as at the date of this prospectus. No assurance can
be given as to the impact of any possible change to English or Scots law or
administrative practice in the United Kingdom after the date of this
prospectus.
INSOLVENCY ACT 2000
Significant changes to the United Kingdom insolvency regime have been
enacted including the Insolvency Act 2000. The Act allows for some "small"
companies (which are defined by reference to specific financial and other
tests) to seek court protection from their creditors while putting together
proposals for a company voluntary arrangement ("CVA"). The moratorium from
creditor action will be for an initial period of 28 days from the date on which
various documents are filed with the court, but this period can be extended by
the creditors' meeting or the shareholders' meeting called to consider the CVA
proposals for a further period not exceeding two months giving a total period
of three months. Most of the provisions of the Insolvency Act 2000 came into
force in April 2001 and the moratorium provisions came into force on 1st
January 2003. The issuer and Funding will not be small companies within the
current definition. In addition, the Secretary of State for Trade and Industry
has the power to expand the definition of small company in the future, which
may be detrimental to your interests. In this respect, we note the proposals in
the Government's White Paper "Modernising Company Law" issued on 16th July,
2002 to increase the limits for the definition of small company to the EU
maximum ([GBP]4.8 million turnover, [GBP]2.4 million balance sheet total, 50
employees). Secondary legislation has now been passed which excludes certain
special purpose companies from the optional moratorium provisions. Such
exceptions include (inter alia) (i) a company which is a party to an agreement
which is or forms part of a "capital market arrangement" under which a party
has incurred a debt of at least [GBP]10 million and which involves the issue of
a "capital market investment" and (ii) a company which has incurred a liability
(including a present, future or contingent liability) of at least [GBP]10
million. While there is no guidance as to how the legislation will be
interpreted, both the issuer and Funding should fall within one of the
exceptions.
The mortgages trustee will fall within the current definition of a "SMALL
COMPANY" under section 247 of the Companies Act 1985, which is the definition
used for the purposes of the Insolvency Act 2000.
ENTERPRISE ACT 2002
On 7th November, 2002, the Enterprise Act 2002 received Royal Assent. The
Act contains significant reforms to both personal and corporate insolvency law.
These reforms, which are expected to be implemented in or around June 2003,
will restrict the right of the holder of a floating charge to appoint an
administrative receiver and instead will 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, and the primary emphasis will be on rescuing the
company. 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 chargor and others with an interest in the equity of
redemption.
The Enterprise Act 2002 contains provisions which would allow the
appointment of an administrative receiver in relation to certain transactions
in the capital markets. The current wording of the relevant exception provides
that the right to appoint an administrative receiver would be retained for
certain types of security (such as the issuer security) that form part of a
capital market arrangement (as defined in the Enterprise Act 2002) that
involves indebtedness of at least [GBP]50,000,000 (or, when the agreement was
entered into, it was expected to incur a debt of at least [GBP]50,000,000) and
the issue of a capital market investment (also defined but generally a rated,
listed or traded bond). The Secretary of State for Trade and Industry is given
the power to
57
modify the exceptions by secondary legislation and the Government has indicated
that changes will be made to the capital market exception before the Enterprise
Act 2002 comes into force. As the capital market exception currently refers to
security granted to a trustee in favour of the holder(s) of a capital market
investment, concerns have been expressed as to whether the capital market
exception would allow an administrative receiver to be appointed in respect of
the security granted by Funding and, unless the capital market exception is
amended by secondary legislation, no assurance can be given that such security
would fall within the capital market exception.
In a press notice issued by the Department of Trade and Industry on 9th
November, 2001, the Secretary of State for Trade and Industry confirmed that
the Government's proposed abolition of administrative receivership would not
apply to corporate lending agreements predating the commencement of the
relevant provisions, and that the current insolvency law provisions would
continue to apply to such lending agreements supported by a floating charge.
While the Enterprise Bill was at the committee stage in the House of Commons,
although a proposed amendment which was designed to prevent the Secretary of
State from abolishing administrative receivership retrospectively was
withdrawn, a "reassurance" was given that the Enterprise Act 2002 would not
apply retrospectively. The Enterprise Act 2002 does not state expressly that
the existing administrative receivership regime will be available in respect of
security created before the relevant provisions come into force. If the date
designated by the Secretary of State for Trade and Industry is the date of
commencement of the corporate insolvency provisions, the prohibition on the
appointment of an administrative receiver should not prevent the appointment of
an administrative receiver pursuant to the floating charges comprised in the
security granted by the issuer and Funding as those charges were created prior
to the relevant provisions of the Enterprise Act 2002 coming into force.
However, if the Government reconsiders its position and determines that the
corporate insolvency provisions of the Enterprise Act 2002 will apply
retrospectively, no assurance can be given that the Enterprise Act 2002 will
not have a detrimental effect on the transactions described in this offering
circular/prospectus or on the interests of Noteholders.
The Enterprise Act 2002 will also introduce a new out-of-court route into
administration for a qualifying floating charge-holder, the directors or the
company itself. There will be a notice period during which the holder of the
floating charge can either agree to the administrator proposed by the directors
or the company or appoint an alternative administrator, although the moratorium
will take effect immediately after notice is given. If the qualifying floating
charge holder does not respond to the directors' notice of intention to
appoint, the company's appointee will automatically take office after the
notice period has elapsed. Where the holder of the floating charge retains the
power to appoint an administrative receiver, it may prevent the appointment of
an administrator out of court by appointing an administrative receiver prior to
the appointment of the administrator being completed.
The Enterprise Act 2002 gives primary emphasis to the rescue of the company
as a going concern. The purpose of realising property to make a distribution to
secured creditors is subordinated to the primary purposes of rescuing the
company as a going concern or achieving a better result for the creditors as a
whole. These purposes could conflict with the wishes or interests of
Noteholders. Nevertheless, the Enterprise Act 2002 makes it clear that the
unsecured creditors would not be able to approve administrators' proposals that
affect the rights of the secured creditors to enforce their security although
it is not clear how this provision of the Act will be interpreted.
YOU WILL NOT RECEIVE ISSUER NOTES IN PHYSICAL FORM, WHICH MAY CAUSE DELAYS IN
DISTRIBUTIONS AND HAMPER YOUR ABILITY TO PLEDGE OR RESELL THE ISSUER NOTES
Unless the global issuer notes are exchanged for definitive issuer notes,
which will only occur under a limited set of circumstances, your beneficial
ownership of the issuer notes will only be recorded in book-entry form with
DTC, Euroclear or Clearstream, Luxembourg. The lack of issuer notes in physical
form could, among other things:
58
* result in payment delays on the issuer notes because the issuer
will be sending distributions on the issuer notes to DTC, Euroclear
or Clearstream, Luxembourg instead of directly to you;
* make it difficult for you to pledge the issuer notes if issuer
notes in physical form are required by the party demanding the
pledge; and
* hinder your ability to resell the issuer notes because some
investors may be unwilling to buy issuer notes that are not in
physical form.
IF YOU HAVE A CLAIM AGAINST US IT MAY BE NECESSARY FOR YOU TO BRING SUIT
AGAINST US IN ENGLAND TO ENFORCE YOUR RIGHTS
We have agreed to submit to the non-exclusive jurisdiction of the courts of
England, and it may be necessary for you to bring a suit in England to enforce
your rights against us.
PROPOSED CHANGES TO THE BASEL CAPITAL ACCORD AND THE RISK-WEIGHTED ASSET
FRAMEWORK MAY RESULT IN CHANGES TO THE RISK-WEIGHTING OF YOUR ISSUER 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
16th January, 2001. The consultation period on the further proposals contained
in the New Basel Capital Accord ended on 31st May, 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.
On 1st October, 2002, the Basel Committee launched a comprehensive field test
for banks of its revised proposals known as the quantitive impact study, or
QIS3, which is focused on the minimum capital requirements under pillar one of
the new Basel Capital Accord. The survey period ended on 20th December, 2002.
It is anticipated that the revised proposals will be issued for public comment
in the second quarter of 2003. The Committee intends to finalise 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 issuer 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.
CERTAIN EVENTS MAY AFFECT THE ELIGIBILITY OF THE SERIES 1 CLASS A ISSUER NOTES
FOR INVESTMENT BY MONEY MARKET FUNDS
The series 1 class A issuer notes are eligible for purchase by money market
funds under Rule 2a-7 under the United States Investment Company Act of 1940,
as amended. However, under Rule 2a-7, a money market fund may be required to
dispose of the series 1 class A issuer notes upon the occurrence of any of the
following events:
* the rating currently assigned to the series 1 class A issuer notes
is lowered or withdrawn;
* a material default occurs with respect to the series 1 class A
issuer notes;
* the money market fund determines that the series 1 class A issuer
notes no longer present minimal credit risk;
* upon certain events of insolvency with respect to the issuer; or
* the series 1 class A issuer notes otherwise cease to meet the
eligibility criteria under Rule 2a-7.
59
US DOLLAR PRESENTATION
Unless otherwise stated in this prospectus, any translations of pounds
sterling into US dollars have been made at the rate of [GBP]0.6354 = US$1.00,
which was the noon buying rate in the City of New York for cable transfers in
sterling per US$1.00 as certified for customs purposes by the Federal Reserve
Bank of New York on 28th February, 2003. Use of this rate does not mean that
pound sterling amounts actually represent those US dollar amounts or could be
converted into US dollars at that rate at any particular time.
References in this prospectus to "[GBP]", "POUNDS" or "STERLING" are to the
lawful currency for the time being of the United Kingdom of Great Britain and
Northern Ireland. References in this prospectus to "US$", "$", "US DOLLARS" or
"DOLLARS" are to the lawful currency of the United States of America.
References to "[E]", "EURO" or "EURO" are to the single currency introduced
at the third stage of European Economic and Monetary Union pursuant to the
Treaty establishing the European Communities, as amended from time to time.
STERLING/US DOLLAR EXCHANGE RATE HISTORY(1)
YEAR TO
28TH FEBRUARY, YEARS ENDED 31ST DECEMBER
2003 2002 2001 2000 1999 1998
-------------- ------ ------ ------ ------ ------
Last(2)... 1.5737 1.6100 1.4543 1.4955 1.6150 1.6628
Average(3) 1.6129 1.5038 1.4396 1.5156 1.6172 1.6573
High...... 1.6482 1.6100 1.5045 1.6538 1.6765 1.7222
Low....... 1.5727 1.4082 1.3730 1.3997 1.5515 1.6114
Notes:
(1) Source: Bloomberg page USCFBPS Crncy.
(2) Last is the closing exchange rate on the last operating business day of
each of the periods indicated, years commencing from 1st January or the
next operating business day.
(3) Average is the average daily exchange rate during the period.
60
THE ISSUER
INTRODUCTION
The issuer was incorporated in England and Wales on 23rd January, 2003
(registered number 4645659) and is a public limited company under the Companies
Act 1985. The authorised share capital of the issuer comprises 100,000 ordinary
shares of [GBP]1 each. The issued share capital of the issuer comprises 50,000
ordinary shares of [GBP]1 each, 49,998 of which are partly paid to [GBP]0.25
each and two of which are fully paid and all of which are beneficially owned by
Holdings (see "HOLDINGS"). The registered office of the issuer is Abbey
National House, 2 Triton Square, Regent's Place, London NW1 3AN.
The issuer is organised as a special purpose company. The issuer has no
subsidiaries. The seller does not own directly or indirectly any of the share
capital of Holdings or the issuer.
The principal objects of the issuer are set out in its memorandum of
association and include among other things:
* lending money and giving credit, secured or unsecured;
* borrowing or raising money and securing the payment of money; and
* granting security over its property for the performance of its
obligations or the payment of money.
The issuer was established to issue the issuer notes and to make the issuer
term AAA advances, the issuer term AA advances and the issuer term A advances
to Funding.
The issuer has not engaged, since its incorporation, in any material
activities other than those incidental to its registration as a public company
under the Companies Act 1985, to the proposed issue of the issuer notes and
making of the issuer term advances to Funding and to the authorisation of
entering into the other issuer transaction documents referred to in this
prospectus.
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 accounting reference date of the issuer is the last day of December.
DIRECTORS AND SECRETARY
The following table sets out the directors of the issuer and their
respective business addresses and occupations.
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ---------------------- ------------------------------ ---------------------------------------
Martin McDermott Tower 42 Executive Director of SPV
International Financial Centre Management Limited
25 Old Broad Street
London EC2N 1HQ
SPV Management Limited Tower 42 Management of Special Purpose Companies
International Financial Centre
25 Old Broad Street
London EC2N 1HQ
Richard Wise Abbey National House Retail Finance and Risk Director
2 Triton Square
Regent's Place
London NW1 3AN
Richard Wise is an employee of the seller.
The directors of SPV Management Limited are set out under the section
"HOLDINGS" in this prospectus.
61
The company secretary of the issuer is:
Abbey National Secretariat
Services Limited
Abbey National House
2 Triton Square
Regent's Place
London NW1 3AN
The activities of the issuer will be restricted by the terms and conditions
of the issuer notes and will be limited to the issue of the issuer notes,
making the issuer term advances to Funding, the exercise of related rights and
powers, and other activities referred to in this prospectus or incidental to
those activities.
CAPITALISATION STATEMENT
The following table shows the capitalisation of the issuer as at 14th
February, 2003:
AS AT
14TH FEBRUARY, 2003
[GBP]
-------------------
AUTHORISED SHARE CAPITAL
Ordinary shares of [GBP]1 each.............. 100,000
ISSUED SHARE CAPITAL
2 ordinary shares of [GBP]1 each fully paid. 2.00
49,998 ordinary shares each one quarter paid 12,499.50
-------------------
12,501.50
===================
The issuer has no loan capital, term loans, other borrowings or indebtedness
or contingent liabilities or guarantees as at 14th February, 2003.
There has been no material change in the capitalisation, indebtedness,
guarantees or contingent liabilities of the issuer since 14th February, 2003.
It is not intended that there be any further payment of the issued share
capital.
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 issuer notes.
The issuer's primary source of liquidity will be payments of interest and
principal on the issuer intercompany loan.
RESULTS OF OPERATIONS
As of the date of this prospectus, the issuer does not have an operating
history. Therefore, this prospectus does not include any historical or pro
forma ratio of earnings to fixed charges. The earnings on the issuer
intercompany loan, the interest costs of the issuer notes and the related
operating expenses will determine the issuer's results of operations in the
future. Fees and expenses of the issuer in connection with the issuance of the
issuer notes will be borne by Funding. The income generated on the issuer
intercompany loan will be used to pay principal and interest on the issuer
notes.
62
USE OF PROCEEDS
The gross proceeds of the issuance of the issuer notes will equal
approximately $[__] and will be applied (after exchanging the gross US dollar
proceeds of the offered issuer notes for sterling proceeds calculated by
reference to the relevant issuer dollar currency swap rates and the gross euro
proceeds of the series 4 class A1 issuer notes, the series 4 class B issuer
notes and the series 4 class M issuer notes for sterling proceeds calculated by
reference to the relevant issuer euro currency swap rate), in accordance with
the issuer intercompany loan, to make the issuer term advances to Funding. The
net proceeds of the issuance of the offered issuer notes will equal the gross
proceeds of the offered issuer notes as (1) the management and underwriting
fees and selling commissions otherwise payable by the issuer will be paid to
the underwriters by Funding from part of the proceeds of the startup loan, and
(2) the additional offering expenses otherwise payable by the issuer in
connection with the issuance of the offered issuer notes will be partly paid by
the underwriters and partly paid by Funding on the issuer's behalf, see "-
UNDERWRITING".
63
THE ABBEY NATIONAL GROUP
THE SELLER
The seller and its subsidiaries (the "GROUP") comprise a major personal
financial services group in the UK, providing a wide range of financial
products and services.
The seller was incorporated in England and Wales on 12th September, 1988
with registered number 2294747 and is the successor company to which the Abbey
National Building Society transferred its business in July 1989. The seller is
the parent company of the group.
The group is the sixth largest banking group in the UK in terms of assets,
with total assets at 31st December, 2002 of [GBP]205.7 billion (2001: restated
[GBP]214.4 billion). During 2002, the group's loss on ordinary activities
before tax was [GBP]984 million (2001: restated profit [GBP]1,470 million).
Included in the loss before tax of [GBP]984 million are a number of material
charges and accounting policy changes, including:
* embedded value re-basing and other related adjustments, of [GBP]632
million;
* goodwill impairments of [GBP]1,138 million; and
* provisioning, impairments and losses on disposals of credit
impaired assets in the Wholesale Bank totalling [GBP]902 million.
Following an intensive strategic review initiated in November 2002, the
ongoing businesses will be focused solely on providing the full range of
personal financial services ("PFS") in the UK through direct and intermediary
channels. All businesses outside this remit (other than treasury activities
supporting PFS) are to be managed for value and exit.
In 2002 the core ongoing personal financial services businesses generated
`trading' profit before tax of [GBP]1,219 million.
The above figures are stated in accordance with generally accepted
accounting principles in the UK.
MORTGAGE BUSINESS
The total value of the group's mortgage loans and advances secured on
residential properties (including mortgage loans and advances administered by
it) as at 31st December, 2002 was approximately [GBP]80.1 billion (2001:
[GBP]73.1 billion). The group is the UK's second largest residential mortgage
lender.
ABBEY NATIONAL TREASURY SERVICES PLC (`ANTS')
ANTS was incorporated in England and Wales on 24th January, 1989. ANTS is a
wholly owned subsidiary of the seller and its registered office is at Abbey
National House, 2 Triton Square, Regent's Place, London NW1 3AN. ANTS was
formerly the Wholesale Bank of the group.
The strategic review mentioned above has redefined the scale and role of the
Wholesale Bank within the group's focus on PFS. Core treasury, risk and product
structuring and money market operations will be retained, with the remainder of
the Wholesale Bank placed in the Portfolio Business Unit, where the group's
businesses outside PFS will be managed for value and exit.
The obligations of ANTS are guaranteed by a deed poll made by the seller and
dated 9th February, 1998.
CARFAX
Carfax Insurance Limited, or Carfax, was incorporated in Guernsey on 22nd
December, 1992. Carfax is a wholly owned subsidiary of the seller and its
registered office is at The Albany, South Esplanade, St Peter Port, Channel
Islands. The principal business activity of Carfax is that of an insurer.
64
BAKER STREET RISK
Baker Street Risk and Insurance (Guernsey) Limited was incorporated in
Guernsey on 12th March, 1993. Baker Street Risk is a wholly owned subsidiary of
the seller and its registered office is at Albert House, South Esplanade, St
Peter Port, Channel Islands. The principal business activity of Baker Street
Risk is that of an insurer.
65
FUNDING
INTRODUCTION
Funding was incorporated in England and Wales on 28th April, 2000
(registered number 3982428) as a private limited company under the Companies
Act 1985. The authorised share capital of Funding comprises 100 ordinary shares
of [GBP]1 each. The issued share capital of Funding comprises two ordinary
shares of [GBP]1 each, both of which are beneficially owned by Holdings (see
"HOLDINGS"). The registered office of Funding is at Abbey National House, 2
Triton Square, Regent's Place, London NW1 3AN.
Funding is organised as a special purpose company. Funding has no
subsidiaries. The seller does not own directly or indirectly any of the share
capital of Holdings or Funding.
The principal objects of Funding are set out in its memorandum of
association and are, among other things, to:
* carry on the business of a property investment company and an
investment holding company;
* acquire trust property and enter into loan arrangements;
* invest, buy, sell and otherwise acquire and dispose of mortgage
loans, advances and other investments and all forms of security;
* carry on business as a money lender, financier and investor; and
* undertake and carry on all kinds of loan, financial and other
operations.
Since its incorporation, Funding has not engaged in any material activities,
other than those relating to the previous issues by the previous issuers and
those incidental to the authorisation of the issuer transaction documents
referred to in this prospectus to which it is or will be a party and other
matters which are incidental to those activities. Funding has no employees.
The accounting reference date of Funding is the last day of December.
DIRECTORS AND SECRETARY
The following table sets out the directors of Funding and their respective
business addresses and occupations.
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ---------------------- ------------------------------ ---------------------------------------
Martin McDermott Tower 42 Executive Director of SPV
International Financial Centre Management Limited
25 Old Broad Street
London EC2N 1HQ
SPV Management Limited Tower 42 Management of Special Purpose Companies
International Financial Centre
25 Old Broad Street
London EC2N 1HQ
Richard Wise Abbey National House Retail Finance and Risk Director
2 Triton Square
Regent's Place
London NW1 3AN
Richard Wise is an employee of the seller.
The directors of SPV Management Limited are set out under the section
"HOLDINGS" in this prospectus.
66
The company secretary of Funding is:
Abbey National Secretariat
Services Limited
Abbey National House
2 Triton Square
Regent's Place
London NW1 3AN
CAPITALISATION STATEMENT
The following table shows the capitalisation of Funding as at 31st January,
2003:
AS AT
31ST JANUARY,
2003
[GBP]
-------------
AUTHORISED SHARE CAPITAL
Ordinary shares of [GBP]1 each 100
ISSUED SHARE CAPITAL
Allotted and fully paid....... 2
TOTAL ISSUED SHARE CAPITAL.... 2
The following table shows the indebtedness of Funding as at [31st January,
2003], all of which is secured and unguaranteed and relates to the previous
issues:
series 1 term AAA advance due July 2005 made by Holmes Financing (No. 1) PLC............. [GBP] 600,000,000
series 1 term AA advance due July 2040 made by Holmes Financing (No. 1) PLC.............. [GBP] 21,000,000
series 1 term BBB advance due July 2040 made by Holmes Financing (No. 1) PLC............. [GBP] 28,000,000
series 2 term AAA advance due July 2007 made by Holmes Financing (No. 1) PLC............. [GBP] 650,000,000
series 2 term AA advance due July 2040 made by Holmes Financing (No. 1) PLC.............. [GBP] 23,000,000
series 2 term BBB advance due July 2040 made by Holmes Financing (No. 1) PLC............. [GBP] 30,000,000
series 3 term AAA advance due July 2010 made by Holmes Financing (No. 1) PLC............. [GBP] 575,000,000
series 3 term AA advance due July 2040 made by Holmes Financing (No. 1) PLC.............. [GBP] 24,000,000
series 3 term BBB advance due July 2040 made by Holmes Financing (No. 1) PLC............. [GBP] 30,000,000
series 4 term AAA advance due July 2013 made by Holmes Financing (No. 1) PLC............. [GBP] 250,000,000
series 4 term AA advance due July 2040 made by Holmes Financing (No. 1) PLC.............. [GBP] 11,000,000
series 4 term BBB advance due July 2040 made by Holmes Financing (No. 1) PLC............. [GBP] 14,000,000
first start-up loan...................................................................... [GBP] 14,791,376
series 2 term AAA advance due July 2017 made by Holmes Financing (No. 2) PLC............. [GBP] 703,000,000
series 2 term AA advance due July 2040 made by Holmes Financing (No. 2) PLC.............. [GBP] 26,011,000
Series 2 term BBB advance due July 2040 made by Homes Financing (No.2) PLC............... [GBP] 34,447,000
series 3 term AAA advance due July 2023 made by Holmes Financing (No. 2) PLC............. [GBP] 500,000,000
series 3 term AA advance due July 2040 made by Holmes Financing (No. 2) PLC.............. [GBP] 19,000,000
series 3 term BBB advance due July 2040 made by Holmes Financing (No. 2) PLC............. [GBP] 25,000,000
series 4 term AAA advance due July 2040 made by Holmes Financing (No. 2) PLC............. [GBP] 300,000,000
series 4 term AA advance due July 2040 made by Holmes Financing (No. 2) PLC.............. [GBP] 12,600,000
series 4 term BBB advance due July 2040 made by Holmes Financing (No. 2) PLC............. [GBP] 21,000,000
second start-up loan..................................................................... [GBP] 14,742,933
series 1 term AA advance due July 2040 made by Holmes Financing (No. 3) PLC.............. [GBP] 23,000,000
series 1 term BBB advance due July 2040 made by Holmes Financing (No. 3) PLC............. [GBP] 37,500,000
series 2 term AAA advance due January 2007 made by Holmes Financing (No. 3) PLC.......... [GBP] 750,000,000
series 2 term AA advance due July 2040 made by Holmes Financing (No. 3) PLC.............. [GBP] 23,000,000
series 2 term BBB advance due July 2040 made by Holmes Financing (No. 3) PLC............. [GBP] 37,500,000
series 3 term AAA advance due July 2040 made by Holmes Financing (No. 3) PLC............. [GBP] 500,000,000
67
series 3 term [GBP]
AA advance due
July 2040 made
by Holmes
Financing (No.
3) PLC........
15,000,000
series 3 term BBB advance due July 2040 made by Holmes Financing (No. 3) PLC............. [GBP] 31,000,000
third start-up loan...................................................................... [GBP] 18,901,221
series 1 term AAA advance due July 2015 made by Holmes Financing (No. 4) PLC............. [GBP] 765,000,000
series 1 term AA advance due July 2040 made by Holmes Financing (No. 4) PLC.............. [GBP] 26,500,000
series 1 term BBB advance due July 2040 made by Holmes Financing (No. 4) PLC............. [GBP] 39,500,000
series 2 term AAA advance due July 2008 made by Holmes Financing (No. 4) PLC............. [GBP] 490,000,000
series 2 term AA advance due July 2040 made by Holmes Financing (No. 4) PLC.............. [GBP] 22,000,000
series 2 term BBB advance due July 2040 made by Holmes Financing (No. 4) PLC............. [GBP] 33,000,000
series 3 term AAA advance due July 2040 made by Holmes Financing (No. 4) PLC............. [GBP] 850,000,000
series 3 term AA advance due July 2040 made by Holmes Financing (No. 4) PLC.............. [GBP] 25,000,000
series 3 term BBB advance due July 2040 made by Holmes Financing (No. 4) PLC............. [GBP] 36,000,000
series 3 term BB advance due July 2040 made by Holmes Financing (No. 4) PLC.............. [GBP] 50,000,000
series 4 term AAA advance due October 2009 made by Holmes Financing (No. 4) PLC.......... [GBP] 350,000,000
series 4 term BBB advance due July 2040 made by Holmes Financing (No. 4) PLC............. [GBP] 11,000,000
series 4 term BB advance due July 2040 made by Holmes Financing (No. 4) PLC.............. [GBP] 19,000,000
fourth start-up loan..................................................................... [GBP] 8,043,841
series 2 term AAA advances due October 2006 made by Holmes Financing (No. 5) PLC......... [GBP] 697,500,000
series 2 term AA advance due July 2040 made by Holmes Financing (No. 5) PLC.............. [GBP] 24,500,000
series 2 term BBB advance due July 2040 made by Holmes Financing (No. 5) PLC............. [GBP] 36,500,000
series 3 term AAA advance due October 2008/July 2040 made by Holmes Financing (No. 5) PLC [GBP] 875,000,000
series 3 term AA advance due July 2040 made by Holmes Financing (No. 5) PLC.............. [GBP] 33,000,000
series 3 term BBB advance due July 2040 made by Holmes Financing (No. 5) PLC............. [GBP] 47,500,000
fifth start-up loan...................................................................... [GBP] 5,370,457
series 1 term AAA advance due July 2003 made by Holmes Financing (No. 6) PLC............. [GBP] 480,646,000
series 1 term AAA advance due October 2003 made by Holmes Financing (No. 6) PLC.......... [GBP] 480,646,000
series 1 term AA advance due July 2040 made by Holmes Financing (No. 6) PLC.............. [GBP] 32,043,000
series 1 term BBB advance due July 2040 made by Holmes Financing (No. 6) PLC............. [GBP] 55,114,000
series 2 term AAA advance due April 2008 made by Holmes Financing (No. 6) PLC............ [GBP] 801,077,000
series 2 term AA advance due July 2040 made by Holmes Financing (No. 6) PLC.............. [GBP] 26,916,000
series 2 term BBB advance due July 2040 made by Holmes Financing (No. 6) PLC............. [GBP] 45,501,000
series 3 term AAA advance due October 2009 made by Holmes Financing (No. 6) PLC.......... [GBP] 633,500,000
series 3 term AA advance due July 2040 made by Holmes Financing (No. 6) PLC.............. [GBP] 21,539,000
series 3 term BBB advance due July 2040 made by Holmes Financing (No. 6) PLC............. [GBP] 36,110,000
series 4A1 term AAA advance due October 2009 made by Holmes Financing (No. 6) PLC........ [GBP] 641,026,000
series 4A2 term AAA advance due October 2009 made by Holmes Financing (No. 6) PLC........ [GBP] 129,230,000
series 4 term AA advance due July 2040 made by Holmes Financing (No. 6) PLC.............. [GBP] 25,642,000
series 4 term BBB advance due July 2040 made by Holmes Financing (No. 6) PLC............. [GBP] 44,231,000
series 5 term AAA advance due July 2040 made by Holmes Financing (No. 6) PLC............. [GBP] 500,000,000
series 5 term AA advance due July 2040 made by Holmes Financing (No. 6) PLC.............. [GBP] 17,000,000
series 5 term BBB advance due July 2040 made by Holmes Financing (No. 6) PLC............. [GBP] 29,000,000
sixth start-up loan...................................................................... [GBP] 6,102,882
Total.................................................................................... [GBP] 13,812,301,710
Other than as set out in the preceding table, Funding has no loan capital,
term loans, other borrowings or indebtedness or contingent liabilities or
guarantees as at 31st January, 2003.
There has been no material change in the capitalisation, indebtedness or
contingent liabilities or guarantees of Funding since 31st January, 2003.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF FUNDING
SOURCES OF CAPITAL AND LIQUIDITY
Funding's source of capital is the previous term advances made to it by the
previous issuers pursuant to the previous intercompany loan agreements and this
will be increased by the issuer term advances made to it by the issuer pursuant
to the issuer intercompany loan agreement.
68
Funding's principal source of liquidity is earnings on its interest in the
trust property, the first reserve fund, the second reserve fund, the Funding
liquidity reserve fund and the Funding liquidity facility.
RESULTS OF OPERATIONS
This prospectus does not include any historical or pro forma ratio of
Funding's earnings to fixed charges. The earnings on its interest in the trust
property, the interest costs of the issuer term advances it pays to the issuer
pursuant to the issuer intercompany loan agreement, the interest costs of the
previous term advances it pays to the previous issuers pursuant to the previous
intercompany loan agreements and the related operating expenses are the
principal components of Funding's results of operations. The income generated
on its interest in the trust property will be used to pay principal and
interest on the issuer intercompany loan to the issuer and on the previous
intercompany loans to the previous issuers.
Audited financial statements for Holmes Funding Limited are included in this
prospectus -- see APPENDIX B.
69
THE MORTGAGES TRUSTEE
INTRODUCTION
The mortgages trustee was incorporated in England and Wales on 28th April,
2000 (registered number 3982431) as a private limited company under the
Companies Act 1985. The authorised share capital of the mortgages trustee
comprises 100 ordinary shares of [GBP]1 each. The issued share capital of the
mortgages trustee comprises two ordinary shares of [GBP]1 each, both of which
are beneficially owned by Holdings (see "HOLDINGS"). The registered office of
the mortgages trustee is at Abbey National House, 2 Triton Square, Regent's
Place, London NW1 3AN.
The mortgages trustee is organised as a special purpose company. 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.
The principal objects of the mortgages trustee are set out in its memorandum
of association and are, among other things, to:
* invest and deal in mortgage loans secured on residential or other
properties within England, Wales and Scotland;
* invest in, buy, sell and otherwise acquire and dispose of mortgage
loans, advances, other similar investments and all forms of
security;
* carry on business as a money lender, financier and investor;
* undertake and carry on all kinds of loan, financial and other
operations; and
* act as trustee in respect of carrying on any of these objects.
The mortgages trustee has not engaged, since its incorporation, 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 previous notes by
the previous issuers, changing its name from Trushelfco (No. 2655) Ltd. on 6th
June, 2000, the authorisation of the issuer transaction documents referred to
in this prospectus to which it is or will be a party and other matters which
are incidental or ancillary to the foregoing. The mortgages trustee has no
employees.
The accounting reference date of the mortgages trustee is the last day of
December.
DIRECTORS AND SECRETARY
The following table sets out the directors of the mortgages trustee and
their respective business addresses and occupations.
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ---------------------- ------------------------------ ---------------------------------------
Martin McDermott Tower 42 Executive Director of SPV
International Financial Centre Management Limited
25 Old Broad Street
London EC2N 1HQ
SPV Management Limited Tower 42 Management of Special Purpose Companies
International Financial Centre
25 Old Broad Street
London EC2N 1HQ
Richard Wise Abbey National House Retail Finance and Risk Director
2 Triton Square
Regent's Place
London NW1 3AN
Richard Wise is an employee of the seller.
70
The directors of SPV Management Limited are set out under the section
"HOLDINGS" in this prospectus.
The company secretary of the mortgages trustee is:
Abbey National Secretariat
Services Limited
Abbey National House
2 Triton Square
Regent's Place
London NW1 3AN
71
HOLDINGS
INTRODUCTION
Holdings was incorporated in England and Wales on 29th December, 1998
(registered number 3689577) as a private limited company under the Companies
Act 1985. The registered office of Holdings is at Abbey National House, 2
Triton Square, Regent's Place, London NW1 3AN.
Holdings has an authorised share capital of [GBP]100 divided into 100
ordinary shares of [GBP]1 each, of which two shares of [GBP]1 each have been
issued. Limited recourse loans were made by SPV Management Limited to Holdings
in order for Holdings to acquire all of the issued share capital of the
previous issuers, Funding, the mortgages trustee and PECOH Limited. A further
limited loan has been made by SPV Management Limited to Holdings in order for
Holdings to acquire all of the issued share capital of the issuer. SPV
Management Limited holds all of the beneficial interest in the issued shares in
Holdings on a discretionary trust for persons employed as nurses in the United
Kingdom and for charitable purposes.
Holdings is organised as a special purpose company.
The principal objects of Holdings are set out in its memorandum of
association and are, among other things, to:
* acquire and hold, by way of investments or otherwise; and
* 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 previous issuers, the issuer, the
mortgages trustee, Funding, and the post-enforcement call option holder).
Holdings has not engaged in any other activities since its incorporation.
Holdings has no employees.
The accounting reference date of Holdings is the last day of December.
DIRECTORS AND SECRETARY
The following table sets out the directors of Holdings and their respective
business addresses and occupations.
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ---------------------- ------------------------------ ---------------------------------------
Martin McDermott Tower 42 Executive Director of SPV
International Financial Centre Management Limited
25 Old Broad Street
London EC2N 1HQ
SPV Management Limited Tower 42 Management of Special Purpose Companies
International Financial Centre
25 Old Broad Street
London EC2N 1HQ
Richard Wise Abbey National House Retail Finance and Risk Director
2 Triton Square
Regent's Place
London NW1 3AN
Richard Wise is an employee of the seller.
72
The directors of SPV Management Limited and their principal activities are
as follows:
NAME FUNCTION PRINCIPAL ACTIVITIES
- ---------------- ----------------------------------------- --------------------
Martin McDermott Managing Director/Chief Executive Officer Company Director
James Fairrie Managing Director/Sales and Marketing Company Director
Stuart Cloke Executive Director Company Director
Nicolas Patch Executive Director Company Director
Emmett Harmon Non-Executive Director Company Director
Anthony Raikes Non-Executive Director Company Director
Howard Cohen Non-Executive Director Banker
David Dupert Non-Executive Director Banker
David Roulston Non-Executive Director Banker
The business address of the directors of SPV Management Limited is Tower 42,
International Financial Centre, 25 Old Broad Street, London EC2N 1HQ.
The company secretary of Holdings is:
Abbey National Secretariat
Services Limited
Abbey National House
2 Triton Square
Regent's Place
London NW1 3AN
73
PECOH LIMITED
INTRODUCTION
The post-enforcement call option holder was incorporated in England and
Wales on 28th April, 2000 (registered number 3982397) as a private limited
company under the Companies Act 1985. The registered office of the post-
enforcement call option holder is Abbey National House, 2 Triton Square,
Regent's Place, London NW1 3AN.
The authorised share capital of the post-enforcement call option holder
comprises 100 ordinary shares of [GBP]1 each. The issued share capital of the
post-enforcement call option holder comprises two ordinary shares of [GBP]1
each, both of which are beneficially owned by Holdings.
The post-enforcement call option holder is organised as a special purpose
company. 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 others, to hold bonds,
notes, obligations and securities issued or guaranteed by any company and any
options or rights in respect of them. The post-enforcement call option holder
has not engaged since its incorporation in any material activities other than
changing its name from Trushelfco (No. 2657) Ltd. on 6th June, 2000 and those
activities relating to the previous issues by the previous issuers and those
incidental to the authorising of the issuer transaction documents referred to
in this prospectus to which it is or will be a party and other matters which
are incidental to those activities. The post-enforcement call option holder has
no employees.
The accounting reference date of the post-enforcement call option holder is
the last day of December.
DIRECTORS AND SECRETARY
The following table sets out the directors of the post-enforcement call
option holder and their respective business addresses and occupations.
NAME BUSINESS ADDRESS BUSINESS OCCUPATION
- ---------------------- ------------------------------ ---------------------------------------
Martin McDermott Tower 42 Executive Director of SPV
International Financial Centre Management Limited
25 Old Broad Street
London EC2N 1HQ
SPV Management Limited Tower 42 Management of Special Purpose Companies
International Financial Centre
25 Old Broad Street
London EC2N 1HQ
Richard Wise Abbey National House Retail Finance and Risk Director
2 Triton Square
Regent's Place
London NW1 3AN
Richard Wise is an employee of the seller.
The directors of SPV Management Limited are set out under the section
"HOLDINGS" in this prospectus.
The company secretary of the post-enforcement call option holder is:
Abbey National Secretariat
Services Limited
Abbey National House
2 Triton Square
Regent's Place
London NW1 3AN
74
THE ISSUER SWAP PROVIDERS
[TO BE PROVIDED]
75
DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS
The previous issuers, Holmes Financing (No. 1) PLC, Holmes Financing (No. 2)
PLC, Holmes Financing (No. 3) PLC, Holmes Financing (No. 4) PLC, Holmes
Financing (No. 5) PLC and Holmes Financing (No. 6) PLC, are each a public
limited company incorporated in England and Wales. The registered office of
each previous issuer is Abbey National House, 2 Triton Square, Regent's Place,
London NW1 3AN. The contact telephone numbers for the previous issuers are (44)
20 7756 6302/4/5. The previous issuers are each a special purpose company whose
purpose is to have issued the previous notes that represent their respective
asset-backed obligations and to have lent an amount equal to the proceeds of
the previous notes to Funding under their respective previous intercompany
loans. Each of the previous issuers does not engage in any activities that are
unrelated to these purposes.
The seller has been appointed as the cash manager for each of the previous
issuers to manage its bank accounts, to determine the amounts of and arrange
payments of monies to be made by it and keep certain records on its behalf. The
seller has also been appointed as an account bank for each of the previous
issuers to provide banking services to it.
The following tables summarise the principal features of the previous notes.
In each table, references to "PREVIOUS NOTES" are references to the previous
notes issued by the relevant previous issuer, the notes of which previous
issuer are described in that table.
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 1) PLC
----------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1
CLASS A CLASS B CLASS C
------------------------------ ------------------------------ ------------------------------
Principal amount: $900,000,000 $31,500,000 $42,000,000
Credit enhancement: Subordination of Subordination of The reserve funds
the class B the class C
previous notes previous notes
and the class C and the reserve
previous notes funds
and the reserve
funds
Interest rate: Three-month USD-LIBOR + margin Three-month USD-LIBOR + margin Three-month USD-LIBOR + margin
Margin: 0.14% p.a. 0.38% p.a. 1.03% p.a.
Until interest payment date July 2010 July 2010 July 2010
falling in:
And thereafter: N/A 1.38% p.a. 2.03% p.a.
Scheduled redemption July 2003 N/A N/A
date:
Outstanding balance at last $900,000,000 $31,500,000 $42,000,000
payment date:
Interest accrual method: Actual/360 Actual/360 Actual/360
Interest payment dates: Quarterly in arrear on the interest payme nt dates falling in January, April, July and October
of each year
First interest payment date: October 2000 October 2000 October 2000
Final maturity date: July 2005 July 2040 July 2040
Listing: UK Listing UK Listing UK Listing
Authority and Authority and Authority and
London Stock London Stock London Stock
Exchange Exchange Exchange
Ratings(S&P/Moody's/ Fitch): AAA/Aaa /AAA AA/Aa3/AA BBB/Baa2/BBB
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 1) PLC
----------------------------------------------------------------------------------------------
SERIES 2 SERIES 2 SERIES 2
CLASS A CLASS B CLASS C
------------------------------ ------------------------------ ------------------------------
Principal amount: $975,000,000 $34,500,000 $45,000,000
Credit enhancement: Subordination of Subordination of The reserve funds
the class B the class C
previous notes previous notes
and the class C and the reserve
previous notes funds
and the reserve
funds
Interest rate: Three-month USD-LIBOR + margin Three-month USD-LIBOR + margin Three-month USD-LIBOR + margin
Margin: 0.19% p.a. 0.41% p.a. 1.15% p.a.
Until interest payment date July 2010 July 2010 July 2010
falling in:
And thereafter: N/A 1.41% p.a. 2.15% p.a.
Scheduled redemption July 2005 N/A N/A
date:
Outstanding balance at last $975,000,000 $34,500,000 $45,000,000
payment date:
Interest accrual method: Actual/360 Actual/360 Actual/360
Interest payment dates: Quarterly in arrear on the interest payme nt dates falling in January, April, July and October
of each year
First interest payment date: October 2000 October 2000 October 2000
Final maturity date: July 2007 July 2040 July 2040
Listing: UK Listing UK Listing UK Listing
Authority and Authority and Authority and
London Stock London Stock London Stock
Exchange Exchange Exchange
Ratings(S&P/Moody's/ Fitch): AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB
76
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 1) PLC
--------------------------------------------------------------------------------------------------------
SERIES 3 SERIES 3 SERIES 3 SERIES 3 SERIES 4 SERIES 4
CLASS A1 CLASS A2 CLASS B CLASS C CLASS A CLASS B
---------------- --------------- ---------------- --------------- ---------------- ----------------
Principal amount: [GBP]375,000,000 e320,000,000 [GBP]24,000,000 [GBP]30,000,000 [GBP]250,000,000 [GBP]11,000,000
Credit enhancement: Subordination of Subordination Subordination of The reserve Subordination of Subordination of
the class B of the class B the class C funds the class B the class C
previous notes previous notes previous notes previous notes previous notes
and the class C and the class C and the reserve and the class C and the reserve
previous notes previous notes funds previous notes funds
and the reserve and the reserve and the reserve
funds funds funds
Interest rate: Three-month Three-month Three-month Three-month 6.62% p.a. until Three-month
sterling LIBOR EURIBOR + sterling LIBOR sterling LIBOR the interest sterling LIBOR
+ margin margin + margin + margin payment date in + margin
July 2010 and
then three-
month sterling
LIBOR + margin
Margin: 0.26% p.a. 0.26% p.a. 0.45% p.a. 1.60% p.a. N/A 0.62% p.a.
Until interest July 2010 July 2010 July 2010 July 2010 July 2010 July 2010
payment date falling
in:
And thereafter: N/A N/A 1.45% p.a. 2.60% p.a. 1.25% p.a. 1.62% p.a.
Scheduled July 2007 July 2007 N/A N/A July 2010 N/A
redemption date:
Outstanding balance [GBP]375,000,000 e320,000,000 [GBP]24,000,000 [GBP]30,000,000 [GBP]250,000,000 [GBP]11,000,000
at last payment date:
Interest accrual Actual/365 Actual/360 Actual/365 Actual/365 Actual/365 Actual/365
method:
Interest payment For the series 3 previous notes, the series 4 class B previous notes and the series 4 class C previous
dates: notes, quarterly in arrear on the interest payment dates falling in January, April, July and October of
each year. For the series 4 class A previous notes, until (and including) the interest payment in July
2010, interest will be paid semi-annually in arrear on the 15th day in January and July of each year
(subject to payment being made on business days). If a trigger event occurs or the issuer security is
enforced prior to the interest payment date in July, 2010, principal amounts due and payable on the
series 4 class A previous notes will be paid quarterly on the interest payment dates falling in January,
April, July and October of each year. After the interest payment date in July, 2010 interest and
principal on the series 4 class A previous notes will be paid quarterly in arrear on the interest
payment dates falling in January, April, July and October of each year.
First interest October 2000 October 2000 October 2000 October 2000 January 2001 October 2000
payment date:
Final maturity date: July 2010 July 2010 July 2040 July 2040 July 2013 July 2040
Listing: UK Listing UK Listing UK Listing UK Listing UK Listing UK Listing
Authority and Authority and Authority and Authority and Authority and Authority and
London Stock London Stock London Stock London Stock London Stock London Stock
Exchange Exchange Exchange Exchange Exchange Exchange
Ratings (S&P/ AAA/Aaa/AAA AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA
Moody's/Fitch):
CLASS OF
PREVIOUS NOTES
ISSUED BY
HOLMES
FINANCING (NO.
1) PLC
---------------
SERIES 4
CLASS C
---------------
Principal amount: [GBP]14,000,000
Credit enhancement: The reserve
funds
Interest rate: Three-month
sterling LIBOR
+ margin
Margin: 1.75% p.a.
Until interest July 2010
payment date falling
in:
And thereafter: 2.75% p.a.
Scheduled N/A
redemption date:
Outstanding balance [GBP]14,000,000
at last payment date:
Interest accrual Actual/365
method:
Interest payment For the series
dates: 3 previous
notes, the
series 4 class
B previous
notes and the
series 4 class
C previous
notes,
quarterly in
arrear on the
interest
payment dates
falling in
January, April,
July and
October of each
year. For the
series 4 class
A previous
notes, until
(and including)
the interest
payment in July
2010, interest
will be paid
semi-annually
in arrear on
the 15th day in
January and
July of each
year (subject
to payment
being made on
business days).
If a trigger
event occurs or
the issuer
security is
enforced prior
to the interest
payment date in
July, 2010,
principal
amounts due and
payable on the
series 4 class
A previous
notes will be
paid quarterly
on the interest
payment dates
falling in
January, April,
July and
October of each
year. After the
interest
payment date in
July, 2010
interest and
principal on
the series 4
class A
previous notes
will be paid
quarterly in
arrear on the
interest
payment dates
falling in
January, April,
July and
October of each
year.
First interest October 2000
payment date:
Final maturity date: July 2040
Listing: UK Listing
Authority and
London Stock
Exchange
Ratings (S&P/ BBB/Baa2/BBB
Moody's/Fitch):
77
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 2) PLC
-----------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 2
CLASS A CLASS B CLASS C CLASS A
---------------- ---------------- ----------------- ----------------------------
Principle amount: $1,000,000,000 $37,000,000 $49,000,000 $1,000,000,000
Credit enhancement: Subordination of Subordination of The reserve funds Subordination of the class B
the class B the class C previous notes
previous notes previous notes and the class C
and the class C and the reserve previous notes
previous notes funds and the reserve
and the reserve funds
funds
Interest rate: Three-month Three-month Three-month Three-month
USD-LIBOR + USD-LIBOR + USD-LIBOR + USD-LIBOR +
margin margin margin margin
Margin: 0.09% p.a. 0.35% p.a. 1.20% p.a. 0.18% p.a.
Until interest payment date October 2007 October 2007 October 2007 October 2007
falling in:
And thereafter: N/A 1.35% p.a. 2.20% p.a. 0.36% p.a.
Scheduled redemption July 2002 N/A N/A October 2003,
date: January 2004,
April 2004 and
July 2004
Outstanding balance at last Nil Nil Nil $1,000,000,000
payment date:
Interest accrual method: Actual/360 Actual/360 Actual/360 Actual/360
Interest payment dates: Quarterly in arrear
on the interest payment dates falling in January, April, July and October of each
year
First interest payment date: 16th January, 16th January, 16th January, 16th January,
2001 2001 2001 2001
Final maturity date: July 2004 July 2040 July 2040 July 2017
Listing: UK Listing UK Listing UK Listing UK Listing
Authority and Authority and Authority and Authority and
London Stock London Stock London Stock London Stock
Exchange Exchange Exchange Exchange
Ratings (S&P/Moody's/ Fitch): AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA
CLASS OF PREVIOUS NOTES ISSUED BY
HOLMES FINANCING (NO. 2) PLC
-----------------------------------
SERIES 2 SERIES 2
CLASS B CLASS C
---------------- -----------------
Principle amount: $37,000,000 $49,000,000
Credit enhancement: Subordination of The reserve funds
the class C
previous notes
and the reserve
funds
Interest rate: Three-month Three-month
USD-LIBOR + USD-LIBOR +
margin margin
Margin: 0.44% p.a. 1.35% p.a.
Until interest payment date October 2007 October 2007
falling in:
And thereafter: 1.44% p.a. 2.35% p.a.
Scheduled redemption N/A N/A
date:
Outstanding balance at last $37,000,000 $49,000,000
payment date:
Interest accrual method: Actual/360 Actual/360
Interest payment dates: Quarterly in arrear
on the interest payment dates
falling in January, April, July and
October of each year
First interest payment date: 16th January, 16th January,
2001 2001
Final maturity date: July 2040 July 2040
Listing: UK Listing UK Listing
Authority and Authority and
London Stock London Stock
Exchange Exchange
Ratings (S&P/Moody's/ Fitch): AA/Aa3/AA BBB/Baa2/BBB
78
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 2) PLC
-----------------------------------------------------------------------------------------
SERIES 3 SERIES 3 SERIES 3 SERIES 4 SERIES 4
CLASS A CLASS B CLASS C CLASS A CLASS B
---------------- ---------------- ----------------- ---------------- ----------------
Principal amount: [GBP]500,000,000 [GBP]19,000,000 [GBP]25,000,000 [e]500,000,000 [e]21,000,000
Credit enhancement: Subordination of Subordination of The reserve funds Subordination of Subordination of
the class B the class C the class B the class C
previous notes previous notes previous notes previous notes
and the class C and the reserve and the class C and the reserve
previous notes funds previous notes funds
and the reserve and the reserve
funds funds
Interest rate: Three-month Three-month Three-month Three-month Three-month
sterling LIBOR + sterling LIBOR + sterling LIBOR + EURIBOR + EURIBOR +
margin margin margin margin margin
Margin: 0.24% p.a. 0.45% p.a. 1.50% p.a. 0.27% p.a. 0.50% p.a.
Until interest payment date October 2007 October 2007 October 2007 October 2007 October 2007
falling in:
And thereafter: 0.48% p.a. 1.45% p.a. 2.50% p.a. 0.54% p.a. 1.50% p.a.
Scheduled redemption October 2005, N/A N/A N/A N/A
date: January 2006,
April 2006 and
July 2006
Outstanding balance at last [GBP]500,000,000 [GBP]19,000,000 [GBP]25,000,000 e500,000,000 e21,000,000
payment date:
Interest accrual method: Actual/365 Actual/365 Actual/365 Actual/360 Actual/360
Interest payment dates: Quarterly in arrear on the interest payment dates falling in January, April, July and
October of each year
First interest payment date: 16th January, 16th January, 16th January, 16th January, 16th January,
2001 2001 2001 2001 2001
Final maturity date: July 2023 July 2040 July 2040 July 2040 July 2040
Listing: UK Listing UK Listing UK Listing UK Listing UK Listing
Authority and Authority and Authority and Authority and Authority and
London Stock London Stock London Stock London Stock London Stock
Exchange Exchange Exchange Exchange Exchange
Ratings (S&P/ Moody's/ Fitch): AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA
CLASS OF PREVIOUS
NOTES ISSUED BY
HOLMES FINANCING
(NO. 2) PLC
-----------------
SERIES 4
CLASS C
-----------------
Principal amount: [e]35,000,000
Credit enhancement: The reserve funds
Interest rate: Three-month
EURIBOR +
margin
Margin: 1.60% p.a.
Until interest payment date October 2007
falling in:
And thereafter: 2.60% p.a.
Scheduled redemption N/A
date:
Outstanding balance at last e35,000,000
payment date:
Interest accrual method: Actual/360
Interest payment dates: Quarterly in
arrear on the
interest payment
dates falling in
January, April,
July and October
of each year
First interest payment date: 16th January,
2001
Final maturity date: July 2040
Listing: UK Listing
Authority and
London Stock
Exchange
Ratings (S&P/ Moody's/ Fitch): BBB/Baa2/BBB
79
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 3) PLC
------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 2
CLASS A CLASS B CLASS C CLASS A
------------------ ------------------ ------------------ ------------------------------
Principal amount: $1,060,000,000 $32,500,000 $53,000,000 $1,060,000,000
Credit enhancement: Subordination of Subordination of The reserve funds Subordination of
the class B the class C the class B
previous notes previous notes previous notes and the class C
and the class C and the reserve previous notes
previous notes funds and the reserve
and the reserve funds
funds
Interest rate: Three-month Three-month Three-month Three-month
USD-LIBOR + margin USD-LIBOR + margin USD-LIBOR + margin USD-LIBOR + margin
Margin: 0.12% p.a. 0.35% p.a. 1.20% p.a. 0.16% p.a.
Until interest payment date July 2006 July 2006 July 2006 July 2006
falling in:
And thereafter: N/A 0.70% p.a. 2.20% p.a. 0.16% p.a.
Scheduled redemption [January 2003] N/A N/A January 2005
date:
Outstanding balance at last Nil $32,500,000 $53,000,000 $1,060,000,000
payment date:
Interest accrual method: Actual/360 Actual/360 Actual/360 Actual/360
Interest payment dates: Quarterly in arrear on the interest payment dates falling in January, April, July and
October of each year
First interest payment date: 16th July, 2001 16th July, 2001 16th July, 2001 16th July, 2001
Final maturity date: January 2005 July 2040 July 2040 January 2007
Listing: UK Listing UK Listing UK Listing UK Listing
Authority and Authority and Authority and Authority and
London Stock London Stock London Stock London Stock
Exchange Exchange Exchange Exchange
Ratings (S&P/ Moody's/ Fitch): AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA
CLASS OF PREVIOUS NOTES ISSUED BY
HOLMES FINANCING (NO. 3) PLC
--------------------------------------
SERIES 2 SERIES 2
CLASS B CLASS C
------------------ ------------------
Principal amount: $32,500,000 $53,000,000
Credit enhancement: Subordination of The reserve funds
the class C
previous notes
and the reserve
funds
Interest rate: Three-month Three-month
USD-LIBOR + margin USD-LIBOR + margin
Margin: 0.40% p.a. 1.27% p.a.
Until interest payment date July 2006 July 2006
falling in:
And thereafter: 0.80% p.a. 2.27% p.a.
Scheduled redemption N/A N/A
date:
Outstanding balance at last $32,500,000 $53,000,000
payment date:
Interest accrual method: Actual/360 Actual/360
Interest payment dates: Quarterly in arrear on the interest
payment dates falling in January,
April, July and October of each year
First interest payment date: 16th July, 2001 16th July, 2001
Final maturity date: July 2040 July 2040
Listing: UK Listing UK Listing
Authority and Authority and
London Stock London Stock
Exchange Exchange
Ratings (S&P/ Moody's/ Fitch): AA/Aa3/AA BBB/Baa2/BBB
80
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 3) PLC
--------------------------------------------------------------
SERIES 3 SERIES 3
CLASS A CLASS B
------------------------------ ------------------------------
Principal amount: [e]805,000,000 [e]24,000,000
Credit enhancement: Subordination of the class B Subordination of the class C
previous notes and the class C previous notes and the reserve
previous notes and the reserve funds
funds
Interest rate: Three-month EURIBOR + margin Three-month EURIBOR + margin
Margin: 0.24% p.a. 0.40% p.a.
Until interest payment date falling in: July 2006 July 2006
And thereafter: 0.48% p.a. 0.80% p.a.
Scheduled redemption date: N/A N/A
Outstanding balance at last payment date: e805,000,000 e24,000,000
Interest accrual method: Actual/360 Actual/360
Interest payment dates: Quarterly in arrear on the interest payment dates falling in
January, April, July and October of each year
First interest payment date: 16th July, 2001 16th July, 2001
Final maturity date: July 2040 July 2040
Listing: UK Listing Authority and UK Listing Authority and
London Stock Exchange London Stock Exchange
Ratings (S&P/Moody's/ Fitch): AAA/Aaa/AAA AA/Aa3/AA
CLASS OF PREVIOUS NOTES
ISSUED BY HOLMES FINANCING
(NO. 3) PLC
----------------------------
SERIES 3
CLASS C
----------------------------
Principal amount: [e]50,000,000
Credit enhancement: The reserve funds
Interest rate: Three-month EURIBOR + margin
Margin: 1.50% p.a.
Until interest payment date falling in: July 2006
And thereafter: 2.50% p.a.
Scheduled redemption date: N/A
Outstanding balance at last payment date: e50,000,000
Interest accrual method: Actual/360
Interest payment dates: Quarterly in arrear on the
interest payment dates
falling in January, April,
July and October of each
year
First interest payment date: 16th July, 2001
Final maturity date: July 2040
Listing: UK Listing Authority and
London Stock Exchange
Ratings (S&P/Moody's/ Fitch): BBB/Baa2/BBB
81
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 4) PLC
----------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1
CLASS A CLASS B CLASS C
---------------- ---------------- ----------------------------------------------
Principal amount: $1,050,000,000 $36,500,000 $54,500,000
Credit enhancement: Subordination of Subordination of Subordination of
the class B the class C the class D
previous notes, previous notes previous notes
the class C and the class D and the reserve
previous notes previous notes funds
and the class D and the reserve
previous notes funds
and the reserve
funds
Interest rate: Three-month Three-month Three-month
USD-LIBOR + USD-LIBOR + USD-LIBOR +
margin margin margin
Margin: 0.19% p.a. 0.39% p.a. 1.20% p.a.
Until interest payment date July 2006 July 2006 July 2006
falling in:
And thereafter: 0.38% p.a. 0.78% p.a. 2.20% p.a.
Scheduled redemption October 2003, N/A N/A
date(s): January 2004,
April 2004, July
2004
Outstanding balance at last $1,050,000,000 $36,500,000 $54,500,000
payment date:
Interest accrual method: Actual/360 Actual/360 Actual/360
Interest payment dates: For all of these previous notes (other than the series 2 class A previous notes),
quarterly in arrear on the interest payment dates falling in January, April, July
and October of each year. For the series 2 class A previous notes, until (and
including) the interest payment date falling in July 2006, interest will be
payable annually in arrear on the 15th day in July of each year (subject to
payment being made on business days). If a trigger event occurs or the previous
issuer security is enforced prior to the interest payment date falling in July
2006, principal and interest amounts due and payable on the series 2 class A
previous notes will be payable quarterly in arrear on the interest payment dates
falling in January, April, July and October of each year. After the interest
payment date falling in July 2006, inter est and principal on the series 2 class A
previous notes will be payable quarterly in arrear on the interest payment dates
falling in January, April, July and October of each year.
First interest payment date: 15th October, 15th October, 15th October,
2001 2001 2001
Final maturity date: July 2015 July 2040 July 2040
Listing: UK Listing UK Listing UK Listing Authority and London Stock Exchange
Authority and Authority and
London Stock London Stock
Exchange Exchange
Ratings (S&P/ Moody's/ Fitch): AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING
(NO. 4) PLC
-----------------------------------------------------
SERIES 2 SERIES 2 SERIES 2
CLASS A CLASS B CLASS C
----------------- ---------------- ----------------
Principal amount: [e]800,000,000 [e]35,800,000 [e]53,800,000
Credit enhancement: Subordination of Subordination of Subordination of
the class B the class C the class D
previous notes, previous notes previous notes
the class C and the class D and the reserve
previous notes previous notes funds
and the class D and the reserve
previous notes funds
and the reserve
funds
Interest rate: 5.05% until the Three-month Three-month
interest payment EURIBOR + EURIBOR +
date in July 2006 margin margin
and then three-
month EURIBOR
+ margin
Margin: N/A 0.40% p.a. 1.45% p.a.
Until interest payment date July 2006 July 2006 July 2006
falling in:
And thereafter: 0.48% p.a. 0.80% p.a. 2.45% p.a.
Scheduled redemption July 2006 N/A N/A
date(s):
Outstanding balance at last e800,000,000 e35,800,000 e53,800,000
payment date:
Interest accrual method: Actual/Actual Actual/360 Actual/360
(ISMA) until the
interest payment
date in July 2006
and then Actual/
360
Interest payment dates: For all of these previous notes (other than the
series 2 class A previous notes), quarterly in arrear
on the interest payment dates falling in January,
April, July and October of each year. For the series
2 class A previous notes, until (and including) the
interest payment date falling in July 2006, interest
will be payable annually in arrear on the 15th day in
July of each year (subject to payment being made on
business days). If a trigger event occurs or the
previous issuer security is enforced prior to the
interest payment date falling in July 2006, principal
and interest amounts due and payable on the series 2
class A previous notes will be payable quarterly in
arrear on the interest payment dates falling in
January, April, July and October of each year. After
the interest payment date falling in July 2006,
interest and principal on the series 2 class A
previous notes will be payable quarterly in arrear on
the interest payment dates falling in January, April,
July and October of each year.
First interest payment date: 15th July, 2002 15th October, 15th October,
2001 2001
Final maturity date: July 2008 July 2040 July 2040
Listing: UK Listing UK Listing UK Listing
Authority and Authority and Authority and
London Stock London Stock London Stock
Exchange Exchange Exchange
Ratings (S&P/ Moody's/ Fitch): AAA/Aaa/AAA AA/Aa3/AA BBB/Baa2/BBB
82
CLASS OF PREVIOUS NOTES ISSUED BY
HOLMES FINANCING (NO. 4) PLC
---------------------------------------
SERIES 3 SERIES 3
CLASS A1 CLASS A2
---------------- ---------------------
Principal amount: [GBP]550,000,000 $410,000,000
Credit enhancement: Subordination Subordination
of the class B of the class B
previous notes, previous notes,
the class C the class C
previous notes previous notes
and the class D and the class D
previous notes previous notes
and the and the reserve funds
reserve funds
Interest rate: Three-month Three-month
sterling LIBOR USD-LIBOR +
+ margin margin
Margin: 0.23% p.a. 0.23% p.a.
Until interest payment date July 2006 July 2006
falling in:
And thereafter: 0.46% p.a. 0.46% p.a.
Scheduled redemption date: N/A N/A
Outstanding balance at last [GBP]550,000,000 $410,000,000
payment date:
Interest accrual method: Actual/365 Actual/360
Interest payment dates: For all of these previous notes,
quarterly in arrear on the interest
payment dates falling in January,
April, July and October of each year
First interest payment date: 15th October, 15th October,
2001 2001
Final maturity date: July 2040 July 2040
Listing: UK Listing UK Listing
Authority and Authority and
London Stock London Stock
Exchange Exchange
Ratings (S&P/ Moody's/Fitch): AAA/Aaa/AAA AAA/Aaa/AAA
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 4) PLC
----------------------------------------------------------------------------------
SERIES 3
CLASS B
----------------------------------------------------------------------------------
Principal amount: $34,500,000
Credit enhancement: Subordination of the class C previous notes and the class D previous notes and the
reserve funds
Interest rate: Three-month
USD-LIBOR + margin
Margin: 0.44% p.a.
Until interest payment date July 2006
falling in:
And thereafter: 0.88% p.a.
Scheduled redemption date: N/A
Outstanding balance at last $34,500,000
payment date:
Interest accrual method: Actual/360
Interest payment dates: For all of these previous notes, quarterly in arrear on the interest payment dates
falling in January, April, July and October of each year
First interest payment date: 15th October,
2001
Final maturity date: July 2040
Listing: UK Listing
Authority and
London Stock
Exchange
Ratings (S&P/ Moody's/Fitch): AA/Aa3/AA
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 4) PLC
-------------------------------------------------------------------------
SERIES 3 SERIES 3 SERIES 3 SERIES 3
CLASS C CLASS D1 CLASS D2 CLASS D3
----------------------- ------------------ ------------- -------------
Principal amount: $49,500,000 [GBP]30,000,000 [e]27,000,000 $5,000,000
Credit enhancement: Subordination
of the class D
previous notes
and the
reserve funds
Interest rate: Three-month USD-LIBOR + Three-month Three-month Three-month
margin sterling LIBOR EURIBOR + USD-LIBOR +
+ margin margin margin
Margin: 1.30% p.a. 4.75% p.a. 4.50% p.a. 4.50% p.a.
Until interest payment date July 2006 July 2006 July 2006 July 2006
falling in:
And thereafter: 2.30% p.a. 5.75% p.a. 5.50% p.a. 5.50% p.a.
Scheduled redemption date: N/A N/A N/A N/A
Outstanding balance at last $49,500,000 [GBP]30,000,000 e27,000,000 $5,000,000
payment date:
Interest accrual method: Actual/360 Actual/365 Actual/360 Actual/360
Interest payment dates: For all of these previous notes, quarterly in arrear on the interest
payment dates falling in January, April, July and October of each year
First interest payment date: 15th October, 15th October, 2001 15th October, 15th October,
2001 2001 2001
Final maturity date: July 2040 July 2040 July 2040 July 2040
Listing: UK Listing UK Listing UK Listing UK Listing
Authority and Authority and Authority and Authority and
London Stock London Stock London Stock London Stock
Exchange Exchange Exchange Exchange
Ratings (S&P/ Moody's/Fitch): BBB/Baa2/BBB BB/Ba2/BB BB/Ba2/BB BB/Ba2/BB
* Credit enhancement provided by the class D issuer notes is subject to the
circumstances in which the class D issuer notes can be repaid.
83
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 4) PLC
--------------------------------------------------------------
SERIES 4 SERIES 4
CLASS A CLASS B
------------------------------ ------------------------------
Principal amount: CHF850,000,000 [GBP]11,000,000
Credit enhancement: Subordination of the class B Subordination of the class C
previous notes, the class C previous notes and the class D
previous notes and the class D previous notes and the reserve
previous notes and the reserve funds
funds
Interest rate: 3.50% until the interest Three-month sterling LIBOR +
payment date in October 2006 margin
and then three-month CHF-
LIBOR + margin
Margin: N/A 0.43% p.a.
Until interest payment date falling in: October 2006 October 2006
And thereafter: 0.36% p.a. 0.86% p.a.
Scheduled redemption date: October 2006 N/A
Outstanding balance at last payment date: CHF850,000,000 [GBP]11,000,000
Interest accrual method: 30/360 until the interes Actual/365
payment date in October 2006
and then Actual/360
Interest payment dates: For all of these previous notes (other than the series 4 class
A previous notes), quarterly in arrear on the interest payment
dates falling in January, April, July and October of each
year. For the series 4 class A previous notes, until (and
including) the interest payment date falling in October 2006,
interest will be payable annually in arrear on the 15th day in
October of each year (subject to payment being made on
business days). If a trigger event occurs or the issuer
security is enforced prior to the interest payment date
falling in October 2006, principal and interest amounts due
and payable on the series 4 class A previous notes will be
payable quarterly in arrear on the interest payment dates
falling in January, April, July and October of each year.
After the interest payment date falling in October 2006,
interest and principal on the series 4 class A previous notes
will be payable quarterly in arrear on the interest payment
dates falling in January, April, July and October of each
year.
First interest payment date: 15th October, 2001 15th October, 2001
Final maturity date: October 2009 July 2040
Ratings (S&P/ Moody's/ Fitch): AAA/Aaa/AAA AA/Aa3/AA
CLASS OF PREVIOUS NOTES ISSUED
BY HOLMES FINANCING (NO. 4)
PLC
------------------------------
SERIES 4
CLASS C
------------------------------
Principal amount: [GBP]19,000,000
Credit enhancement: Subordination of the class D
previous notes and the reserve
funds
Interest rate: Three-month sterling LIBOR +
margin
Margin: 1.50% p.a.
Until interest payment date falling in: October 2006
And thereafter: 2.50% p.a.
Scheduled redemption date: N/A
Outstanding balance at last payment date: [GBP]19,000,000
Interest accrual method: Actual/365
Interest payment dates: For all of these previous
notes (other than the series 4
class A previous notes),
quarterly in arrear on the
interest payment dates falling
in January, April, July and
October of each year. For the
series 4 class A previous
notes, until (and including)
the interest payment date
falling in October 2006,
interest will be payable
annually in arrear on the 15th
day in October of each year
(subject to payment being made
on business days). If a
trigger event occurs or the
issuer security is enforced
prior to the interest payment
date falling in October 2006,
principal and interest amounts
due and payable on the series
4 class A previous notes will
be payable quarterly in arrear
on the interest payment dates
falling in January, April,
July and October of each year.
After the interest payment
date falling in October 2006,
interest and principal on the
series 4 class A previous
notes will be payable
quarterly in arrear on the
interest payment dates falling
in January, April, July and
October of each year.
First interest payment date: 15th October, 2001
Final maturity date: July 2040
Ratings (S&P/ Moody's/ Fitch): BBB/Baa2/BBB
84
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 5) PLC
---------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 2
CLASS A CLASS B CLASS C CLASS A1
-------------------------- ---------------- ----------------- ----------------
Principal amount: $1,000,000,000 $35,000,000 $52,000,000 $750,000,000
Credit enhancement: Subordination of Subordination of The reserve funds Subordination of
the class B the class C the class B
previous notes previous notes previous notes
and the class C and the reserve and the class C
previous notes funds previous notes
and the reserve and the reserve
funds funds
Interest rate: One-month USD- Three-month Three-month Three-month
LIBOR + margin USD-LIBOR + USD-LIBOR + USD-LIBOR +
margin margin margin
Margin: 0.01% p.a. 0.35% p.a. 1.35% p.a. 0.20% p.a.
Until interest payment date October 2002 October 2006 October 2006 October 2006
falling in:
And thereafter: N/A 0.70% p.a. 2.35% p.a. N/A
Scheduled redemption July 2002 and October 2002 N/A N/A October 2004
date(s):
Outstanding balance at last Nil Nil Nil $750,000,000
payment date:
Interest accrual method: Actual/360 Actual/360 Actual/360 Actual/360
Interest payment dates: For the series 1 class A previous notes, monthly in arrear on the interest
payment date falling in each consecutive month. For the other series 1 previous
notes and for all of the series 2 previous notes (other than the series 2 class
A2 previous notes), quarterly in arrear on the interest payment dates falling in
January, April, July and October of each year. For the series 2 class A2 previous
notes, until (and including) the interest payment date falling in October 2004,
interest will be payable annually in arrear on the 15th day in October of each
year (subject to payment being made on business days). If a trigger event occurs
or the previous issuer security is enforced prior to the interest payment date
falling in October 2002, interest and principal due and payable on the series 1
class A previous notes will be payable quarterly in arrear on the interest
payment dates falling in January, April, July and October in 2002, as applicable.
If a trigger event occurs or the previous issuer security is enforced prior to
the interest payment date falling in October 2004, interest and principal due and
payable on the series 2 class A2 previous notes will be payable quarterly in
arrear on the interest payment dates falling in January, April, July and October
of each year. After the interest payment date falling in October 2004, interest
and principal on the series 2 class A2 previous notes will be payable quarterly
in arrear on the interest payment dates falling in January, April, July and
October of each year.
First interest payment date: 17th December, 15th January, 15th January, 15th January,
2001 2002 2002 2002
Final maturity date: October 2002 July 2040 July 2040 October 2006
Listing: UK Listing UK Listing UK Listing UK Listing
Authority and Authority and Authority an Authority and
London Stock London Stock London Stock London Stock
Exchange Exchange Exchange Exchange
Ratings (S&P/Moody's/ Fitch): A-1+/P-1/F1+ AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA
CLASS OF PREVIOUS NOTES ISSUED BY
HOLMES FINANCING (NO. 5) PLC
-------------------------------------
SERIES 2 SERIES 2
CLASS A2 CLASS B
------------------- ----------------
Principal amount: CHF400,000,000 $35,000,000
Credit enhancement: Subordination of Subordination of
the class B the class C
previous notes previous notes
and the class C and the reserve
previous notes funds
and the reserve
funds
Interest rate: 2.5% p.a. until the Three-month
interest payment USD-LIBOR +
date in October margin
2004 and then
three-month CHF
LIBOR + margin
Margin: N/A 0.43% p.a.
Until interest payment date October 2004 October 2006
falling in:
And thereafter: 0.22% p.a. 0.86% p.a.
Scheduled redemption October 2004 N/A
date(s):
Outstanding balance at last CHF400,000,000 $35,000,000
payment date:
Interest accrual method: 30/360 until the Actual/360
interest payment
date in October
2004 and then
Actual/360
Interest payment dates: For the series 1 class A previous
notes, monthly in arrear on the
interest payment date falling in each
consecutive month. For the other
series 1 previous notes and for all
of the series 2 previous notes (other
than the series 2 class A2 previous
notes), quarterly in arrear on the
interest payment dates falling in
January, April, July and October of
each year. For the series 2 class A2
previous notes, until (and including)
the interest payment date falling in
October 2004, interest will be
payable annually in arrear on the
15th day in October of each year
(subject to payment being made on
business days). If a trigger event
occurs or the previous issuer
security is enforced prior to the
interest payment date falling in
October 2002, interest and principal
due and payable on the series 1 class
A previous notes will be payable
quarterly in arrear on the interest
payment dates falling in January,
April, July and October in 2002, as
applicable. If a trigger event occurs
or the previous issuer security is
enforced prior to the interest
payment date falling in October 2004,
interest and principal due and
payable on the series 2 class A2
previous notes will be payable
quarterly in arrear on the interest
payment dates falling in January,
April, July and October of each year.
After the interest payment date
falling in October 2004, interest and
principal on the series 2 class A2
previous notes will be payable
quarterly in arrear on the interest
payment dates falling in January,
April, July and October of each year.
First interest payment date: 15th October, 15th January,
2002 2002
Final maturity date: October 2006 July 2040
Listing: SWX Swiss UK Listing
Exchange Authority and
London Stock
Exchange
Ratings (S&P/Moody's/ Fitch): AAA/Aaa/AAA AA/Aa3/AA
85
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 5) PLC
--------------------------------------------------------------------------------------
SERIES 2 SERIES 3 SERIES 3 SERIES 3
CLASS C CLASS A1 CLASS A2 CLASS B
-------------------- -------------------- -------------------- --------------------
Principal amount: $52,000,000 [e]600,000,000 [GBP]500,000,000 [e]53,000,000
Credit enhancement: The reserve funds Subordination of the Subordination of the Subordination of the
class B previous class B previous class C previous
notes and the class notes and the class notes and the
C previous notes and C previous notes and reserve funds
the reserve funds the reserve funds
Interest rate: Three-month USD- 4.25% p.a. until the Three-month sterling Three-month
LIBOR + margin interest payment LIBOR + margin EURIBOR + margin
date in October 2006
and then three-
month EURIBOR +
margin
Margin: 1.45% p.a. N/A 0.23% p.a. 0.40% p.a.
Until interest payment date October 2006 October 2006 October 2006 October 2006
falling in:
And thereafter: 2.45% p.a. 0.42% p.a. 0.46% p.a. 0.80% p.a.
Scheduled redemption date(s): N/A October 2006 N/A N/A
Outstanding balance at last $52,000,000 e600,000,000 [GBP]500,000,000 [e]53,000,000
payment date:
Interest accrual method: Actual/360 Actual/Actual (ISMA) Actual/365 Actual/360
until the interest
payment date in
October 2006 and
then Actual/360
Interest payment dates: For all of the series 3 previous notes (other than the series 3 class A1 previous
notes), quarterly in arrear on the interest payment dates falling in January, April,
July and October of each year. For the series 3 class A1 previous notes, until (and
including) the interest payment date in October 2006, interest will be payable
annually in arrear on the 15th day in October of each year (subject to payment being
made on business days). If a trigger event occurs or the previous issuer security is
enforced prior to the interest payment date in October 2006, interest and principal
due and payable on the series 3 class A1 previous notes will be payable quarterly in
arrear on the interest payment dates falling in January, April, July and October of
each year. After the interest payment date falling in October 2006, interest and
principal on the series 3 class A1 previous notes will be payable quarterly in arrear
on the interest payment dates falling in January, April, July and October of each
year.
First interest payment date: 15th January, 2002 15th October, 2002 15th January, 2002 15th January, 2002
Final maturity date: July 2040 October 2008 July 2040 July 2040
Listing: UK Listing Authority UK Listing Authority UK Listing Authority UK Listing Authority
and London Stock and London Stock and London Stock and London Stock
Exchange Exchange Exchange Exchange
Ratings (S&P/Moody's/ Fitch): BBB/Baa2/BBB AAA/Aaa/AAA AAA/Aaa/AAA AA/Aa3/AA
CLASS OF PREVIOUS
NOTES ISSUED BY
HOLMES FINANCING
(NO. 5) PLC
--------------------
SERIES 3
CLASS C
--------------------
Principal amount: [e]76,000,000
Credit enhancement: The reserve funds
Interest rate: Three-month
EURIBOR + margin
Margin: 1.47% p.a.
Until interest payment date October 2006
falling in:
And thereafter: 2.47% p.a.
Scheduled redemption date(s): N/A
Outstanding balance at last [e]76,000,000
payment date:
Interest accrual method: Actual/360
Interest payment dates: For all of the
series 3 previous
notes (other than
the series 3 class
A1 previous notes),
quarterly in arrear
on the interest
payment dates
falling in January,
April, July and
October of each
year. For the series
3 class A1 previous
notes, until (and
including) the
interest payment
date in October
2006, interest will
be payable annually
in arrear on the
15th day in October
of each year
(subject to payment
being made on
business days). If a
trigger event occurs
or the previous
issuer security is
enforced prior to
the interest payment
date in October
2006, interest and
principal due and
payable on the
series 3 class A1
previous notes will
be payable quarterly
in arrear on the
interest payment
dates falling in
January, April, July
and October of each
year. After the
interest payment
date falling in
October 2006,
interest and
principal on the
series 3 class A1
previous notes will
be payable quarterly
in arrear on the
interest payment
dates falling in
January, April, July
and October of each
year.
First interest payment date: 15th January, 2002
Final maturity date: July 2040
Listing: UK Listing Authority
and London Stock
Exchange
Ratings (S&P/Moody's/ Fitch): BBB/Baa2/BBB
86
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 6) PLC
---------------------------------------------------------------------------------------------------
SERIES 1 SERIES 1 SERIES 1 SERIES 2 SERIES 2
CLASS A CLASS B CLASS C CLASS A CLASS B
---------------- ---------------- ------------------- ------------------------ ----------------
Principal amount: $1,500,000,000 $50,000,000 $86,000,000 $1,250,000,000 $42,000,000
Credit enhancement: Subordination of Subordination of The reserve funds Subordination of Subordination of
the class B the class C the class B the class C
previous notes previous notes previous notes previous notes
and the class C and the reserve and the class C and the reserve
previous notes funds previous notes funds
and the reserve and the reserve
funds funds
Interest rate: One-month USD- Three-month Three-month Three-month USD- LIBOR + Three-month
LIBOR + margin USD- LIBOR + USD- LIBOR + margin margin USD- LIBOR +
margin margin
Margin: 0.00% p.a. 0.375% p.a. 1.35% p.a. 0.17% p.a. 0.41% p.a.
Until interest payment date October 2003 April 2008 April 2008 April 2008 April 2008
falling in:
And thereafter: N/A 0.75% p.a. 2.35% p.a. N/A 0.82% p.a.
Scheduled redemption date(s): July 2003 and N/A N/A April 2005 N/A
October 2003
Outstanding balance at last $1,500,000,000 $50,000,000 $86,000,000 $1,250,000,000 $42,000,000
payment date:
Interest accrual method: Actual/360 Actual/360 Actual/360 Actual/360 Actual/360
Interest payment dates: For the series 1 class A previous notes, monthly in arrear on the interest payment date falling in
each consecutive month.
For the other series 1 issuer notes and for all of the series 2 previous notes, quarterly in arrear
on the interest payment dates falling in January, April, July and October of each year. If a
trigger event occurs or the issuer security is enforced prior to the interest payment date falling
in October 2003, interest and principal due and payable on the series 1 class A previous notes will
be payable quarterly in arrear on the interest payment dates falling in January, April, July and
October, as applicable.
First interest payment date: 15th December, 15th January, 15th January, 15th January, 15th January,
2002 2003 2003 2003 2003
Final maturity date: October 2003 July 2040 July 2040 April 2008 July 2040
Listing: UK Listing UK Listing UK Listing UK Listing UK Listing
Authority and Authority and Authority and Authority and Authority and
London Stock London Stock London Stock London Stock London Stock
Exchange Exchange Exchange Exchange Exchange
Ratings (S&P/Moody's/ A-1+/P-1/F1+ AA/Aa3/AA BBB/Baa2/BBB AAA/Aaa/AAA AA/Aa3/AA
Fitch):
CLASS OF PREVIOUS
NOTES ISSUED BY
HOLMES FINANCING
(NO. 6) PLC
-----------------
SERIES 2
CLASS C
-----------------
Principal amount: $71,000,000
Credit enhancement: The reserve funds
Interest rate: Three-month
USD- LIBOR +
margin
Margin: 1.45% p.a.
Until interest payment date April 2008
falling in:
And thereafter: 2.45% p.a.
Scheduled redemption date(s): N/A
Outstanding balance at last $71,000,000
payment date:
Interest accrual method: Actual/360
Interest payment dates: For the series 1
class A previous
notes, monthly in
arrear on the
interest payment
date falling in
each consecutive
month.
For the other
series 1 issuer
notes and for all
of the series 2
previous notes,
quarterly in
arrear on the
interest payment
dates falling in
January, April,
July and October
of each year. If
a trigger event
occurs or the
issuer security
is enforced prior
to the interest
payment date
falling in
October 2003,
interest and
principal due and
payable on the
series 1 class A
previous notes
will be payable
quarterly in
arrear on the
interest payment
dates falling in
January, April,
July and October,
as applicable.
First interest payment date: 15th January,
2003
Final maturity date: July 2040
Listing: UK Listing
Authority and
London Stock
Exchange
Ratings (S&P/Moody's/ BBB/Baa2/BBB
Fitch):
87
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 6) PLC
--------------------------------------------------------------
SERIES 3 SERIES 3
CLASS A CLASS B
------------------------------ ------------------------------
Principal amount: [e]1,000,000,000 [e]34,000,000
Credit enhancement: Subordination of the class B Subordination of the class C
previous notes and the class C previous notes and the reserve
previous notes and the reserve funds
funds
Interest rate: Three-month EURIBOR + margin Three-month EURIBOR + margin
Margin: 0.24%p.a. 0.50% p.a.
Until interest payment date falling in: April 2008 April 2008
And thereafter: 0.48% p.a. 1.00% p.a.
Scheduled redemption date(s): April 2007 N/A
Outstanding balance at last payment date: [e]1,000,000,000 [e]34,000,000
Interest accrual method: Actual/360 Actual/360
Interest payment dates: For all of the series 3 previous notes, quarterly in arrear on
the interest payment dates falling in January, April, July and
October of each year.
First interest payment date: 15th January 2003 15th January, 2003
Final maturity date: October 2009 July 2040
Listing: UK Listing Authority and UK Listing Authority and
London Stock Exchange London Stock Exchange
Ratings (S&P/Moody's/Fitch): AAA/Aaa/AAA AA/Aa3/AA
CLASS OF PREVIOUS NOTES
ISSUED BY HOLMES FINANCING
(NO. 6) PLC
----------------------------
SERIES 3
CLASS C
----------------------------
Principal amount: [e]57,000,000
Credit enhancement: The reserve funds
Interest rate: Three-month EURIBOR + margin
Margin: 1.50% p.a.
Until interest payment date falling in: April 2008
And thereafter: 2.50% p.a.
Scheduled redemption date(s): N/A
Outstanding balance at last payment date: [e]57,000,000
Interest accrual method: Actual/360
Interest payment dates: For all of the series 3
previous notes, quarterly in
arrear on the interest
payment dates falling in
January, April, July and
October of each year.
First interest payment date: 15th January, 2003
Final maturity date: July 2040
Listing: UK Listing Authority and
London Stock Exchange
Ratings (S&P/Moody's/Fitch): BBB/Baa2/BBB
88
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 6) PLC
----------------------------------------------------------------------------
SERIES 4 SERIES 4 SERIES 4
CLASS A1 CLASS A2 CLASS B
------------------------- ------------------------- ----------------------
Principal amount: $1,000,000,000 CHF300,000,000 $40,000,000
Credit enhancement: Subordination of the Subordination of the Subordination of the
class B previous notes class B previous notes class C previous notes
and the class C and the class C and the reserve funds
previous notes and the previous notes and the
reserve funds reserve funds
Interest rate: Three-month USD- 2.50% p.a. until the Three-month USD-
LIBOR + margin interest payment date LIBOR + margin
in October 2007 and
then three-month CHF-
LIBOR + margin
Margin: 0.24% p.a. N/A 0.52% p.a.
Until interest payment date falling in: April 2008 October 2007 April 2008
And thereafter: 0.48% p.a. 0.35% p.a. 1.04% p.a.
Scheduled redemption date(s): October 2007 October 2007 N/A
Outstanding balance at last payment date: $1,000,000,000 CHF300,000,000 $40,000,000
Interest accrual method: Actual/360 30/360 until the interest Actual/360
payment date in
October 2007 and then
Actual/360
Interest payment dates: For the series 4 previous notes (other than the series 4 class A2 previous
notes), quarterly in arrear on the interest payment dates falling in
January, April, July and October of each year. For the series 4 class A2
previous notes, until (and including) the interest payment date falling in
October 2007 interest will be payable annually in arrear on the 15th day in
October of each year (subject to payment being made on business days). If a
trigger event occurs or the issuer security is enforced prior to the
interest payment date falling in October 2007, interest and principal due
and payable on the series 4 class A2 previous notes will be payable
quarterly in arrear on the interest payment dates falling in January, April,
July and October of each year. After the interest payment date falling in
October 2007 interest and principal on the series 4 class A2 previous notes
will be payable quarterly in arrear on the interest payment dates falling in
January, April, July and October of each year
First interest payment date: 15th January, 2003 15th October, 2003 15th January, 2003
Final maturity date: October 2009 October 2009 July 2040
Listing: UK Listing Authority SWX Swiss Exchange UK Listing Authority
and London Stock Exchange and London Stock
Exchange
Ratings (S&P/ Moody's/Fitch): AAA/Aaa/AAA AAA/Aaa/AAA AA/Aa3/AA
CLASS OF PREVIOUS
NOTES ISSUED BY
HOLMES FINANCING
(NO. 6) PLC
--------------------
SERIES 4
CLASS C
--------------------
Principal amount: $69,000,000
Credit enhancement: The reserve funds
Interest rate: Three-month USD-
LIBOR + margin
Margin: 1.55% p.a.
Until interest payment date falling in: April 2008
And thereafter: 2.55% p.a.
Scheduled redemption date(s): N/A
Outstanding balance at last payment date: $69,000,000
Interest accrual method: Actual/360
Interest payment dates: For the series 4
previous notes
(other than the
series 4 class A2
previous notes),
quarterly in arrear
on the interest
payment dates
falling in January,
April, July and
October of each
year. For the series
4 class A2 previous
notes, until (and
including) the
interest payment
date falling in
October 2007
interest will be
payable annually in
arrear on the 15th
day in October of
each year (subject
to payment being
made on business
days). If a trigger
event occurs or the
issuer security is
enforced prior to
the interest payment
date falling in
October 2007,
interest and
principal due and
payable on the
series 4 class A2
previous notes will
be payable quarterly
in arrear on the
interest payment
dates falling in
January, April, July
and October of each
year. After the
interest payment
date falling in
October 2007
interest and
principal on the
series 4 class A2
previous notes will
be payable quarterly
in arrear on the
interest payment
dates falling in
January, April, July
and October of each
year
First interest payment date: 15th January, 2003
Final maturity date: July 2040
Listing: UK Listing Authority
and London Stock
Exchange
Ratings (S&P/ Moody's/Fitch): BBB/Baa2/BBB
89
CLASS OF PREVIOUS NOTES ISSUED BY HOLMES FINANCING (NO. 6) PLC
------------------------------------------------------------------------
SERIES 5 SERIES 5
CLASS A CLASS B
----------------------------------- -----------------------------------
Principal amount: [GBP]500,000,000 [GBP]17,000,000
Credit enhancement: Subordination of the class B Subordination of the class C
previous notes and the class C previous notes and the and the
previous notes and the reserve reserve funds
funds
Interest rate: Three-month sterling-LIBOR + margin Three-month sterling-LIBOR + margin
Margin: 0.24% p.a. 0.52% p.a.
Until interest payment date falling in: April 2008 April 2008
And thereafter: 0.48% p.a. 1.04% p.a.
Scheduled redemption date(s): N/A N/A
Outstanding balance at last payment date: [GBP]500,000,000 [GBP]17,000,000
Interest accrual method: Actual/365 Actual/365
Interest payment dates: For all of the series 5 previous notes, quarterly in arrear on the
interest payment dates falling in January, April, July and October of
each year.
First interest payment date: 15th January, 2003 15th January, 2003
Final maturity date: July 2040 July 2040
Listing: UK Listing Authority and UK Listing Authority and
London Stock Exchange London Stock Exchange
Ratings (S&P/Moody's/Fitch): AAA/Aaa/AAA AA/Aa3/AA
CLASS OF PREVIOUS NOTES ISSUED BY
HOLMES FINANCING (NO. 6) PLC
-----------------------------------
SERIES 5
CLASS C
-----------------------------------
Principal amount: [GBP]29,000,000
Credit enhancement: The reserve funds
Interest rate: Three-month sterling-LIBOR + margin
Margin: 1.55% p.a.
Until interest payment date falling in: April 2008
And thereafter: 2.55% p.a.
Scheduled redemption date(s): N/A
Outstanding balance at last payment date: [GBP]29,000,000
Interest accrual method: Actual/365
Interest payment dates: For all of the series 5 previous
notes, quarterly in arrear on the
interest payment dates falling in
January, April, July and October of
each year.
First interest payment date: 15th January, 2003
Final maturity date: July 2040
Listing: UK Listing Authority and
London Stock Exchange
Ratings (S&P/Moody's/Fitch): BBB/Baa2/BBB
Each of the previous issuers' obligations to pay principal and interest on
its previous notes are funded primarily from the payments of principal and
interest received by it from Funding under the relevant previous intercompany
loan. Each of the previous issuers' primary asset is the relevant previous
intercompany loan. None of the previous issuers nor the previous noteholders
have any direct interest in the trust property, although the previous issuers
share the security interest under the Funding deed of charge in Funding's share
of the trust property.
Each of the previous intercompany loans is split into separate previous term
advances to match the underlying series and classes of previous notes (for this
purpose, the series 2 class A1 previous notes and the series 2 class A2
previous notes issued by Holmes Financing (No. 5) PLC are treated as one class
of series 2 previous notes and the series 3 class A1 previous notes and the
series 3 class A2 previous notes issued by each of Holmes Financing (No. 1)
PLC, Holmes Financing (No. 4) PLC and Holmes Financing (No. 5) PLC are treated
as one class of series 3 previous notes): the previous term AAA advances,
matching the issue of the class A previous notes of each series; the previous
term AA advances, matching the issue of the class B previous notes of each
series; the previous term BBB advances, matching the issue of the class C
previous notes of each series; and, in the case of the previous intercompany
loan made by Holmes Financing (No. 4) PLC, the previous term BB advance,
matching the issue of the series 3 class D previous notes. Together these
advances are referred to in this prospectus as the previous term advances. The
principal amounts of the previous term advances outstanding as at 31st January,
2003 are listed under "FUNDING".
The previous term AAA advances reflect the rating assigned to the class A
previous notes by the rating agencies (being, in the case of the series 1 class
A previous notes issued by Holmes Financing (No. 5) PLC and by Holmes Financing
(No. 6) PLC, A-1+ by Standard & Poor's, P-1 by Moody's and F1+ by Fitch and, in
the case of all other class A previous notes, AAA by Standard & Poor's, Aaa by
Moody's and AAA by Fitch). The previous term AA advances reflect the rating
assigned to the class B previous notes by the rating agencies (being AA by
Standard & Poor's, Aa3 by Moody's and AA by Fitch), the previous term BBB
advances reflect the rating assigned to the class C previous notes by the
rating agencies (being BBB by Standard & Poor's, Baa2 by Moody's and BBB by
Fitch) and the previous term BB advance reflected the rating assigned to the
Class D previous notes by the rating agencies (being BB by Standard's and
Poor's, Ba2 by Moody's and BB by Fitch).
90
Funding used the proceeds of the previous intercompany loan from Holmes
Financing (No. 1) PLC to pay the seller for loans and their related security
assigned to the mortgages trustee which comprised its original share of the
trust property. Funding used the proceeds of the previous intercompany loans
from Holmes Financing (No. 2) PLC and Holmes Financing (No. 4) PLC to pay the
seller for an increase in Funding's share of the trust property (resulting in a
corresponding decrease in the seller's share of the trust property). Funding
used the proceeds of the previous intercompany loans from Holmes Financing (No.
3) PLC, Holmes Financing (No. 5) PLC and Holmes Financing (No. 6) PLC to pay
the seller for loans and their related security assigned to the mortgages
trustee which constituted an addition to Funding's existing share of the trust
property.
91
THE LOANS
Introduction
The UK housing market is primarily one of owner-occupied housing. Owner-
occupation has been over 60 per cent. since 1984. The mortgage market, whereby
loans are provided for the purchase of a property and secured on that property,
is the major source of household borrowings in the UK. At the end of 2002,
mortgage loans outstanding amounted to [GBP]671 billion. Outstanding mortgage
debt grew at an annual average rate of 7 per cent. between 1992 and 2002. At
the end of 2002, 70 per cent. of outstanding mortgage debt was held with banks
and 18 per cent. with building societies. The statistics in this paragraph have
been sourced from the Department of Transport, Local Government and the
Regions, The Council of Mortgage Lenders and the Bank of England.
The following is a description of some of the characteristics of the loans
currently or previously offered by the seller including details of loan types,
the underwriting process, lending criteria and selected statistical
information.
The portfolio of loans together with their related security, accrued
interest and other amounts derived from the loans as they make up the trust
property on the closing date are called the current portfolio. These items as
they make up the trust property at other times are referred to simply as the
portfolio. The portfolio as at 31st December, 2002, for which statistics are
presented later in this section, and the current portfolio will differ due to,
among other things, amortisation of loans in the portfolio and replenishment of
the portfolio by the addition of further new loans.
Each loan in the current portfolio may incorporate one or more of the
features referred to in this section. Each borrower may have more than one loan
incorporating different features, but all loans secured on the same property
will be incorporated in a single account with the seller which is called the
mortgage account. Each loan is secured by a first legal charge over a
residential property in England or Wales or a first-ranking standard security
over a residential property in Scotland. Some flexible loans are secured by
both a first and a second legal charge or standard security in favour of the
seller. As at 31st December, 2002, approximately 84 per cent. of the mortgages
securing the loans in the portfolio were on freehold properties or the Scottish
equivalent, approximately 15 per cent. were on leasehold properties and 1 per
cent. were unknown.
Unless otherwise indicated, the description that follows relates to types of
loans that have been or could be assigned to the mortgages trustee, either as
part of the current portfolio or as a new loan assigned to the mortgages
trustee at a later date.
The portfolio as at 31st December, 2002 comprised 418,225 mortgage accounts
having an aggregate outstanding principal balance of [GBP]28,137,450,990 as at
that date. The loans in the portfolio at that date were originated by the
seller between 1st August, 1995 and 30th September, 2002. No loan in the
portfolio was delinquent or non-performing at the time it was assigned to the
mortgages trustee.
After the closing date, the seller may assign new loans and their related
security to the mortgages trustee. The seller reserves the right to amend its
lending criteria and to assign to the mortgages trustee new loans which are
based upon mortgage terms (as defined in the glossary) different from those
upon which loans forming the portfolio as at 31st December, 2002 are based.
Those new loans may include loans which are currently being offered to
borrowers which may or may not have some of the characteristics described here,
but may also include loans with other characteristics that are not currently
being offered to borrowers or that have not yet been developed. All new loans
will be required to comply with the warranties set out in the mortgage sale
agreement and all the material warranties in the mortgage sale agreement are
described in this prospectus. See "ASSIGNMENT OF THE LOANS AND THEIR RELATED
SECURITY".
92
CHARACTERISTICS OF THE LOANS
REPAYMENT TERMS
Loans are typically repayable on one of the following bases:
* "repayment": the borrower makes monthly payments of both interest
and principal so that, when the loan matures, the full amount of
the principal of the loan will have been repaid; and
* "interest-only": the borrower makes monthly payments of interest
but not of principal; when the loan matures, the entire principal
amount of the loan is still outstanding and is payable in one lump
sum.
In the case of either repayment loans or interest-only loans, the required
monthly payment may alter from month to month for various reasons, including
changes in interest rates.
As at 31st December, 2002, 96.49 per cent. of the loans in the portfolio had
an active direct debit instruction, the servicer having agreed to another
specific form of payment for the balance of the loans.
As at 31st December, 2002, approximately 60.80 per cent. of the loans in the
portfolio were repayment loans and approximately 39.2 per cent. were interest-
only loans.
For interest-only loans, because the principal is repaid in a lump sum at
the maturity of the loan, the borrower is recommended to have some repayment
mechanism (such as an investment plan) in place to ensure that funds will be
available to repay the principal at the end of the term. However, the seller
does not take security over these repayment mechanisms.
Principal prepayments may be made in whole or in part at any time during the
term of a loan. A prepayment of the entire outstanding balance of all loans
under a mortgage account discharges the mortgage. Any prepayment in full must
be made together with all accrued interest, arrears of interest, any unpaid
expenses and any early repayment fee(s).
Each of the English loans is governed by English law and each of the
Scottish loans is governed by Scots law.
EARLY REPAYMENT FEES
Borrowers who have received the benefit of some of the interest rates and/or
features referred to in this section may in certain circumstances be required
to pay an early repayment fee if they repay all or part of their loans, or if
they make a product switch, before a date specified in the offer conditions.
The right to receive such early repayment fees is retained by the seller. The
seller also retains discretion to waive or enforce early repayment fees in
accordance with the seller's policy from time to time (unless it is necessary
to waive such fees in order to effect a change in the interest rate and the
seller has not complied with its obligations to buy back the affected loan, in
which case the mortgages trustee is authorised to waive early repayment fees on
behalf of the seller). For example, the seller's current policy is to waive
early repayment fees in circumstances where the amount of the principal
repayment in any calendar year (other than scheduled repayments of principal on
a repayment loan) is less than ten per cent. of the sum of the principal
balance of the loan at the beginning of that calendar year and the principal
balance on any further advance completed during that year. The mortgages
trustee has not agreed to purchase any early repayment fees from the seller, so
any sums received will be for the seller's account and not for the account of
the mortgages trustee.
Some of the loans offered by the seller include a "CASHBACK" feature under
which the borrower is offered a sum of money which is usually paid on
completion of the loan. Where any loan is subject to a cashback, if there is an
unscheduled principal repayment or a product switch (as described in "--
PRODUCT SWITCHES"), in either case before a date specified in the offer
conditions, then some or all of the cashback must be repaid to the seller. In
some circumstances, the cashback may not be paid until a specified period after
the loan has been advanced, which is called a "DELAYED CASHBACK". In this case,
the obligation to pay any delayed cashback remains
93
an obligation of the seller and will not pass to the mortgages trustee. See
"RISK FACTORS -- SET-OFF RISKS IN RELATION TO FLEXIBLE LOANS AND DELAYED
CASHBACKS MAY ADVERSELY AFFECT THE FUNDS AVAILABLE TO THE ISSUER TO REPAY THE
ISSUER NOTES".
INTEREST PAYMENTS AND INTEREST RATE SETTING
Interest on each loan is payable monthly in arrear. Interest on loans is
computed daily on balances which are recalculated on a daily, monthly or annual
basis.
The basic rate of interest set by the seller for loans beneficially owned by
the seller outside the mortgages trust is either the Abbey SVR or a rate
directly linked to a rate set from time to time by the Bank of England. The
Abbey SVR is as a result of the 2002 mortgage conditions subject to a cap which
is currently set at a margin of 2.5 per cent. above the Bank of England's base
rate. This cap may be varied as set out below. As at 1st March, 2003, the Abbey
SVR was 5.79 per cent. per annum.
Loans may combine one or more of the features listed in this section. In
respect of the interest rates which last for a period of time specified in the
offer conditions, after the expiration of that period a loan associated with
that interest rate may (a) move to some other interest rate type or (b) become
a tracker loan (as described in the following bulleted list) with a variable
rate of interest linked to a rate set from time to time by the Bank of England
or (c) revert to, or remain at, the SVR. The features that apply to a
particular loan are specified in the offer conditions (as varied from time to
time). The features are as follows:
* "large loan discounts" allows some borrowers to pay interest at a
discretionary discount to the SVR, based on the aggregate size of
the loans under the mortgage account (i) at origination or (ii)
when a further advance is made;
* "discounted variable rate loans" allow the borrower to pay interest
at a specified discount to the SVR;
* "capped rate loans" are subject to a maximum rate of interest and
charge interest at the lesser of the SVR (or, as the case may be,
the tracker rate) or the specified capped rate;
* "tracker loans" are subject to a variable rate of interest that is
linked to an interest rate other than the SVR -- for example the
rate may be set at a fixed or variable margin above or below
sterling LIBOR or above or below rates set from time to time by the
Bank of England;
* "minimum rate loans" are subject to an interest rate that is the
greater of the SVR (or, as the case may be, the tracker rate) or a
specified minimum rate;
* "higher variable rate loans" are subject to an interest rate that
is set at a margin above the SVR; and
* "fixed rate loans" are subject to a fixed rate of interest.
As at 31st December, 2002, approximately 23 per cent. of the loans in the
portfolio were fixed rate loans and approximately 29 per cent. were tracker
loans. The remaining (approximately) 48 per cent. of the loans in the portfolio
were SVR loans, higher variable rate loans, large loan discounts, minimum rate
loans or discounted variable rate loans. None of the loans were capped rate
loans.
Except in limited circumstances as set out in "THE SERVICING AGREEMENT --
UNDERTAKINGS BY THE SERVICER", the servicer is responsible for setting the
mortgages trustee SVR on the loans in the current portfolio as well as on any
new loans that are assigned to the mortgages trustee. The 1995 mortgage
conditions applicable to SVR loans provide that the SVR may only be varied for
certain reasons, which are specified in those mortgage conditions. These
reasons include:
* to maintain the competitiveness of the seller's business as a
whole, taking into account actual or expected changes in market
conditions;
* to reflect actual or expected changes in the cost of funds used by
the seller in its mortgage lending business;
94
* to ensure that the seller's business is run prudently;
* to reflect a change in the general practice of mortgage lenders;
* to reflect any regulatory requirements or guidance or any change in
the law or decision or recommendation by a court or an ombudsman;
or
* to reflect a change which the seller reasonably believes has
occurred or is likely to occur in the risk it runs in connection
with its security or the recovery of the sums due from the
borrower.
The term "seller" in these six bullet points means Abbey National plc and
its successors and assigns.
In respect of the loans with these 1995 mortgage conditions, the servicer
may also change the mortgages trustee SVR for any other reason which is valid.
The 2002 mortgage conditions applicable to SVR loans provide that the SVR
may be varied for one or more of the following reasons, which are specified in
those mortgage conditions:
* to maintain the competitiveness of the seller's personal banking
business, taking account of actual or anticipated changes in the
interest rates which other financial institutions charge to
personal mortgage borrowers;
* to reflect actual or expected changes in the cost of funds used by
the seller in making loans to its personal mortgage borrowers;
* to ensure that the seller's business is run in a way which complies
with the requirements of its regulator or of any central bank or
other monetary authority; or
* to enable the seller to ensure that the SVR does not exceed the
cap.
The term "seller" in these four bullet points means Abbey National plc and
its successors and assigns.
In respect of the loans with these 2002 mortgage conditions, the servicer
may also:
* change the mortgages trustee SVR for any reason which is valid; or
* increase or reduce the margin creating the cap on the SVR,
provided that in each case not less than 30 days' notice of an increase is
given and not less than seven days' notice of a reduction is given. If, in the
case of loans under the 2002 mortgage conditions, the mortgages trustee SVR is
increased for a valid reason or if the margin creating the cap on the SVR is
increased, then an affected borrower will be entitled to repay all the sums due
from that borrower under the mortgage terms within three months from the date
on which the increase takes effect without paying any early repayment fee that
would otherwise apply.
In maintaining, determining or setting the mortgages trustee SVR, the
servicer will apply the factors set out here and, except in limited
circumstances as set out in "THE SERVICING AGREEMENT -- UNDERTAKINGS BY THE
SERVICER", has undertaken to maintain, determine or set the mortgages trustee
SVR at a rate which is not higher than the Abbey SVR from time to time.
The servicer is also responsible for setting any variable margins in respect
of tracker loans in the current portfolio as well as on any new tracker loans
that are assigned to the mortgages trustee. However, in maintaining,
determining or setting these variable margins, except in the limited
circumstances as set out in "THE SERVICING AGREEMENT -- UNDERTAKINGS BY THE
SERVICER", the servicer has undertaken to maintain, determine or set the
variable margins at a level which is not higher than the variable margins set
in accordance with the seller's policy from time to time.
FURTHER ADVANCES
If a borrower wishes to take out a further loan secured by the same mortgage
(but excluding a drawdown under a flexible loan as described under "-- FLEXIBLE
LOANS"), the borrower will need to make a further application and the seller
will use the lending criteria applicable to further advances at that time in
determining whether to approve the application. All further advances will be
funded solely by the seller. The seller will also reassess the value of the
property by a valuer approved by the seller or, where appropriate, according to
a methodology which would meet the
95
standards of a reasonable, prudent mortgage lender (as referred to under "THE
SERVICING AGREEMENT -- UNDERTAKINGS BY THE SERVICER") and which has been
approved by the Director of Group Property and Survey of the seller. A new
loan-to-value ratio will be calculated by dividing the aggregate of the
outstanding amount and the further advance by the reassessed valuation. The
aggregate of the outstanding amount of the loan and the further advance may be
greater than the original amount of the loan. However, no loans will be
assigned to the mortgages trust where the LTV ratio at the time of origination
or further advance is in excess of 95 per cent.
As at 31st December, 2002, none of the loans in the portfolio obliged the
seller to make further advances (other than drawdowns under flexible loans as
described under "-- FLEXIBLE LOANS"). However, some loans in the portfolio at
that time may have had further advances made on them prior to their assignment
to the mortgages trust, and new loans added to the portfolio may have had
further advances made on them in the past. If a loan becomes subject to a
further advance after that loan has been assigned to the mortgages trust, then
the seller will be required to repurchase the loan or loans under the relevant
mortgage account and their related security from the mortgages trustee. See
"RISK FACTORS -- LOANS SUBJECT TO PRODUCT SWITCHES AND FURTHER ADVANCES WILL BE
REPURCHASED BY THE SELLER FROM THE MORTGAGES TRUSTEE, WHICH WILL AFFECT THE
PREPAYMENT RATE OF THE LOANS, AND THIS MAY AFFECT THE YIELD TO MATURITY OF THE
ISSUER NOTES" and "ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY".
FLEXIBLE LOANS
General
A flexible loan typically incorporates features that give the borrower
options to make further drawings on the loan account and/or to overpay or to
underpay principal and interest in a given month. The seller offers flexible
loans to its borrowers, and it has the right to assign to the mortgages trustee
new loans that may be flexible loans. In addition to the flexible loans offered
to date, the seller may offer flexible loans in the future (that may be
assigned to the mortgages trustee) that have different features from those
described here. See "THE MORTGAGES TRUST -- ADDITIONS TO TRUST PROPERTY". The
seller has also offered loans to its borrowers which may, after the expiry of a
period of time specified in the offer conditions, acquire features of flexible
loans other than the ability to make further drawings.
Currently the total amount outstanding at any time on a flexible loan as
described below cannot exceed an LTV ratio of 90 per cent. The loan and, where
applicable, the available funds facility are secured by a first legal charge
over a property in England and Wales or a first ranking standard security over
a property in Scotland. Some of the flexible loans are secured by both a first
and second charge or standard security in favour of the seller.
Flexible loans -- offer dated on or before 2nd July, 2002
In respect of flexible loans where the seller's offer to lend is dated on or
before 2nd July 2002, there are three basic elements: the initial loan, the
available funds facility and the overpaid funds account. The amount of the
initial loan is agreed at origination. Borrowers may, during the life of these
flexible loans, draw additional amounts from the available funds facility on
request to the seller, up to the amount available and subject to the mortgage
conditions.
The agreement for the available funds facility is regulated by the Consumer
Credit Act 1974, which prescribes the form and procedure for making an
agreement regulated by the Act.
Subject to the provisions for underpayments and payment holidays, borrowers
are required to make a monthly payment on the initial loan and (if a drawdown
has been made) on the available funds facility. A borrower may make an
overpayment at any time. If a borrower makes an overpayment, it is used for the
following purposes and in the following order:
* to reduce any part of the initial loan which is then overdue;
* to reduce any part of the drawdown debt in the available funds
facility which is then overdue;
96
* to reduce the remainder of the drawdown debt in the available funds
facility, if specifically requested by the borrower, or if the
overpaid funds account has been closed; and
* to create or to increase a credit balance in the overpaid funds
account.
The credit balance in the overpaid funds account can be used by the borrower
to fund an underpayment or a payment holiday or it can be used to reduce the
balance owing on the initial loan. If the overpaid funds account has been
closed, which will occur when the initial loan is repaid, the balance of any
overpayment which would otherwise have been credited to the overpaid funds
account will be repaid to the borrower.
Borrowers may make an underpayment or miss a monthly payment entirely if
there is a credit balance on the overpaid funds account that is equal to or
greater than the amount to be underpaid or the missed monthly payment.
Alternatively, a borrower may make an underpayment or miss a monthly payment if
there is an amount available for drawdown in the available funds facility that
is at least as much as the amount to be underpaid or the missed monthly
payment.
The "repayment" basis (as set out in "-- REPAYMENT TERMS") applies to the
whole of the drawdown debt under the available funds facility.
The seller may increase or reduce the credit limit for the available funds
facility for one of the reasons specified in the credit agreement for the
available funds facility.
Flexible loans -- offer dated on or after 3rd July, 2002
In respect of flexible loans where the seller's offer to lend is dated on or
after 3rd July, 2002, there is a flexible loan facility with a credit limit.
The amount of the credit limit and the "amount available" (that is, the credit
limit less the monies owing to the seller) are agreed at origination. Borrowers
may, during the life of these flexible loans, draw additional amounts from the
flexible loan facility on request to the seller, up to the amount available and
subject to the mortgage conditions.
The agreement for the flexible loan facility has been designed by the seller
with the intention that it is not regulated by the Consumer Credit Act 1974.
Subject to the provisions for underpayments and payment holidays, borrowers
are required to make monthly payments on the flexible loan facility. A borrower
may make an overpayment at any time. Any such overpayment will immediately
reduce the balance owing on the flexible loan facility.
The "amount available" can be used by the borrower to fund an underpayment
or a payment holiday or a further drawdown, subject to the mortgage conditions.
In respect of further drawdowns, unless the borrower gives the seller
instructions to the contrary (as set out below):
* if the offer conditions specify that the "repayment" basis (as set
out in "-- REPAYMENT TERMS") applies to the whole of the first
drawdown, then the "repayment" basis will also apply to the whole
of each further drawdown made under that flexible loan facility;
* if the offer conditions specify that the "interest-only" basis (as
set out in "-- REPAYMENT TERMS") applies to the whole of the first
drawdown, then the "interest-only" basis will also apply to the
whole of each further drawdown made under that flexible loan
facility; and
* if the offer conditions specify that the "interest-only" basis (as
set out in "-- REPAYMENT TERMS") applies to part only of the first
drawdown, then the "repayment" basis will apply to the whole of
each further drawdown made under that flexible loan facility.
A borrower's request to the seller for a further drawdown may include
instructions to the seller that, as from the date when the borrower makes the
further drawdown:
* the "repayment" basis is to apply to the whole or a specified part
of the balance owing in place of the "interest-only" basis; or
97
* the "interest-only" basis is to apply to the whole or a specified
part of the balance owing in place of the "repayment" basis.
The seller may increase the credit limit if:
* the borrower writes to the seller asking the seller to exercise its
power to increase the credit limit;
* the borrower pays any credit limit review charge; and
* if requested to do so, the borrower pays for a new valuation report
on the property and provides the seller with further information in
relation to the borrower's financial position.
The seller may reduce the credit limit:
* to ensure that the monies owing to the seller under the flexible
loan facility and the amount available do not together exceed 90
per cent. of the current market value of the property;
* to ensure that the amount available at any time does not exceed the
amount available as at the date of completion of the flexible loan
facility;
* if the borrower is in breach of the mortgage terms;
* if the seller is reasonably of the opinion that, because of a
change in the borrower's financial position, the borrower could not
afford to repay present or future drawdowns up to the existing
credit limit; or
* to ensure that the seller's business is run in a way that complies
with the requirements of the seller's regulator or of any central
bank or other monetary authority.
If a reduction in the credit limit means that the monies owing to the seller
exceed the reduced credit limit for the flexible loan facility, then the
borrower must pay off the excess within three months after the date on which
the seller gives the borrower notice of the reduction.
Product switches
From time to time borrowers may request or the servicer may offer a
variation in the financial terms and conditions applicable to the borrower's
loan. If a loan is subject to a product switch, then the seller will be
required to repurchase the loan or loans under the relevant mortgage account
and their related security from the mortgages trustee. See "RISK FACTORS --
LOANS SUBJECT TO PRODUCT SWITCHES AND FURTHER ADVANCES WILL BE REPURCHASED BY
THE SELLER FROM THE MORTGAGES TRUSTEE, WHICH WILL AFFECT THE PREPAYMENT RATE OF
THE LOANS, AND THIS MAY AFFECT THE YIELD TO MATURITY OF THE ISSUER NOTES" and
"ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY".
ORIGINATION OF THE LOANS
The seller currently derives its mortgage-lending business from the
following sources: through a branch network throughout the United Kingdom,
through intermediaries and from telephone sales. In terms of value of mortgage-
lending business generated, the current principal intermediaries are Allied
Dunbar (ZAN), Countrywide Assured Group (CAG), Legal and General, MYSIS,
Norwich Union and Prudential. The seller also originates some of its mortgage
loans through electronic commerce channels. Of the loans in the portfolio, as
at 31st December, 2002, approximately 39 per cent. were originated through the
branch network, approximately 47 per cent. through intermediaries and
approximately 19 per cent. through telephone sales.
The seller is subject to the Financial Ombudsman Scheme and follows both the
Code of Banking Practice and the Council of Mortgage Lenders' Code of Mortgage
Lending Practice.
FRANCHISING
The seller has introduced internal franchising of its branches in
approximately 70 per cent. of its local markets.
98
The aims of internal franchising are to continue to improve the management and
service of the seller within local market areas, to give increased
responsibility and accountability of the business to local management and to
increase sales performance through better local targeting and knowledge.
The seller has piloted full franchises within four local markets. These
franchises had greater autonomy and decision making power with regard to
marketing priorities and local working practices. The seller provided the
infrastructure to support the operations and retained control of all compliance
and regulatory requirements. Following the pilot, these local markets have
reverted to the internal franchise.
Underwriting
The decision to offer a loan to a potential borrower is made by underwriters
located in branches, head office sites, telephone operations centres or
business development units, who liaise with the intermediaries. Each
underwriter must pass a formal training programme conducted by the seller to
gain the authority to approve loans. The seller has established various levels
of authority for its underwriters who approve loan applications. The levels are
differentiated by, among other things, degree of risk and the ratio of the loan
amount to the value of the property in the relevant application. An underwriter
wishing to move to the next level of authority must first take and pass a
further training course. The seller also monitors the quality of underwriting
decisions on a regular basis.
The seller is continually reviewing the way in which it conducts its mortgage
origination business, for example by means of the internal franchising scheme
described above, in order to ensure that it remains up-to-date and cost
effective in a competitive market. In the future, the seller may also introduce
an automated decisioning process which reduces manual assessment of those
segments of the business that perform well and meet the eligibility criteria.
This will not affect the substance of the decisioning process.
Furthermore, notwithstanding any of the changes described in this section,
the seller will continue to retain exclusive control over the underwriting
policies and lending criteria to be applied to the origination of each loan.
LENDING CRITERIA
Each loan in the portfolio as at 31st December, 2002 was originated
according to the seller's lending criteria applicable at the time the loan was
offered, which included some or all of the criteria set out in this section.
New loans may only be included in the portfolio if they are originated in
accordance with the lending criteria applicable at the time the loan is offered
and if the conditions contained in "ASSIGNMENT OF THE LOANS AND THEIR RELATED
SECURITY -- ASSIGNMENT OF NEW LOANS AND THEIR RELATED SECURITY TO THE MORTGAGES
TRUSTEE" have been satisfied. However, the seller retains the right to revise
its lending criteria from time to time, so the criteria applicable to new loans
may not be the same as those currently used. Some of the factors currently used
in making a lending decision are as follows.
(1) Type of property
Properties may be either freehold or the Scottish equivalent or leasehold.
In the case of leasehold properties, the unexpired portion of the lease must in
most cases not expire earlier than 30 years after the term of the loan.
All properties have been valued by a valuer approved by the seller or, where
appropriate, according to a methodology which would meet the standards of a
reasonable, prudent mortgage lender (as referred to under "THE SERVICING
AGREEMENT -- UNDERTAKINGS BY THE SERVICER"). Such methodology may involve a
form of valuation which is less comprehensive than the traditional full
valuation and may involve an external viewing only by the valuer or a desktop
valuation, rather than an internal inspection. All valuations are carried out
in a manner which has been approved by the Director of Group Property and
Survey of the seller.
99
(2) Term of loan
There is no minimum term on the loans and the maximum term is normally 35
years. For interest-only loans where the borrower is using a pension plan as
the relevant repayment mechanism to repay the loan at maturity, the maximum
term is extended to 57 years to reflect the long-term nature of pension plans.
For these "pension-linked loans", if the property is a leasehold and the lease
has [55] or fewer years unexpired as at the date of completion of the mortgage,
the maximum term is [25] years.
(3) Age of applicant
All borrowers must be aged 18 or over. The mortgage account must mature no
later than the time when the borrower reaches 85 years of age if the loan has a
related mortgage indemnity guarantee, or MIG, policy. Otherwise there is no
maximum age limit unless the loan is a pension-linked loan, in which case the
loan must mature no later than the time when the borrower reaches 75 years of
age.
(4) Loan-to-value (or "LTV") ratio
The maximum original LTV ratio of loans in the current portfolio is 95 per
cent., excluding any capitalised (as defined in the glossary) high loan-to-
value fee and/or booking fee and/or valuation fee (these fees are also defined
in the glossary).
In the case of a property which is being purchased, value is determined by
the lower of a valuation and the purchase price. In the case of a remortgage or
further advance, value is determined on the basis of a valuation only.
(5) Mortgage indemnity guarantee policies
With the exception of some flexible loans with an LTV ratio between 75 per
cent. and 90 per cent. advanced to then existing Abbey National plc mortgage
loan borrowers, coverage under the then current MIG policies was required for
each mortgage account until 31st December, 2001, where the aggregate of the
outstanding principal balance of the relevant loan(s) at origination (excluding
any capitalised high loan-to-value fees and/or booking fees and/or valuation
fees), or the aggregate outstanding principal balance of the relevant loan(s)
at the time that any further advance is made, exceeded 75 per cent. of the
property value ("relevant mortgage loans"). Since 1st January, 2002 Abbey
National plc has not declared new mortgage loans to MIG policies, although the
seller continues to charge high LTV fees on loans with an LTV ratio greater
than 90 per cent.
Relevant mortgage loans made prior to 1st January, 2002 are still covered by
the MIG policies and as at 31st December, 2002 there were 255,121 relevant
mortgage loans in the portfolio. Of the relevant mortgage loans in the
portfolio as at 31st December, 2002, 172,359 are covered by the MIG policies
and 82,762 are not so covered. The seller is not actively considering removing
MIG cover from loans which are beneficially owned by the seller and which
currently have the benefit of such cover. See "-- INSURANCE POLICIES -- MIG
POLICIES".
(6) Status of applicant(s)
The maximum amount of the aggregate loan(s) under a mortgage account is
determined by a number of factors, including the applicant's income. In
determining income, the seller includes basic salary as primary income and also
the following which it considers to be regular: overtime, bonus, performance/
profit related pay, allowances, mortgage subsidies, pensions, annuities and
commission (for self-employed applicants income is derived from the net profit
of the business). If these payments are not considered regular, they are
treated as secondary income.
In the case of low credit risk mortgage loans with an LTV ratio of 75 per
cent. or less a borrower (whether employed or self-employed) certifies as to
income himself. For mortgage loans with an LTV of over 75 per cent. an
accountant (in the case of a self- employed borrower) must certify as to the
borrower's income and an employed borrower must submit documentation (such as
pay slips or bank statements) to certify the employed borrower's income.
100
The amount available to a borrower is initially calculated as follows:
Single Applicant: 3 times primary income plus 1 times secondary
income.
Multiple Applicants: 3 times primary income of one applicant plus
primary income of any other applicant (up to a
maximum of 3 other applicants) plus 1 times
secondary income of all applicants; or
2.5 times joint primary income (of two applicants)
plus 1 times primary income of any other applicant
plus 1 times secondary income of all applicants.
This criterion is similarly applied to the relevant
share of net profit for self-employed applicants.
The seller may exercise discretion within its lending criteria in applying
those factors which are used to determine the maximum amount of the loan(s).
Accordingly, these parameters may vary for some loans.
(7) Credit history
(a) Credit search
With the exception, in some circumstances, of then existing Abbey
National plc mortgage loan borrowers, a credit search is carried
out in respect of all applicants. Applications may be declined
where an adverse credit history (for example, county court
judgment, default or bankruptcy notice) is revealed.
(b) Existing lender's reference
The seller may also seek a reference from any existing and/or
previous lender. Any reference must satisfy the seller that the
account has been properly conducted and that no history of material
arrears exists.
(c) First time buyers/applicants in rented accommodation
Where applicants currently reside in rented accommodation, a
landlord's reference may be sought by the seller. In addition, if
considered appropriate, a further reference may be taken in
connection with any other property rented by the applicant(s)
within the three preceding years.
(d) Bank reference
A bank reference may be sought or the applicant may be required to
provide bank statements in support of his or her application.
(8) Scorecard
With the exception of some additional loans made to existing borrowers, the
seller uses some of the criteria described here and various other criteria to
produce an overall score for the application which reflects a statistical
analysis of the risk of advancing the loan.
CHANGES TO THE UNDERWRITING POLICIES AND THE LENDING CRITERIA
The seller's underwriting policies and lending criteria are subject to
change within the seller's sole discretion. New loans and further advances that
are originated under lending criteria that are different than the criteria set
out here may be assigned to the mortgages trustee.
Insurance policies
INSURANCE ON THE PROPERTY
A borrower is required to provide for insurance on the mortgaged property
for an amount equal to the estimated rebuilding cost of the property. The
borrower may either purchase the insurance through the seller or the borrower
or landlord (for a leasehold property) may arrange for the insurance
independently. Where borrower or landlord-arranged insurance fails, a
properties in possession policy issued in favour of the seller by Baker Street
Risk and Insurance (Guernsey) Limited or Carfax, each a wholly owned insurance
subsidiary of the seller, provides cover for the
101
seller (but not the borrower) for any losses or costs which the insured is
unable to recover, and the seller can claim under the properties in possession
policy once the relevant property has been repossessed by the seller.
ABBEY NATIONAL PLC POLICIES
If a borrower asks the seller to arrange insurance on its behalf, a policy
will be issued by an insurance underwriter in favour of that borrower. The
policy will provide the borrower with rebuilding insurance up to an amount
equal to the actual rebuilding cost subject to the valuation. Standard policy
conditions apply, which are renegotiated periodically by the seller with the
insurance underwriter(s) selected from time to time by the seller to provide
the insurance. Generally the seller is named as an insured in a schedule to the
policy, but successors in title and assigns, including the mortgages trustee,
are not covered. However, the insurer has confirmed or will confirm to the
seller, the mortgages trustee, Funding and the security trustee that,
notwithstanding the fact that the seller has agreed to assign the seller's
interest in a number of properties which are covered by Abbey National plc
policies to the mortgages trustee, the insurer will continue to process and pay
claims in respect of those properties in the same way and in the same amount as
it would have done had the agreement not been entered into. Amounts paid under
the insurance policy are generally utilised to fund the reinstatement of the
property or are otherwise paid to the seller to reduce the amount of the
loan(s).
In the mortgage sale agreement, the seller has agreed to transfer the
proceeds of all relevant claims made under the Abbey National plc policies (but
not the right to make and enforce claims) to the mortgages trustee. The seller
has also 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. In
the servicing agreement, the seller, acting in its capacity as servicer, has
also agreed to deal with claims under the Abbey National plc policies in
accordance with its normal procedures. If the seller, acting in its capacity as
servicer, receives any claim proceeds relating to a loan which has been
assigned to the mortgages trustee, these will be required to be paid into the
mortgages trustee's, rather than the seller's, accounts.
SELLER-INTRODUCED INSURANCE
If the Abbey National plc insurer is unwilling to provide insurance to a
borrower, the seller has ad hoc arrangements with other insurers who may
provide the borrower with insurance. If it transpires that the property thought
to be covered by seller-introduced insurance is not so covered, and the
property is damaged while uninsured, the seller is entitled (once the property
has gone into possession) to make a claim under the properties in possession
policy (described later in this section).
BORROWER OR LANDLORD-ARRANGED INSURANCE
If a borrower elects not to take up an Abbey National plc policy, or if a
borrower who originally had an Abbey National plc policy confirms that the
borrower no longer requires that insurance, that borrower is either sent an
"ALTERNATIVE INSURANCE REQUIREMENTS -- NEW BUSINESS" form or an "ALTERNATIVE
INSURANCE REQUIREMENTS" form, whichever is appropriate. This varies the
insurance provisions of the mortgage conditions, the most significant variation
being the fact that they do not stipulate a level of insurance cover. Once an
alternative insurance requirements form has been dispatched, it is assumed that
the borrower is making arrangements in accordance with those requirements.
THE PROPERTIES IN POSSESSION POLICIES
If it transpires that a borrower has not complied with the borrower or
landlord-arranged insurance requirements set out in the alternative insurance
requirements form or that a property thought to be covered by seller-introduced
insurance is not so covered, and if the property is damaged while uninsured,
the seller is entitled (once the property has gone into possession) to make a
claim under the properties in possession policy. The properties in possession
policy is an insurance policy provided to the seller by either Baker Street
Risk and Insurance (Guernsey) Limited or Carfax that insures the seller against
loss relating to properties after those properties
102
have been repossessed by the seller. It is not possible for the properties in
possession policy from Baker Street Risk and Insurance (Guernsey) Limited or
Carfax to provide cover for any company outside the Abbey National group,
including for the mortgages trustee. However, the insurer has confirmed to the
seller, the mortgages trustee, Funding and the security trustee that,
notwithstanding the fact that the seller has agreed to assign the seller's
interest in a number of properties which are covered by the properties in
possession policy to the mortgages trustee, the insurer will continue to
process and pay claims in respect of those properties in the same way and in
the same amount as it would have done had the agreement not been entered into.
The servicer will make claims in accordance with the seller's policy and pay
proceeds relating to the loans into the mortgages trustee's accounts.
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 the "CML'S
LENDERS' HANDBOOK FOR ENGLAND & WALES" 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 properties in possession
policy once the property has been repossessed by the seller.
If a borrower who originally had Abbey National plc-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 Abbey
National plc-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 loan.
As with its interest in the Abbey National plc policies, the seller has
agreed to assign the proceeds of any claims under any borrower or landlord-
arranged insurance to the mortgages trustee and, to the extent that any
proceeds are received by the servicer, it has agreed to pay these into the
mortgages trustee's accounts.
In the mortgage sale agreement the seller has agreed to make and enforce
claims under the relevant policies and to hold the proceeds of claims on trust
for the mortgages trustee or as the mortgages trustee may direct.
MIG POLICIES
A MIG policy is an agreement between a lender and an insurance company to
underwrite the amount of each relevant mortgage account which exceeds a certain
LTV ratio. Until and including 31st December, 2001, Abbey National plc required
MIG policies for all mortgaged properties with an LTV ratio of 75 per cent. or
more (with the exception of some flexible loans), and such mortgage loans made
prior to 1st January, 2002 are still covered by MIG policies. Since 1st
January, 2002 Abbey National plc has not declared new mortgage loans to MIG
policies. As at 31st December, 2002 there were 175,685 mortgage loans in the
portfolio covered by MIG policies. As at 31st December, 2002, the portfolio
contained 255,121 mortgage loans with an LTV ratio of 75 per cent. or more,
172,359 of which are declared to the MIG policies and 82,762 of which are not
so declared. The seller is not actively considering removing MIG cover from
loans which are beneficially owned by the seller and which currently have the
benefit of such cover (see "-- CHARACTERISTICS OF THE LOANS -- LENDING CRITERIA
- -- (5) MORTGAGE INDEMNITY GUARANTEE POLICIES"). The cover provided by MIG
policies is capped at an agreed level, both in the aggregate and in relation to
each mortgage account.
The insured under each MIG policy is the seller and/or its relevant
subsidiary. The seller has formally assigned, and will continue to assign, its
interest in each MIG policy to the mortgages trustee to the extent that it
relates to loans from time to time comprised in the portfolio. Practically
speaking, this has little effect on the way in which claims are made and paid
under the policies as they continue to be administered by the seller acting in
its capacity as servicer. To the extent that claims relate to loans in the
portfolio, their proceeds are paid by the seller into the mortgages trustee's
accounts and all other claims are paid into the seller's account.
Carfax is the underwriter of MIG policies for the seller. Carfax is a wholly
owned insurance subsidiary of the seller. Carfax does not have a separate
credit rating. The seller does not guarantee the liabilities of Carfax and is
under no legal obligation to support Carfax in the
103
discharge of those liabilities. The seller is, however, contingently liable to
Carfax to pay up any unpaid amount in respect of the seller's shareholding in
Carfax. The unpaid share capital is immaterial in relation to Carfax's overall
exposure.
Management of the seller believes that financial information relating to
Carfax is not material to an investor's decision to purchase the issuer notes.
Carfax is not rated by any nationally recognised statistical rating agency.
SCOTTISH LOANS
A proportion of the loans in the current portfolio are secured over
properties in Scotland. Under Scots law, the only means of creating a fixed
charge or security over heritable or long leasehold property is the statutorily
prescribed standard security. In relation to Scottish loans, references in this
prospectus to a "MORTGAGE" are to be read as references to such a standard
security and references to a "MORTGAGEE" are to be read as references to the
security holder (termed in Scots law the "HERITABLE CREDITOR").
In practice, the seller has advanced and intends to advance loans on a
similar basis both in England and Wales and in Scotland. While there are
certain differences in law and procedure in connection with the enforcement and
realisation of Scottish mortgages the seller does not consider that these
differences make Scottish mortgages significantly different or less effective
than those secured over properties in England and Wales. For more information
on the Scottish loans, see "MATERIAL LEGAL ASPECTS OF THE LOANS -- SCOTTISH
LOANS".
STATISTICAL INFORMATION ON THE PORTFOLIO
The statistical and other information contained in this prospectus has been
compiled by reference to the loans and mortgage accounts in the portfolio as at
31st December, 2002. Columns stating percentage amounts may not add up to 100
per cent. due to rounding. A loan will be removed from the portfolio if in the
period from 31st December, 2002 up to (and including) the closing date the loan
is repaid in full or if the loan does not comply with the terms of the mortgage
sale agreement on the closing date. For statistical information on the
portfolio during the period 9th January, 2003 to 10th February, 2003, see Annex
A.
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OUTSTANDING PRINCIPAL BALANCES
Range of outstanding principal balances (including capitalised high loan-to-
value fees and/or booking fees and/or valuation fees)
RANGE OF OUTSTANDING PRINCIPAL AGGREGATE
BALANCES (INCLUDING CAPITALISED HIGH OUTSTANDING NUMBER OF
LOAN-TO-VALUE FEES AND/OR BOOKING PRINCIPAL BALANCE MORTGAGE
FEES AND/OR VALUATION FEES) ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ------------------------------------ ----------------- ---------- --------- ----------
[GBP]0 -- [GBP]24,999.......... 180,016,473 0.64 13,074 3.13
[GBP]25,000 -- [GBP]49,999 ........ 5,786,827,128 20.57 153,721 36.76
[GBP]50,000 -- [GBP]74,999 ........ 7,329,580,973 26.05 119,300 28.53
[GBP]75,000 -- [GBP]99,999 ........ 5,621,801,540 19.98 65,434 15.65
[GBP]100,000 -- [GBP]124,999........ 3,650,761,528 12.97 32,844 7.85
[GBP]125,000 -- [GBP]149,999........ 2,170,424,102 7.71 15,956 3.82
[GBP]150,000 -- [GBP]174,999........ 1,285,334,923 4.57 7,997 1.91
[GBP]175,000 -- [GBP]199,999........ 814,865,951 2.90 4,375 1.05
[GBP]200,000 -- [GBP]224,999........ 570,537,061 2.03 2,702 0.65
[GBP]225,000 -- [GBP]249,999........ 378,332,027 1.34 1,596 0.38
[GBP]250,000 -- [GBP]274,999........ 146,830,171 0.52 568 0.14
[GBP]275,000 -- [GBP]299,999........ 80,190,537 0.28 279 0.07
[GBP]300,000 -- [GBP]324,999........ 68,322,878 0.24 221 0.05
[GBP]325,000 -- [GBP]350,000........ 53,625,699 0.19 158 0.04
----------------- ---------- --------- ----------
Totals.............................. 28,137,450,990 100.00 418,225 100.00
================= ========== ========= ==========
The largest mortgage account has an outstanding principal balance of
[GBP]350,000.00 and the smallest mortgage account has an outstanding principal
balance of -[GBP]186,225.95. The average outstanding principal balance is
approximately [GBP]67,278.26.
There are a small number of mortgage accounts in the portfolio with a
negative balance. In these cases, this is due to overpayment of the amount
required to redeem the mortgage account. The account status is set to
"REDEEMED" when the balance is zero and the overpaid amount has been refunded
which normally happens within two to three days of that overpayment.
105
LOAN-TO-VALUE RATIOS AT ORIGINATION
The following table shows the range of loan-to-value, or LTV, ratios, which
express the outstanding balance of a mortgage loan as at the date of the
original initial mortgage loan origination divided by the value of the property
securing that mortgage loan at the same date.
RANGE OF LOAN-TO-VALUE RATIOS AT AGGREGATE
ORIGINATION (EXCLUDING CAPITALISED OUTSTANDING NUMBER OF
HIGH LOAN-TO-VALUE FEES AND/OR PRINCIPAL BALANCE MORTGAGE
BOOKING FEES AND/OR VALUATION FEES) ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ----------------------------------- ----------------- ---------- --------- ----------
00.00% -- 24.99%................... 334,488,148 1.19 7,926 1.90
25.00% -- 49.99%................... 2,595,272,391 9.22 46,598 11.14
50.00% -- 74.99%................... 7,794,157,958 27.70 108,580 25.96
75.00% -- 79.99%................... 2,084,928,119 7.41 27,542 6.59
80.00% -- 84.99%................... 2,201,326,210 7.82 28,898 6.91
85.00% -- 89.99%................... 4,594,385,079 16.33 58,943 14.09
90.00% -- 95%...................... 8,532,893,085 30.00 139,738 33.41
----------------- ---------- --------- ----------
Totals............................. 28,137,450,990 100.00 418,225 100.00
================= ========== ========= ==========
The weighted average loan-to-value ratio of the mortgage accounts (excluding
any capitalised high loan-to-value fees and capitalised booking fees) at
origination was 76.97 per cent. The highest loan-to-value ratio of any mortgage
account (excluding any capitalised high loan-to-value fees and any capitalised
booking fees) at origination was 95.00 per cent. and the lowest was 0.00 per
cent. The average value of capitalised high loan-to-value fees and/or booking
fees and/or valuation fees at origination was approximately [GBP]500.
LTV RATIOS AT ORIGINATION INDEXED ACCORDING TO THE NATIONWIDE HOUSE PRICE INDEX
The following table shows the range of LTV ratios, which express the
outstanding balance of a mortgage loan as at the date of the original initial
mortgage origination divided by the indexed valuation of the property securing
that mortgage loan as at 31st December, 2002, based on the Nationwide House
Price Index.
RANGE OF LOAN-TO-VALUE RATIOS AT AGGREGATE
ORIGINATION (EXCLUDING CAPITALISED OUTSTANDING NUMBER OF
HIGH LOAN-TO-VALUE FEES AND/OR PRINCIPAL BALANCE MORTGAGE
BOOKING FEES AND/OR VALUATION FEES) ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ----------------------------------- ----------------- ---------- --------- ----------
00.00% -- 24.99%................... 1,097,816,008 3.90 24,774 5.92
25.00% -- 49.99%................... 9,776,441,705 34.75 157,978 37.77
50.00% -- 74.99%................... 15,633,965,278 55.56 215,475 51.52
75.00% -- 79.99%................... 1,030,491,885 3.66 13,135 3.14
80.00% -- 84.99%................... 368,103,237 1.31 4,272 1.02
85.00% -- 89.99%................... 135,556,016 0.48 1,406 0.34
90.00% -- 95%...................... 95,076,860 0.34 1,185 0.28
----------------- ---------- --------- ----------
Totals............................. 28,137,450,990 100.00 418,225 100.00
================= ========== ========= ==========
The weighted average loan-to-value ratio of the mortgage accounts (excluding
any capitalised high loan-to-value fees and capitalised booking fees) at
origination was 53.74 per cent.
106
LTV RATIOS AT ORIGINATION INDEXED ACCORDING TO THE HALIFAX HOUSE PRICE INDEX
The following table shows the range of LTV ratios, which express the
outstanding balance of a mortgage loan as at the date of the original initial
mortgage origination divided by the indexed valuation of the property securing
that mortgage loan as at 31st December, 2002, based on the Halifax House Price
Index.
RANGE OF LOAN-TO-VALUE RATIOS AT AGGREGATE
ORIGINATION (EXCLUDING CAPITALISED OUTSTANDING NUMBER OF
HIGH LOAN-TO-VALUE FEES AND/OR PRINCIPAL BALANCE MORTGAGE
BOOKING FEES AND/OR VALUATION FEES) ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ----------------------------------- ----------------- ---------- --------- ----------
00.00% -- 24.99%................... 977,821,584 3.48 22,109 5.29
25.00% -- 49.99%................... 8,497,885,467 30.20 135,542 32.41
50.00% -- 74.99%................... 16,991,371,187 60.39 240,176 57.43
75.00% -- 79.99%................... 1,228,062,987 4.36 15,267 3.65
80.00% -- 84.99%................... 325,542,142 1.16 3,720 0.89
85.00% -- 89.99%................... 116,767,624 0.41 1,411 0.34
90.00% -- 95%...................... 0 0.00 0 0.00
----------------- ---------- --------- ----------
Totals............................. 28,137,450,990 100.00 418,225 100.00
================= ========== ========= ==========
The weighted average loan-to-value ratio of the mortgage accounts (excluding
any capitalised high loan-to-value fees and capitalised booking fees) at
origination was 54.48 per cent.
GEOGRAPHICAL SPREAD
The following table shows the spread of properties throughout England, Wales
and Scotland. No properties are situated outside England, Wales and Scotland.
The geographical location of a property has no impact upon the seller's lending
criteria and credit scoring tests.
AGGREGATE
OUTSTANDING NUMBER OF
PRINCIPAL BALANCE MORTGAGE
REGION ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ---------------------------- ----------------- ---------- --------- ----------
East Anglia................. 987,007,682 3.51 16,334 3.91
East Midlands............... 1,262,452,912 4.49 22,412 5.36
London...................... 6,238,648,925 22.17 72,134 17.25
North....................... 892,746,489 3.17 18,330 4.38
Northwest................... 2,529,909,899 8.99 48,531 11.60
Southeast (excluding London) 8,974,750,213 31.90 112,610 26.93
Scotland.................... 601,794,087 2.14 10,902 2.61
Southwest................... 2,192,880,918 7.79 33,461 8.00
Unknown..................... 429,147,960 1.53 6,572 1.57
Wales....................... 1,054,847,294 3.75 21,358 5.11
West Midlands............... 1,614,801,916 5.74 28,300 6.77
Yorkshire................... 1,358,462,694 4.83 27,281 6.52
----------------- ---------- --------- ----------
Totals...................... 28,137,450,990 100.00 418,225 100.00
================= ========== ========= ==========
107
SEASONING OF LOANS
The following table shows the time elapsed since the date of origination of
the loans:
AGGREGATE
OUTSTANDING NUMBER OF
PRINCIPAL BALANCE MORTGAGE
AGE OF LOANS IN MONTHS ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ---------------------- ----------------- ---------- --------- ----------
0 to 56............... 1,683,696,669 5.98 20,650 4.94
6 to 512.............. 3,434,969,809 12.21 44,094 10.54
12 to 518............. 5,105,175,530 18.14 65,680 15.70
18 to 524............. 3,773,887,029 13.41 51,433 12.30
24 to 530............. 2,235,158,611 7.94 33,867 8.10
30 to 536............. 2,282,394,742 8.11 35,957 8.60
36 to 542............. 2,291,835,233 8.15 36,014 8.61
42 to 548............. 1,048,579,479 3.73 17,457 4.17
48 to 554............. 1,459,632,447 5.19 24,467 5.85
54 to 560............. 1,208,292,683 4.29 20,310 4.86
60 to 566............. 985,602,679 3.50 17,603 4.21
66 to 572............. 802,798,998 2.85 14,712 3.52
72 to 578............. 852,274,165 3.03 16,044 3.84
78 to 584............. 530,605,462 1.89 10,694 2.56
84 to 590............. 442,229,054 1.57 9,237 2.21
90 to 596............. 318,399 0.00 6 0.00
---------------- ---------- --------- ----------
Totals................ 28,137,450,990 100.00 418,225 100.00
================ ========== ========= ==========
The weighted average seasoning of loans was 30.87 months and the maximum
seasoning of loans was 91.27 months. The minimum seasoning of loans was 3.02
months.
YEARS TO MATURITY OF LOANS
The following table shows the number of years of the mortgage term which
remain unexpired:
AGGREGATE
OUTSTANDING NUMBER OF
PRINCIPAL BALANCE MORTGAGE
YEARS TO MATURITY ([GBP]) % OF TOTAL ACCOUNTS % OF TOTAL
- ----------------- ----------------- ---------- ----------- ----------
0 to 55.......... 81,360,253 0.29 2,348 0.56
5 to 510......... 1,412,897,092 5.02 28,379 6.79
10 to 515........ 3,896,611,546 13.85 64,466 15.41
15 to 520........ 7,228,042,183 25.69 113,859 27.22
20 to 525........ 14,988,494,678 53.27 202,972 48.53
25 to 530........ 422,438,800 1.50 4,929 1.18
30 to 538........ 107,606,438 0.38 1,272 0.30
----------------- ---------- ----------- ----------
Totals........... 28,137,450,990 100.00 418,225.00 100.00
================= ========== =========== ==========
The weighted average remaining term of loans was 19.50 years and the maximum
remaining term was 34.99 years. The minimum remaining term was 0.08 years.
108
PURPOSE OF LOAN
The following table shows the purpose of the loans on origination:
AGGREGATE
OUTSTANDING
PRINCIPAL BALANCE
USE OF PROCEEDS ([GBP]) % OF TOTAL
- --------------- ----------------- ----------
Purchase....... 25,311,524,195 89.96
Remortgage..... 2,825,926,794 10.04
----------------- ----------
Totals......... 28,137,450,990 100.00
================= ==========
PROPERTY TYPE
Descriptions of the terms used in these property types are contained in the
glossary.
AGGREGATE
OUTSTANDING
PRINCIPAL BALANCE NUMBER OF
PROPERTY TYPE ([GBP]) % OF TOTAL PROPERTIES % OF TOTAL
- --------------------------------- ----------------- ---------- ---------- ----------
Converted Flat/Maisonette........ 589,570,438 2.10 7,871 1.88
Detached House................... 6,155,251,625 21.88 70,369 16.83
Detached or Chalet Bungalow...... 559,534,436 1.99 8,729 2.09
Purpose-built Flat/Maisonette.... 2,733,290,576 9.71 41,439 9.91
Semi-detached Bungalow........... 614,940,677 2.19 9,717 2.32
Semi-detached/Link-detached House 7,809,456,919 27.75 123,093 29.43
Terraced House/Bungalow.......... 7,815,096,372 27.77 132,525 31.69
Other/Unknown.................... 1,860,309,947 6.61 24,482 5.85
---------------- ---------- ---------- ----------
Totals........................... 28,137,450,990 100.00 418,225 100.00
================ ========== ========== ==========
DISTRIBUTION OF FIXED RATE LOANS
Fixed rate loans remain at the relevant fixed rate for a period of time as
specified in the offer conditions, after which they move to the SVR or some
other rate as specified in the offer conditions.
AGGREGATE
OUTSTANDING NUMBER OF % OF TOTAL
PRINCIPAL BALANCE MORTGAGE FIXED RATE
FIXED RATE % ([GBP]) % OF TOTAL ACCOUNTS LOANS
- ------------ ----------------- ---------- ---------- ----------
3.00 -- 3.99 513,031 0.01 2 0.00
4.00 -- 4.99 223,187,144 3.50 2,704 2.96
5.00 -- 5.99 3,157,868,028 49.52 38,037 41.58
6.00 -- 6.99 2,041,968,463 32.02 32,718 35.77
7.00 -- 7.99 921,538,583 14.45 17,422 19.05
8.00 -- 8.99 31,953,905 0.50 591 0.65
9.00 -- 9.99 214,000 0.00 2 0.00
---------------- ---------- ---------- ----------
Totals...... 6,377,243,154 100.00 91,476.00 100.00
================ ========== ========== ==========
109
AGGREGATE
OUTSTANDING NUMBER OF % OF TOTAL
PRINCIPAL BALANCE MORTGAGE FIXED RATE
YEAR IN WHICH FIXED RATE PERIOD ENDS ([GBP]) % OF TOTAL ACCOUNTS LOANS
- ------------------------------------ ----------------- ---------- --------- ----------
2003................................ 2,062,623,876 32.34 28,181 30.81
2004................................ 1,746,914,687 27.39 24,932 27.26
2005................................ 668,808,779 10.49 12,060 13.18
2006................................ 1,207,465,896 18.93 16,885 18.46
2007................................ 564,415,325 8.85 7,118 7.78
2008................................ 46,552,668 0.73 870 0.95
2009................................ 80,428,609 1.26 1,429 1.56
2011................................ 33,313 0.00 1 0.00
----------------- ---------- --------- ----------
Totals.............................. 6,377,243,154 100.00 91,476.00 100.00
================= ========== ========= ==========
CHARACTERISTICS OF UNITED KINGDOM RESIDENTIAL MORTGAGE MARKET
The housing market in the UK is primarily one of owner-occupied housing. At
the end of 2001, owner-occupation and privately rented accommodation accounted
for 68 per cent. and 10.0 per cent. of the housing stock respectively,
according to the Department of Transport, Local Government and the Regions. The
remainder were in some form of public/social ownership.
According to the Council of Mortgage Lenders, at the end of 2002, mortgage
loans outstanding amounted to [GBP]671 billion, with banks and building
societies holding 70 per cent. and 18 per cent. of the total respectively, and
in 2001 outstanding mortgage debt grew by 13.5 per cent., well above the long-
term average of 7 per cent. during 1992-2001.
Set out in the following tables are a number of characteristics of the
United Kingdom mortgage market.
CPR RATES
This quarterly constant prepayment rate, or CPR, data was calculated by
dividing the amount of mortgages repaid in a quarter by the quarterly balance
of mortgages outstanding for building societies in the UK. These quarterly
repayment rates were then annualised using standard methodology.
AGGREGATE AGGREGATE AGGREGATE AGGREGATE
CPR QUARTERS OVER CPR QUARTERS OVER CPR QUARTERS OVER CPR QUARTERS OVER
(%) 39 YEARS (%) 39 YEARS (%) 39 YEARS (%) 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 22.5 1
Source: Council of Mortgage Lenders
Over the past 40 years, the highest single quarter CPR experienced in
respect of residential mortgage loans made by building societies was recorded
in September 2002 at a level of 22.40 per cent. The lowest level was 7.94 per
cent. in June and March of 1974.
110
The highest 12-month rolling average CPR over the same 40-year period was
20.79 per cent. The lowest was 8.84 per cent.
CPR RATE 12-MONTH CPR RATE 12-MONTH
FOR THE ROLLING FOR THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
QUARTER (%) (%) QUARTER (%) (%)
- ---- ---------- -------- ------------- --------- --------
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
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
111
CPR RATE 12-MONTH CPR RATE 12-MONTH
FOR THE ROLLING FOR THE ROLLING
QUARTER AVERAGE QUARTER AVERAGE
QUARTER (%) (%) QUARTER (%) (%)
- ---- ---------- -------- ------------- --------- --------
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
September 2002 22.40 20.01 December 2002 22.14 20.79
Source of repayment and outstanding mortgage information: Council of Mortgage
Lenders
REPOSSESSION RATE
The repossession rate of residential properties in the UK has steadily
declined since 1991:
REPOSSESSIONS REPOSSESSIONS REPOSSESSIONS
YEAR (%) YEAR (%) YEAR (%)
- --------- ------------- ---- ------------- ---- -------------
1982..... 0.11 1989 0.17 1996 0.40
1983..... 0.12 1990 0.47 1997 0.31
1984..... 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 2002 0.11
Source: Council of Mortgage Lenders
112
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 "Department of
the Environment, Transport and the Regions/Building Societies Association Five
per cent. Sample Survey of Building Society Mortgage Completions" and sourced
from and including 1994 from the "Department of the Environment, Transport and
the Regions/Council of Mortgage Lenders Survey of Mortgage Lenders") compared
to the average annual salary in the UK as calculated from the weekly earnings
in April of the same year of male employees whose earnings were not affected by
their absence from work (as recorded by the Department for Education and
Employment). While this is a good indication of house affordability, it does
not take into account the fact that the majority of households have more than
one income to support a mortgage loan.
HOUSE PRICE TO HOUSE PRICE TO
YEAR EARNINGS RATIO YEAR EARNINGS RATIO
- --------- -------------- ---- --------------
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
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 the greatest decrease in the early 1990s.
The Housing Indices have generally increased since 1996.
NATIONWIDE HALIFAX HOUSE
HOUSE PRICE
RETAIL PRICE INDEX PRICE INDEX INDEX
-------------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- -------------- ---------- -------- ----- -------- ----- --------
March 1981.... 72.0 11.9 47.3 4.5 NA NA
June 1981..... 75.0 10.7 48.1 3.2 NA NA
September 1981 76.3 10.8 48.3 2.5 NA NA
December 1981. 78.3 11.4 47.5 1.3 NA NA
March 1982.... 79.4 9.8 48.2 1.9 NA NA
June 1982..... 81.9 8.8 49.2 2.3 NA NA
September 1982 81.9 7.0 49.8 3.1 NA NA
December 1982. 82.5 5.3 51.0 7.1 NA NA
March 1983.... 83.1 4.5 52.5 8.5 97.1 NA
June 1983..... 84.8 3.6 54.6 10.4 99.4 NA
September 1983 86.1 5.0 56.2 12.1 101.5 NA
December 1983. 86.9 5.2 57.1 11.3 102.3 NA
March 1984.... 87.5 5.1 59.2 12.0 104.1 7.00
June 1984..... 89.2 5.0 61.5 11.9 106 6.4
September 1984 90.1 4.6 62.3 10.3 108.4 6.6
December 1984. 90.9 4.5 64.9 12.8 111.0 8.2
113
NATIONWIDE HALIFAX HOUSE
HOUSE PRICE
RETAIL PRICE INDEX PRICE INDEX INDEX
-------------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- -------------- ---------- -------- ----- -------- ----- --------
March 1985.... 92.8 5.9 66.2 11.2 113.5 8.6
June 1985..... 95.4 6.7 68.2 10.3 115.4 8.5
September 1985 95.4 5.7 69.2 10.5 116.8 7.5
December 1985. 96.1 5.5 70.7 8.6 120.6 8.3
March 1986.... 96.7 4.1 71.1 7.1 124 8.8
June 1986..... 97.8 2.5 73.8 7.9 128.1 10.4
September 1986 98.3 2.9 76.3 9.8 132.2 12.4
December 1986. 99.6 3.6 79.0 11.1 136.8 12.6
March 1987.... 100.6 3.9 81.6 13.8 142.3 13.8
June 1987..... 101.9 4.1 85.8 15.1 146.7 13.6
September 1987 102.4 4.1 88.6 15.0 151.5 13.6
December 1987. 103.3 3.6 88.5 11.4 158 14.4
March 1988.... 104.1 3.4 90.0 9.8 167 16.0
June 1988..... 106.6 4.5 97.6 12.9 179.4 20.1
September 1988 108.4 5.7 108.4 20.2 197.4 26.5
December 1988. 110.3 6.6 114.2 25.5 211.8 29.3
March 1989.... 112.3 7.6 118.8 27.8 220.7 27.9
June 1989..... 115.4 7.9 124.2 24.1 226.1 23.1
September 1989 116.6 7.3 125.2 14.4 225.5 13.3
December 1989. 118.8 7.4 122.7 7.2 222.5 4.9
March 1990.... 121.4 7.8 118.9 0.1 223.7 1.3
June 1990..... 126.7 9.3 117.7 (5.4) 223.3 (1.2)
September 1990 129.3 10.3 114.2 (9.2) 222.7 (1.2)
December 1990. 129.9 8.9 109.6 (11.3) 223 0.2
March 1991.... 131.4 7.9 108.8 (8.9) 223.1 (0.3)
June 1991..... 134.1 5.7 110.6 (6.2) 221.9 (0.6)
September 1991 134.6 4.0 109.5 (4.2) 219.5 (1.4)
December 1991. 135.7 4.4 107.0 (2.4) 217.7 (2.4)
March 1992.... 136.7 3.9 104.1 (4.4) 213.2 (4.5)
June 1992..... 139.3 3.8 105.1 (5.1) 208.8 (6.1)
September 1992 139.4 3.5 104.2 (5.0) 206.9 (5.9)
December 1992. 139.2 2.5 100.1 (6.7) 199.5 (8.7)
March 1993.... 139.3 1.9 100.0 (4.0) 199.6 (6.6)
June 1993..... 141.0 1.2 103.6 (1.4) 201.7 (3.5)
September 1993 141.9 1.8 103.2 (1.0) 202.6 (2.1)
December 1993. 141.9 1.9 101.8 1.7 203.5 2.0
March 1994.... 142.5 2.3 102.4 2.4 204.6 2.5
June 1994..... 144.7 2.6 102.5 (1.1) 202.9 0.6
September 1994 145.0 2.2 103.2 0.0 202.7 0.0
December 1994. 146.0 2.8 104.0 2.1 201.9 (0.8)
March 1995.... 147.5 3.4 101.9 (0.5) 201.8 (1.4)
June 1995..... 149.8 3.5 103.0 0.5 199.3 (1.8)
September 1995 150.6 3.8 102.4 (0.80) 197.8 (2.4)
December 1995. 150.7 3.2 101.6 (2.3) 199.2 (1.3)
March 1996.... 151.5 2.7 102.5 0.6 202.1 0.1
June 1996..... 153.0 2.1 105.8 2.7 206.7 3.6
September 1996 153.8 2.1 107.7 5.0 208.8 5.4
December 1996. 154.4 2.4 110.1 8.0 213.9 7.1
March 1997.... 155.4 2.5 111.3 8.3 216.7 7.0
June 1997..... 157.5 2.9 116.5 9.6 220.2 6.3
September 1997 159.3 3.5 121.2 11.8 222.6 6.4
December 1997. 160.0 3.6 123.3 11.4 225.4 5.2
March 1998.... 160.8 3.4 125.5 12.0 228.4 5.3
114
NATIONWIDE HALIFAX HOUSE
HOUSE PRICE
RETAIL PRICE INDEX PRICE INDEX INDEX
-------------------- --------------- ---------------
% ANNUAL % ANNUAL % ANNUAL
QUARTER INDEX CHANGE1 INDEX CHANGE1 INDEX CHANGE1
- -------------- ---------- -------- ----- -------- ----- --------
June 1998..... 163.4 3.7 130.1 11.0 232.1 5.3
September 1998 164.4 3.2 132.4 8.8 234.8 5.3
December 1998. 164.4 2.7 132.3 7.0 237.2 5.1
March 1999.... 164.1 2.0 134.6 7.0 238.6 4.4
June 1999..... 165.6 1.3 139.7 7.1 245.5 5.6
September 1999 166.2 1.1 144.4 8.6 255.5 8.4
December 1999. 167.3 1.7 148.9 11.8 264.1 10.7
March 2000.... 168.4 2.6 155.0 14.1 273.1 13.5
June 2000..... 171.1 3.3 162.0 14.8 272.8 10.5
September 2000 171.7 3.3 161.5 11.2 275.9 7.7
December 2000. 172.2 2.9 162.8 8.9 278.6 5.3
March 2001.... 172.2 2.2 167.5 7.8 281.7 3.1
June 2001..... 174.4 1.9 174.8 7.6 293.2 7.2
September 2001 174.6 1.7 181.6 11.7 302.4 9.2
December 2001. 173.4 0.7 184.6 12.6 312.1 11.4
March 2002.... 174.5 1.3 190.2 12.7 329.1 15.6
June 2002..... 176.2 1.0 206.5 16.7 343.8 15.9
September 2002 177.6 1.7 221.1 19.7 365.8 19.0
December 2002. 178.5 2.9 231.3 22.6 394.0 23.4
Source: Datastream, Nationwide Building Society and Halifax Plc, respectively.
"NA" indicates that the relevant figure is not available.
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.
All information contained in this prospectus in respect of the Nationwide
House Price Index has been reproduced from information published by Nationwide
Building Society. All information contained in this prospectus in respect of
the Halifax House Price Index has been reproduced from information published by
Halifax plc.
The issuer has not participated in the preparation of that information nor
made any enquiry with respect to that information. Neither the issuer nor
Nationwide Building Society nor Halifax plc makes any representation as to the
accuracy of the information or has any liability whatsoever to you in
connection with that information. Anyone relying on the information does so at
their own risk.
115
THE SERVICER
THE SERVICER
Under the servicing agreement, Abbey National plc has been appointed as the
initial servicer of the loans. The day-to-day servicing of the loans is
performed by the servicer through the servicer's retail branches, telephone and
electronic banking centres and the joint venture operations centres which are
subject to the joint venture arrangements described in "THE SERVICING AGREEMENT
- -- ACTUAL DELEGATION BY THE SERVICER TO JOINT VENTURE WITH EDS". The servicer's
registered office is Abbey National House, 2 Triton Square, Regent's Place,
London NW1 3AN.
This section describes the servicer's procedures in relation to mortgage
loans generally. A description of the servicer's obligation under the servicing
agreement follows in the next section.
Abbey National plc is continually reviewing the way in which it conducts its
mortgage loan servicing business in order to ensure that it remains up-to-date
and cost effective in a competitive market, and the servicer may therefore
change its servicing processes from time to time. However, Abbey National plc
will retain exclusive control over the underwriting policies and lending
criteria and will agree the servicing standards to be applied in the course of
servicing mortgage loans.
SERVICING OF LOANS
Servicing procedures include responding to customer enquiries, monitoring
compliance with and servicing the loan features and facilities applicable to
the loans and management of loans in arrears. See "THE SERVICING AGREEMENT".
Pursuant to the terms and conditions of the loans, borrowers must pay the
monthly amount required under the terms and conditions of the loans on or
before each monthly instalment due date. Interest accrues in accordance with
the terms and conditions of each loan and is collected from borrowers monthly.
In the case of variable rate loans, the servicer sets the mortgages trustee
SVR and any variable margin applicable to any tracker loan on behalf of the
mortgages trustee and the beneficiaries, except in the limited circumstances as
set out in the servicing agreement. In the case of some loans that are not
payable at the mortgages trustee SVR, for example loans at a fixed rate, the
borrower will continue to pay interest at the relevant fixed rate until the
relevant period ends in accordance with the borrower's offer conditions. After
that period ends, and unless the servicer offers, and the borrower accepts,
another option with an incentive, interest will be payable at the mortgages
trustee SVR. In addition, some other types of loans are payable or may change
so as to become payable by reference to other rates not under the control of
the servicer such as LIBOR or rates set by the Bank of England, which rates may
also include a fixed or variable rate margin set by the servicer.
The servicer will take all steps necessary under the mortgage terms to
notify borrowers of any change in the interest rates applicable to the loans,
whether due to a change in the mortgages trustee SVR or any variable margin or
as a consequence of any provisions of those terms.
Payments of interest and, in the case of repayment loans, principal, are
payable in arrear monthly. The servicer is responsible for ensuring that all
payments are made by the relevant borrower either directly to the mortgages
trustee GIC account held in the name of the mortgages trustee or to the
relevant alternative account or cleared through the relevant Abbey National plc
account and credited to the mortgages trustee GIC account, as appropriate. All
payments from borrowers are made by direct debits unless the servicer has
specifically agreed to another form of payment with that borrower. The servicer
initially credits the mortgages trustee GIC account and the alternative
accounts with the full amount of the direct debit requests. However, a few days
after the due date for payment the unpaid direct debits begin to be returned,
at which time the servicer is permitted to reclaim from the mortgages trustee
GIC account or the relevant alternative account, as appropriate, the
corresponding amounts previously credited. In these circumstances the usual
arrears procedures described in "-- ARREARS AND DEFAULT PROCEDURES" will be
taken.
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All amounts which are credited and paid to an alternative account are
transferred into the mortgages trustee GIC account on a regular basis and in
any event no later than the next business day after they are deposited in the
relevant alternative account. Any amounts which are due to be paid to the
mortgages trustee GIC account but which are credited in error to an account of
the seller will initially be held on trust by the seller for the mortgages
trustee. The seller will then transfer those amounts to the mortgages trustee
GIC account as soon as reasonably practicable.
ARREARS AND DEFAULT PROCEDURES
The servicer regularly gives to the mortgages trustee and the beneficiaries
written details of loans that are in arrears. A loan is identified as being "IN
ARREARS" when the aggregate of all amounts overdue is at least equal to the
monthly payment then due. In general, the servicer attempts to collect all
payments due under or in connection with the loans, having regard to the
circumstances of the borrower in each case.
The arrears are reported between 10 and 21 days after the amount has been
identified unless the arrears have been reduced in the meantime to an amount
less than the monthly payment then due. After the arrears are first reported
the borrower is contacted and asked for payment of the arrears. The servicer
then continues to contact the borrower asking for payment of the arrears.
Where considered appropriate, the servicer may enter into arrangements with
the borrower regarding the arrears, including:
* arrangements to make each monthly payment as it falls due plus an
additional amount to pay the arrears over a period of time;
* arrangements to pay only a portion of each monthly payment as it
falls due; and
* a deferment for a period of time of all payments, including
interest and principal or parts of any of them.
Any arrangements may be varied from time to time at the discretion of the
servicer, the primary aim being to rehabilitate the borrower and recover the
situation.
Legal proceedings do not usually commence until the arrears become
equivalent to at least three times the monthly payment then due. However, in
many cases legal proceedings may commence later than this. Once legal
proceedings have commenced, the servicer may send further letters to the
borrower encouraging the borrower to enter into discussions to pay the arrears.
The servicer may still enter into an arrangement with a borrower at any time
prior to a court hearing, or it may adjourn a court hearing. If a court order
is made for payment and the borrower subsequently defaults in making the
payment, then the servicer may take action as it considers appropriate,
including entering into an arrangement with the borrower. If the servicer
applies to the court for an order for possession, the court has discretion as
to whether it will grant the order.
The servicer has discretion to deviate from these procedures. In particular,
the servicer may deviate from these procedures where a borrower suffers from a
mental or physical infirmity, is deceased or where the borrower is otherwise
prevented from making payment due to causes beyond the borrower's control. This
is the case for both sole and joint borrowers.
After possession, the servicer may take action as it considers appropriate,
including to:
* secure, maintain or protect the property and put it into a suitable
condition for sale;
* create (other than in Scotland) any estate or interest on the
property, including a leasehold;
* dispose 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
* let the property for any period of time.
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The servicer has discretion as to the timing of any of these actions, including
whether to postpone the action for any period of time. The servicer may also
carry out works on the property as it considers appropriate, including the
demolition of the whole or any part of it.
It should also be noted that the servicer's ability to exercise its power of
sale in respect of the property is dependent upon mandatory legal restrictions
as to notice requirements. In addition, there may be factors outside the
control of the servicer, 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 decision of the servicer to exercise its power of sale and final
completion of the sale.
The net proceeds of sale of the property are applied 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 and the loan is covered by a MIG policy, a
claim is made under the MIG policy, if appropriate. From 1st January, 2002, no
new mortgage loans of the seller are covered by MIG policies. Where the funds
arising from application of these procedures are insufficient to pay all
amounts owing in respect of a loan, the funds are applied first in paying
principal, and secondly in paying interest and costs.
At this point the account is closed. However, the borrower is still liable
for the deficit left over after the property is sold but before the proceeds of
any MIG insurance are applied. The servicer attempts to recover as much of this
deficit as possible from the borrower.
These arrears and security enforcement procedures may change over time as a
result of a change in the servicer's business practices or legislative and
regulatory changes.
ARREARS EXPERIENCE
The following table summarises loans in arrears and repossession experience
for loans serviced by Abbey National plc, including the loans that are
contained in the trust property. The table includes mortgage assets which were
not originated by Abbey National plc, but which were acquired by Abbey National
plc after their origination. These mortgages are administered in accordance
with Abbey National plc's policies, but do not form any part of the assets
sold, or to be sold, to the mortgages trustee. For arrears and repossession
experience specific to the portfolio during the period 9th January, 2003 to
10th February, 2003, see Annex A.
AS AT 31ST DECEMBER
--------------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- -------- --------
OUTSTANDING BALANCE
([GBP] BILLIONS)....................... 57.58 55.12 56.22 58.55 61.24 66.40 75.59
Number of Loans Outstanding (thousands) 1,540.68 1,488.21 1,459.40 1,435.55 1,414.67 1,401.59 1,392.60
OUTSTANDING BALANCE OF LOANS IN ARREARS
([GBP] MILLIONS)
30-59 days............................. 783.47 918.07 1,438.02 1,099.60 1,100.76 902.54 816.65
60-89 days............................. 355.15 365.65 600.58 453.49 504.00 412.75 366.70
90-119 days............................ 234.90 223.27 347.02 269.86 265.32 247.09 210.10
120 or more days....................... 958.55 801.31 1,373.22 973.51 746.90 650.72 438.30
TOTAL OUTSTANDING BALANCE OF LOANS IN
ARREARS ([GBP] MILLIONS)............... 2,332.07 2,308.31 3,758.83 2,796.46 2,616.98 2,213.10 1,831.75
TOTAL NUMBER OF LOANS IN ARREARS
(THOUSANDS)
30-59 days............................. 34.96 34.94 38.25 26.45 25.01 19.64 17.04
60-89 days............................. 8.33 8.72 14.58 10.68 11.26 9.15 7.75
90-119 days............................ 11.64 10.40 9.40 6.27 5.91 5.28 4.39
120 or more days....................... 26.14 20.57 27.22 22.00 16.50 13.90 9.13
TOTAL NUMBER OF LOANS IN ARREARS
(THOUSANDS)............................ 81.07 74.63 89.44 65.40 58.68 47.97 38.32
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31ST DECEMBER
--------------------------------------------------
1996 1997 1998 1999 2000 2001 2002
------ ------ ----- ----- ----- ----- ------
PERCENTAGE OF PROPERTIES REPOSSESSED*.................... 0.44% 0.36% 0.36% 0.41% 0.36% 0.28% 0.19%
AMOUNT OF LOAN LOSSES ([GBP] MILLIONS)................... 105.83 107.77 55.04 41.78 35.66 21.50 11.02
LOAN LOSSES AS % OF TOTAL OUTSTANDING BALANCE AT YEAR END 0.18% 0.20% 0.10% 0.07% 0.06% 0.03% 0.015%
* Number of properties taken into possession during the period as a percentage
of number of accounts outstanding at the end of the period.
Repossessions expresses the number of properties taken into possession
during the applicable period, as a percentage of the number of loans
outstanding at the end of the period. As at 31st December, 2002 over 96 per
cent. of the loans reflected in the table were originated by Abbey National plc
and there is no material difference in the arrears experience of loans
originated by Abbey National plc and loans reflected in the table. Although a
due diligence review was carried out by, or on behalf of, Abbey National plc in
relation to the loans that were not originated by Abbey National plc, Abbey
National plc did not re-underwrite those loans.
There can be no assurance that the arrears and repossession experience with
respect to the loans comprising the trust property will correspond to the
experience of Abbey National plc's overall loan portfolio as set forth in the
foregoing table. The statistics in the preceding table represent only the
arrears and repossession experience for the periods presented, whereas the
arrears and repossession experience on the loans in the trust property depends
on results obtained over the life of the loans in the trust property. The
foregoing statistics include loans with a variety of payment and other
characteristics that may not correspond to those of the 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 property falls
below the principal balances of the loans comprising the overall pool, the
actual rates of arrears and repossessions could be significantly higher than
those previously experienced by Abbey National plc. 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 loans in the trust property. Noteholders should observe that the United
Kingdom experienced relatively low and stable interest rates during the periods
covered in the preceding table. If interest rates were to rise, it is likely
that the rate of arrears and repossessions likewise would rise.
Abbey National plc's level of mortgage arrears has been on a downward trend
since the recession in the UK in the early nineties. Between June 1996 and June
1998, interest rate increases, with the reduction of benefits offered by the
mortgage interest relief at source, levelled off this trend. However, the
centralisation of operational responsibility for arrears, a healthy economic
climate and interest rate reductions saw arrears fall by 25 per cent. in 1999,
by a further 10.3 per cent. during 2000, by 18.3 per cent. during 2001, and by
20.1 per cent. during 2002.
House price inflation has indirectly contributed to the improved arrears
situation by enabling borrowers to sell at a profit if they encounter financial
hardship. In the past few years, house price inflation has been above its
historical upward trend line and is expected to moderate. In the late 1980s
house prices rose substantially faster than inflation as housing turnover
increased to record levels. This was at a time when the 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
119
value of the property) in relation to their mortgages. Abbey National plc
regularly reviews its lending policies in the light of prevailing market
conditions and reviews actions so as to mitigate possible problems.
The performance of Abbey National plc new business and the arrears profiles
are monitored monthly against various triggers. Whenever a trigger is exceeded
then the reason is reviewed and acted upon. Over the last few years arrears
management has been centralised and the main collection platform has helped in
achieving the favourable arrears trend. Collections scoring has been introduced
to further increase the targeting of customers in arrears, in order to optimise
on collections performance.
In the current economic environment, it is expected that arrears levels will
remain stable in the short term.
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THE SERVICING AGREEMENT
The following section contains a summary of the material terms of the
servicing agreement. The summary does not purport to be complete and is subject
to the provisions of the servicing agreement, a form of which has been filed as
an exhibit to the registration statement of which this prospectus is a part.
INTRODUCTION
On 26th July, 2000, Abbey National plc was appointed by the mortgages
trustee, Funding and the seller under the servicing agreement to be their agent
to service the loans and their related security and the security trustee
consented to the appointment. Abbey National plc has undertaken that in its
role as servicer it will comply with any proper directions and instructions
that the mortgages trustee, Funding, the seller or the security trustee may
from time to time give to Abbey National plc in accordance with the provisions
of the servicing agreement. The servicer is required to administer the loans in
the following manner:
* in accordance with the servicing agreement; and
* as if the loans and mortgages had not been assigned to the
mortgages trustee but remained with the seller, and in accordance
with the seller's procedures and administration and enforcement
policies as they apply to those loans from time to time.
The servicer's actions in servicing the loans in accordance with its
procedures are binding on the mortgages trustee. The servicer may, in some
circumstances, delegate or sub-contract some or all of its responsibilities and
obligations under the servicing agreement. However, the servicer remains liable
at all times for servicing the loans and for the acts or omissions of any
delegate or sub-contractor. The servicer has delegated some of its
responsibilities and obligations under the servicing agreement as described in
"-- ACTUAL DELEGATION BY THE SERVICER TO JOINT VENTURE WITH EDS".
POWERS
Subject to the guidelines for servicing set forth in the preceding section,
the servicer has the power, among other things:
* to exercise the rights, powers and discretions of the mortgages
trustee, the seller and Funding in relation to the loans and their
related security and to perform their duties in relation to the
loans and their related security; and
* to do or cause to be done any and all other things which it
reasonably considers necessary or convenient or incidental to the
administration of the loans and their related security or the
exercise of such rights, powers and discretions.
UNDERTAKINGS BY THE SERVICER
The servicer has undertaken, among other things, the following:
(A) To maintain approvals, authorisations, consents, and licences
required in order properly to service the loans and their related
security and to perform or comply with its obligations under the
servicing agreement.
(B) To determine and set the mortgages trustee SVR and any variable
margin applicable in relation to any tracker loan in relation to
the loans (including the relevant tracker loans) comprising the
trust property except in the limited circumstances described in
this paragraph (B) when the mortgages trustee will be entitled to
do so. It will not at any time, without the prior consent of the
mortgages trustee, Funding and the security trustee, set or
maintain:
(i) the mortgages trustee SVR at a rate which is higher than
(although it may be lower than) the then prevailing Abbey SVR
which applies to loans beneficially owned by the seller outside
the mortgages trust;
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(ii)a margin in respect of any tracker loan which, where the offer
conditions for that loan provide that the margin shall be the
same as the margin applicable to all other loans having the
same offer conditions in relation to interest rate setting, is
higher than the margin then applying to those loans
beneficially owned by the seller outside the mortgages trust;
and
(iii)a margin in respect of any other tracker loan which is
higher than the margin which would then be set in
accordance with the seller's policy from time to time in
relation to that loan.
In particular, the servicer will determine on each interest payment
date, having regard to:
(a) the income which Funding would expect to receive during the
next succeeding interest period;
(b) the mortgages trustee SVR, any variable margins applicable in
relation to any tracker loans and the variable mortgage rates
in respect of the loans which the servicer proposes to set
under the servicing agreement; and
(c) the other resources available to Funding including the Funding
swap agreement and the reserve funds,
whether Funding would receive an amount of income during that loan interest
period which is less than the amount which is the aggregate of (1) the amount
of interest which will be payable in respect of all term AAA advances on the
interest payment date falling at the end of that loan interest period and (2)
the other senior expenses of Funding ranking in priority to interest due on all
those term AAA advances. If the servicer determines that there will be a
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 the amount of the shortfall and the SVR and any variable margins
applicable in relation to any tracker loans which would, in the servicer's
opinion, need to be set in order for no shortfall to arise, having regard to
the date(s) on which the change to the SVR and any variable margins would take
effect and at all times acting in accordance with the standards of a
reasonable, prudent mortgage lender as regards the competing interests of
borrowers with SVR loans and borrowers with tracker loans. If the mortgages
trustee, Funding and the security trustee notify the servicer that, having
regard to the obligations of Funding, the SVR and/or any variable margins
should be increased, the servicer will take all steps which are necessary to
increase the SVR and/or any variable margins including publishing any notice
which is required in accordance with the mortgage terms.
The mortgages trustee and/or Funding and the security trustee may terminate
the authority of the servicer to determine and set the mortgages trustee SVR
and any variable margins on the occurrence of a "SERVICER TERMINATION EVENT" as
defined under "-- REMOVAL OR RESIGNATION OF THE SERVICER", in which case the
mortgages trustee will set the mortgages trustee SVR and any variable margins
itself in accordance with this paragraph (B) and Abbey National plc will have
the right to make representations to the mortgages trustee with respect to
changes to the variable margin.
(C) To the extent so required by the relevant mortgage terms and
applicable law, to notify borrowers of any change in interest
rates, whether due to a change in the mortgages trustee SVR, the
margin applicable to any tracker loan or as a consequence of any
provisions of the mortgage conditions or the offer conditions. It
will also notify the mortgages trustee, the security trustee and
the beneficiaries of any change in the mortgages trustee SVR.
(D) To execute all documents on behalf of the mortgages trustee, the
seller and Funding which are necessary or desirable for the
efficient provision of services under the servicing agreement.
(E) To keep records and accounts on behalf of the mortgages trustee in
relation to the loans.
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(F) To keep the customer files and title deeds in safe custody and
maintain records necessary to enforce each mortgage. It will ensure
that each title deed is capable of identification and retrieval and
that each title deed is distinguishable from information held by
the servicer for other persons. If the servicer's short-term,
unsecured, unsubordinated and unguaranteed debt is rated less than
A-1 by Standard & Poor's, P-1 by Moody's and F1 by Fitch, it will
use reasonable endeavours to ensure the customer files and title
deeds are located separately from customer files and title deeds
which relate to loans held outside the trust property.
(G) To provide the mortgages trustee, Funding and the security trustee
with access to the title deeds and other records relating to the
administration of the loans and mortgages.
(H) To make available to beneficial owners of the issuer notes, who
have provided the beneficial ownership certification as described
in the servicing agreement, on a monthly basis a report containing
information about the loans in the mortgages trust.
(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.
(J) To take all reasonable steps, in accordance with the usual
procedures undertaken by a reasonable, prudent mortgage lender, to
recover all sums due to the mortgages trustee, including
instituting proceedings and enforcing any relevant loan or
mortgage.
(K) To enforce any loan which is in default in accordance with its
enforcement procedures or, to the extent that the enforcement
procedures are not applicable having regard to the nature of the
default in question, with the usual procedures undertaken by a
reasonable, prudent mortgage lender on behalf of the mortgages
trustee.
(L) To not knowingly fail to comply with any legal requirements in the
performance of its obligations under the servicing agreement.
(M) To ensure that at all times the loans (including the flexible
loans) comply with the terms of the Consumer Credit Act 1974 (to
the extent that such loans are regulated by that Act).
The requirement for any action to be taken according to the standards of a
"REASONABLE, PRUDENT MORTGAGE LENDER" is as defined in the glossary and shall
be satisfied by the servicer taking the relevant action in accordance with the
seller's policy from time to time.
COMPENSATION OF THE SERVICER
The servicer receives a fee for servicing the loans. The mortgages trustee
pays to the servicer a servicing fee of 0.12 per cent. per annum on the
aggregate outstanding amount of the Funding share of the trust property as of
the preceding interest payment date. The fee is payable in arrear on each
distribution date only to the extent that the mortgages trustee has sufficient
funds to pay it. Any unpaid balance will be carried forward until the next
distribution date and, if not paid earlier, will be payable on the final
repayment date of the previous intercompany loans, the issuer intercompany loan
and all new intercompany loans or on their earlier repayment in full by
Funding.
REMOVAL OR RESIGNATION OF THE SERVICER
The mortgages trustee and/or Funding and the security trustee may, upon
written notice to the servicer, terminate the servicer's rights and obligations
immediately if any of the following events (each a "SERVICER TERMINATION
EVENT") occurs:
* the servicer defaults in the payment of any amount due and fails to
remedy that default for a period of three London business days
after becoming aware of the default;
* the servicer fails to comply with any of its other material
obligations under the servicing agreement which in the opinion of
the security trustee is materially prejudicial to noteholders of
the previous issuers, the issuer or any new issuers, respectively
and does not remedy that failure within 20 days after becoming
aware of the failure;
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* an insolvency event (as defined in the glossary) occurs in relation
to the servicer; or
* neither the servicer nor a wholly owned subsidiary of the servicer
is servicing the loans pursuant to the servicing agreement.
Subject to the fulfilment of a number of conditions, the servicer may
voluntarily resign by giving not less than 12 months' notice to the mortgages
trustee and the beneficiaries, provided that a substitute servicer has been
appointed. The substitute servicer is required to have a management team which
has experience of administering mortgages in the United Kingdom and to enter
into a servicing agreement with the mortgages trustee, Funding and the security
trustee substantially on the same terms as the relevant provisions of the
servicing agreement. It is a further condition precedent to the resignation of
the servicer that the current ratings of the issuer notes are not adversely
affected as a result of the resignation, unless the relevant classes of
noteholders otherwise agree by an extraordinary resolution.
If the appointment of the servicer is terminated, the servicer must deliver
the title deeds and customer files relating to the loans to, or at the
direction of, the mortgages trustee. The servicing agreement will terminate
when Funding no longer has an interest in the trust property.
RIGHT OF DELEGATION BY THE SERVICER
The servicer may sub-contract or delegate the performance of its duties
under the servicing agreement, provided that it meets particular conditions,
including that:
* Funding and the security trustee consent to the proposed sub-
contracting or delegation; and
* Funding and the security trustee have no liability for any costs,
charges or expenses in relation to the proposed sub-contracting or
delegation.
The consent of Funding and the security trustee referred to here will not be
required in respect of any delegation to a wholly owned subsidiary of Abbey
National plc from time to time or to persons such as receivers, lawyers or
other relevant professionals.
If the servicer sub-contracts or delegates the performance of its duties, it
will nevertheless remain responsible for the performance of those duties to
Funding, the mortgages trustee and the security trustee.
ACTUAL DELEGATION BY THE SERVICER TO JOINT VENTURE WITH EDS
The seller and Electronic Data Systems Limited ("EDS") established on 2nd
May, 2001 a joint venture arrangement involving two companies: Abbey National
Credit and Payment Services Limited ("ANCAPS") and EDS Credit Services Limited
("ECSL"). The joint venture provides the seller with loan administration
services previously performed by the servicer itself. The seller entered into
this arrangement to generate efficiencies as a result of the utilisation of
more integrated lending systems.
The seller owns 51 per cent. of the voting rights in ANCAPS and EDS owns 49
per cent. The seller holds 100 per cent. of the shares that are entitled to
dividends. The seller owns 25.02 per cent. of the voting rights in ECSL and EDS
owns 74.98 per cent. EDS holds 100 per cent. of the shares that are entitled to
dividends. ANCAPS's registered address is at Abbey National House, 2 Triton
Square, Regent's Place, London NW1 3AN and ECSL's registered address is at
Wavendon Tower, Wavendon, Milton Keynes, Buckinghamshire MK17 8LX. Both
companies are engaged in the purposes of the joint venture. The joint venture
is staffed mainly by former loan administration personnel of the servicer. The
systems used by it include systems provided by the seller.
In accordance with the terms of the servicing agreement, the servicer has,
with the consent of the mortgages trustee and Funding, sub-contracted to the
joint venture the provision of services to the mortgages trustee, Funding and
the seller. However, the servicer remains liable to the mortgages trustee,
Funding and the seller for its obligations (whether performed by it or by the
joint venture) under the servicing agreement.
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From the time when the seller agrees in principle to make a mortgage offer
to a borrower, the joint venture will provide services in connection with the
issue and procuring of the offer and the subsequent administration of the loan.
Some services will involve the joint venture dealing directly with the borrower.
Other services relate to the processing and administering of the loan and the
storing of documents relating to the loan.
The joint venture arrangement does not affect the underwriting procedure
described in "THE LOANS -- CHARACTERISTICS OF THE LOANS -- UNDERWRITING" and
the joint venture services do not include managing of arrears, or enforcement
and handling of relevant insurance claims, both of which remain with the
seller.
Electronic Data Systems Corporation has given the seller an unconditional
and irrevocable guarantee of the joint venture's performance and payment
obligations under the joint venture services agreements and related joint
venture transaction documents.
If ANCAPS performs services in a manner which would result or may result in
the servicer breaching its obligations under the servicing agreement, the
servicer has the right under the joint venture arrangements to take over the
direction, supervision and provision of those services. ANCAPS must provide the
servicer with all necessary information, access, facilities and assistance
necessary for the servicer to exercise those rights.
Upon termination of the joint venture, the seller must transfer to EDS its
shares in ANCAPS and ECSL and ANCAPS must (subject to stated exceptions)
transfer to the seller those staff who are mainly engaged in providing services
to the seller. The termination provisions also provide (a) for the seller to be
granted (subject to a number of exceptions) a perpetual, royalty-free licence
to use any intellectual property rights owned by ECSL which are required for
the provision of equivalent services to the seller and (b) for ANCAPS to use
reasonable endeavours to procure novations to the seller of all contracts
between (i) the joint venture or the EDS group of companies and (ii) third
parties which are required solely for the provision of equivalent services to
the seller.
If any contract between the joint venture and a third party relates to
services provided to the seller and to others, upon termination ANCAPS must use
reasonable endeavours to procure the grant of a sub-licence or partial
assignment to the seller of that contract, if possible, or otherwise consent to
the seller entering into a new contract with that third party. All hardware
exclusively used for providing services to the seller shall, if required by the
seller, be transferred to it.
For a period of up to six months after the termination of the joint venture,
EDS must give the seller such assistance as the seller reasonably requires to
achieve a successful transfer of the services.
The joint venture agreement has an initial term of 10 years, with a
provision for a mutual right to require good faith negotiations of the terms of
an extension for a further period.
LIABILITY OF THE SERVICER
The servicer will indemnify the mortgages trustee and the beneficiaries
against all losses, liabilities, claims, expenses or damages incurred as a
result of negligence or wilful default by the servicer in carrying out its
functions or as a result of a breach of the terms of the servicing agreement.
If the servicer does breach the terms of the servicing agreement and thereby
causes loss to the beneficiaries, then the seller share of the trust property
will be reduced by an amount equal to the loss.
GOVERNING LAW
The servicing agreement is governed by English law.
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ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY
The following section contains a summary of the material terms of the
mortgage sale agreement. The summary 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.
INTRODUCTION
Loans and their related security have been, and will continue to be,
assigned to the mortgages trustee pursuant to the terms of a mortgage sale
agreement which was originally entered into on 26th July, 2000 between the
seller, the mortgages trustee, the security trustee and Funding, amended on
29th November, 2000 and amended and restated on 23rd May, 2001, 5th July, 2001,
8th November, 2001, 7th November, 2002 and on the closing date. The mortgage
sale agreement has six primary functions:
* it provides for the sale of loans;
* it sets out the circumstances under which new loans can be added to
the mortgages trust;
* it provides for the equitable and (in certain circumstances) legal
assignment of the loans to the mortgages trustee;
* it sets out the representations and warranties given by the seller;
* it provides for the repurchase of mortgage accounts and related
security which have loans (1) which are subject to a product switch
or (2) in respect of which a further advance is made or (3) which
cause the seller to be in breach of any of its warranties in
respect of the loans; and
* it provides for drawings in respect of flexible loans contained in
the trust property.
ASSIGNMENT OF THE CURRENT PORTFOLIO OF LOANS AND THEIR RELATED SECURITY TO THE
MORTGAGES TRUSTEE
Under the mortgage sale agreement, on 26th July, 2000 the seller transferred
by way of equitable assignment to the mortgages trustee its interest in a
portfolio of loans, together with all of the related security to those loans.
Further assignments of loans took place on subsequent distribution dates. Full
legal assignment of the loans will be deferred until a later date, as described
under "-- LEGAL ASSIGNMENT OF THE LOANS TO THE MORTGAGES TRUSTEE". On the
closing date, the consideration paid to the seller will have consisted of:
* the sum of [GBP]2,256,000,000 paid by Funding on 26th July, 2000
pursuant to the terms of the mortgage sale agreement (from the
proceeds of the previous intercompany loan made by Holmes Financing
(No. 1) PLC) and a covenant by Funding to pay, at a later date, the
deferred consideration;
* the sum of [GBP]2,404,516,000 paid by Funding on 29th November,
2000 pursuant to the terms of the mortgages trust deed (from the
proceeds of the previous intercompany loan made by Holmes Financing
(No. 2 PLC) and a covenant by Funding to pay, at a later date, the
deferred consideration;
* the sum of [GBP]2,167,000,000 paid by Funding on 23rd May, 2001
pursuant to the terms of the mortgage sale agreement (from the
proceeds of the previous intercompany loan made by Holmes Financing
(No. 3) PLC) and a covenant by Funding to pay, at a later date, the
deferred consideration;
* the sum of [GBP]2,667,000,000 paid by Funding on 5th July, 2001
pursuant to the terms of the mortgages trust deed (from the
proceeds of the previous intercompany loan made by Holmes Financing
(No. 4) PLC and a covenant by Funding to pay, at a later date, the
deferred consideration;
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* the sum of [GBP]2,479,000,000 paid by Funding on 8th November, 2001
pursuant to the terms of the mortgage sale agreement (from the
proceeds of the previous intercompany loan made by Holmes Financing
(No. 5) PLC) and a covenant by Funding to pay, at a later date, the
deferred consideration;
* the sum of [GBP]3,999,221,000 paid by Funding on 7th November, 2002
pursuant to the terms of the mortgage trust deed (from the proceeds
of the previous intercompany loan made by Holmes Financing (No. 6)
PLC) and a covenant by Funding to pay, at a later date, the
deferred consideration;
* the sum of [GBP][2,378,042,000] paid by Funding on the closing date
pursuant to the terms of the mortgage trust deed (from the proceeds
of the issuer intercompany loan) and a covenant by Funding to pay,
at a later date, the deferred consideration; and
* the promise by the mortgages trustee to hold the trust property on
trust for the seller (as to the seller share) and Funding (as to
the Funding share) in accordance with the terms of the mortgages
trust deed.
The deferred consideration is paid in accordance with the priority of
payments set out in "CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE REVENUE
RECEIPTS" and "CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL
RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY OR THE OCCURRENCE OF A
TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER SECURITY". Funding and the seller
(as beneficiaries of the mortgages trust) are not entitled to retain any early
repayment fees received by the mortgages trustee, which, upon receipt and
identification by the servicer, the mortgages trustee returns to the seller.
ASSIGNMENT OF NEW LOANS AND THEIR RELATED SECURITY TO THE MORTGAGES TRUSTEE
The mortgage sale agreement provides that the seller may assign new loans
and their related security to the mortgages trustee, which may have the effect
of increasing or maintaining the overall size of the trust property. New loans
and their related security can only be assigned if certain conditions, as
described in this section, are met. The mortgages trustee will hold the new
loans and their related security on trust for the seller and Funding pursuant
to the terms of the mortgages trust deed.
The consideration for the assignment of the new loans and their new related
security (in all cases at their face value) to the mortgages trustee will
consist of:
* a payment by Funding to the seller of the proceeds of any new term
advance borrowed from a new issuer pursuant to a new intercompany
loan agreement and deferred consideration; and/or
* the promise of the mortgages trustee to hold the trust property
(including the new loans and their related security) on trust for
the seller (as to the seller share) and Funding (as to the Funding
share) in accordance with the terms of the mortgages trust deed.
The assignment of new loans and their related security to the mortgages
trustee will in all cases be subject to the following conditions being
satisfied on the relevant date of assignment ("ASSIGNMENT DATE"):
(A) each new loan complies with the loan warranties set out in the
mortgage sale agreement at the assignment date of that new loan to
the mortgages trustee;
(B) the seller's lending criteria applicable at the time of origination
of the relevant new loan have been applied to the new loan and to
the circumstances of the borrower at the time the new loan was
made;
(C) the total amount of arrears in respect of all the loans in the
mortgages trust, as a percentage of the total amount of gross
interest due to the mortgages trustee during the previous 12 months
on all loans outstanding during all or part of that period, does
not exceed 2 per cent. "ARREARS" for this purpose in respect of a
loan on any date means the aggregate amount overdue on the loan on
that date but only where the aggregate amount overdue equals or
exceeds an amount equal to twice the monthly payments then due on
the loan;
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(D) as at the relevant assignment date, the aggregate outstanding
principal balance of loans in the mortgages trust, in respect of
which the aggregate amount in arrears is more than three times the
monthly payment then due, is less than 5 per cent. of the aggregate
outstanding principal balance of loans in the mortgages trust;
(E) no new loan has on the relevant assignment date an aggregate amount
in arrears which is more than the amount of the monthly payment
then due, and each new loan was made at least three calendar months
prior to the relevant assignment date;
(F) each new loan is secured by a mortgage constituting a valid and
subsisting first charge by way of legal mortgage or (in Scotland)
standard security over the relevant property (except in the case of
some flexible loans in respect of which the mortgage constitutes
valid and subsisting first and second charges by way of legal
mortgage or (in Scotland) standard security over the relevant
property), subject only (in appropriate cases) to registration at
H.M. Land Registry or the Registers of Scotland;
(G) no outstanding principal balance on any new loan is, at the
relevant assignment date, greater than [GBP]350,000;
(H) for so long as amounts are owed by Funding to Holmes Financing (No.
1) PLC under the previous intercompany loan agreement made by
Holmes Financing (No. 1) PLC, no new loan has a final maturity date
beyond July 2038;
(I) each borrower has made at least one full monthly payment in respect
of the relevant new loan;
(J) no event of default under the transaction documents shall have
occurred which is continuing as at the relevant assignment date;
(K) the principal deficiency ledger does not have a debit balance at
the relevant assignment date (for a description of the principal
deficiency ledger, see "CREDIT STRUCTURE -- PRINCIPAL DEFICIENCY
LEDGER");
(L) the mortgages trustee is not aware that the purchase of the
portfolio of new loans on the assignment date would adversely
affect the then current ratings by Moody's, Standard & Poor's or
Fitch of the current notes or any of them;
(M) the short-term, unsecured, unguaranteed and unsubordinated debt
obligations of the seller are rated at least P-1 by Moody's, A-1 by
Standard & Poor's and F1 by Fitch at the time of, and immediately
following, the assignment of new loans to the mortgages trustee;
(N) except where Funding is paying amounts to the mortgages trustee in
consideration of new loans to be assigned to it, the aggregate
outstanding principal balance (excluding arrears of interest (as
defined in the glossary)) of new loans transferred in any one
interest period does not exceed [15] per cent. of the aggregate
outstanding principal balance of loans (excluding arrears of
interest) in the mortgages trust as at the beginning of that
interest period;
(O) the assignment of new loans on the relevant assignment date does
not result in the product of the weighted average repossession
frequency ("WAFF") and the weighted average loss severity ("WALS")
for the loans constituting the mortgages trust after such purchase
calculated on such assignment date in the same way as for the loans
constituting the mortgages trust as at the initial closing date (or
as agreed by the servicer and the rating agencies from time to
time) exceeding the product of the WAFF and WALS for the loans
constituting the mortgages trust calculated on the most recent
previous closing date, plus 0.25 per cent.;
(P) the yield on the loans in the mortgages trust together with the new
loans to be assigned to the mortgages trustee on the relevant
assignment date is not less than LIBOR for three-month sterling
deposits plus 0.8 per cent., taking into account the average yield
on the loans which are variable rate loans, tracker loans and fixed
rate loans and the margins on the Funding swap and amounts standing
to the credit of the second reserve fund, in each case as at the
relevant assignment date;
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(Q) the assignment of new loans on the relevant assignment date does
not result in the loan-to-value ratio of the loans and the new
loans, after application of the LTV test on the relevant assignment
date, exceeding the loan-to-value ratio (based on the LTV test), as
determined in relation to the loans constituting the trust property
on the most recent previous closing date, plus 0.25 per cent.;
(R) the assignment of new loans on the relevant assignment date does
not result in the loans (other than fixed-rate loans) with a
discount of more than 0.8 per cent. to the stabilised rate as at
the relevant assignment date that have more than two years
remaining on their incentive period in aggregate accounting for
more than 20 per cent. of the aggregate outstanding principal
balance of loans constituting the trust property;
(S) no assignment of new loans may occur after the interest payment
date falling in October 2010 if the option to redeem the previous
notes issued by Holmes Financing (No. 1) PLC on the interest
payment date in July 2010 pursuant to condition number 5 of the
terms and conditions of those previous notes is not exercised; and
(T) the first reserve fund has not been debited on or prior to the
relevant assignment date for the purposes of curing a principal
deficiency in respect of the term BBB advances and/or current term
A advances and/or the current term AA advances and where the first
reserve fund has not been replenished by a corresponding amount by
the relevant assignment date.
In the mortgage sale agreement, the seller promises to use all reasonable
efforts to offer to assign to the mortgages trustee, and the mortgages trustee
promises to use all reasonable efforts to acquire from the seller and hold in
accordance with the terms of the mortgages trust deed, until the earlier of the
interest payment date falling in [April 2004] (or a later date as may be
notified by Funding) and the occurrence of a trigger event, sufficient new
loans and their related security so that the aggregate outstanding principal
balance of loans in the mortgages trust is not less than [GBP][21] billion (or
another amount notified by Funding to the seller), as well as to acquire from
the seller and hold in accordance with the terms of the mortgages trust deed,
until the earlier of the interest payment date falling in [July 2006] (or a
later date as may be notified by Funding) and the occurrence of a trigger
event, sufficient new loans and their related security so that the aggregate
outstanding principal balance of loans in the mortgages trust is not less than
[GBP][14] billion as well as to acquire from the seller and hold in accordance
with the terms of the mortgages trust deed, until the earlier of the interest
payment date falling in [July 2010] (or a later date as may be notified by
Funding) and the occurrence of a trigger event, sufficient new loans and their
related security so that the aggregate outstanding principal balance of the
loans in the mortgages trust is not less than [GBP][2.5] billion (or another
amount notified by Funding to the seller). However, the seller is not obliged
on any distribution date to assign to the mortgages trustee, and the mortgages
trustee is not obliged to acquire, new loans and their related security if, in
the opinion of the seller, that 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 outstanding principal balance of loans in the mortgages trust at a
specified level prior to a trigger event may be extended.
LEGAL ASSIGNMENT OF THE LOANS TO THE MORTGAGES TRUSTEE
The English loans in the current portfolio were assigned, and any new
English loans will be assigned, to the mortgages trustee by way of equitable
assignment. The transfer of the beneficial interest in the Scottish loans in
the current portfolio to the mortgages trustee has been given effect by a
declaration of trust by the seller, and the transfer of the beneficial interest
in any new Scottish loans will be given effect by further declarations of trust
(and in relation to Scottish loans, references in this prospectus to the
"ASSIGNMENT" of loans are to read as references to the making of such
declarations of trust). In each case this means that legal title to the loans
and their related security remains with the seller until notice of the
assignment is given by the seller to the borrowers. Legal assignment of the
loans and their related security (including, where appropriate, their
registration) to the mortgages trustee will remain deferred, save in the
limited circumstances described in this section. See "RISK FACTORS -- THERE MAY
BE RISKS ASSOCIATED WITH THE FACT THAT
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THE MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGES, WHICH MAY ADVERSELY
AFFECT PAYMENTS ON THE ISSUER NOTES" and "RISK FACTORS -- SET-OFF RISKS IN
RELATION TO FLEXIBLE LOANS AND DELAYED CASHBACKS MAY ADVERSELY AFFECT THE FUNDS
AVAILABLE TO THE ISSUER TO REPAY THE ISSUER NOTES".
Legal assignment of the loans and their related security to the mortgages
trustee will be completed on the fifth London business day after the earliest
of the following:
(A) the service of an intercompany loan enforcement notice in relation
to any intercompany loan or a note enforcement notice in relation
to any notes of the previous issuer, the issuer or any new issuer;
(B) the seller being required, by an order of a court of competent
jurisdiction, or by a regulatory authority of which the seller is a
member or any organisation whose members comprise, but are not
necessarily limited to, mortgage lenders with whose instructions it
is customary for the seller to comply, to perfect legal title to
the mortgages;
(C) it being rendered necessary by law to take any of those actions;
(D) the security under the Funding deed of charge or any material part
of that security being in jeopardy and the security trustee
deciding to take that action to reduce materially that jeopardy;
(E) unless otherwise agreed by the rating agencies and the security
trustee, the termination of the seller's role as servicer under the
servicing agreement;
(F) the seller requesting that transfer by notice to the mortgages
trustee, Funding and the security trustee;
(G) the date on which the seller ceases to be assigned a long-term
unsecured, unsubordinated debt obligation rating by Moody's of at
least Baa3 or by Standard & Poor's of at least BBB- or by Fitch of
at least BBB-; and
(H) the latest of the last repayment dates of the issuer intercompany
loan, the previous intercompany loans and any new intercompany
loans.
Pending completion of the transfer, the right of the mortgages trustee to
exercise the powers of the legal owner of the mortgages has been secured by an
irrevocable power of attorney granted by the seller in favour of the mortgages
trustee, Funding and the security trustee.
The title deeds and customer files relating to the 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 loans and their related security. The
seller has undertaken that all the title deeds and customer files relating to
the loans which are at any time in its possession or under its control or held
to its order be held to the order of the mortgages trustee.
REPRESENTATIONS AND WARRANTIES
Neither the mortgages trustee, Funding, the security trustee nor the issuer
has made or has caused to be made on its behalf any enquiries, searches or
investigations in respect of the loans and their related security. Instead,
each is relying entirely on the representations and warranties by the seller
contained in the mortgage sale agreement. The parties to the mortgage sale
agreement may, with the prior consent of the security trustee (which consent
shall be given if the rating agencies confirm to it and to the issuer that the
ratings of the notes as at that time will not be adversely affected as a
result), amend the representations and warranties in the mortgage sale
agreement. The material representations and warranties are as follows:
* each loan was originated by the seller in pounds sterling and is
denominated in pounds sterling (or was originated and is
denominated in euro if the euro has been adopted as the lawful
currency of the UK);
* each loan in the current portfolio was made not earlier than 1st
August, 1995 and not later than 31st December, 1999 (as regards
those loans assigned to the mortgages trustee on 26th July, 2000)
or three calendar months before the relevant assignment date (as
regards those loans assigned to the mortgages trustee after 26th
July, 2000);
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* no loan has an outstanding principal balance of more than
[GBP]350,000;
* prior to the making of each advance under a loan, the lending
criteria and all preconditions to the making of any loan were
satisfied in all material respects subject only to exceptions as
would be acceptable to a reasonable, prudent mortgage lender;
* other than with respect to monthly payments, no borrower is or has,
since the date of the relevant mortgage, been in material breach of
any obligation owed in respect of the relevant loan or under the
related security and accordingly no steps have been taken by the
seller to enforce any related security;
* the total amount of arrears of interest or principal, together with
any fees, commissions and premiums payable at the same time as that
interest payment or principal repayment, on any loan is not on the
assignment date more than the monthly payment payable in respect of
that loan in respect of the month in which that assignment date
falls and has at no date in the past been more than two times the
then monthly payment payable in respect of that loan;
* all of the borrowers are individuals;
* each borrower has made at least one monthly payment;
* the whole of the outstanding principal balance on each loan and any
arrears of interest and all accrued interest is secured by a
mortgage;
* each mortgage constitutes a valid and subsisting first charge by
way of legal mortgage or (in Scotland) standard security over the
relevant property, except in the case of some flexible loans in
respect of which a mortgage may constitute a valid and subsisting
first and second charge by way of legal mortgage or standard
security over the relevant property, and subject only in certain
appropriate cases to applications for registrations at H.M. Land
Registry or the Registers of Scotland;
* all of the properties are in England, Wales or Scotland;
* not more than six months (or a longer period as may be acceptable
to a reasonable, prudent mortgage lender) prior to the grant of
each mortgage (excluding mortgages granted in relation to flexible
loans as a result of that loan being the subject matter of a
product switch to that flexible loan), the seller received a
valuation report on the relevant property (or another form of
valuation concerning the relevant property as would be acceptable
to a reasonable, prudent mortgage lender), the contents of which
were such as would be acceptable to a reasonable, prudent mortgage
lender;
* the benefit of all valuation reports, any other valuation report
referred to in this section (if any) and certificates of title can
be validly assigned to the mortgages trustee without obtaining the
consent of the relevant valuer, solicitor or licensed or qualified
conveyancer;
* prior to the taking of each mortgage (excluding mortgages granted
in relation to flexible loans as a result of that loan being the
subject matter of a product switch to that flexible loan), the
seller instructed its solicitor or licensed or qualified
conveyancer (A) to carry out an investigation of title to the
relevant property and to undertake other searches, investigations,
enquiries and other actions on behalf of the seller as are set out
in the General Instructions to Solicitors or the CML's Lenders'
Handbook for England & Wales or Scotland contained in the standard
documentation (or other comparable or successor instructions and/or
guidelines as may for the time being be in place), subject only to
those variations as would be acceptable to a reasonable, prudent
mortgage lender or (B) in the case of a remortgage to carry out a
more limited form of investigation of title for properties located
in England, Wales and Scotland, in particular in the case of
registered land in England and Wales (e.g. confirming that the
borrower is the registered proprietor of the property and the
description of the property corresponds with the entries on H.M.
Land Registry's register) and confirming such other matters as are
required by a reasonable prudent mortgage lender;
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* insurance cover for each property is or will at all relevant times
be available under either a policy arranged by the borrower or an
Abbey National plc policy or a seller-introduced insurance policy
or a policy arranged by the relevant landlord or the properties in
possession policy;
* where applicable, the MIG policies are in full force and effect in
relation to the portfolio and all premiums have been paid;
* the seller has good title to, and is the absolute unencumbered
legal and beneficial owner of, all property, interests, rights and
benefits agreed to be sold by the seller to the mortgages trustee
under the mortgage sale agreement;
* the seller has, since the making of each loan, kept or procured the
keeping of full and proper accounts, books and records showing
clearly all transactions, payments, receipts, proceedings and
notices relating to such loan; and
* there are no authorisations, approvals, licences or consents
required as appropriate for the seller to enter into or to perform
the obligations under the mortgage sale agreement or to make the
mortgage sale agreement legal, valid, binding and enforceable.
REPURCHASE OF LOANS UNDER A MORTGAGE ACCOUNT
Under the mortgage sale agreement, if a loan does not materially comply on
the assignment date with the representations and warranties made under the
mortgage sale agreement:
(A) the seller is required to remedy the breach within 20 days of the
seller being given written notice of such breach by the mortgages
trustee; or
(B) if the breach is not remedied within the 20-day period then, at the
direction of Funding and the security trustee, the mortgages
trustee will require the seller to purchase the loan or loans under
the relevant mortgage account and their related security from the
mortgages trustee at a price equal to their outstanding principal
balances, together with any arrears of interest and accrued
interest and expenses to the date of purchase.
The seller is also required to repurchase the loan or loans under any
mortgage account and their related security if a court, tribunal or any
ombudsman makes any determination in respect of any loan and its related
security that:
(C) any material term which relates to the recovery of interest under
the standard documentation applicable to that loan and its related
security is unfair; or
(D) the treatment of any borrower in relation to the interest payable
by that borrower under any loan is unfair; or
(E) the interest payable under any loan is to be set by reference to
the Abbey SVR (and not that of its successors or assigns or those
deriving title from them) and at any time on or after the
determination the Abbey SVR shall be below or shall fall below the
SVR set by those successors or assigns or those deriving title from
them; or
(F) the variable margin under any tracker loan must be set by the
seller (rather than by its successors or assigns or those deriving
title from them); or
(G) the interest payable under any loan is to be set by reference to an
interest rate other than that set or purported to be set by either
the servicer or the mortgages trustee as a result of the seller
having more than one variable mortgage rate; or
(H) a borrower should be or should have been offered the opportunity to
switch to an interest rate other than that required by the servicer
or the mortgages trustee for that borrower as a result of the
seller having more than one variable rate; or
(I) there has been a breach of or non-observance or non-compliance with
any obligation, undertaking, covenant or condition on the part of
the seller relating to the interest payable by or available to a
borrower under any loan.
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If the seller fails to pay the consideration due for the repurchase (or
otherwise fails to complete the repurchase), then the seller share of the trust
property shall be deemed to be reduced by an amount equal to that
consideration.
DRAWINGS UNDER FLEXIBLE LOANS
The seller is solely responsible for funding all future drawings in respect
of flexible loans contained in the trust property. The amount of the seller's
share of the trust property will increase by the amount of the drawing.
PRODUCT SWITCHES AND FURTHER ADVANCES
If a loan is subject to a product switch or an offer of a further advance,
then the seller is required to repurchase the loan or loans under the relevant
mortgage account and the related security from the mortgages trustee at a price
equal to their aggregate outstanding principal balances together with any
arrears of interest and accrued interest and expenses to the date of purchase.
A loan will be subject to a "PRODUCT SWITCH" if the borrower and the seller
agree or the servicer offers a variation in the financial terms and conditions
applicable to the relevant borrower's loan other than:
* any variation agreed with a borrower to control or manage arrears
on the loan;
* any variation in the maturity date of the loan unless, while the
previous intercompany loan made by Holmes Financing (No. 1) PLC is
outstanding, it is extended beyond July 2038;
* any variation imposed by statute;
* any variation of the principal available and/or the rate of
interest payable in respect of the loan where that rate is offered
to the borrowers of more than 10 per cent. by outstanding principal
amount of loans in the trust property in any interest period; or
* any variation in the frequency with which the interest payable in
respect of the loan is charged.
For these purposes only, a loan is subject to a "FURTHER ADVANCE" if an
existing borrower requests a further amount to be lent to him or her under the
mortgage in circumstances where the servicer has a discretion to make that
further amount available to the relevant borrower and it grants that request.
However, any drawings pursuant to a flexible loan shall not be a further
advance for these purposes.
REASONABLE, PRUDENT MORTGAGE LENDER
Reference in the documents to the seller and/or the servicer acting to the
standard of a reasonable, prudent mortgage lender mean the seller and/or the
servicer, as applicable, acting in accordance with the seller's policy from
time to time.
GOVERNING LAW
The mortgage sale agreement is governed by English law (other than certain
aspects relating to the Scottish loans and their related security which are
governed by Scots law).
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THE MORTGAGES TRUST
The following section contains a summary of the material terms of the
mortgages trust deed. The summary does not purport to be complete and is
subject to the provisions of the mortgages trust deed, a form of which has been
filed as an exhibit to the registration statement of which this prospectus is a
part.
GENERAL LEGAL STRUCTURE
The mortgages trust 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 for the financings of the previous issuers, for
the financings described in this prospectus and for the financings of new
issuers and Funding 2. This section describes the material terms of the
mortgages trust, including how money is distributed from the mortgages trust to
Funding and the seller.
This section describes the material terms of the mortgages trust, including
how money is distributed from the mortgages trust to Funding and the seller. If
new issuers are established or Funding 2 becomes a beneficiary of the mortgages
trust (subject to the agreement of the seller and Funding) or new types of
loans are added to the mortgages trust, then the terms of the mortgages trust
will be amended. Such amendments may affect the timing of payments on the
notes. The prior consent of noteholders will not be sought in relation to any
of the proposed amendments to the mortgages trust deed, provided (amongst other
things) that the rating agencies confirm that the ratings of the existing notes
will not be adversely affected by such amendments. There can be no assurance
that the effect of any such amendments will not ultimately adversely affect
your interests.
Under the terms of the mortgages trust deed, the mortgages trustee holds all
the trust property on trust absolutely for Funding (as to Funding's share) and
for the seller (as to the seller's share). The "TRUST PROPERTY" is:
* the sum of [GBP]100 settled by SPV Management Limited on trust on
the date of the mortgages trust deed;
* the current portfolio of loans and their related security assigned
to the mortgages trustee by the seller;
* any new loans and their related security assigned to the mortgages
trustee by the seller after the closing date;
* any drawings under flexible loans;
* any interest and principal paid by borrowers on their loans;
* any other amounts received under the loans and related security
excluding third party amounts;
* rights under the MIG policies; and
* amounts on deposit (and interest earned on those amounts) in the
mortgages trustee GIC account and in the alternative accounts
less
* any actual losses in relation to the loans and any actual
reductions occurring in respect of the loans as described in
paragraph (1) in "-- FUNDING SHARE OF TRUST PROPERTY" below; and
* distributions of principal made from time to time to the
beneficiaries of the mortgages trust.
Funding is not entitled to particular loans and their related security
separately from the seller; rather each of them has an undivided interest in
all of the loans and their related security constituting the trust property.
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The aggregate outstanding principal balance of the loans in the trust
property will be approximately [GBP][24,000,000,000]. The actual Funding share,
seller share, Funding share percentage and seller share percentage will not be
determined until the day prior to the closing date.
FLUCTUATION OF THE SELLER'S SHARE/FUNDING'S SHARE OF THE TRUST PROPERTY
Funding's share and the seller's share of the trust property fluctuates
depending on a number of factors including:
* the allocation of principal receipts on the loans to Funding and/or
the seller;
* losses arising on the loans;
* if new loans and their related security are assigned to the
mortgages trustee;
* if Funding acquires part of the seller's share of the trust
property from the seller (as described under "-- ACQUISITION BY
FUNDING OF A FURTHER INTEREST IN THE TRUST PROPERTY");
* if a borrower makes a drawing under a flexible loan;
* if a borrower makes underpayments or takes payment holidays under a
flexible loan; and
* if the seller acquires part of Funding's share of the trust
property, as described in "ACQUISITION BY THE SELLER OF A FURTHER
INTEREST IN THE TRUST PROPERTY" below.
The Funding share and the seller share are recalculated by the cash manager
on each distribution date. A distribution date is the eighth day (or, if not a
London business day, the next succeeding London business day) of each month or
the date on which Funding acquires a further interest in the trust property.
The recalculation is based on the total outstanding principal balance of the
loans in the trust property as at the close of business on the second London
business day immediately preceding the relevant distribution date. The period
from (and including) one distribution date, to (but excluding) the next
distribution date, is known as a "DISTRIBUTION PERIOD". The first distribution
period in respect of this issue will be the period from (and including) the
closing date to (but excluding) 8th April, 2003.
The reason for the recalculation is to determine the new percentage shares
of Funding and the seller in the trust property. The percentage share that each
of Funding and the seller has in the trust property determines their
entitlement to interest and principal receipts from the loans in the trust
property and also the allocation of losses arising on the loans. The method for
determining those new percentage shares is set out in the next two sections.
FUNDING SHARE OF THE TRUST PROPERTY
On each distribution date and the date when the mortgages trust terminates
(each case also referred to in this section as the "RELEVANT DISTRIBUTION
DATE"), the interest of Funding in the trust property is recalculated in
accordance with the following formula:
* The current share of Funding in the trust property is an amount
equal to:
A -- B -- C + D + E + F
* The current percentage share of Funding in the trust property is an
amount equal to:
A -- B -- C + D + E + F
----------------------- x 100
G
in the latter case expressed as a percentage and rounded upwards to five
decimal places,
where:
A = the amount of the share of Funding in the trust property on the
immediately preceding distribution date;
135
B = the amount of any principal receipts on the loans to be 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 loans in the period from the
last distribution date to the relevant distribution date and
allocated to Funding in the distribution period ending on the
relevant distribution date according to Funding's percentage share
at the previous distribution date;
D = the amount of any consideration (excluding deferred consideration)
to be paid by Funding to the seller with respect to any new loans
assigned to the mortgages trustee on the relevant distribution
date;
E = the amount of any consideration (excluding deferred consideration)
paid by Funding to the seller in relation to the acquisition by
Funding from the seller on the relevant distribution date of an
interest in the trust property;
F = the amount equal to Funding's share of any capitalised interest
accruing on a flexible loan due to borrowers taking payment
holidays or making underpayments since the last distribution date
less the amount to be paid by the seller to Funding on the relevant
distribution date in an amount up to but not exceeding Funding's
share of that capitalised interest as described in "ACQUISITION BY
THE SELLER OF A FURTHER INTEREST IN THE TRUST PROPERTY" below; and
G = the aggregate outstanding principal balance of all the loans in the
trust property as at the relevant distribution date including after
making the distributions, allocations and additions referred to in
"B", "C", "D", "E" and "F", taking account of (i) any distribution
of principal receipts to Funding and the seller, (ii) the amount of
any losses allocated to Funding and the seller, (iii) any increase
in the loan balances due to borrowers taking payment holidays and/
or making underpayments under flexible loans, (iv) the adjustments
referred to in paragraphs (1) to (5) in this section and (v) the
amount of any other additions or subtractions to the trust
property.
If any of the following events occurs during a distribution period, then the
aggregate total outstanding principal balance of the loans in the trust
property is reduced or deemed to be reduced for the purposes of the calculation
of "G":
(1) any borrower exercises a right of set-off so that the amount of
principal and interest owing under a loan is reduced but no
corresponding payment is received by the mortgages trustee. In this
event, the aggregate outstanding principal balance of the loans in
the trust property is reduced by an amount equal to the amount of
that set-off; and/or
(2) a 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 or other obligation
of the seller to repurchase, and in each case the seller fails to
repurchase the loan or loans under the relevant mortgage account
and their related security to the extent required by the terms of
the mortgage sale agreement. In this event, the aggregate
outstanding principal balance of the loans in the trust property is
deemed to be reduced for the purposes of the calculation in "G" by
an amount equal to the outstanding principal balance of the
relevant loan or loans under the relevant mortgage account
(together with arrears of interest and accrued interest); and/or
(3) the seller would be required to repurchase a loan and its related
security as required by the terms of the mortgage sale agreement,
but the loan is not capable of being repurchased. In this event,
the aggregate outstanding principal balance of the loans in the
trust property is deemed to be reduced for the purposes of the
calculation in "G" by an amount equal to the outstanding principal
balance of the relevant loan or loans under the relevant mortgage
account (together with arrears of interest and accrued interest);
and/or
136
(4) the seller materially breaches any other obligation or warranty
under the mortgage sale agreement and/or (for so long as the seller
is the servicer) the servicing agreement, which is also grounds for
terminating the appointment of the servicer. In this event, the
aggregate outstanding principal balance of the loans in the trust
property is deemed to be reduced by an amount equal to the
resulting loss incurred by the beneficiaries; and/or
(5) the seller share of the mortgages trustee revenue receipts is less
than the loss amount payable to the mortgage trustee and/or
Funding. In this event, the trust property is deemed to be reduced
for the purposes of the calculation in "G" by an amount equal to
the shortfall in the loss amount. The "loss amount" means any
costs, losses or other claims suffered by the mortgages trustee
and/or Funding as a result of any of the matters listed at (C) to
(I) (inclusive) in "ASSIGNMENT OF THE LOANS AND THEIR RELATED
SECURITY -- REPURCHASE OF THE LOANS UNDER A MORTGAGE ACCOUNT" and
where such costs, losses or other claims are in connection with any
recovery of interest on the loans to which the seller, the
mortgages trustee or Funding was not entitled or could not enforce.
The reductions set out in paragraphs (1) to (5) are made to the seller's
share of the trust property only.
Any subsequent recoveries in respect of loans which have been subject to a
set-off (as set out in paragraph (1)) belong to the seller (and to the extent
received by the mortgages trustee will be returned to the seller).
SELLER SHARE OF THE TRUST PROPERTY
The current share of the seller in the trust property is an amount equal to:
the total amount of trust property -- current Funding share.
The current percentage share of the seller in the trust property is an
amount equal to:
100 per cent. -- current Funding percentage share.
Neither the Funding share nor the seller share of the trust property may be
reduced below zero.
MINIMUM SELLER SHARE
The seller's 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 [GBP]960,000,000, but the amount of the minimum seller share
fluctuates depending on changes to the characteristics of the loans in the
trust property. The seller is not 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
is in an amount equal to zero or an asset trigger event occurs. The minimum
seller share is the amount determined on each distribution date in accordance
with the following formula:
X + Y + Z
where:
X = 4.0 per cent. of the aggregate outstanding principal balance of
loans in the trust property;
Y = the product of: p, q and r where:
p = 8.0 per cent.;
q = the "FLEXIBLE DRAW CAPACITY", being an amount equal to the
excess of (1) the maximum amount that borrowers may draw under
flexible loans included in the trust property (whether or not
drawn) over (2) the aggregate principal balance of actual
flexible loan advances in the trust property on the relevant
distribution date; and
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r = 3; and
Z = the aggregate sum of reductions deemed made (if any) in accordance
with paragraphs (2), (3) and (4) as described in "-- FUNDING SHARE
OF TRUST PROPERTY" above.
The purpose of "X" is to mitigate the risks relating to the loans (see "RISK
FACTORS -- THERE MAY BE RISKS ASSOCIATED WITH THE FACT THAT THE MORTGAGES
TRUSTEE HAS NO LEGAL TITLE TO THE MORTGAGES, WHICH MAY ADVERSELY AFFECT
PAYMENTS ON THE ISSUER NOTES"). The purpose of the calculation in "Y" is to
mitigate the risk of the seller failing to fund a drawing under a flexible
loan. The purpose of the calculation in "Z" is to mitigate the risk of the
seller not repurchasing loans where the interest rate is set lower than the
Abbey SVR.
CASH MANAGEMENT OF TRUST PROPERTY -- INTEREST RECEIPTS
Under the cash management agreement, the cash manager is responsible for
distributing interest 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 APPLICATION OF REVENUE RECEIPTS
"MORTGAGES TRUST AVAILABLE REVENUE RECEIPTS" is calculated by the cash
manager two London business days prior to each distribution date and is an
amount equal to the sum of:
* revenue receipts on the loans (but excluding principal receipts);
and
* interest payable to the mortgages trustee on the mortgages trustee
GIC account and on the alternative accounts;
less
* amounts due to third parties (also known as "THIRD PARTY AMOUNTS")
including:
(1) payments of high loan-to-value fees due to the seller;
(2) amounts under a direct debit which are repaid to the bank
making the payment if that bank is unable to recoup that amount
itself from its customer's account;
(3) payments by borrowers of early repayment fees and other charges
which are due to the seller; or
(4) recoveries in respect of loans which have been subject to a
set-off as described in paragraph (1) of "FUNDING SHARE OF
TRUST PROPERTY" above,
which amounts may be paid daily from monies on deposit in the mortgages
trustee GIC account or, as applicable, the alternative accounts.
On each distribution date, the cash manager applies mortgages trust
available revenue receipts in the following order or priority (the "MORTGAGES
TRUST APPLICATION OF REVENUE RECEIPTS"):
(A) in no order of priority between them but in proportion to the
respective amounts due, to pay amounts due to:
* the mortgages trustee under the provisions of the mortgages
trust deed; and
* third parties from the mortgages trustee in respect of the
mortgages trust but only if:
(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 due to the servicer or to become due to the
servicer during the following distribution period under the
provisions of the servicing agreement; and
(C) in no order of priority between them but in proportion to the
respective amounts due, to allocate and pay the remaining mortgages
trust available revenue receipts to:
138
* Funding in an amount determined by multiplying the total amount
of the remaining mortgages trust available revenue receipts by
Funding's percentage share of the trust property (as determined
on the prior distribution date); and
* the seller in an amount equal to the mortgages trust available
revenue receipts remaining after determining Funding's share of
the mortgages trust available revenue receipts.
Amounts due to the mortgages trustee and the servicer are inclusive of value
added tax payable under English tax law. At the date of this prospectus, value
added tax (or "VAT") is calculated at the rate of 17.5 per cent. of the amount
to be paid. Payment of VAT reduces the amounts ultimately available to pay
interest on the issuer notes.
CASH MANAGEMENT AND ALLOCATION OF TRUST PROPERTY -- PRINCIPAL RECEIPTS
Under the cash management agreement, the cash manager is also responsible
for allocating and 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. The cash accumulation period will
be calculated separately for each bullet term advance. To understand how the
cash manager distributes principal receipts on the loans on each distribution
date you need to understand the following definitions:
"CASH ACCUMULATION PERIOD" means the period beginning on the earlier of:
* the commencement of the anticipated cash accumulation period; and
* four months prior to the scheduled repayment date of the relevant
bullet amount;
and ending when Funding has accumulated an amount equal to the relevant
bullet amount for payment to the issuer (as shown on the cash accumulation
ledger).
"ANTICIPATED CASH ACCUMULATION PERIOD" means the anticipated number of
months required to accumulate sufficient principal receipts to pay the relevant
bullet amount, which is equal to:
J + K -- L
----------
MN (O -- P)
calculated in months and rounded up to the nearest whole number, where:
J = the relevant bullet amount (as defined later in this section);
K = the aggregate principal amount outstanding of any bullet amount
and/or scheduled amortisation amount that was not fully repaid on
its scheduled repayment date, plus any other bullet amount and/or
scheduled amortisation amount the scheduled repayment date of which
falls on or before the scheduled repayment date of the relevant
bullet amount;
L = the amount of any available cash already standing to the credit of
the cash accumulation ledger;
M = the principal payment rate (as defined later in this section);
N = 0.90;
O = the aggregate outstanding principal balance of the loans comprising
the trust property; and
P = the principal amount outstanding of any pass-through current term
advance (and, as the case may be, any new term advance which is a
pass-through term advance) which is then due and payable.
"RELEVANT BULLET AMOUNT" means:
* in respect of the issuer series 2 term AAA advance, the sum of
[GBP]789,640,000;
* in respect of the previous series 2 term AAA advance made by Holmes
Financing (No. 6) PLC, the sum of [GBP]801,077,000;
139
* in respect of the previous series 3 term AAA advance made by Holmes
Financing (No. 6) PLC, the sum of [GBP]633,500,000;
* in respect of the previous series 4A1 term AAA advance made by
Holmes Financing (No. 6) PLC, the sum of [GBP]641,026,000;
* in respect of the previous series 4A2 term AAA advance made by
Holmes Financing (No. 6) PLC, the sum of [GBP]129,230,000;
* in respect of the previous series 2A1 term AAA advance made by
Holmes Financing (No. 5) PLC, the sum of [GBP]527,500,000;
* in respect of the previous series 2A2 term AAA advance made by
Holmes Financing (No. 5) PLC, the sum of [GBP]170,000,000;
* in respect of the previous series 3A1 term AAA advance made by
Holmes Financing (No. 5) PLC, the sum of [GBP]375,000,000;
* in respect of the previous series 2 term AAA advance made by Holmes
Financing (No. 4) PLC, the sum of [GBP]490,000,000;
* in respect of the previous series 4 term AAA advance made by Holmes
Financing (No. 4) PLC, the sum of [GBP]350,000,000;
* in respect of the previous series 2 term AAA advance made by Holmes
Financing (No. 3) PLC, the sum of [GBP]750,000,000;
* in respect of the previous series 1 term AAA advance made by Holmes
Financing (No. 2) PLC, the sum of [GBP]703,000,000;
* in respect of the previous series 1 term AAA advance made by Holmes
Financing (No. 1) PLC, the sum of [GBP]600,000,000;
* in respect of the previous series 2 term AAA advance made by Holmes
Financing (No. 1) PLC, the sum of [GBP]650,000,000;
* in respect of the previous series 3 term AAA advance made by Holmes
Financing (No. 1) PLC, the sum of [GBP]575,000,000;
* in respect of the previous series 4 term AAA advance made by Holmes
Financing (No. 1) PLC, the sum of [GBP]250,000,000; or
* in respect of any new term advance scheduled for repayment in full
on one scheduled interest payment date, the principal amount of
that new term advance.
A "PRINCIPAL PAYMENT RATE" means the average monthly rolling principal
payment rate on the loans for the 12 months immediately preceding the relevant
distribution date, calculated on each payment rate date. The principal payment
rate is calculated by:
* dividing (1) the aggregate principal receipts received in relation
to the loans during the payment rate period ending on the payment
rate date which is the same as or, if not the same, immediately
preceding, the relevant distribution date by (2) the aggregate
outstanding principal balance of the loans on the previous payment
rate date;
* aggregating the result of the foregoing calculation with the
results of the equivalent calculation made on each of the eleven
most recent prior distribution dates during the relevant twelve
month period; and
dividing the aggregated result by 12.
A "PAYMENT RATE DATE" is the eighth day (or, if not a London business day,
the next succeeding London business day) of each month.
A "PAYMENT RATE PERIOD" is the period from and including a payment rate date
to but excluding the next payment rate date.
"SCHEDULED AMORTISATION AMOUNT" means:
* in respect of the issuer series 1 term AAA advance, the sum of
[GBP]236,890,000 due on each of the two scheduled repayment dates
of the issuer series 1 term AAA advance;
140
* in respect of the issuer series 3 term AAA advance, the sum of
[GBP]157,928,000 due on each of the two scheduled repayment dates
of the issuer series 3 term AAA advance;
* in respect of the previous series 1 term AAA advance made by Holmes
Financing (No. 6) PLC, the sum of [GBP]480,646,000 due on each of
the two scheduled repayment dates of the previous series 1 term AAA
advance;
* in respect of the previous series 1 term AAA advance made by Holmes
Financing (No. 5) PLC, the sum of [GBP]352,000,000 due on each of
the two scheduled repayment dates of the previous series 1 term AAA
advance;
* in respect of the previous series 1 term AAA advance made by Holmes
Financing (No. 4) PLC, the sum of [GBP]191,250,000 due on each of
the four scheduled repayment dates of the previous series 1 term
AAA advance;
* in respect of the previous series 2 term AAA advance made by Holmes
Financing (No. 2) PLC, the sum of [GBP]175,750,000 due on each of
the four scheduled repayment dates of that previous series 2 term
AAA advance; and
* in respect of the previous series 3 term AAA advance made by Holmes
Financing (No. 2) PLC, the sum of [GBP]125,000,000 due on each of
the four scheduled repayment dates of that previous series 3 term
AAA advance.
"SCHEDULED AMORTISATION PERIOD" means the period commencing on the
distribution date falling 3 months prior to the scheduled repayment date of a
scheduled amortisation amount, and which ends on the date that an amount equal
to the relevant scheduled amortisation amount has been accumulated by Funding,
subject to the following exceptions.
In respect of the issuer series 1 term AAA advance, if at any time prior to
the interest payment date in [January 2004], the portfolio CPR in respect of
the loans in the trust property is less than [8] per cent. per annum, then the
scheduled amortisation period means, in respect of the scheduled amortisation
amount falling due (or accrued due) in [April 2004], the period from (and
including) the distribution date falling immediately after the date of such
occurrence to (but excluding) the date when that scheduled amortisation amount
has been accumulated by Funding (expected to be the interest payment date in
[April 2004]). All amounts so accumulated by Funding shall be deposited in the
Funding GIC account and recorded in the cash accumulation ledger. An amount
equal to the amount so recorded will not be available for any other purpose
other than to repay the issuer series 1 term AAA advance on the scheduled
repayment dates in [January and April 2004].
The mortgages trustee may vary the scheduled amortisation period for other
term advances in the future depending on the portfolio CPR of the loans in the
trust property.
"SCHEDULED REPAYMENT DATE" means:
* in respect of the issuer series 1 term AAA advance:
(a) the interest payment date in January 2004; and
(b) the interest payment date in April 2004;
* in respect of the issuer series 2 term AAA advance, the interest
payment date in January 2006;
* in respect of the issuer series 3 term AAA advance:
(a) the interest payment date in January 2007; and
(b) the interest payment date in April 2007;
* in respect of the previous series 1 term AAA advance made by Holmes
Financing (No. 6) PLC:
(a) the interest payment date in July 2003; and
(b) the interest payment date in October 2003;
* in respect of the previous series 2 term AAA advance made by Holmes
Financing (No. 6) PLC, the interest payment date in April 2005;
141
* in respect of the previous series 3 term AAA advance made by Holmes
Financing (No. 6) PLC, the interest payment date in April 2007;
* in respect of the previous series 4A1 term AAA advance and the
previous series 4A2 term AAA advance made by Holmes Financing (No.
6) PLC, the interest payment date in October 2007;
* in respect of the previous series 1 term AAA advance made by Holmes
Financing (No. 5) PLC, the interest payment date in October 2002,
the previous series 1 term AAA advance having been partially repaid
in July 2002;
* in respect of the previous series 2A1 term AAA advance and the
previous series 2A2 term AAA advance made by Holmes Financing (No.
5) PLC, the interest payment date in October 2004;
* in respect of the previous series 3A1 term AAA advance made by
Holmes Financing (No. 5) PLC, the interest payment date in October
2006;
* in respect of the previous series 1 term AAA advance made by Holmes
Financing (No. 4) PLC:
(a) the interest payment date in October 2003;
(b) the interest payment date in January 2004;
(c) the interest payment date in April 2004; and
(d) the interest payment date in July 2004,
subject to repayment in full of the previous series 1 term AAA term advance
made by Holmes Financing (No. 1) PLC. If that previous series 1 term AAA term
advance has not been repaid in full by the first scheduled repayment date set
out in (a) above, then the scheduled amortisation amounts in respect of the
previous series 1 term AAA advance will be paid on the four successive interest
payment dates following the interest payment date that that previous series 1
term AAA advance is fully repaid;
* in respect of the previous series 2 term AAA advance made by Holmes
Financing (No. 4) PLC, the interest payment date in July 2006;
* in respect of the previous series 4 term AAA advance made by Holmes
Financing (No. 4) PLC, the interest payment date in October 2006;
* in respect of the previous series 1 term AAA advance made by Holmes
Financing (No. 3) PLC, the interest payment date in January 2003;
* in respect of the previous series 2 term AAA advance made by Holmes
Financing (No. 3) PLC, the interest payment date in January 2005;
* in respect of the previous series 2 term AAA advance made by Holmes
Financing (No. 2) PLC:
(a) the interest payment date in October 2003;
(b) the interest payment date in January 2004;
(c) the interest payment date in April 2004; and
(d) the interest payment date in July 2004,
subject to repayment in full of the previous series 1 term AAA term advance
made by Holmes Financing (No. 1) PLC. If that previous series 1 term AAA term
advance has not been repaid in full by the first scheduled repayment date set
out in (a) above, then the scheduled amortisation amounts in respect of this
previous series 2 term AAA advance will be paid on the four successive interest
payment dates following the interest payment date that that previous series 1
term AAA advance is fully repaid;
* in respect of the previous series 3 term AAA advance made by Holmes
Financing (No. 2) PLC:
(a) the interest payment date in October 2005;
142
(b) the interest payment date in January 2006;
(c) the interest payment date in April 2006; and
(d) the interest payment date in July 2006,
subject to repayment in full of the previous series 2 term AAA term advance
made by Holmes Financing (No. 1) PLC. If that previous series 2 term AAA term
advance has not been repaid in full by the first scheduled repayment date set
out in (a) above, then the scheduled amortisation amounts in respect of this
previous series 3 term AAA advance will be paid on the four successive interest
payment dates following the interest payment date that that previous series 2
term AAA advance is fully repaid;
* in respect of the previous series 1 term AAA advance made by Holmes
Financing (No. 1) PLC, the interest payment date in July 2003;
* in respect of the previous series 2 term AAA advance made by Holmes
Financing (No. 1) PLC, the interest payment date in July 2005;
* in respect of the previous series 3 term AAA advance made by Holmes
Financing (No. 1) PLC, the interest payment date in July 2007;
* in respect of the previous series 4 term AAA advance made by Holmes
Financing (No. 1) PLC, the interest payment date in July 2010; and
* in respect of any new term advance that is intended to be a bullet
amount or a scheduled amortisation amount, its own scheduled
repayment date.
The "CASH ACCUMULATION LEDGER" is a ledger maintained by the cash manager
for Funding, which records amounts accumulated by Funding to pay relevant
bullet amounts or, as applicable, relevant scheduled amortisation amounts.
A "TRIGGER EVENT" means an asset trigger event and/or a non-asset trigger
event.
An "ASSET TRIGGER EVENT" will occur when losses occur on the loans to the
extent that an amount is debited to the principal deficiency sub-ledger
established for any term AAA advances. For more information on the principal
deficiency ledger, see "CREDIT STRUCTURE".
A "NON-ASSET TRIGGER EVENT" will occur if:
* an insolvency event occurs in relation to the seller;
* the seller's role as servicer is terminated and a new servicer is
not appointed within 60 days;
* the seller share at any time is equal to or less than the minimum
seller share; or
* the aggregate outstanding principal balance of loans comprising the
trust property at any time during the period from and including the
closing date to but excluding the interest payment date in [April
2004] is less than [GBP][21] billion or, at any time during the
period from and including the interest payment date in [April 2004]
to but excluding the interest payment date in [July 2006] is less
than [GBP][14] billion or, at any time during the period from and
including the interest payment date in [July 2006] to but excluding
the interest payment date in [July 2010], is less than [GBP][2.5]
billion.
The terms of the asset trigger event and the non-asset trigger event may be
amended without your prior consent following entry by Funding into a new
intercompany loan agreement. A change in these terms may affect the timing of
payments on your notes.
MORTGAGES TRUST ALLOCATION AND DISTRIBUTION OF PRINCIPAL RECEIPTS PRIOR TO THE
OCCURRENCE OF A TRIGGER EVENT
Prior to the occurrence of a trigger event, the mortgages trustee will
allocate and distribute principal receipts on each distribution date as
follows:
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(a) subject to the terms of paragraphs (c), (d) and (e) below, until
the start of a cash accumulation period and during the period
between the end of a cash accumulation period and the start of the
next cash accumulation period, all principal receipts will be
allocated and paid to the seller in an amount up to but not
exceeding the seller share of the trust property at that time less
the minimum seller share;
(b) from and including the start of a cash accumulation period, all
principal receipts will be allocated and paid to Funding, in an
amount up to but not exceeding the Funding share of the trust
property at that time, until an amount equal to the relevant bullet
amount has been accumulated by Funding, as shown on the cash
accumulation ledger;
(c) from and including the date when:
(i) the cash accumulation period in respect of a bullet term
advance has not started; and
(ii)amounts are outstanding in respect of one or more
pass-through term advances that are due and payable (the
"PAYABLE PASS- THROUGH TERM ADVANCES") and/or one or more
scheduled amortisation term advances that are due and
payable (the "PAYABLE SCHEDULED AMORTISATION TERM ADVANCES")
under an intercompany loan ("INTERCOMPANY LOAN AGREEMENT
X"); and/or
(iii) the scheduled amortisation period has started under an
intercompany loan,
then an amount calculated (by the cash manager) in accordance with
the following formula shall be allocated and distributed to
Funding:
outstanding principal balance of
intercompany loan agreement X
Funding share percentage x principal receipts x ----------------------------------
aggregate outstanding principal
balance of all intercompany loans
until the payable pass-through term advances and/or, as applicable,
the payable scheduled amortisation term advances, are fully repaid.
Subject to paragraph (d) and (e) below, any excess principal
receipts will be paid to the seller;
(d) to the extent that during a scheduled amortisation period,
Funding has not received sufficient principal receipts
(calculated in accordance with the foregoing paragraph (c)) in
order to pay the scheduled amortisation amount due on the
relevant scheduled amortisation term advance on the immediately
succeeding interest payment date, the cash manager on behalf of
the mortgages trustee shall allocate and distribute principal
receipts to Funding in an amount equal to the shortfall, which
Funding shall apply solely towards repayment of the relevant
scheduled amortisation amount; and
(e) to the extent that there is a shortfall in the Funding
liquidity reserve fund required amount, the cash manager on
behalf of the mortgages trustee shall allocate and distribute
principal receipts to Funding in an amount equal to the
shortfall. Any excess principal receipts shall be paid to the
seller.
For the purpose of calculating the outstanding principal balance of any
intercompany loan, the principal amount outstanding of any term advance, the
proceeds of which have been credited to the first reserve fund, shall be
deducted from the amount outstanding on the relevant intercompany loan.
If Funding enters into new intercompany loans, then the terms of the
mortgages trust, including the provisions regarding the way in which the
mortgages trustee distributes principal receipts, may change.
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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,
all principal receipts will be allocated and distributed, with no order of
priority between them but in proportion to the respective amounts due, to
Funding and the seller according to the Funding percentage share of the trust
property and the seller percentage share of the trust property respectively,
until the Funding share of the trust property is zero. When the Funding share
of the trust property is zero, the remaining principal receipts (if any) will
be allocated to the seller.
On each distribution date after the occurrence of a non-asset trigger event
but prior to the occurrence of an asset trigger event, all principal receipts
will be allocated and paid to Funding until the Funding share of the trust
property is zero.
Following the occurrence of a non-asset trigger event but prior to the
occurrence of an asset trigger event, the issuer notes will be subject to
prepayment risk (that is, they may be repaid earlier than expected). Following
the occurrence of an asset trigger event, the series 1 class A issuer notes,
the series 2 class A issuer notes, the series 3 class A issuer notes and the
series 4 class A issuer notes may not be repaid in full by their respective
final maturity dates. See "RISK FACTORS -- THE YIELD TO MATURITY OF THE ISSUER
NOTES MAY BE ADVERSELY AFFECTED BY PREPAYMENTS OR REDEMPTIONS ON THE LOANS".
LOSSES
All losses arising on the loans are applied in reducing proportionately the
Funding share and the seller share of the trust property. Funding's share and
the seller's share of the losses are determined by multiplying the amount of
losses during a distribution period by the Funding share percentage, which are
allocated to Funding (until the Funding share of the trust property is zero),
and the remainder, which are allocated to the seller, on each distribution
date.
DISPOSAL OF TRUST PROPERTY
The trust property is held on trust for the benefit of Funding and the
seller. Subject to the terms of the mortgages trust deed, the mortgages trustee
is not 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, including its share of the trust
property, then the security trustee is entitled, among other things, to sell
Funding's 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 THE TRUST PROPERTY
The trust property may be increased from time to time by the assignment of
new loans and their related security to the mortgages trustee. The mortgages
trustee will hold the new 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 loans and their related security to the
mortgages trustee, see "ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY".
ACQUISITION BY FUNDING OF A FURTHER INTEREST IN THE TRUST PROPERTY
On not more than 60 nor less than 30 days' written notice, Funding may offer
to make a payment to the seller in consideration for an increase in Funding's
share of the trust property on a distribution date specified in that notice,
with the effect that Funding's share of the trust property shall increase and
the seller's share of the trust property shall correspondingly decrease.
Funding is permitted to do this only if it meets a number of conditions,
including:
* that no intercompany loan event of default has occurred under any
intercompany loan agreement that has not been remedied or waived;
* as at the most recent interest payment date, no deficiency is
recorded on Funding's principal deficiency ledger (which remains
outstanding);
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* the security trustee is not aware that the increase in the Funding
share of the trust property (or the corresponding decrease in the
seller share of the trust property) would adversely affect the then
current ratings by the rating agencies of the current notes;
* as at the relevant distribution date, the aggregate outstanding
principal balance of loans constituting the trust property, in
respect of which the aggregate amount in arrears is more than three
times the monthly payment then due, is less than 5 per cent. of the
aggregate outstanding principal balance of all loans constituting
the trust property;
* the short-term, unsecured, unguaranteed and unsubordinated debt
obligations of the seller are rated at least P-1 by Moody's, A-1 by
Standard & Poor's and F1 by Fitch at the time of, and immediately
following, the payment made by Funding on the relevant distribution
date; and
* the product of the weighted average repossession frequency ("WAFF")
and the weighted average loss severity ("WALS") for the loans
constituting the trust property calculated on the relevant
distribution date in the same way as for the initial portfolio (or
as agreed by the servicer and the rating agencies from time to
time) does not exceed the product of the WAFF and WALS for the
loans constituting the trust property calculated on the most recent
previous closing date, plus 0.25 per cent.
ACQUISITION BY THE SELLER OF A FURTHER INTEREST IN THE TRUST PROPERTY
If a borrower takes a payment holiday or makes an underpayment in respect of
interest pursuant to the terms of a flexible loan, then the outstanding
principal balance of the flexible loan will increase by, in the case of a
payment holiday, the amount of interest that would have been paid on the
relevant loan if not for such payment holiday and, in the case of an
underpayment, the excess of the amount of interest that would have been paid on
the relevant loan if not for such underpayment over the reduced amount of
interest paid by the borrower (in each case, the "CAPITALISED INTEREST").
The increase in the loan balance as a result of the capitalised interest
will be allocated to the Funding share of the trust property and to the seller
share of the trust property, based on their respective percentage shares in the
trust property as calculated on the previous distribution date.
Prior to an insolvency event occurring in respect of the seller, on each
distribution date, the seller will make a cash payment to Funding in an amount
equal to Funding's share of the capitalised interest in respect of those loans
that are subject to payment holidays or underpayments. Following such payment:
* the seller share of the trust property will increase by an amount
equal to the amount paid to Funding for Funding's share of the
capitalised interest, and Funding's share of the trust property
will decrease by a corresponding amount; and
* Funding will apply the proceeds of the amount paid by the seller in
accordance with the Funding pre-enforcement revenue priority of
payments and, after enforcement of the Funding security, in
accordance with the Funding post enforcement priority of payments.
If an insolvency event occurs in respect of the seller, then the seller may
acquire from Funding its share of the capitalised interest in the same manner
and for the same purpose described above, but it is not obliged to do so.
PAYMENT BY THE SELLER TO FUNDING OF THE AMOUNT OUTSTANDING UNDER AN
INTERCOMPANY LOAN
If the seller offers to make a payment to Funding of the amount outstanding
under a series of an intercompany loan, then Funding may accept that offer but
only if:
* the aggregate outstanding principal balance of the relevant series
of the intercompany loan is less than 10 per cent. of the principal
balance of that series immediately after the intercompany loan in
relation to that series was drawn by Funding;
* the security trustee has received written confirmation from each of
the rating agencies that there would not be any adverse effect on
the then current ratings of the issuer notes if Funding accepted
the offer;
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* Funding would receive the payment on a distribution date; and
* the relevant issuer has confirmed to Funding that the proceeds of
the corresponding payment made by Funding to the relevant issuer
would be applied to repay the relevant intercompany loan and the
issuer has exercised its right to prepay the corresponding series
of notes in these circumstances.
The Funding share of the trust property would decrease by an amount equal to
the payment made by the seller and the seller share would increase by a
corresponding amount.
TERMINATION OF MORTGAGES TRUST
The mortgages trust will terminate on the later to occur of:
* the date on which all amounts due from Funding under all the
intercompany loan agreements have been repaid in full; and
* any other date agreed in writing by Funding and the seller.
RETIREMENT OF MORTGAGES TRUSTEE
The mortgages trustee is not entitled to retire or otherwise terminate its
appointment. The seller and Funding covenant not to replace the mortgages
trustee.
GOVERNING LAW
The mortgage trust deed is governed by English law.
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THE ISSUER INTERCOMPANY LOAN AGREEMENT
The following section contains a summary of the material terms of the issuer
intercompany loan agreement. The summary does not purport to be complete and is
subject to the provisions of the issuer intercompany loan agreement, a form of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
On the closing date, the issuer will lend to Funding an amount in sterling
equal to the proceeds of the issue of the issuer notes, after converting the US
dollar proceeds of the series 1 issuer notes, and the series 2 issuer notes and
the series 3 class A issuer notes into sterling at the relevant issuer dollar
currency swap rates and after converting the euro proceeds of the series 4
issuer notes (other than the series 4 class A2 issuer notes) into sterling at
the relevant issuer euro currency swap rates. Funding will then pay the
proceeds of the issuer intercompany loan to the seller in return for an
addition to Funding's already existing share of the trust property. The issuer
intercompany loan will be split into [13] separate sub-loans, or "ADVANCES", to
correspond to the related series and classes of issuer notes:
* the issuer series 1 term AAA advance, which corresponds to the
series 1 class A issuer notes;
* the issuer series 2 term AAA advance, which corresponds to the
series 2 class A issuer notes;
* the issuer series 3 term AAA advance, which corresponds to the
series 3 class A issuer notes;
* the issuer series 4A1 term AAA advance, which corresponds to the
series 4 class A1 issuer notes;
* the issuer series 4A2 term AAA advance, which corresponds to the
series 4 class A2 issuer notes;
* the issuer series 1 term AA advance, which corresponds to the
series 1 class B issuer notes;
* the issuer series 2 term AA advance, which corresponds to the
series 2 class B issuer notes;
* the issuer series 3 term AA advance, which corresponds to the
series 3 class B issuer notes;
* the issuer series 4 term AA advance, which corresponds to the
series 4 class B issuer notes;
* the issuer series 1 term A advance, which corresponds to the series
1 class M issuer notes;
* the issuer series 2 term A advance, which corresponds to the series
2 class M issuer notes;
* the issuer series 3 term A advance, which corresponds to the series
3 class M issuer notes; and
* the issuer series 4 term A advance, which corresponds to the series
4 class M issuer notes.
Unless the context otherwise requires, the issuer series 4A1 term AAA
advance and the issuer series 4A2 term AAA advance are collectively referred to
as the "ISSUER SERIES 4 TERM AAA ADVANCES" the issuer series 1 term AAA advance,
the issuer series 2 term AAA advance, the issuer series 3 term AAA advance and
the issuer series 4 term AAA advances are collectively referred to as the
"ISSUER TERM AAA ADVANCES", the issuer series 1 term AA advance, the issuer
series 2 term AA advance, the issuer series 3 term AA advance and the issuer
series 4 term AA advance are collectively referred to as the "ISSUER TERM AA
ADVANCES" and the issuer series 1 term A advance, the issuer series 2 term A
advance, the issuer series 3 term A advance and the issuer series 4 term A
advance are collectively referred to as the "ISSUER TERM A ADVANCES".
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The issuer term AAA advances reflect the ratings expected to be assigned to
the series 2 class A issuer notes, the series 3 class A issuer notes and the
series 4 class A issuer notes by the rating agencies on the closing date. The
issuer series 1 term AAA advance will have the same rating as the issuer series
2 term AAA advance, the issuer series 3 term AAA advance and the issuer series 4
term AAA advance despite the series 1 class A issuer notes having different
short- term ratings. The issuer term AA advances reflect the rating expected to
be assigned to the class B issuer notes by the rating agencies on the closing
date. The issuer term A advances reflect the rating expected to be assigned to
the class M issuer notes by the rating agencies on the closing date. If, after
the closing date, the rating agencies subsequently change the ratings assigned
to each class of the issuer notes, then this will not affect the designated
ratings of the issuer term advances under the issuer intercompany loan.
The final repayment date of each issuer term advance will be the final
maturity date of the relevant underlying class of issuer notes.
The issuer intercompany loan agreement will provide that, subject to
satisfying the conditions in "-- CONDITIONS TO DRAWDOWN", the following
advances will be made available by the issuer to Funding by way of the issuer
intercompany loan made on the closing date:
* the issuer term AAA advances in an aggregate principal amount of
[[GBP]2,173,866,000], which shall be funded by the issue of the
class A issuer notes on the closing date, and which shall consist
of the issuer series 1 term AAA advance in the amount of
[[GBP]473,780,000], the issuer series 2 term AAA advance in the
amount of [[GBP]789,640,000], the issuer series 3 term AAA advance
in the amount of [[GBP]315,856,000] the issuer series 4A1 term AAA
advance in the amount of [[GBP]344,590,000] and the issuer series
4A2 term AAA advance in the amount of [[GBP]250,000,000];
* the issuer term AA advances in an aggregate principal amount of
[[GBP]81,156,000], which shall be funded by the issue of the class
B issuer notes on the closing date, and which shall consist of the
issuer series 1 term AA advance in the amount of [[GBP]14,210,000],
the issuer series 2 term AA advance in the amount of
[[GBP]23,690,000], the issuer series 3 term AA advance in the
amount of [[GBP]15,000,000] and the issuer series 4 term AA advance
in the amount of [[GBP]28,256,000]; and
* the issuer term A advances in an aggregate principal amount of
[[GBP]123,020,000], which shall be funded by the issue of the class
M issuer notes on the closing date, and which shall consist of the
issuer series 1 term A advance in the amount of [[GBP]24,160,000],
the issuer series 2 term A advance in the amount of
[[GBP]40,270,000], the issuer series 3 term A advance in the amount
of [[GBP]20,000,000] and the issuer series 4 term A advance in the
amount of [[GBP]38,590,000].
The money received by Funding under the advances will be used by Funding on
the closing date to pay the seller the consideration due to the seller in
relation to the assignment by the seller to Funding of a part of its share of
the trust property. Funding's interest in the current portfolio will constitute
the Funding share of the trust property.
The issuer will make payments of interest and principal on the issuer notes
from, among other things, respective payments of interest and principal made by
Funding to the issuer under the issuer term AAA advances, the issuer term AA
advances and the issuer term A advances of the issuer intercompany loan and
from amounts paid by the issuer dollar currency swap providers and the issuer
euro currency swap provider to the issuer under the issuer dollar currency
swaps and the issuer euro currency swaps, respectively.
The issuer has no obligation to make any further advances to Funding under
the terms of the issuer intercompany loan agreement.
CONDITIONS TO DRAWDOWN
The issuer will not be obliged to make the advances available to Funding
unless the issuer security trustee is satisfied on the closing date that a
number of conditions have been met, including:
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* that the issuer notes have been issued and the proceeds received by
or on behalf of the issuer;
* that Funding has delivered a certificate certifying that it is
solvent; and
* that each of the issuer transaction documents has been duly
executed by the relevant parties to them.
REPRESENTATIONS AND AGREEMENTS
Funding will make several representations to the issuer in the issuer
intercompany loan agreement including representations that Funding has been
duly incorporated and that it has the requisite corporate power and authority
to enter into the transaction documents to which it is a party.
In addition, Funding will agree that:
* it will not create or permit to subsist any encumbrance, unless
arising by operation of law, or other security interest over any of
its assets other than pursuant to the transaction documents;
* it will not carry on any business or engage in any activity
whatsoever 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;
* it will not have any subsidiaries, any subsidiary undertakings,
both as defined in the Companies Act 1985 as amended, or any
employees or premises;
* it will not transfer, sell, lend, part with or otherwise dispose of
all or any of its assets, properties or undertakings or any
interest, estate, right, title or benefit therein other than as
contemplated in the transaction documents;
* it will not pay any dividend or make any other distribution to its
shareholders, other than in accordance with the Funding deed of
charge, and it will not issue any new shares;
* it will not incur any indebtedness in respect of any borrowed money
or give any guarantee in respect of any indebtedness or of any
obligation of any person whatsoever other than indebtedness
contemplated by the transaction documents; and
* it will not enter into any amalgamation, demerger, merger or
reconstruction, nor acquire any assets or business nor make any
investments other than as contemplated in the transaction
documents.
PAYMENTS OF INTEREST
The interest rates applicable to the issuer term advances from time to time
will be determined by reference to LIBOR for three-month sterling deposits
(other than, in each case, in respect of the first interest period) plus, in
each case, a margin which will differ for each separate advance. For the first
interest period, LIBOR will be determined on the basis of a linear
interpolation between LIBOR for two-month and three-month sterling deposits.
LIBOR for an interest period will be determined on the relevant interest
determination date. The "INTEREST DETERMINATION DATE" will be the interest
payment date (as described later in this section) on which the relevant
interest period (as described in this section) commences or, in the case of the
first interest period, the closing date.
The margins applicable to each issuer term advance and the loan interest
periods for which those margins apply, are as follows:
* in respect of the issuer series 1 term AAA advance, [__] per cent.
per annum;
* in respect of the issuer series 2 term AAA advance, [__] per cent.
per annum;
* in respect of the issuer series 3 term AAA advance, [__] per cent.
per annum up to (and including) the interest period ending in April
2008 and thereafter [__] per cent. per annum;
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* in respect of the issuer series 4A1 term AAA advance, [__] per
cent. per annum up to (and including) the interest period ending in
April 2008 and thereafter [__] per cent. per annum;
* in respect of the issuer series 4A2 term AAA advance, [__] per
cent. per annum up to (and including) the interest period ending in
April 2008 and thereafter [__] per cent. per annum;
* in respect of the issuer series 1 term AA advance, [__] per cent.
per annum up to (and including) the interest period ending in April
2008 and thereafter [__] per cent. per annum;
* in respect of the issuer series 2 term AA advance, [__] per cent.
per annum up to (and including) the interest period ending in April
2008 and thereafter [__] per cent. per annum;
* in respect of the issuer series 3 term AA advance, [__] per cent.
per annum up to (and including) the interest period ending in April
2008 and thereafter [__] per cent. per annum;
* in respect of the issuer series 4 term AA advance, [__] per cent.
per annum up to (and including) the interest period ending in April
2008 and thereafter [__] per cent. per annum;
* in respect of the issuer series 1 term A advance, [__] per cent.
per annum up to (and including) the interest period ending in April
2008 and thereafter [__] per cent. per annum;
* in respect of the issuer series 2 term A advance, [__] per cent.
per annum up to (and including) the interest period ending in April
2008 and thereafter [__] per cent. per annum;
* in respect of the issuer series 3 term A advance, [__] per cent.
per annum up to (and including) the interest period ending in April
2008 and thereafter [__] per cent. per annum; and
* in respect of the issuer series 4 term A advance, [__] per cent.
per annum up to (and including) the interest period ending in April
2008 and thereafter [__] per cent. per annum;
In addition, Funding will agree to pay an additional fee to the issuer on
each interest payment date or otherwise when required. The fee on each interest
payment date will be equal to the amount needed by the issuer to pay or provide
for other amounts falling due, if any, to be paid to its creditors (other than
amounts of interest and principal due on the issuer notes and tax that can be
met out of the issuer's profits) and a sum (in amount up to 0.01 per cent. of
the interest paid to the issuer on the term advances on each interest payment
date), to be retained by the issuer as profit. The fee will be paid by Funding
out of the Funding available revenue receipts.
REPAYMENT OF PRINCIPAL ON THE ISSUER TERM ADVANCES
The issuer term advances will be repaid on the dates and in the priorities
described in "CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS
PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY OR THE OCCURRENCE OF A TRIGGER
EVENT OR ENFORCEMENT OF THE ISSUER SECURITY".
DEFERRAL OF PAYMENTS ON TERM BBB ADVANCES, TERM A ADVANCES AND TERM AA
ADVANCES WHEN LOSSES ARE RECORDED ON RESPECTIVE PRINCIPAL DEFICIENCY LEDGERS
AND IN OTHER CIRCUMSTANCES
If:
* a principal loss has been recorded on the principal deficiency
ledger in respect of any of the term BBB advances, the term A
advances or the term AA advances (whether in respect of the issuer
intercompany loan, the previous intercompany loans or any new
intercompany loan); or
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* monies standing to the credit of the first reserve fund have been
used, on or prior to the relevant interest payment date, to cure a
principal deficiency in respect of the term BBB advances and/or the
term A advances and/or the term AA advances (whether in respect of
the issuer intercompany loan, the previous intercompany loans or
any new intercompany loan), and the first reserve fund has not been
replenished by a corresponding amount on the relevant interest
payment date; or
* as at the relevant interest payment date, the total outstanding
principal balance of loans in the mortgages trust, in respect of
which the aggregate amount in arrears is more than three times the
monthly payment then due, is more than 5 per cent. of the total
outstanding principal balance of loans in the mortgages trust,
then the term BBB advances, the term A advances, and, as applicable, the term
AA advances will not be entitled to principal repayments until the relevant
circumstance as described in the preceding bulleted list has been cured or
otherwise ceases to exist.
LIMITED RECOURSE
Funding will only be obliged to pay amounts to the issuer under the issuer
intercompany loan to the extent that it has funds to do so after making
payments ranking in priority to amounts due on the issuer term advances.
If, on the final repayment date of an issuer term advance, there is a
shortfall between the amount of interest and/or principal due on that issuer
term advance and the amount available to Funding to make that payment, then
that shortfall shall not be due and payable to the issuer until the time (if
ever) when Funding has enough money available to pay the shortfall on that
issuer term advance (after making any other payments due that rank higher in
priority to that advance).
If, on the final repayment date of the issuer intercompany loan, there is a
shortfall between the amount required to pay all outstanding interest and/or
principal on the issuer term AA advances and /or the issuer term A advances and
the amount available to Funding to make those payments, then the shortfall
shall be deemed to be not due and payable under the issuer intercompany loan
agreement and any claim that the issuer may have against Funding in respect of
that shortfall will be extinguished.
ISSUER INTERCOMPANY LOAN EVENTS OF DEFAULT
The issuer intercompany loan agreement will contain events of default (each
an "ISSUER INTERCOMPANY LOAN EVENT OF DEFAULT"), which will include, among
others, the following events:
* a default by Funding for a period of three London business days in
the payment of any amount payable under any intercompany loan
agreement (whether any previous intercompany loan agreement, the
issuer intercompany loan agreement or any new intercompany loan
agreement) (but subject to the limited recourse provisions
described later in this section and in "-- LIMITED RECOURSE");
* Funding does not comply in any material respect with its
obligations under the transaction documents (other than non-payment
as set out in the preceding paragraph) and that non-compliance, if
capable of remedy, is not remedied promptly and in any event within
twenty London business days of Funding becoming aware of its non-
compliance or of receipt of notice from the security trustee
requiring Funding's non- compliance to be remedied; and
* insolvency related events occur in relation to Funding or it is, or
becomes, unlawful for Funding to perform its obligations under any
of the transaction documents.
Investors should note that, as described in "-- LIMITED RECOURSE", it will
not be an event of default under an intercompany loan agreement (whether any
previous intercompany loan agreement, the issuer intercompany loan agreement or
any new intercompany loan agreement) if default is made by Funding in paying
amounts due under the intercompany loan agreement where Funding does not have
the money available to make the relevant payment. The ability of the issuer to
repay the issuer notes will depend upon payments to the issuer from Funding
under the issuer
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intercompany loan agreement. See "RISK FACTORS -- FAILURE BY FUNDING TO MEET
ITS OBLIGATIONS UNDER THE ISSUER INTERCOMPANY LOAN AGREEMENT WOULD ADVERSELY
AFFECT PAYMENTS ON THE ISSUER NOTES".
Investors should also note that an event of default by Funding in respect of
any previous intercompany loan or any new intercompany loan or any agreement
entered into by Funding in connection with that previous intercompany loan or
new intercompany loan, will constitute an event of default under the issuer
intercompany loan.
If an issuer intercompany loan event of default occurs, then the security
trustee will be entitled to deliver a notice to Funding stating that the issuer
intercompany loan event of default has occurred (an "ISSUER INTERCOMPANY LOAN
ENFORCEMENT NOTICE"). Upon the service of an issuer intercompany loan
enforcement notice, the security trustee may direct that the issuer term
advances become immediately due and payable and/ or that the issuer term
advances become due and payable on the demand of the security trustee.
NEW INTERCOMPANY LOAN AGREEMENTS
Holdings is expected to establish new issuers for the purpose of issuing new
notes to investors. The issuer intercompany loan agreement will provide that
Funding may at any time, by written notice to the security trustee and the
rating agencies, enter into a new intercompany loan agreement with a new issuer
and draw new term advances thereunder. Each new term advance will be financed
by the issue of new notes, and will only be permitted if certain conditions
precedent are satisfied, including:
* the proceeds of the new intercompany loan are used by Funding (1)
to pay the seller for new loans to be assigned to the mortgages
trustee under the mortgage sale agreement and/or (2) to acquire
part of the current seller share of the trust property from the
seller and/or (3) to refinance the existing debts of Funding (which
could include a current intercompany loan) and/or (4) to apply a
part thereof to further fund one or more of the reserve funds;
* each of the rating agencies confirms in writing to the security
trustee that there will not, as a result of the new issuer issuing
any new notes, be any adverse effect on the ratings at that time by
the rating agencies of the current notes or the implicit ratings at
that time of the current term advances;
* no current intercompany loan event of default under any current
intercompany loan agreement is continuing unwaived on the date when
the advance is drawn; and
* no principal deficiency is recorded on the principal deficiency
ledger.
Each new intercompany loan agreement will be on substantially the same terms
as the issuer intercompany loan agreement, except as to the amount advanced,
the rating of the new notes to which the new term advances correspond (the
designated "NEW TERM ADVANCE RATINGS"), the interest rates applicable to the
new term advances, the date that the new term advances are drawn and the terms
for repayment.
Subject to the rules regarding the application of principal receipts by
Funding (see "CASHFLOWS -- RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL
RECEIPTS AND FUNDING PRINCIPAL RECEIPTS"), Funding shall pay interest and repay
principal which is due and payable on the term advances (which includes the
previous term advances and any new term advances) to the issuer, the previous
issuers and each new issuer in an order of priority which will depend on the
relative term advance ratings of each term advance. Each term AAA advance due
and payable will rank equally and proportionately as to payment (to the current
issuers and any new issuer) of interest and principal, ahead of payments of
interest and principal due and payable to the current issuers and any new
issuer on the term AA advances, the term A advances and the term BBB advances.
Similarly, each term AA advance due and payable will rank equally and
proportionately as to payment of interest and principal due and payable, ahead
of payments of interest and principal due and payable on the term A advances
and the term BBB advances. Similarly, each term A advance due and payable will
rank equally and proportionately as to payment of interest and principal due
and payable, ahead of payments of interest and principal
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due and payable on the term BBB advances. Payments of interest on the term AAA
advances, the term AA advances, the term A advances and the term BBB advances
rank ahead of payments of interest and principal on any term BB advance.
Investors should note that amounts due and payable on the previous term
advances and any new term advances may be paid to the previous issuer and to
any new issuer ahead of payments due and payable on the issuer term AA advances
or the issuer term A advances if the term advance rating of that previous term
advance or, as the case may be, new term advance is higher than the term
advance rating of the issuer term AA advances or the issuer term A advances, as
the case may be. References in this paragraph to subordination of any term BB
advance are subject to the fact that principal payments on any term BB advance
are made out of excess Funding available revenue receipts and/or amounts
standing to the credit of the reserve funds (subject in each case to meeting
certain conditions precedent). Accordingly, principal may be paid on any term
BB advance, provided those conditions are met, before principal is paid on
higher ranking term advances.
FUNDING'S BANK ACCOUNTS
Funding maintains two bank accounts in its name with Abbey National plc.
These are:
(1) the Funding GIC account: the reserve funds (including the Funding
liquidity reserve fund) are credited to this account and on each
distribution date Funding's share of the mortgages trust available
revenue receipts and any distribution of principal receipts to
Funding under the mortgages trust are initially deposited in this
account. On each interest payment date, amounts required to meet
Funding's obligations to its various creditors are, with the
consent of the security trustee, transferred to the Funding
transaction account; and
(2) the Funding transaction account: on each interest payment date,
monies standing to the credit of the Funding GIC account are, with
the consent of the security trustee, transferred to the Funding
transaction account and applied by the cash manager in accordance
with the relevant order for priority of payments. Amounts
representing Funding's profits are retained in the Funding
transaction account.
If Funding makes a Funding stand-by drawing under the Funding liquidity
facility, then Funding shall open a new account in its name, subject to the
terms of the Funding liquidity facility agreement, called the "FUNDING
LIQUIDITY FACILITY STAND-BY ACCOUNT" into which the Funding stand-by drawing
will be deposited. See "CREDIT STRUCTURE -- FUNDING LIQUIDITY FACILITY".
GOVERNING LAW
The issuer intercompany loan agreement is governed by English law.
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SECURITY FOR FUNDING'S OBLIGATIONS
Funding has granted security for its obligations under the current
intercompany loan agreements (and the other transaction documents to which it
is a party) by entering into the Funding deed of charge with the security
trustee, the cash manager, the account bank, the seller, the corporate services
provider, the previous issuers, the Funding swap provider, the Funding
liquidity facility provider, the previous start-up loan provider and the start-
up loan provider. The issuer will enter into a deed of accession to the Funding
deed of charge which means that it will share in the security granted by
Funding under the Funding deed of charge. In addition, if Funding enters into
new intercompany loan agreements with new issuers, then the new issuers
(together with any new start-up loan providers), will enter into deeds of
accession in relation to the Funding deed of charge. This means that they will
also share in the security granted by Funding under the Funding deed of charge
with the existing Funding secured creditors.
The Funding deed of charge has seven primary functions:
* it sets out the covenants of Funding;
* it creates security for the security trustee which the security
trustee then administers on trust for each of the Funding secured
creditors;
* it sets out the order in which the cash manager applies money
received by Funding prior to enforcement of the security;
* it sets out the enforcement procedures relating to a default by
Funding on its covenants under the transaction documents (including
provisions relating to the appointment of a receiver);
* it sets out the order in which the security trustee applies money
received by Funding following the enforcement of the security;
* it sets out the appointment of the security trustee, its powers and
responsibilities and the limitations on those responsibilities; and
* it sets out how new creditors of Funding can accede to the terms of
the Funding deed of charge.
The following section contains a summary of the material terms of the
Funding deed of charge. The summary does not purport to be complete and is
subject to the provisions of the Funding deed of charge, a form of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
COVENANTS OF FUNDING
The Funding deed of charge contains covenants made by Funding in favour of
the security trustee on trust for the benefit of itself, any receiver of
Funding and the Funding secured creditors. The main covenants are that Funding
will pay all amounts due to each of the Funding secured creditors as they
become due (subject to the limited recourse provisions of the current
intercompany loans) and that it will comply with its other obligations under
the transaction documents.
FUNDING SECURITY
Under the Funding deed of charge, Funding creates the following security
(also known as the "FUNDING SECURITY") in respect of all the intercompany loans
outstanding at any one time:
* a first ranking fixed charge (which may take effect as a floating
charge) over the Funding share of the trust property;
* an assignment by way of first ranking fixed security of all of its
rights and interest in the transaction documents to which Funding
is a party from time to time;
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* a charge by way of first fixed charge (which may take effect as a
floating charge) of the rights and benefits of Funding in the
Funding GIC account, the Funding transaction account and the
Funding liquidity facility stand-by account, all amounts standing
to the credit of those accounts and all authorised investments
purchased from those accounts;
* with regard to all of Funding's assets located in England and Wales
or governed by English law, a first ranking floating charge over
all the assets and the undertaking of Funding not otherwise secured
by any fixed charge detailed here; and
* with regard to all of Funding's assets located in Scotland or
governed by Scots law, a first ranking floating charge.
NATURE OF SECURITY -- FIXED 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 is not
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
(being the charges described in the first three bullet points in this section).
NATURE OF SECURITY -- FLOATING CHARGE
Unlike the fixed charges, the floating charge does not attach to specific
assets but instead "FLOATS" over a class of assets which may change from time
to time, allowing Funding to deal with those assets and to give third parties
title to those assets free from any encumbrance in the event of sale, discharge
or modification, provided those dealings and transfers of title are in the
ordinary course of Funding's business. Any of Funding's assets, whether
currently held or acquired after the closing date (including assets acquired as
a result of the disposition of any other asset of Funding), which are not
subject to the fixed charges mentioned in this section and all of its Scottish
assets are subject to the floating charge.
The existence of the floating charge allows the security trustee to appoint
an administrative receiver of Funding and thereby prevent the appointment of an
administrator or receiver of Funding by one of Funding's other creditors. This
ensures that in the event that enforcement proceedings are commenced in respect
of amounts due and owing by Funding, the security trustee will always be able
to control those proceedings in the best interests of the Funding secured
creditors. However, see "RISK FACTORS -- CHANGES OF LAW MAY ADVERSELY AFFECT
YOUR INTERESTS" relating to potential prohibition on appointment of
administrative receivers.
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 amounts due to the UK tax authorities. This means that preferential
creditors will be paid out of the proceeds of enforcement of the floating
charge ahead of amounts due to the issuer under the issuer intercompany loan
agreement. Again, see "RISK FACTORS -- CHANGES OF LAW MAY ADVERSELY AFFECT YOUR
INTERESTS" relating to the introduction of enhanced rights for unsecured
creditors in respect of floating charge recoveries.
The floating charge created by the Funding deed of charge may "crystallise"
and become a fixed charge over the relevant class of assets owned by Funding at
the time of crystallisation. Crystallisation 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 except in relation to Funding's
Scottish assets, where crystallisation will occur on the appointment of an
administrative receiver. A crystallised floating charge will rank ahead of the
claims of unsecured creditors but 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 PRIORITY OF PAYMENTS
The Funding deed of charge sets out the order of priority of distribution by
the cash manager, as at the closing date and prior to the enforcement of the
Funding security, of amounts standing to the credit of the Funding transaction
account on each interest payment date. This
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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 OR THE
OCCURRENCE OF A TRIGGER EVENT OR ENFORCEMENT OF THE ISSUER SECURITY".
FOLLOWING THE CREATION OF NEW INTERCOMPANY LOAN AGREEMENTS
As new issuers are established to issue new notes and accordingly to make
new term advances to Funding, those new issuers (together with any new start-up
loan providers), will likewise enter into deeds of accession in relation to the
Funding deed of charge which will amend the Funding pre-enforcement revenue
priority of payments, the Funding pre-enforcement principal priority of
payments and the Funding post-enforcement priority of payments to reflect the
amounts due to the new issuer and any new start-up loan provider. The ranking
of those new amounts due will be as follows:
* subject to the rules regarding the application of principal
receipts by Funding (see "CASHFLOWS -- RULES FOR APPLICATION OF
FUNDING AVAILABLE PRINCIPAL RECEIPTS AND FUNDING PRINCIPAL
RECEIPTS"), all amounts due and payable to the previous issuers,
the issuer and any new issuer will be paid, subject to their
relevant repayment dates, in descending order of the respective
ratings of their term advances so the term advance with the highest
term advance rating will be paid first and the term advance with
the lowest term advance rating will be paid last; and
* all start-up loan providers will rank in no order of priority
between them but in proportion to the respective amounts due to
them.
ENFORCEMENT
The Funding deed of charge sets out the general procedures by which the
security trustee may take steps to enforce the security created by Funding so
that the security trustee can protect the interests of each of the Funding
secured creditors.
The Funding deed of charge requires the security trustee to consider the
interests of each of the Funding secured creditors as to the exercise of its
powers, trusts, authorities, duties and discretions, but requires the security
trustee in the event of a conflict between the interests of the previous
issuers, the issuer and any new issuers and the interests of any other Funding
secured creditors, to consider only, unless stated otherwise, the interests of
the previous issuers, the issuer and any new issuers. As among the previous
issuers, the issuer and any new issuers, the security trustee will exercise its
rights under the Funding deed of charge only in accordance with the directions
of the previous issuers, the issuer and/or the new issuer(s) with the highest-
ranking term advance ratings. If the previous issuers, the issuer and/or any
new issuers with term advances of equal ratings give conflicting directions,
then the security trustee will act in accordance with the directions of the
previous issuers, the issuer or new issuer (or two or more of them if in
agreement) whose aggregate principal amount outstanding of its/their highest-
ranking term advances is the greatest. In all cases, the security trustee will
only act if it is indemnified to its satisfaction.
The Funding security will become enforceable upon the service of an
intercompany loan enforcement notice under any intercompany loan, provided
that, if the Funding security has become enforceable otherwise than by reason
of a default in payment of any amount due on any of the term advances, the
security trustee will not be entitled to dispose of all or part of the assets
comprised in the Funding security unless either:
* a sufficient amount would be realised to allow a full and immediate
discharge of all amounts owing in respect of the term AAA advances
-- including the term AAA advances made under the previous
intercompany loans, the issuer intercompany loan and any new
intercompany loans (or, once these term AAA advances have been
repaid, the term advances with the next highest term advance
rating, and so on); or
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* the security trustee is of the opinion that the cashflow expected
to be received by Funding will not (or that there is a significant
risk that it will not) be sufficient, having regard to any other
relevant actual, contingent or prospective liabilities of Funding,
to discharge in full over time all amounts owing in respect of the
term AAA advances -- including the term AAA advances made under the
previous intercompany loans, the issuer intercompany loan and any
new intercompany loans (or, once these term AAA advances have been
repaid, the term advances with the next highest term advance
rating, and so on).
Each of the Funding secured creditors will agree under the Funding deed of
charge that they will not take steps directly against Funding for any amounts
owing to them, unless the security trustee has become bound to enforce the
Funding security but has failed to do so within 30 days of becoming so bound.
FUNDING POST-ENFORCEMENT PRIORITY OF PAYMENTS
The Funding deed of charge sets out the order of priority of distribution as
at the closing date 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. This order of priority
is described in "CASHFLOWS -- DISTRIBUTION OF FUNDING PRINCIPAL RECEIPTS AND
FUNDING REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF THE FUNDING SECURITY".
FOLLOWING THE CREATION OF NEW INTERCOMPANY LOAN AGREEMENTS
Any deeds of accession will amend the Funding post-enforcement priority of
payments to reflect the amounts due to the new issuer and any new start-up loan
provider or any other relevant creditor that has acceded to the terms of the
Funding deed of charge.
APPOINTMENT, POWERS, RESPONSIBILITIES AND LIABILITIES OF THE SECURITY TRUSTEE
The security trustee is appointed to act as trustee on behalf of the Funding
secured creditors on the terms and conditions of the Funding deed of charge. It
holds the benefit of the security created by the Funding deed of charge on
trust for each of the Funding secured creditors in accordance with the terms
and conditions of the Funding deed of charge.
The Funding Deed of Charge provides that the security trustee may agree
amendments or modifications to any of the transaction documents:
* which in the opinion of the security trustee it may be expedient to
make, provided that the security trustee is of the opinion acting
reasonably, that such modifications will not be materially
prejudicial to the interests of the Funding secured creditors or,
if it is not of that opinion in relation to any Funding secured
creditors, such Funding secured creditor has given its written
consent to such modifications;
* which in the opinion of the security trustee are made to correct a
manifest or demonstrable error or are of a formal, minor or
technical nature; or
* provided that the rating agencies confirm that as result of such
modification there will not be any adverse effect on the then
current ratings by the rating agencies of the existing issuer
notes.
If Funding 2 is established, then the security trustee may agree changes to
the transaction documents to enable the inclusion of Funding 2 as a beneficiary
of the mortgages trust, and the prior consent of noteholders will not be
obtained in relation to those modifications, provided that the rating agencies
confirm that the inclusion of Funding 2 as a beneficiary of the mortgages trust
would not adversely affect the existing ratings of any issuer notes.
THE SECURITY TRUSTEE'S FEES AND EXPENSES
Funding shall reimburse the security trustee for all its costs and expenses
properly incurred in acting as security trustee. The security trustee is
entitled to a fee payable quarterly in the amount agreed from time to time by
the security trustee and Funding. Funding has agreed to
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indemnify the security trustee and each of its officers, employees and advisers
from and against all claims, actions, proceedings, demands, liabilities,
losses, damages, costs and expenses arising out of or in connection with:
* the transaction documents; or
* the security trustee's engagement as security trustee,
which it or any of its officers, employees or advisers may suffer.
Funding is not responsible under the Funding deed of charge for any
liabilities, losses, damages, costs or expenses resulting from fraud,
negligence, wilful misconduct 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.
Funding may remove the security trustee at any time provided that it has the
consent, which must not be unreasonably withheld or delayed, of each of the
Funding secured creditors to the removal.
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 regulating the
scope of the security trustee's duties and liabilities. These include the
following:
* the security trustee will, if reasonably practicable, give prior
notification to the seller of the security trustee's intention to
enforce the Funding security (although any failure to so notify
will not prejudice the ability of the security trustee to enforce
the Funding security);
* the security trustee is not responsible for the adequacy or
enforceability of the Funding deed of charge or any other
transaction document;
* the security trustee is not required to exercise its powers under
the Funding deed of charge without being directed to do so by the
issuer, the previous issuers or the other Funding secured
creditors;
* the security trustee may rely on documents provided by the
mortgages trustee, Funding and the cash manager and the advice of
consultants and advisors;
* the security trustee is not required to monitor whether an
intercompany loan event of default under any intercompany loan has
occurred or compliance by Funding with the transaction documents;
* the security trustee will be taken not to have knowledge of the
occurrence of an intercompany loan event of default under any
intercompany loan unless the security trustee 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;
* the security trustee has no duties or responsibilities except those
expressly set out in the Funding deed of charge or the transaction
documents;
* any action taken by the security trustee under the Funding deed of
charge or any transaction document binds all of the Funding secured
creditors;
* each Funding secured creditor must make its own independent
investigations, without reliance on the security trustee, as to the
affairs of Funding and whether or not to request that the security
trustee take any particular course of action under any transaction
document;
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* the security trustee and its affiliates may engage in any kind of
business with Funding or any of the Funding secured creditors as if
it were not security trustee and may receive consideration for
services in connection with any transaction document or otherwise
without having to account to the Funding secured creditors;
* the security trustee has no liability under or in connection with
the Funding deed of charge or any other transaction document,
whether to a Funding secured creditor or otherwise, other than to
the extent to which (1) the liability is able to be satisfied in
accordance with the Funding deed of charge out of the property held
by it on trust under the Funding deed of charge and (2) it is
actually indemnified for the liability. This limitation of
liability does not apply to a liability of the security trustee to
the extent that it is not satisfied because there is a reduction in
the extent of the security trustee's indemnification as a result of
its fraud, negligence or wilful misconduct or breach of the terms
of the Funding deed of charge; and
* the security trustee is not responsible for any deficiency which
may arise because it is liable to tax in respect of the proceeds of
security.
The security trustee has had no involvement in the preparation of any part
of this prospectus, other than any particular reference to the security
trustee. The security trustee expressly disclaims and takes no responsibility
for any other part of this prospectus. The security trustee makes no statement
or representation in this prospectus, has not authorised 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 issuer notes or the payment
of principal or interest on the issuer notes.
GOVERNING LAW
The Funding deed of charge is governed by English law.
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SECURITY FOR THE ISSUER'S OBLIGATIONS
The issuer will provide security for its obligations by entering into the
issuer deed of charge with the issuer secured creditors, who are the issuer
security trustee, the note trustee, the paying agents, the registrar, the
transfer agent, the agent bank, the issuer dollar currency swap providers, the
issuer euro currency swap provider, the corporate services provider, the issuer
cash manager and the issuer account banks.
The issuer deed of charge has five primary functions:
* it sets out covenants of the issuer;
* it creates security for the issuer security trustee which the
issuer security trustee then administers on trust for each of the
issuer secured creditors;
* it sets out the enforcement procedures relating to a default by the
issuer of its covenants under the transaction documents (including
the appointment of a receiver);
* it sets out the order in which the issuer security trustee applies
monies standing to the credit of the issuer transaction accounts
following the enforcement of the issuer security; and
* it sets out the appointment of the issuer security trustee, its
powers and responsibilities and the limitations on those
responsibilities.
The following section contains a summary of the material terms of the issuer
deed of charge. The summary does not purport to be complete and is subject to
the provisions of the issuer deed of charge, a form of which has been filed as
an exhibit to the registration statement of which this prospectus is a part.
COVENANTS OF THE ISSUER
The issuer deed of charge contains covenants made by the issuer in favour of
the issuer security trustee on trust for the benefit of itself, any receiver of
the issuer and the issuer secured creditors. The main covenants are that the
issuer will pay all amounts due to each of the issuer secured creditors as they
become due and that it will comply with its other obligations under the issuer
transaction documents.
ISSUER SECURITY
Under the issuer deed of charge, the issuer creates the following security
in respect of its obligations:
* an assignment and charge by way of first fixed security of the
issuer's rights under the issuer transaction documents to which it
is a party, including the issuer intercompany loan agreement, the
Funding deed of charge, the issuer dollar currency swap agreements,
the issuer euro currency swap agreements, the issuer paying agent
and agent bank agreements, the issuer underwriting agreement, the
issuer subscription agreement, the issuer corporate services
agreement, the issuer bank account agreement, the issuer cash
management agreement and the issuer trust deed;
* a charge by way of first fixed charge (which may take effect as a
floating charge) of the issuer's right, title and interest and
benefit in the issuer transaction accounts and any amounts
deposited in them;
* a charge by way of first fixed charge (which may take effect as a
floating charge) of the issuer's right, title, interest and benefit
in all authorised investments made by or on behalf of the issuer,
including all monies and income payable under them;
* with regard to all of the issuer's assets located in England or
Wales or governed by English law a first ranking floating charge
over the issuer's business and assets not already charged under the
fixed charges described here; and
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* with regard to all of the issuer's assets located in Scotland or
governed by Scots law a first ranking floating charge (all of the
assets subject to fixed charges as listed above being wholly
governed by English law).
NATURE OF SECURITY -- FIXED CHARGE
The issuer may not deal with those of its assets which are subject to a
fixed charge without the consent of the issuer security trustee. Accordingly,
the issuer will not be permitted to deal in its ordinary course of business
with the assets which are expressed to be subject to a fixed charge. In this
way, the security is said to "fix" over those assets which are expressed to be
subject to a fixed charge (being the charges described in the first three
bullet points in this section).
NATURE OF SECURITY -- FLOATING CHARGE
Unlike the fixed charges, the floating charge does not attach to specific
assets but instead "floats" over a class of assets which may change from time
to time, allowing the issuer to deal with those assets and to give third
parties title to those assets free from any encumbrance in the event of sale,
discharge or modification, provided those dealings and transfers of title are
in the ordinary course of the issuer's business. Any assets acquired by the
issuer after the closing date (including assets acquired as a result of the
disposition of any other assets of the issuer) which are not subject to fixed
charges described in the preceding section and all of its Scottish assets will
also be subject to the floating charge.
The existence of the floating charge allows the issuer security trustee to
appoint an administrative receiver of the issuer and thereby prevent the
appointment of an administrator or receiver of the issuer by one of the
issuer's other creditors. This ensures that in the event that enforcement
proceedings are commenced in respect of amounts due and owing by the issuer,
the issuer security trustee will always be able to control those proceedings in
the best interest of the issuer secured creditors.
The interest of the issuer 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 issuer security -- for example,
any amounts due to the UK tax authorities. This means that preferential
creditors will be paid out of the proceeds of enforcement of the floating
charge ahead of amounts due to noteholders.
The floating charge created by the issuer deed of charge may "crystallise"
and become a fixed charge over the relevant class of assets owned by the issuer
at the time of crystallisation. Crystallisation will occur automatically
following the occurrence of specific events set out in the issuer deed of
charge, including, among other events, notice to the issuer from the issuer
security trustee following an event of default under the issuer notes (except
in relation to the issuer's Scottish assets, where crystallisation will occur
on the appointment of an administrative receiver). A crystallised floating
charge will rank ahead of the claims of unsecured creditors but will continue
to rank behind the claims of preferential creditors (as referred to in this
section) on enforcement of the issuer security.
ENFORCEMENT
The issuer deed of charge sets out the general procedures by which the
issuer security trustee may take steps to enforce the security created by the
issuer so that the issuer security trustee can protect the interests of each of
the issuer secured creditors.
The issuer deed of charge requires the issuer security trustee to consider
the interests of each of the issuer secured creditors as to the exercise of its
powers, trusts, authorities, duties and discretions, but requires the issuer
security trustee in the event of a conflict between the interests of the
noteholders and the interests of any other issuer secured creditor, to consider
only, unless stated otherwise, the interests of the noteholders. As among
noteholders, the issuer security trustee will exercise its rights under the
issuer deed of charge only in accordance with the directions of the class of
noteholders with the highest-ranking issuer notes. If there is a conflict
between the interests of the class A noteholders of one series and the class A
noteholders of
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another series, or conflict between the class B noteholders of one series and
the class B noteholders of another series, or conflict between the class M
noteholders of one series and the class M noteholders of another series then a
resolution directing the issuer security trustee to take any action must be
passed at separate meetings of the holders of each series of the class A issuer
notes or, as applicable, each series of the class B issuer notes or, as
applicable, each series of the class M issuer notes, as applicable.
The issuer security will become enforceable upon either (1) the enforcement
of the Funding security or (2) the occurrence of an issuer note event of
default which is not being waived by the issuer security trustee, provided
that, if the issuer security has become enforceable otherwise than by reason of
a default in payment of any amount due on the issuer notes, the issuer security
trustee will not be entitled to dispose of all or part of the assets comprised
in the issuer security unless either:
* a sufficient amount would be realised to allow a full and immediate
discharge of all amounts owing in respect of the class A issuer
notes or, if the class A issuer notes have been fully repaid, the
class B issuer notes or, if the class B issuer notes have been
fully repaid, the class M issuer notes; or
* the issuer security trustee is of the opinion that the cashflow
expected to be received by the issuer will not, or that there is a
significant risk that it will not, be sufficient, having regard to
any other relevant actual, contingent or prospective liabilities of
the issuer, to discharge in full over time all amounts owing in
respect of the class A issuer notes or, if the class A issuer notes
have been fully repaid, the class B issuer notes or, if the class B
issuer notes have been fully repaid, the class M issuer notes.
Each of the issuer secured creditors (other than the noteholders, the note
trustee acting on behalf of the noteholders and the issuer security trustee)
will agree under the issuer deed of charge that they will not take steps
directly against the issuer for any amounts owing to them, unless the issuer
security trustee has become bound to enforce the issuer security but has failed
to do so within 30 days of becoming so bound.
ISSUER POST-ENFORCEMENT PRIORITY OF PAYMENTS
The issuer deed of charge sets out the order of priority of distribution by
the issuer security trustee, following service of an issuer note enforcement
notice, of amounts received or recovered by the issuer security trustee (or a
receiver appointed on its behalf). There are two separate payment orders of
priority depending on whether the Funding security has also been enforced.
These orders of priority are described in "CASHFLOWS".
APPOINTMENT, POWERS, RESPONSIBILITIES AND LIABILITIES OF THE ISSUER SECURITY
TRUSTEE
The issuer security trustee is appointed to act as trustee on behalf of the
issuer secured creditors on the terms and conditions of the issuer deed of
charge. It holds the benefit of the security created by the issuer deed of
charge on trust for each of the issuer secured creditors in accordance with the
terms and conditions of the issuer deed of charge.
The issuer deed of charge provides that the issuer security trustee may
agree to amendments or modifications to any of the transaction documents:
* which in the opinion of the issuer security trustee it may be
expedient to make, provided that the issuer security trustee is of
the opinion, acting reasonably, that such modifications will not be
materially prejudicial to the interests of the noteholders; and
* which in the opinion of the issuer security trustee will not
materially prejudice the interests of any of dollar currency swap
providers or euro currency swap provider; or
* which in the opinion of the issuer security trustee are made to
correct a manifest or demonstrable error or are of a formal, minor
or technical nature
The issuer security trustee is entitled to assume in the exercise of its
discretions and powers, that the proposed exercise would not be materially
prejudicial to the interests of the holders of the issuer notes, if the
existing ratings of the issuer notes are not adversely affected by that
proposed
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exercise. The prior consent of noteholders will not be obtained in relation to
the inclusion of Funding 2 as a beneficiary of the mortgages trust, provided
that the rating agencies confirm that the inclusion of Funding 2 as a
beneficiary of the mortgages trust would not adversely affect the existing
ratings of any issuer notes.
ISSUER SECURITY TRUSTEE'S FEES AND EXPENSES
The issuer will reimburse the issuer security trustee for all its costs and
expenses properly incurred in acting as issuer security trustee. The issuer
security trustee shall be entitled to a fee payable quarterly in the amount
agreed from time to time by the issuer security trustee and the issuer. The
issuer has agreed to indemnify the issuer security trustee and each of its
officers, employees and advisers from and against all claims, actions,
proceedings, demands, liabilities, losses, damages, costs and expenses arising
out of or in connection with:
* the issuer transaction documents; or
* the issuer security trustee's engagement as issuer security
trustee,
which it or any of its officers, employees or advisers may suffer.
The issuer will not be responsible under the issuer deed of charge for any
liabilities, losses, damages, costs or expenses resulting from fraud, wilful
default or negligence on the part of the issuer security trustee or any of its
officers, employees and advisers or breach by them of the terms of the issuer
deed of charge.
RETIREMENT AND REMOVAL
Subject to the appointment of a successor issuer security trustee, the
issuer security trustee may retire after giving three months' notice in writing
to the issuer.
The issuer may remove the issuer security trustee at any time providing that
it has the consent, which must not be unreasonably withheld or delayed, of each
of the issuer secured creditors to the removal.
In addition, the issuer security trustee may, subject to the conditions
specified in the issuer deed of charge, appoint a co-trustee to act jointly
with it.
ADDITIONAL PROVISIONS OF THE ISSUER DEED OF CHARGE
The issuer deed of charge contains a range of provisions regulating the
scope of the issuer security trustee's duties and liability. These include the
following:
* the issuer security trustee will, if reasonably practicable, give
prior notification to the seller of the issuer security trustee's
intention to enforce the issuer security (although any failure to
so notify will not prejudice the ability of the issuer security
trustee to enforce the issuer security);
* the issuer security trustee is not responsible for the adequacy or
enforceability of the issuer deed of charge or any other issuer
transaction document;
* the issuer security trustee is not required to exercise its powers
under the issuer deed of charge without being directed or requested
to do so by an extraordinary resolution of the noteholders or in
writing by the holders of at least 25 per cent. of the aggregate
principal amount outstanding of the issuer notes then outstanding
or by any other issuer secured creditor provided that:
(i) the issuer security trustee will not act at the direction or
request of the class B noteholders unless either so to do would
not, in its opinion, be materially prejudicial to the interests
of the class A noteholders or the action is sanctioned by an
extraordinary resolution of the class A noteholders;
(ii)the issuer security trustee will not act at the direction or
request of the class M noteholders unless either so to do would
not, in its opinion, be materially prejudicial to the interests
of the class A noteholders and/or the class B noteholders or
the action is sanctioned by extraordinary resolutions of the
class A noteholders and/or the class B noteholders, as the case
may be; and
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(iii) the issuer security trustee will not act at the direction
or request of any other issuer secured creditor unless so
to do would not, in its opinion, be materially prejudicial
to the interests of the noteholders or the action is
sanctioned by extraordinary resolutions of the noteholders
and each of the other relevant secured creditors that ranks
ahead of that issuer secured creditor (in the issuer post-
enforcement priority of payments) also consents to that
action and in particular;
* the issuer security trustee is entitled to assume that, in the
exercise of its rights, powers, duties and discretions, the
exercise will not be materially prejudicial to the noteholders if
each of the rating agencies has confirmed that the then current
ratings of the notes will not be adversely affected by the
exercise;
* the issuer security trustee may rely on documents provided by the
issuer, the issuer cash manager, the issuer dollar currency swap
providers, the issuer euro currency swap provider, the agent bank,
the paying agents, the registrar, the transfer agent, the issuer
account banks and the corporate services provider and the advice of
consultants and advisers;
* the issuer security trustee is not required to monitor whether an
issuer note event of default has occurred or compliance by the
issuer with the issuer transaction documents;
* the issuer security trustee will be taken not to have knowledge of
the occurrence of an issuer note event of default unless the issuer
security trustee has received notice from an issuer secured
creditor stating that an issuer note event of default has occurred
and describing that issuer note event of default;
* the issuer security trustee may rely on any 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 issuer trust deed;
* the issuer security trustee has no duties or responsibilities
except those expressly set out in the issuer deed of charge or the
issuer transaction documents;
* any action taken by the issuer security trustee under the issuer
deed of charge or any of the issuer transaction documents binds all
of the issuer secured creditors;
* each issuer secured creditor must make its own independent
investigations, without reliance on the issuer security trustee, as
to the affairs of the issuer and whether or not to request that the
issuer security trustee take any particular course of action under
any issuer transaction document;
* the issuer security trustee in a capacity other than as issuer
security trustee can exercise its rights and powers as such as if
it were not acting as the issuer security trustee;
* the issuer security trustee and its affiliates may engage in any
kind of business with the issuer or any of the issuer secured
creditors as if it were not the issuer security trustee and may
receive consideration for services in connection with any issuer
transaction document or otherwise without having to account to the
issuer secured creditors;
* the issuer security trustee has no liability under or in connection
with the issuer deed of charge or any other issuer transaction
document, whether to an issuer secured creditor or otherwise, (1)
other than to the extent to which the liability is able to be
satisfied in accordance with the issuer deed of charge out of the
property held by it on trust under the issuer deed of charge and
(2) it is actually indemnified for the liability. This limitation
of liability does not apply to a liability of the issuer security
trustee to the extent that it is not satisfied because there is a
reduction in the extent of the issuer security trustee's
indemnification as a result of its fraud, negligence, wilful
misconduct or breach of the terms of the issuer deed of charge; and
* the issuer security trustee is not responsible for any deficiency
which may arise because it is liable to tax in respect of the
proceeds of security.
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The issuer security trustee has had no involvement in the preparation of any
part of this prospectus, other than any particular reference to the issuer
security trustee. The issuer security trustee expressly disclaims and takes no
responsibility for any other part of this prospectus. The issuer security
trustee makes no statement or representation in this prospectus, has not
authorised or caused the issue of any part of it and takes no responsibility
for any part of it. The issuer security trustee does not guarantee the success
of the issuer notes or the payment of principal or interest on the issuer
notes.
TRUST INDENTURE ACT PREVAILS
The issuer deed of charge contains a provision that, if any other provision
of the issuer deed of charge limits, qualifies or conflicts with another
provision which is required to be included in the issuer deed of charge by, and
is not subject to contractual waiver under, the US Trust Indenture Act of 1939
(as amended), then the required provision of that Act will prevail.
GOVERNING LAW
The issuer deed of charge will be governed by English law.
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CASHFLOWS
Distribution of Funding available revenue receipts
DEFINITION OF FUNDING AVAILABLE REVENUE RECEIPTS
"FUNDING AVAILABLE REVENUE RECEIPTS" will be calculated by the cash manager
on the day falling four business days prior to each interest payment date and
will be an amount equal to the sum of:
* all mortgages trust available revenue receipts distributed to
Funding during the interest period ending on the immediately
following interest payment date;
* other net income of Funding including all amounts of interest
received on the Funding GIC account, the Funding transaction
account and/or authorised investments (as defined in the glossary),
amounts received by Funding under the Funding swap agreement (other
than any early termination amount received by Funding under the
Funding swap agreement), in each case to be received on or prior to
the immediately following interest payment date; and
* the amounts standing to the credit of the first reserve ledger, the
second reserve ledger and the Funding liquidity reserve ledger.
Four business days prior to each interest payment date, the cash manager
will calculate whether there will be an excess or a deficit of Funding
available revenue receipts (including the first reserve fund and the second
reserve fund) to pay items (A) to (E), (G), (I) and (K) of the Funding pre-
enforcement revenue priority of payments.
If there is a deficit on an interest payment date, then Funding shall pay or
provide for that deficit by applying amounts then standing to the credit of the
Funding principal ledger, if any, and the cash manager shall make a
corresponding entry in the relevant principal deficiency ledger, as described
in "CREDIT STRUCTURE".
Funding principal receipts may not be used to pay interest on any term
advance 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 term advance.
Funding shall apply any excess revenue to extinguish any balance on the
principal deficiency ledger, as described in "CREDIT STRUCTURE".
DISTRIBUTION OF FUNDING AVAILABLE REVENUE RECEIPTS 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. If Funding enters into new
intercompany loan agreements, then this order of priority will change -- see
"SECURITY FOR FUNDING'S OBLIGATIONS".
Except for amounts due to third parties by the issuer, the previous issuers
and/or Funding under paragraph (A) or amounts due to the account bank, the
issuer account bank and/or the previous issuer account banks, which shall be
paid when due, on each interest payment date prior to enforcement of the
Funding security, the cash manager will apply the Funding available revenue
receipts in the following order of priority (the "FUNDING PRE-ENFORCEMENT
REVENUE PRIORITY OF PAYMENTS"):
(A) first, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to:
* the security trustee (together with interest and any amount in
respect of VAT on those amounts) and to provide for any amounts
due or to become due in the immediately following interest
period to the security trustee under the Funding deed of
charge;
* in no order of priority between them but in proportion to the
respective amounts due, to pay amounts due to (1) the issuer in
respect of the issuer's obligations specified in items (A) to
(D) inclusive of the issuer pre-enforcement revenue priority of
payments or, as the case may be, items (A) to (C) inclusive of
the issuer post- enforcement priority of payments, as described
in "- DISTRIBUTION OF ISSUER
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REVENUE RECEIPTS" and "- DISTRIBUTION OF ISSUER PRINCIPAL
RECEIPTS AND ISSUER REVENUE RECEIPTS FOLLOWING ENFORCEMENT OF
THE ISSUER SECURITY AND ENFORCEMENT OF THE FUNDING SECURITY"
and (2) the previous issuers in respect of the previous
issuers' similar obligations under their respective priorities
of payments; and
* any third party creditors of Funding (other than those referred
to later in this order of priority of payments), 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 of these
amounts expected to become due and payable in the immediately
following interest period by Funding and to pay or discharge
any liability of Funding for corporation tax on any chargeable
income or gain of Funding;
(B) then, towards payment of amounts due and payable to the cash
manager under the cash management agreement (together with any
amount in respect of VAT on those amounts);
(C) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of amounts, if any, due and
payable to the account bank under the terms of the bank account
agreement and to the corporate services provider under the
corporate services agreement;
(D) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of amounts (if any) due and
payable to the Funding swap provider under the Funding swap
agreement (except for any termination payments due and payable by
Funding following a Funding swap provider default (as defined later
in this section)) and amounts due to the Funding liquidity facility
provider under the Funding liquidity facility agreement other than
principal repayments and "FUNDING LIQUIDITY SUBORDINATED AMOUNTS"
which are:
* any withholding taxes and increased costs on the provision of
the Funding liquidity facility; and
* any additional costs incurred by the Funding liquidity facility
provider to comply with the requirements of the Bank of
England, the Financial Services Authority and/or the European
Central Bank and/or changes to the capital adequacy rules
applicable to the Funding liquidity facility provider and
Funding;
(E) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of interest due and payable
on the current term AAA advances in relation to the current
intercompany loans;
(F) then, towards a credit to the AAA principal deficiency sub-ledger
in an amount sufficient to eliminate any debit on that ledger;
(G) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of interest due and payable
on the current term AA advances in relation to the current
intercompany loans;
(H) then, towards a credit to the AA principal deficiency sub-ledger in
an amount sufficient to eliminate any debit on that ledger;
(I) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of interest due and payable
on the current term A advances in relation to the current
intercompany loans;
(J) then, towards a credit to the A principal deficiency sub-ledger in
an amount sufficient to eliminate any debit on that ledger;
(K) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of interest due and payable
on the previous term BBB advances in relation to the current
intercompany loans;
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(L) then, towards a credit to the BBB principal deficiency sub-ledger
in an amount sufficient to eliminate a debit on that ledger;
(M) then, towards payment of interest due and payable on the previous
term BB advance in relation to the previous intercompany loan made
by Holmes Financing (No. 4) PLC;
(N) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of any amounts due to the
issuer and the previous issuers in respect of their respective
obligations (if any) to make a termination payment to a current
swap provider (but excluding any payment due to a current swap
provider as a result of a current swap provider default or any
downgrade termination payment due to a current swap provider);
(O) then, towards a credit to the first reserve ledger in an amount up
to the first reserve fund required amount (see "CREDIT STRUCTURE --
FIRST RESERVE FUND") (except that amounts standing to the credit of
the second reserve ledger shall not be available for this purpose);
(P) then, towards a credit to the Funding liquidity reserve ledger in
an amount up to the Funding liquidity reserve fund required amount;
(Q) then, in no order of priority between them but in proportion to the
respective amounts due, to pay amounts due to:
* the issuer and/or the previous issuers, as the case may be, in
respect of their respective obligations to pay any termination
payment to a current swap provider following a current swap
provider default or any downgrade termination payment due to a
current swap provider;
* the previous issuers, as the case may be, in respect of their
respective obligations to pay any previous issuer liquidity
subordinated amounts under any previous issuer liquidity
facility agreement;
* any other amounts due to the issuer under the issuer
intercompany loan agreement and/or to the previous issuers
under the previous intercompany loan agreements, and not
otherwise provided for in this order of priorities;
* after the occurrence of a Funding swap provider default,
towards payment of any termination payment due and payable by
Funding under the Funding swap agreement; and
* the Funding liquidity facility provider to pay any Funding
liquidity subordinated amounts due under the Funding liquidity
facility agreement;
(R) then, towards a credit to the second reserve ledger in an amount up
to the second reserve fund required amount (see "CREDIT STRUCTURE");
(S) then, subject to meeting certain conditions precedent for repayment
of principal on the previous term BB advance, towards repayment of
principal due on the previous term BB advance;
(T) then, towards payment of amounts due to all start-up loan providers
under the start-up loan agreements;
(U) then, an amount equal to 0.01 per cent. of the Funding available
revenue receipts which shall be retained by Funding or distributed by it
by way of dividends to its shareholders;
(V) then, towards payment of any additional consideration due to the
seller pursuant to the terms of the mortgage sale agreement (this
together with the postponed deferred consideration, known as "DEFERRED
CONSIDERATION") other than postponed deferred consideration; and
(W) then, towards payment of any additional consideration due to the
seller which has been postponed pursuant to the terms of the mortgage
sale agreement (known as "POSTPONED DEFERRED CONSIDERATION").
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As used in this prospectus, "FUNDING SWAP PROVIDER DEFAULT" means the
occurrence of an event of default (as defined in the Funding swap agreement)
where the Funding swap provider is the defaulting party (as defined in the
Funding swap agreement).
As used in this prospectus, "CURRENT SWAP PROVIDER DEFAULT" means the
occurrence of an event of default (as defined in the relevant current swap
agreement) where a current swap provider is the defaulting party (as defined in
the relevant current swap agreement). "CURRENT SWAP PROVIDERS" means the issuer
swap providers and the previous swap providers to the previous issuers.
"CURRENT SWAP AGREEMENTS" means the issuer swap agreements and the previous
swap agreements entered into by the previous issuers.
DISTRIBUTION OF ISSUER REVENUE RECEIPTS
DEFINITION OF ISSUER REVENUE RECEIPTS
"ISSUER REVENUE RECEIPTS" will be calculated by the issuer cash manager four
business days prior to each interest payment date and will be an amount equal
to the sum of:
* interest to be paid by Funding on the relevant interest payment
date in respect of the issuer term advances under the issuer
intercompany loan;
* fees to be paid to the issuer by Funding on the relevant date under
the terms of the issuer intercompany loan;
* interest payable on the issuer's bank accounts and any authorised
investments (as defined in the glossary) and which will be received
on or before the relevant interest payment date in respect of the
issuer notes; and
* other net income of the issuer including amounts received or to be
received under the issuer swap agreements on or before the relevant
date (without double counting).
Distribution of issuer 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 amounts received by the issuer on each interest payment date. As
at the closing date, the order of priority will be as described in this
section.
As used in this prospectus, "ISSUER SWAP PROVIDER DEFAULT" means the
occurrence of an event of default (as defined in the relevant issuer dollar
currency swap agreements and/or the relevant issuer euro currency swap
agreements) where the relevant issuer swap provider is the defaulting party (as
defined in the relevant issuer swap agreement). "ISSUER SWAP AGREEMENT" means
any swap agreement between an issuer swap provider and the issuer. "DOWNGRADE
TERMINATION EVENT" means the occurrence of an additional termination event
following the failure by the relevant issuer swap provider to comply with the
ratings downgrade provisions set out in the relevant issuer swap agreement and
"DOWNGRADE TERMINATION PAYMENT" means a termination payment due and payable to
the relevant issuer swap provider following the occurrence of a downgrade
termination event, save to the extent that such termination payment may be
satisfied by any swap replacement payment made to the issuer following a
downgrade termination event in respect of the relevant swap and applied in
accordance with the relevant order of priority of payments.
If either on each interest payment date or when due in respect of amounts
due to third parties under paragraph (B) below or amounts due to the issuer
account banks under the issuer bank account agreement under paragraph (D)
below, the issuer security trustee will apply issuer revenue receipts in the
following order of priority (the "ISSUER PRE-ENFORCEMENT REVENUE PRIORITY OF
PAYMENTS"):
(A) first, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to:
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* the issuer security trustee, together with interest and any
amount in respect of VAT on those amounts, and to provide for
any amounts due or to become due during the following interest
period to the issuer security trustee under the issuer deed of
charge;
* the note trustee, together with interest and any amount in
respect of 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 issuer trust deed; and
* the agent bank, the paying agents, the registrar and the
transfer agent, together with interest and any amount in
respect of VAT on those amounts, and any costs, charges,
liabilities and expenses then due or to become due during the
following interest period to the agent bank, the paying agents,
the registrar and the transfer agent under the issuer paying
agent and agent bank agreement;
(B) then, 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), which amounts have been incurred without breach by the
issuer of the issuer transaction documents to which it is a party
and for which payment has not been provided for elsewhere and to
provide for any of those 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;
(C) then, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to the issuer
cash manager, together with any amount in respect of VAT on
those amounts, and to provide for any amounts due, or to become
due to the issuer cash manager in the immediately succeeding
interest period, under the issuer cash management agreement
and to the corporate services provider under the issuer
corporate services agreement and to the issuer account banks
under the issuer bank account agreement;
(D) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 class A issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
1 class A issuer dollar currency swap provider to pay interest
due and payable on the series 1 class A issuer notes;
* amounts due to the series 2 class A issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
2 class A issuer dollar currency swap provider to pay interest
due and payable on the series 2 class A issuer notes;
* amounts due to the series 3 class A issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
3 class A issuer dollar currency swap provider to pay interest
due and payable on the series 3 class A issuer notes;
* amounts due to the series 4 class A1 issuer euro currency swap
provider (except for any termination payment due and payable to
that issuer euro currency swap provider as a result of an issuer
euro currency swap provider default or any downgrade termination
payment) and from amounts received from the series 4 class A1
issuer euro currency swap provider to pay interest due and payable
on the series 4 class A1 issuer notes; and
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* interest due and payable on the series 4 class A2 issuer notes;
(E) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 class B issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
1 class B issuer dollar currency swap provider to pay interest
due and payable on the series 1 class B issuer notes;
* amounts due to the series 2 class B issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
2 class B issuer dollar currency swap provider to pay interest
due and payable on the series 2 class B issuer notes;
* interest due and payable on the series 3 class B issuer notes;
and
* amounts due to the series 4 class B issuer euro currency swap
provider (except for any termination payment due and payable to
that issuer euro currency swap provider as a result of an
issuer euro currency swap provider default or any downgrade
termination payment) and from amounts received from the series
4 class B issuer euro currency swap provider to pay interest
due and payable on the series 4 class B issuer notes;
(F) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 class M issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
1 class M issuer dollar currency swap provider to pay interest
due and payable on the series 1 class M issuer notes;
* amounts due to the series 2 class M issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
2 class M issuer dollar currency swap provider to pay interest
due and payable on the series 2 class M issuer notes;
* interest due and payable on the series 3 class M issuer notes;
and
* amounts due to the series 4 class M issuer euro currency swap
provider (except for any termination payment due and payable to
that issuer euro currency swap provider as a result of an
issuer euro currency swap provider default or any downgrade
termination payment) and from amounts received from the series
4 class M issuer euro currency swap provider to pay interest
due and payable on the series 4 class M issuer notes;
(G) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* any termination payment due to the series 1 class A issuer
dollar currency swap provider following an issuer dollar
currency swap provider default by the series 1 class A issuer
dollar currency swap provider or any downgrade termination
payment;
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* any termination payment due to the series 2 class A issuer
dollar currency swap provider following an issuer dollar
currency swap provider default by the series 2 class A issuer
dollar currency swap provider or any downgrade termination
payment; and
* any termination payment due to the series 3 class A issuer
dollar currency swap provider following an issuer dollar
currency swap provider default by the series 3 class A issuer
dollar currency swap provider or any downgrade termination
payment; and
* any termination payment due to the series 4 class A1 issuer
euro currency swap provider following an issuer euro currency
swap provider default by the series 4 class A1 issuer euro
currency swap provider or any downgrade termination payment;
(H) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* any termination payment due to the series 1 class B issuer
dollar currency swap provider following an issuer dollar
currency swap provider default by the series 1 class B issuer
dollar currency swap provider or any downgrade termination
payment;
* any termination payment due to the series 2 class B issuer
dollar currency swap provider following an issuer dollar
currency swap provider default by the series 2 class B issuer
dollar currency swap provider or any downgrade termination
payment; and
* any termination payment due to the series 4 class B issuer euro
currency swap provider following an issuer euro currency swap
provider default by the series 4 class B issuer euro currency
swap provider or any downgrade termination payment;
(I) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* any termination payment due to the series 1 class M issuer
dollar currency swap provider following an issuer dollar
currency swap provider default by the series 1 class M issuer
dollar currency swap provider or any downgrade termination
payment;
* any termination payment due to the series 2 class M issuer
dollar currency swap provider following an issuer dollar
currency swap provider default by the series 2 class M issuer
dollar currency swap provider or any downgrade termination
payment; and
* any termination payment due to the series 4 class M issuer euro
currency swap provider following an issuer euro currency swap
provider default by the series 4 class M issuer euro currency
swap provider or any downgrade termination payment;
(J) then, any surplus to the issuer.
DISTRIBUTION OF ISSUER REVENUE RECEIPTS AFTER ENFORCEMENT OF THE ISSUER
SECURITY BUT PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY
Following enforcement of the issuer security under the issuer deed of
charge, but prior to enforcement of the Funding security under the Funding deed
of charge, the issuer security trustee will apply issuer revenue receipts in
the same order of priority as set out in "DISTRIBUTION OF ISSUER REVENUE
RECEIPTS" except that:
173
* in addition to the amounts due to the issuer security trustee under
paragraph (A) of "DISTRIBUTION OF ISSUER REVENUE RECEIPTS --
DISTRIBUTION OF ISSUER REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE
ISSUER SECURITY", issuer revenue receipts will be applied to pay
amounts due to any receiver appointed by the issuer security
trustee together with interest and any amount in respect of VAT on
those amounts, and to provide for any amounts due or to become due
to the receiver during the following interest period; and
* the issuer security trustee will not be required to pay amounts due
to any entity which is not an issuer secured creditor.
DISTRIBUTION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF
THE FUNDING SECURITY OR THE OCCURRENCE OF A TRIGGER EVENT OR ENFORCEMENT OF THE
ISSUER SECURITY
DEFINITION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS
"FUNDING AVAILABLE PRINCIPAL RECEIPTS" will be calculated by the cash
manager on the day falling four business days prior to each interest payment
date and will be an amount equal to the sum of:
* all Funding principal receipts received by Funding during the
interest period ending on the relevant interest payment date;
* all Funding principal receipts standing to the credit of the cash
accumulation ledger which are to be applied on the next interest
payment date to repay a bullet term advance and/or, as applicable,
a scheduled amortisation term advance;
* the amount, if any, to be credited to the principal deficiency
ledger pursuant to items (F), (H) and (J) in "DISTRIBUTION OF
FUNDING AVAILABLE REVENUE RECEIPTS -- DISTRIBUTION OF FUNDING
AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING
SECURITY" on the relevant interest payment date;
* prior to enforcement of the Funding security or the occurrence of
an asset trigger event, and in respect of:
(1) the series 1 term AAA advance, the series 2 term AAA advance or
the series 3 term AAA advance under the issuer intercompany
loan;
(2) the series 1 term AAA advance, the series 2 term AAA advance,
the series 3 term AAA advance, the series 4A1 term AAA advance
or the series 4A2 term AAA advance under the previous
intercompany loan made by Holmes Financing (No. 6) PLC;
(3) the series 2 term AAA advances or the series 3A1 term AAA
advance under the previous intercompany loan made by Holmes
Financing (No. 5) PLC;
(4) the series 2 term AAA advance or the series 4 term AAA advance
under the previous intercompany loan made by Holmes Financing
(No. 4) PLC;
(5) the series 2 term AAA advance under the previous intercompany
loan made by Holmes Financing (No. 3) PLC; and
(6) all the term AAA advances under the previous intercompany loan
made by Holmes Financing (No. 1) PLC,
any amounts available to be drawn under the Funding liquidity
facility; and
* prior to enforcement of the Funding security and in respect of:
(1) the series 1 term AAA advance, the series 2 term AAA advance or
the series 3 term AAA advance under the issuer intercompany
loan;
(2) the series 1 term AAA advance, the series 2 term AAA advance,
the series 3 term AAA advance, the series 4A1 term AAA advance,
or the series 4A2 term AAA advance under the previous
intercompany loan made by Holmes Financing (No. 6) PLC;
174
(3) the series 2 term AAA advances or the series 3A1 term AAA
advance under the previous intercompany loan made by Holmes
Financing (No. 5) PLC;
(4) the series 2 term AAA advance or the series 4 term AAA advance
under the previous intercompany loan made by Holmes Financing
(No. 4) PLC;
(5) the series 2 term AAA advance under the previous intercompany
loan made by Holmes Financing (No. 3) PLC; and
(6) all the term AAA advances under the previous intercompany loan
made by Holmes Financing (No. 1) PLC,
the amount then standing to the credit of the first reserve ledger and the
Funding liquidity reserve ledger (if applicable) (but less any amounts applied
or to be applied on the relevant date in payment of interest and other revenue
expenses as set out in items (A) to (N) (inclusive) of the Funding pre-
enforcement revenue priority of payments), less the amount of Funding principal
receipts to be applied on the relevant interest payment date to pay items (A)
to (E) (inclusive), (G), (I) and (K) of the Funding pre-enforcement revenue
priority of payments.
RULES FOR APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND FUNDING
PRINCIPAL RECEIPTS
The Funding deed of charge sets out certain rules for the application by
Funding, or the cash manager on its behalf, of the Funding available principal
receipts on each interest payment date. The nine principal rules are as
follows:
(1)General rules
On each interest payment date, Funding or the cash manager on its
behalf will apply Funding available principal receipts:
* first, to repay the Funding liquidity facility provider amounts
drawn under the Funding liquidity facility on the prior
interest payment date in order to repay principal due on the
previous term AAA advances under the previous intercompany loan
made by Holmes Financing (No. 1) PLC, the previous series 2
term AAA advance under the previous intercompany loan made by
Holmes Financing (No. 3) PLC, the previous series 2 term AAA
advance and the previous series 4 term AAA advance under the
previous intercompany loan made by Holmes Financing (No. 4)
PLC, the previous series 2 term AAA advances and the previous
series 3A1 term AAA advance under the previous intercompany
loan made by Holmes Financing (No. 5) PLC, the previous series
1 term AAA advance, the previous series 2 term AAA advance, the
previous series 3 term AAA advance and the previous series 4
term AAA advances under the previous intercompany loan made by
Holmes Financing (No. 6) PLC and the series 1 term AAA advance,
the series 2 term AAA advance and the series 3 term AAA advance
made under the issuer intercompany loan;
* then, to replenish the first reserve fund to the extent only
that monies have been drawn from the first reserve fund to make
scheduled principal repayments on the previous term AAA
advances under the previous intercompany loan made by Holmes
Financing (No. 1) PLC, the previous series 2 term AAA advance
under the previous intercompany loan made by Holmes Financing
(No. 3) PLC, the previous series 2 term AAA advance and the
previous series 4 term AAA advance under the previous
intercompany loan made by Holmes Financing (No. 4) PLC, the
previous series 2 term AAA advances and the previous series 3A1
term AAA advance under the previous intercompany loan made by
Holmes Financing (No. 5) PLC, the previous series 1 term AAA
advance, the previous series 2 term AAA advance, the previous
series 3 term AAA advance and the previous series 4 term AAA
advances under the previous intercompany loan made by Holmes
Financing (No. 6) PLC and the series 1 term AAA advance, the
series 2 term AAA advance and the series 3 term AAA advance
under the issuer intercompany loan;
175
* then, after the application of Funding available revenue
receipts to replenish the Funding liquidity reserve fund up to
the amount of the Funding liquidity reserve required amount;
and
* then, to repay all outstanding term advances in accordance with
the terms and provisions of, as applicable, the issuer
intercompany loan and the previous intercompany loans and the
relative term advance ratings of those term advances. The
repayment terms of the issuer intercompany loan are described
in the remaining subsections under this section. Subject to the
principles described in paragraphs (2) to (9) inclusive below,
term advances will be repaid according to their respective term
advance ratings (first on the term advances with the highest
term advance rating, and thereafter on the term advances with
the next highest term advance rating, and so on, down to the
term advances with the lowest term advance rating).
(2) Prior to the occurrence of a trigger event and the enforcement of the
Funding security, repayment of the term AAA advances is determined by
final maturity date if more than one term AAA advance is due and payable
on the same interest payment date
If on any interest payment date amounts are due and payable under
more than one term AAA advance (whether in respect of the issuer
intercompany loan, the previous intercompany loans or any new
intercompany loan), then Funding will apply Funding available
principal receipts to repay the term AAA advance with the earliest
final maturity date and then the next earliest, and so on.
If, in this instance, any term AAA advances have the same final
maturity date, then Funding will apply Funding available principal
receipts to repay those term AAA advances in no order of priority
between them but in proportion to the respective amounts due.
(3) In certain circumstances, payment on all the term BBB advances, all the
term A advances and all the term AA advances is deferred
If:
* a principal loss has been recorded on the principal deficiency
ledger in respect of any of the term BBB advances, the term A
advances or the term AA advances under any intercompany loan;
or
* monies standing to the credit of the first reserve fund have
been used, on or prior to the relevant interest payment date,
to cure a principal deficiency in respect of any of the term
BBB advances and/or the term A advances and/or the term AA
advances under any current intercompany loan, and the first
reserve fund has not been replenished by a corresponding amount
on the relevant interest payment date; or
* as at the relevant interest payment date, the aggregate
outstanding principal balance of loans in the mortgages trust,
in respect of which the aggregate amount in arrears is more
than three times the monthly payment then due, is more than 5
per cent. of the aggregate outstanding principal balance of
loans in the mortgages trust,
then, any term BBB advances, any term A advances or term AA
advances which are due and payable (whether in respect of the
issuer intercompany loan, the previous intercompany loans or any
new intercompany loan) will not be entitled to receive principal
repayments until the relevant circumstances as described in the
preceding bulleted list have been cured or otherwise cease to
exist.
176
(4) Effect of cash accumulation period on term advances
From the time that a cash accumulation period has started in
respect of a bullet term advance, Funding available principal
receipts will be deposited in the Funding GIC account and the
amount of those deposits will be recorded on the cash accumulation
ledger until Funding has saved enough to repay the relevant bullet
term advance. Amounts accumulated by Funding during a scheduled
amortisation period will also be deposited in the Funding GIC
account and the amount so deposited recorded in the cash
accumulation ledger, until Funding has received sufficient
principal receipts to repay the relevant scheduled amortisation
term advance.
During the cash accumulation period for a bullet term advance made
under an intercompany loan agreement ("INTERCOMPANY LOAN AGREEMENT
X") no principal repayments will be made on the pass-through term
advances or any scheduled amortisation term advances made under
that intercompany loan agreement X (unless that scheduled
amortisation term advance has a deemed "AAA" rating). Subject to
the terms set out in paragraphs (1) and (9) of this section,
however, during a cash accumulation period under intercompany loan
agreement X, payments may continue to be made in relation to term
advances due and payable under other intercompany loan agreements.
(5) Repayment of pass-through term advances when there are no amounts due on
scheduled amortisation term advances and no cash accumulation period
If:
* amounts are due and payable in respect of any payable pass-
through term advances;
* no amounts are due and payable on any scheduled amortisation
term advances; and
* the cash accumulation period has not commenced in respect of
any bullet term advance or all bullet term advances have been
repaid,
then subject to paragraphs (1), (6) and (8) of this section, on
each interest payment date, Funding or the cash manager on its
behalf will apply all Funding available principal receipts to repay
the payable pass-through term advances.
(6) Repayment of scheduled amortisation term advances when there are no
amounts due on pass-through term advances and no cash accumulation
period
If:
* amounts are due and payable in respect of any scheduled
amortisation term advance;
* no amounts are due and payable on any pass-through term
advances; and
* the cash accumulation period has not commenced in respect of
any bullet term advance or all bullet term advances have been
repaid,
then subject to paragraphs (1) and (8) of this section, on each
applicable interest payment date, Funding or the cash manager on
its behalf will apply all Funding available principal receipts to
repay the payable scheduled amortisation term advances.
(7) Repayment of the issuer series 1 term AAA advance
If the scheduled amortisation period is extended in respect of the
previous issuer series 1 term AAA advance made by Holmes Financing
(No. 6) PLC and the issuer series 1 term AAA advance (because the
portfolio CPR in respect of the loans has fallen to below 8 per
cent. per annum), then the extra amounts accumulated by Funding
during that extended scheduled amortisation period will not be
available for any other purpose other than to repay the previous
issuer series 1 term AAA advance made by Holmes Financing (No. 6)
PLC and the issuer series 1 term AAA advance on their scheduled
repayment dates in October 2003 and April 2004, respectively.
177
(8) Repayment of pass-through term advances and scheduled amortisation term
advances when there is no cash accumulation period
If amounts are due and payable in respect of pass-through term
advances and/or scheduled amortisation term advances on the same
interest payment date under different intercompany loan agreements,
then in certain circumstances Funding will apply principal receipts
to repay both of them, irrespective of term advance rating. That
is, if:
(a) under an intercompany loan agreement (called "INTERCOMPANY LOAN
AGREEMENT A"), amounts are due and payable in respect of a
pass-through term advance and/or a scheduled amortisation term
advance, in either case which does not have a term advance
rating of "AAA" (the "SUBORDINATED PAYABLE PASS-THROUGH TERM
ADVANCE" and the "SUBORDINATED SCHEDULED AMORTISATION TERM
ADVANCE" respectively);
(b) under a different intercompany loan agreement ("INTERCOMPANY
LOAN AGREEMENT B"), amounts are due and payable in respect of a
pass-through term advance and/or a scheduled amortisation term
advance in either case which has a term advance rating of "AAA"
(the "SENIOR PAYABLE PASS-THROUGH TERM ADVANCE" and the "SENIOR
PAYABLE SCHEDULED AMORTISATION TERM ADVANCE"); and
(c) there is no cash accumulation period under intercompany loan
agreement A or intercompany loan agreement B affecting payments
under intercompany loan agreement A or intercompany loan
agreement B, respectively,
then on each interest payment date prior to the occurrence of a
trigger event or enforcement of the Funding security, Funding or
the cash manager on its behalf will apply Funding principal
receipts:
(i) to repay the subordinated payable pass-through term advance
and/or (as applicable) the subordinated scheduled amortisation
term advance:
outstanding principal balance of intercompany loan A
Funding share percentage x principal receipts x ----------------------------------------------------------------------
aggregate outstanding principal balance of all intercompany loans; and
(ii) to repay the senior payable pass-through term advance and/or
(as applicable) the senior payable scheduled amortisation term
advance as follows:
outstanding principal balance of intercompany loan B
Funding share percentage x principal receipts x ------------------------------------------------------------------
aggregate outstanding principal balance of all intercompany loans;
(iii) if, after applying the Funding share percentage of
principal receipts to repay the payable pass-through term
advance and/or the payable scheduled amortisation term
advance pursuant to paragraphs (i) and (ii) above, there is
a shortfall in the amount due and payable on that interest
payment date on a payable scheduled amortisation term
advance, Funding will apply those additional principal
receipts received from the mortgages trustee during the
current interest period for the purpose of repayment of the
relevant payable scheduled amortisation term advance, to
repay that scheduled amortisation term advance (see "THE
MORTGAGES TRUST -- MORTGAGES TRUSTEE DISTRIBUTION OF
PRINCIPAL RECEIPTS PRIOR TO THE OCCURRENCE OF A TRIGGER
EVENT"); and
(iv) if there is more than one pass-through term advance or more
than one scheduled amortisation term advance due and payable
under an intercompany loan agreement, then those advances will
be aggregated for the purposes of the above calculations.
178
(9) Repayment of pass-through term advances and scheduled amortisation
advances during a cash accumulation period under a different
intercompany loan
Funding may continue to make payments on pass-through term advances
and scheduled amortisation term advances in circumstances where a
cash accumulation period has commenced under a different
intercompany loan. That is, if:
* amounts are outstanding in respect of a payable pass-through
term advance or a payable scheduled amortisation term advance
made under an intercompany loan agreement (called "INTERCOMPANY
LOAN AGREEMENT Y"); and
* in respect of a different intercompany loan agreement (called
"INTERCOMPANY LOAN AGREEMENT Z") the cash accumulation period
in relation to a bullet term advance made under that
intercompany loan agreement Z has commenced,
then on each interest payment date, Funding or the cash manager on
its behalf will apply an amount equal to the amount determined as
follows to repay the outstanding payable pass-through term advance
and/or the payable scheduled amortisation term advance under
intercompany loan agreement Y:
outstanding principal balance of
intercompany loan Y
Funding share percentage x principal receipts x ----------------------------------
aggregate outstanding principal
balance of all intercompany loans;
If, however, the relevant interest payment date is also the
scheduled repayment date for the bullet term advance under
intercompany loan agreement Z and there is not enough money to
repay that bullet term advance and the payable pass- through term
advances and the payable scheduled amortisation term advances due
under intercompany loan agreement Y, then the following principle
will apply: to the extent that that bullet term advance has a
higher rating than the payable pass-through term advances or the
payable scheduled amortisation term advances, all monies will be
applied to repay that bullet term advance.
The nine principal rules will not affect principal payments on the
previous term BB advance made by Holmes Financing (No. 4) PLC
because they are made out of Funding available revenue receipts
and/or amounts standing to the credit of the reserve funds (subject
in each case to meeting the relevant conditions precedent). For the
purpose of calculating the outstanding principal balance of any
intercompany loan, the principal amount outstanding of any term
advance the proceeds of which have been credited to the first
reserve fund, shall be deducted from the amount outstanding of the
relevant intercompany loan.
Repayment of issuer term AAA advances prior to a trigger event,
enforcement of the issuer security or enforcement of the Funding
security
Prior to:
(1) the occurrence of a trigger event (as described further in
"MORTGAGES TRUST"); or
(2) enforcement of the issuer security by the issuer security
trustee under the issuer deed of charge; or
(3) enforcement of the Funding security by the security trustee
under the Funding deed of charge,
the issuer term AAA advances will be repaid in accordance with the
issuer intercompany loan agreement as follows (after replenishing
the first reserve fund (to the extent only that money has been
drawn from the first reserve fund to make scheduled principal
repayments) and then replenish the Funding liquidity reserve fund
up to the Funding liquidity reserve required amount):
179
* on the interest payment date falling in January 2004, Funding
is required to repay the issuer series 1 term AAA advance to
the issuer in accordance with the repayment schedule following
this bulleted list. If there are insufficient funds available
to repay the issuer series 1 term AAA advance on the interest
payment date falling in January 2004, then the shortfall will
be repaid on the subsequent interest payment date falling in
April 2004 (together with any other amounts scheduled to be
repaid on the issuer series 1 term AAA advance on that interest
payment date) from Funding available principal receipts;
* on the interest payment date falling in January 2006, Funding
is required to repay the issuer series 2 term AAA advance to
the issuer and, if there are insufficient funds available to
repay the issuer series 2 term AAA advance on that interest
payment date, then the shortfall will be repaid on subsequent
interest payment dates from Funding available principal
receipts until the issuer series 2 term AAA advance is fully
repaid; and
* on the interest payment date falling in January 2007, Funding
is required to repay the issuer series 3 term AAA advance to
the issuer in accordance with the repayment schedule following
this bulleted list. If there are insufficient funds available
to repay the issuer series 3 term AAA advance on the interest
payment date falling in January 2007, then the shortfall will
be repaid on the subsequent interest payment date falling in
April 2007 (together with any other amounts scheduled to be
repaid on the issuer series 3 term AAA advance on that interest
payment date) from Funding available principal receipts.
REPAYMENT SCHEDULE IN RELATION TO THE ISSUER SERIES 1 TERM AAA ADVANCE:
INTEREST PAYMENT DATE FALLING IN AMOUNT DUE
------------------
January 2004 .................... [GBP][236,890,000]
April 2004 ...................... [GBP][236,890,000]
REPAYMENT SCHEDULE IN RELATION TO THE ISSUER SERIES 3 TERM AAA ADVANCE:
INTEREST PAYMENT DATE FALLING IN AMOUNT DUE
------------------
January 2007 .................... [GBP][157,928,000]
April 2007 ...................... [GBP][157,928,000]
Repayment of issuer term AA advances prior to a trigger event or enforcement of
the issuer security or enforcement of the Funding security
Prior to:
(1) the occurrence of a trigger event (as described further in "THE
MORTGAGES TRUST"); or
(2) enforcement of the issuer security by the issuer security trustee
under the issuer deed of charge; or
(3) enforcement of the Funding security by the security trustee under
the Funding deed of charge,
the issuer term AA advances will be repaid in accordance with the issuer
intercompany loan agreement as follows (after replenishing the first reserve
fund (to the extent only that money has been drawn from the first reserve fund
to make scheduled principal repayments) and then replenish the Funding
liquidity reserve fund up to the Funding liquidity reserve required amount):
* on each interest payment date falling on or after the date on which
the issuer series 1 term AAA advance has been fully repaid, Funding
is required to repay the issuer series 1 term AA advance from
Funding available principal receipts until the issuer series 1 term
AA advance is fully repaid;
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* on each interest payment date falling on or after the date on which
the issuer series 2 term AAA advance has been fully repaid, Funding
is required to repay the issuer series 2 term AA advance from
Funding available principal receipts until the issuer series 2 term
AA advance is fully repaid;
* on each interest payment date falling on or after the date on which
the issuer series 3 term AAA advance has been fully repaid, Funding
is required to repay the issuer series 3 term AA advance from
Funding available principal receipts until the issuer series 3 term
AA advance is fully repaid; and
* on each interest payment date falling on or after the date on which
the issuer series 4 term AAA advances have been fully repaid,
Funding is required to repay the issuer series 4 term AA advance
from Funding available principal receipts until the issuer series 4
term AA advance is fully repaid.
If on any interest payment date amounts are due and payable under any term
AA advances (whether in respect of the issuer intercompany loan, the previous
intercompany loans or any new intercompany loan) when amounts are also due and
payable under any term AAA advances (whether in respect of the issuer
intercompany loan, the previous intercompany loans or any new intercompany
loan) then Funding will apply Funding available principal receipts to repay
those term AAA advances in priority to amounts due under any term AA advance.
If on any interest payment date amounts are due and payable under more than
one term AA advance (whether in respect of the issuer intercompany loan, the
previous intercompany loans or any new intercompany loan), then Funding will
apply Funding available principal receipts to repay those term AA advances
without priority between them and in accordance with the respective amounts due
to each of them.
In the circumstances described in paragraphs (2) and (3) of "RULES FOR
APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND FUNDING PRINCIPAL
RECEIPTS", payment of principal on the term AA advances will be deferred until
such time (if ever) as the relevant circumstances cease to exist or are
otherwise cured.
Repayment of issuer term A advances prior to a trigger event or enforcement
of the issuer security or enforcement of the Funding security
Prior to:
(1) the occurrence of a trigger event (as described further in "THE
MORTGAGES TRUST"); or
(2) enforcement of the issuer security by the issuer security trustee
under the issuer deed of charge; or
(3) enforcement of the Funding security by the security trustee under
the Funding deed of charge,
the issuer term A advances will be repaid in accordance with the issuer
intercompany loan agreement as follows (after replenishing the first reserve
fund (to the extent only that money has been drawn from the first reserve fund
to make scheduled principal repayments) and then replenish the Funding
liquidity reserve fund up to the Funding liquidity reserve required amount):
* on each interest payment date falling on or after the date on which
the issuer series 1 term AA advance has been fully repaid, Funding
is required to repay the issuer series 1 term A advance from
Funding available principal receipts until the issuer series 1 term
A advance is fully repaid;
* on each interest payment date falling on or after the date on which
the issuer series 2 term AA advance has been fully repaid, Funding
is required to repay the issuer series 2 term A advance from
Funding available principal receipts until the issuer series 2 term
A advance is fully repaid;
* on each interest payment date falling on or after the date on which
the issuer series 3 term AA advance has been fully repaid, Funding
is required to repay the issuer series 3 term A advance from
Funding available principal receipts until the issuer series 3 term
A advance is fully repaid; and
181
* on each interest payment date falling on or after the date on which
the issuer series 4 term AA advance has been fully repaid, Funding
is required to repay the issuer series 4 term A advance from
Funding available principal receipts until the issuer series 4 term
A advance is fully repaid;
If on any interest payment date amounts are due and payable under any term A
advances (whether in respect of the issuer intercompany loan or any new
intercompany loan), when amounts are also due and payable under any term AAA
and/or any term AA advances (whether in respect of the issuer intercompany
loan, the previous intercompany loans or any new intercompany loan), then
Funding will apply Funding available principal receipts to repay those term AAA
advances and/or term AA advances in priority to amounts due under any term A
advances.
If on any interest payment date amounts are due and payable under more than
one term A advance (whether in respect of the issuer intercompany loan, the
previous intercompany loans or any new intercompany loan), then Funding will
apply Funding available principal receipts to repay those term A advances
without priority between them and in accordance with the respective amounts due
to each of them.
In the circumstances described in paragraphs (2) and (3) of "RULES FOR
APPLICATION OF FUNDING AVAILABLE PRINCIPAL RECEIPTS AND FUNDING PRINCIPAL
RECEIPTS", payment of principal on the term A advances will be deferred until
such time (if ever) as the relevant circumstances cease to exist or are
otherwise cured.
REPAYMENT OF PREVIOUS TERM BB ADVANCE MADE BY HOLMES FINANCING (NO. 4) PLC
The previous BB term advance made by Holmes Financing (No. 4) PLC is repaid
out of Funding available revenue receipts and/or amounts standing to the credit
of the reserve funds (subject in each case to meeting certain conditions
precedent), as described in "CASHFLOWS -- DISTRIBUTION OF FUNDING AVAILABLE
REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY".
REPAYMENT OF TERM ADVANCES OF EACH SERIES (OTHER THAN THE PREVIOUS TERM BB
ADVANCE MADE BY HOLMES FINANCING (NO. 4) PLC) FOLLOWING THE OCCURRENCE OF A
NON-ASSET TRIGGER EVENT PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY OR THE
FUNDING SECURITY.
Following the occurrence of a non-asset trigger event under the mortgages
trust deed but prior to enforcement of the Funding security by the security
trustee under the Funding deed of charge or the issuer security under the
issuer deed of charge, the bullet term advances and the scheduled amortisation
term advances in respect of any intercompany loan will be deemed to be pass-
through term advances and on each interest payment date Funding will be
required to apply Funding available principal receipts in the following order
of priority (after replenishing the first reserve fund (to the extent only that
money has been drawn from the first reserve fund to make scheduled principal
repayments) and then replenish the Funding liquidity reserve fund up to the
Funding liquidity reserve required amount):
first, to repay the term AAA advance with the earliest final maturity
date, then to repay the term AAA advance with the next earliest final
maturity, and so on until the term AAA advances in respect of the issuer
intercompany loan, the previous intercompany loans and any new
intercompany loans are fully repaid;
then, in no order of priority between them but in proportion to the
amounts due, to repay the term AA advances in respect of the issuer
intercompany loan, the previous intercompany loans and any new
intercompany loans, until those term AA advances are fully repaid;
then, in no order of priority between them but in proportion to the
amounts due, to repay the term A advances in respect of the issuer
intercompany loan, any previous intercompany loan and any new
intercompany loans, until those term A advances are fully repaid; and
then, in no order of priority between them but in proportion to the
amounts due, to repay the term BBB advances in respect of the previous
intercompany loans and any new intercompany loans, until those term BBB
advances are fully repaid.
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REPAYMENT OF TERM ADVANCES OF EACH SERIES (OTHER THAN THE PREVIOUS TERM BB
ADVANCE MADE BY HOLMES FINANCING (NO. 4) PLC) FOLLOWING THE OCCURRENCE OF AN
ASSET TRIGGER EVENT PRIOR TO ENFORCEMENT OF THE ISSUER SECURITY OR THE FUNDING
SECURITY.
Following the occurrence of an asset trigger event but prior to enforcement
by the security trustee of the Funding security under the Funding deed of
charge or the issuer security under the issuer deed of charge, the bullet term
advances and the scheduled amortisation term advances in respect of any
intercompany loan will be deemed to be pass-through term advances and on each
interest payment date Funding will be required to apply Funding available
principal receipts in the following order of priority (after replenishing the
first reserve fund (to the extent only that money has been drawn from the first
reserve fund to make scheduled principal repayments) and then replenish the
Funding liquidity reserve fund up to the Funding liquidity reserve required
amount):
first, in no order of priority between them, but in proportion to the
amounts due, to repay the term AAA advances in respect of the issuer
intercompany loan, the previous intercompany loans and any new
intercompany loans, until each of those term AAA advances is fully
repaid;
then, in no order of priority between them, but in proportion to the
amounts due, to repay the term AA advances in respect of the issuer
intercompany loan, the previous intercompany loans and any new
intercompany loans, until each of those term AA advances is fully repaid;
then, in no order of priority between them but in proportion to the
amounts due, to repay the term A advances in respect of the issuer
intercompany loan, any previous intercompany loan and any new
intercompany loans, until those term A advances are fully repaid; and
then, in no order of priority between them, but in proportion to the
amounts due, to repay the term BBB advances in respect of the previous
intercompany loans and any new intercompany loans, until each of those
term BBB advances is fully repaid.
REPAYMENT OF TERM ADVANCES OF EACH SERIES FOLLOWING ENFORCEMENT OF THE ISSUER
SECURITY
If the issuer security is enforced by the issuer security trustee under the
issuer deed of charge, then that will not result in automatic enforcement of
the Funding security under the Funding deed of charge. In those circumstances,
however, the bullet term advance and the scheduled amortisation advances under
the issuer intercompany loan (only) will be deemed to be pass-through term
advances and Funding will be required to apply Funding available principal
receipts on each interest payment date in the following order of priority
(after replenishing the first reserve fund (to the extent only that money has
been drawn from the first reserve fund to make scheduled principal repayments)
and then replenish the Funding liquidity reserve fund up to the Funding
liquidity reserve required amount):
first, in no order of priority between them, but in proportion to the
amounts due, to repay the issuer series 1 term AAA advance, the issuer
series 2 term AAA advance, the issuer series 3 term AAA advance and the
issuer series 4 term AAA advance until each of those advances is fully
repaid;
then, in no order of priority between them, but in proportion to the
amounts due, to repay the issuer series 1 term AA advance, the issuer
series 2 term AA advance, the issuer series 3 term AA advance and the
issuer series 4 term AA advance until each of those advances is fully
repaid; and
then, in no order of priority between them, but in proportion to the
amounts due, to repay the issuer series 1 term A advance, the issuer
series 2 term A advance, the issuer series 3 term A advance and the
issuer series 4 term A advance until each of those advances is fully
repaid.
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DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS
DEFINITION OF ISSUER PRINCIPAL RECEIPTS
Prior to enforcement of the issuer security, "ISSUER PRINCIPAL RECEIPTS"
will be calculated by the issuer cash manager four business days prior to each
interest payment date and will be an amount equal to the sum of all principal
amounts to be repaid by Funding to the issuer under the issuer intercompany
loan during the relevant interest period.
Following enforcement of the issuer security, but prior to enforcement of
the Funding security, "ISSUER PRINCIPAL RECEIPTS" means the sum calculated by
the issuer security trustee four business days prior to each interest payment
date as the amount to be repaid by Funding to the issuer under the issuer
intercompany loan during the relevant interest period and/or the sum otherwise
recovered by the issuer security trustee (or the receiver appointed on its
behalf) representing the principal balance of the issuer notes.
DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS PRIOR TO ENFORCEMENT OF THE ISSUER
SECURITY
Prior to enforcement of the issuer security, the issuer, or the issuer cash
manager on its behalf, will apply any issuer principal receipts on each
interest payment date, to repay the issuer notes in the following manner:
CLASS A ISSUER NOTES
* the series 1 class A issuer notes will be redeemed on each interest
payment date (1) in amounts corresponding to the amounts (if any)
repaid under the issuer series 1 term AAA advance after converting
the same into dollars at the relevant issuer dollar currency swap
rate;
* the series 2 class A issuer notes will be redeemed on each interest
payment date (1) in amounts corresponding to the amounts (if any)
repaid under the issuer series 2 term AAA advance after converting
the same into dollars at the relevant issuer dollar currency swap
rate;
* the series 3 class A issuer notes will be redeemed on each interest
payment date (1) in amounts corresponding to the relevant amounts
(if any) repaid under the issuer series 3 term AAA advance after
converting the same into dollars at the relevant issuer dollar
currency swap rate;
* the series 4 class A1 issuer notes will be redeemed on each
interest payment date (1) in amounts corresponding to the relevant
amounts (if any) repaid under the issuer series 4 A1 term AAA
advance after converting the same into euros at the relevant issuer
euro currency swap rate; and
* the series 4 class A2 issuer notes will be redeemed on each
interest payment date in amounts corresponding to the relevant
amounts (if any) repaid under the issuer series 4A2 term AAA
advance.
CLASS B ISSUER NOTES
* the series 1 class B issuer notes will be redeemed on each interest
payment date in amounts corresponding to the amounts (if any)
repaid under the issuer series 1 term AA advance after converting
the same into dollars at the relevant issuer dollar currency swap
rate;
* the series 2 class B issuer notes will be redeemed on each interest
payment date in amounts corresponding to the amounts (if any)
repaid under the issuer series 2 term AA advance after converting
the same into dollars at the relevant issuer dollar currency swap
rate;
* the series 3 class B issuer notes will be redeemed on each interest
payment date in amounts corresponding to the amounts (if any)
repaid under the issuer series 3 term AA advance; and
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* the series 4 class B issuer notes will be redeemed on each interest
payment date in amounts corresponding to the amounts (if any)
repaid under the issuer series 4 term AA advance after converting
the same into euro at the relevant issuer euro currency swap rate.
CLASS M ISSUER NOTES
* the series 1 class M issuer notes will be redeemed on each interest
payment date in amounts corresponding to the amounts (if any)
repaid under the issuer series 1 term A advance after converting
the same into dollars at the relevant issuer dollar currency swap
rate;
* the series 2 class M issuer notes will be redeemed on each interest
payment date in amounts corresponding to the amounts (if any)
repaid under the issuer series 2 term A advance after converting
the same into dollars at the relevant issuer dollar currency swap
rate;
* the series 3 class M issuer notes will be redeemed on each interest
payment date in amounts corresponding to the amounts (if any)
repaid under the issuer series 3 term A advance; and
* the series 4 class M issuer notes will be redeemed on each interest
payment date in amounts corresponding to the amounts (if any)
repaid under the issuer series 4 term A advance after converting
the same into euro at the relevant issuer euro currency swap rate.
DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS FOLLOWING ENFORCEMENT OF THE ISSUER
SECURITY BUT PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY
The issuer deed of charge sets out the order of priority of distribution of
issuer principal receipts received or recovered by the issuer security trustee
(or a receiver appointed on its behalf) following enforcement of the issuer
security but prior to enforcement of the Funding security. In these
circumstances, the issuer security trustee will apply issuer principal receipts
on each interest payment date to repay the issuer notes in the following
manner:
* first, in no order of priority between them, but in proportion to
the amounts due, to repay the series 1 class A issuer notes (after
converting the relevant amount of issuer principal receipts into
dollars at the relevant issuer dollar currency swap rate), the
series 2 class A issuer notes (after converting the relevant amount
of issuer principal receipts into dollars at the relevant issuer
dollar currency swap rate), the series 3 class A issuer notes
(after converting the relevant amount of issuer principal receipts
into dollars at the relevant issuer dollar currency swap rate), the
series 4 class A1 issuer notes (after converting the relevant
amount of issuer principal receipts into euro at the relevant
issuer euro currency swap rate) and the series 4 class A2 issuer
notes;
* then, in no order of priority between them, but in proportion to
the amounts due, to repay the series 1 class B issuer notes (after
converting the relevant amount of issuer principal receipts into
dollars at the relevant issuer dollar currency swap rate), the
series 2 class B issuer notes (after converting the relevant amount
of issuer principal receipts into dollars at the relevant issuer
dollar currency swap rate), the series 3 class B issuer notes and
the series 4 class B issuer notes (after converting the relevant
amount of issuer principal receipts into euro at the relevant
issuer euro currency swap rate); and
* then, in no order of priority between them, but in proportion to
the amounts due, to repay the series 1 class M issuer notes (after
converting the relevant amount of issuer principal receipts into
dollars at the relevant issuer dollar currency swap rate), the
series 2 class M issuer notes (after converting the relevant amount
of issuer principal receipts into dollars at the relevant issuer
dollar currency swap rate), the series 3 class M issuer notes and
the series 4 class M issuer notes (after converting the relevant
amount of issuer principal receipts into euro at the relevant
issuer euro currency swap rate).
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DISTRIBUTION OF FUNDING PRINCIPAL RECEIPTS AND FUNDING REVENUE RECEIPTS
FOLLOWING ENFORCEMENT OF THE FUNDING SECURITY
The Funding deed of charge sets out the order of priority of distribution as
at the closing date by the security trustee, following service of a current
intercompany loan enforcement notice, of amounts received or recovered by the
security trustee or a receiver appointed on its behalf. If Funding enters into
new intercompany loan agreements, then this order of priority will change --
see "SECURITY FOR FUNDING'S OBLIGATIONS".
The security trustee will apply amounts received or recovered following
enforcement of the Funding security on each interest payment date in accordance
with the following order of priority (except for amounts due to the account
bank under the bank account agreement, which will be paid when due):
(A) first, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to:
* the security trustee and any receiver appointed by the security
trustee, together with interest and any amount in respect of
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; and
* the issuer in respect of the issuer's obligations specified in
items (A) to (C) of the issuer post-enforcement priority of
payments and the previous issuers in respect of their own
similar obligations;
(B) then, 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 VAT on those amounts;
(C) then, 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) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of amounts (if any) due to
the Funding swap provider under the Funding swap agreement (except
for any termination payments due and payable by Funding under the
Funding swap agreement following a Funding swap provider default)
and amounts due to the Funding liquidity facility provider under
the Funding liquidity facility agreement (except for any Funding
liquidity facility subordinated amounts);
(E) then, in no order of priority between them but in proportion to the
respective amounts due, towards payments of interest and principal
due and payable on the current term AAA advances outstanding under
the current intercompany loans;
(F) then, in no order of priority between them but in proportion to the
respective amounts due, towards payments of interest and principal
due and payable on the current term AA advances outstanding under
the current intercompany loans;
(G) then, in no order of priority between them but in proportion to the
respective amounts due, towards payments of interest and principal
due and payable on the current term A advances outstanding under
the current intercompany loans;
(H) then, in no order of priority between them but in proportion to the
respective amounts due, towards payments of interest and principal
due and payable on the previous term BBB advances outstanding under
the previous intercompany loans;
(I) then, towards payment of any amounts due to the issuer and the
previous issuers in respect of their respective obligations (if
any) to make a termination payment to a current swap provider (but
excluding any payment due to a relevant current swap provider
following a current swap provider default or any downgrade
termination payment to a current swap provider);
186
(J) then, towards payments of interest and principal due and payable on
the previous term BB advance outstanding under the previous
intercompany loan made by Holmes Financing (No. 4) PLC;
(K) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the issuer and the previous issuers in respect
of their respective obligations to pay any termination payment
to a current swap provider following a current swap provider
default or any downgrade termination payment to a current swap
provider;
* amounts due to the previous issuers in respect of their
respective obligations to pay any previous issuer liquidity
subordinated amounts to any previous issuer liquidity facility
providers;
* any other amounts due to the issuer and/or the previous issuers
under the issuer intercompany loan agreement and/or the
previous intercompany loan agreements and not otherwise
provided for earlier in this order of priorities;
* any Funding liquidity subordinated amounts due to the Funding
liquidity facility provider; and
* after the occurrence of a Funding swap provider default,
towards payment of any termination payment due and payable by
Funding under the Funding swap;
(L) then, towards payment of amounts due to all start-up loan providers
under the start-up loan agreements;
(M) then, towards payment of any postponed deferred consideration due
to the seller pursuant to the terms of the mortgage sale agreement;
and
(N) last, towards payment of any deferred consideration (other than
postponed deferred consideration) due to the seller pursuant to the
terms of the mortgage sale agreement.
DISTRIBUTION OF ISSUER PRINCIPAL RECEIPTS AND ISSUER REVENUE RECEIPTS FOLLOWING
ENFORCEMENT OF THE ISSUER SECURITY AND ENFORCEMENT OF THE FUNDING SECURITY
If the Funding security is enforced under the Funding deed of charge, then
there will be an automatic enforcement of the issuer security under the issuer
deed of charge. The issuer deed of charge sets out the order of priority of
distribution by the issuer security trustee, following enforcement of the
issuer security and enforcement of the Funding security (known as the "ISSUER
POST-ENFORCEMENT PRIORITY OF PAYMENTS"), of amounts received or recovered by
the issuer security trustee (or a receiver appointed on its behalf) (i) on each
interest payment date or (ii) when due in respect of amounts due to the issuer
account banks under the issuer bank account agreement under paragraph (B)
below, the issuer security trustee will apply amounts received or recovered
following enforcement of the issuer security as follows:
(A) first, in no order of priority between them but in proportion to
the respective amounts due, to pay amounts due to:
* the issuer security trustee and any receiver appointed by the
issuer security trustee together with interest and any amount
in respect of VAT on those amounts and any amounts then due or
to become due to the issuer security trustee and the receiver
under the provisions of the issuer deed of charge;
* the note trustee together with interest and any amount in
respect of VAT on those amounts and any amounts then due or to
become due and payable to the note trustee under the provisions
of the issuer trust deed; and
* the agent bank, the paying agents, the registrar and the
transfer agent together with interest and any amount in respect
of VAT on those amounts and any costs, charges, liabilities and
expenses then due or to become due and payable to them under
the provisions of the issuer paying agent and agent bank
agreement;
187
(B) then, in no order of priority between them but in proportion to the
respective amounts due, towards payment of amounts (together with
any amount in respect of 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 issuer corporate
services agreement and to the issuer account banks;
(C) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 class A issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
1 class A issuer dollar currency swap provider to pay interest
and principal due and payable on the series 1 class A issuer
notes;
* amounts due to the series 2 class A issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
2 class A issuer dollar currency swap provider to pay interest
and principal due and payable on the series 2 class A issuer
notes;
* amounts due to the series 3 class A issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
3 class A issuer dollar currency swap provider to pay interest
and principal due and payable on the series 3 class A issuer
notes;
* amounts due to the series 4 class A1 issuer euro currency swap
provider (except for any termination payment due and payable to
that issuer euro currency swap provider as a result of an
issuer euro currency swap provider default or any downgrade
termination payment) and from amounts received from the series
4 class A1 issuer euro currency swap provider to pay interest
and principal due and payable on the series 4 class A1 issuer
notes; and
* interest and principal due and payable on the series 4 class A2
issuer notes;
(D) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 class B issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
1 class B issuer dollar currency swap provider to pay interest
and principal due and payable on the series 1 class B issuer
notes;
* amounts due to the series 2 class B issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
2 class B issuer dollar currency swap provider to pay interest
and principal due and payable on the series 2 class B issuer
notes;
* amounts due to the series 3 class B issuer notes; and
188
* interest and principal due and payable on the series 4 class B
issuer euro currency swap provider (except for any
termination payment due and payable to that issuer euro
currency swap provider as a result of an issuer euro currency
swap provider default or any downgrade termination payment) and
from amounts received from the series 4 class B issuer euro
currency swap provider to pay interest and principal due and
payable on the series 4 class B issuer notes;
(E) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* amounts due to the series 1 class M issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
1 class M issuer dollar currency swap provider to pay interest
and principal due and payable on the series 1 class M issuer
notes;
* amounts due to the series 2 class M issuer dollar currency swap
provider (except for any termination payment due and payable to
that issuer dollar currency swap provider as a result of an
issuer dollar currency swap provider default or any downgrade
termination payment) and from amounts received from the series
2 class M issuer dollar currency swap provider to pay interest
and principal due and payable on the series 2 class M issuer
notes;
* amounts due to the series 3 class M issuer notes; and
* interest and principal due and payable on the series 4 class M
issuer euro currency swap provider (except for any termination
payment due and payable to that issuer euro currency swap
provider as a result of an issuer euro currency swap provider
default or any downgrade termination payment) and from amounts
received from the series 4 class M issuer euro currency swap
provider to pay interest and principal due and payable on the
series 4 class M issuer notes;
(F) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* any termination payment due to the series 1 class A issuer
dollar currency swap provider, following an issuer dollar
currency swap provider default by the series 1 class A issuer
dollar currency swap provider or any downgrade termination
payment;
* any termination payment due to the series 2 class A issuer
dollar currency swap provider, following an issuer dollar
currency swap provider default by the series 2 class A issuer
dollar currency swap provider or any downgrade termination
payment; and
* any termination payment due to the series 3 class A issuer
dollar currency swap provider, following an issuer dollar
currency swap provider default by the series 3 class A issuer
dollar currency swap provider or any downgrade termination
payment; and
* any termination payment due to the series 4 class A1 issuer
euro currency swap provider, following an issuer euro currency
swap provider default by the series 4 class A1 issuer euro
currency swap provider or any downgrade termination payment;
(G) then, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* any termination payment due to the series 1 class B issuer
dollar currency swap provider, following an issuer dollar
currency swap provider default by the series 1 class B issuer
dollar currency swap provider or any downgrade termination
payment;
189
* any termination payment due to the series 2 class B issuer
dollar currency swap provider, following an issuer dollar
currency swap provider default by the series 2 class B issuer
dollar currency swap provider or any downgrade termination
payment; and
* any termination payment due to the series 4 class B issuer euro
currency swap provider, following an issuer euro currency swap
provider default by the series 4 class B issuer euro currency
swap provider or any downgrade termination payment; and
(H) last, in no order of priority between them but in proportion to the
respective amounts due, to pay:
* any termination payment due to the series 1 class M issuer
dollar currency swap provider, following an issuer dollar
currency swap provider default by the series 1 class M issuer
dollar currency swap provider or any downgrade termination
payment;
* any termination payment due to the series 2 class M issuer
dollar currency swap provider, following an issuer dollar
currency swap provider default by the series 2 class M issuer
dollar currency swap provider or any downgrade termination
payment; and
* any termination payment due to the series 4 class M issuer euro
currency swap provider, following an issuer euro currency swap
provider default by the series 4 class M issuer euro currency
swap provider or any downgrade termination payment.
190
CREDIT STRUCTURE
The issuer 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 a number of main features of the transaction which enhance
the likelihood of timely receipt of payments to noteholders, as follows:
* Funding available revenue receipts are expected to exceed interest
and fees payable to the issuer;
* a shortfall in Funding available revenue receipts may be met from
Funding's principal receipts;
* the first reserve fund, which was established on 26th July, 2000,
which was further funded on 29th November, 2000, 23rd May, 2001 and
5th July, 2001, is available to meet shortfalls in interest due on
the term advances and principal due on the previous term AAA
advances made by Holmes Financing (No. 1) PLC, the previous series
1 term AAA advance made by Holmes Financing (No. 2) PLC, the
previous series 1 term AAA advance and the previous series 2 term
AAA advance made by Holmes Financing (No. 3) PLC, the previous
series 2 term AAA advance and the previous series 4 term AAA
advance made by Holmes Financing (No. 4) PLC, the previous series 1
term AAA advance, the previous series 2 term AAA advances and the
previous series 3A1 term AAA advance made by Holmes Financing (No.
5) PLC, the previous series 1 term AAA advance, the previous series
2 term AAA advance, the previous series 3 term AAA advance and the
previous series 4 term AAA advances made by Holmes Financing (No.
6) PLC and the issuer series 1 term AAA advance, the issuer series
2 term AAA advance and the issuer series 3 term AAA advance;
* the second reserve fund, which was established on 29th November,
2000, further funded on 5th July, 2001 from the proceeds of the
previous term BB advance made by Holmes Financing (No. 4) PLC and
will be further funded by Funding's excess revenue to meet
shortfalls in interest due on the term advances if amounts standing
to the credit of the first reserve fund are insufficient for that
purpose;
* payments of the class M issuer notes will be subordinated to
payments on the class A issuer notes and class B issuer notes;
* payments on the class B issuer notes will be subordinated to
payments on the class A issuer notes;
* the mortgages trustee GIC account and the Funding GIC account each
earn interest at a specified rate (LIBOR for three-month sterling
deposits);
* a liquidity facility is available to Funding to pay principal
amounts due on the previous term AAA advances made by Holmes
Financing (No. 1) PLC, the previous series 1 term AAA advance made
by Holmes Financing (No. 2) PLC, the previous series 1 term AAA
advance and the previous series 2 term AAA advance made by Holmes
Financing (No. 3) PLC, the previous series 2 term AAA advance and
the previous series 4 term AAA advance made by Holmes Financing
(No. 4) PLC, the previous series 1 term AAA advance, the previous
series 2 term AAA advances and the previous series 3A1 term AAA
advance made by Holmes Financing (No. 5) PLC, the previous series 1
term AAA advance, the previous series 2 term AAA advance, the
previous series 3 term AAA advance and the previous series 4 term
AAA advances made by Holmes Financing (No. 6) PLC and the issuer
series 1 term AAA advance, the issuer series 2 term AAA advance and
the issuer series 3 term AAA advance;
* Funding will be obliged to establish a Funding liquidity reserve
fund if the seller ceases to have a long-term unsecured,
unsubordinated and unguaranteed credit rating by Moody's of at
least A3 or at least A- by Fitch (unless the relevant rating agency
confirms that the current rating of the notes will not be adversely
affected by the rating downgrade of the seller); and
191
* a seventh start-up loan will be provided to meet the costs of
setting up the structure.
Each of these factors is considered more fully in the remainder of this
section.
CREDIT SUPPORT FOR THE ISSUER NOTES PROVIDED BY FUNDING AVAILABLE REVENUE
RECEIPTS
It is anticipated that, during the life of the issuer notes, the Funding
share of the interest received from borrowers on the loans will, assuming that
all of the loans are fully performing, be greater than the sum of the interest
which the issuer has to pay on all of the issuer notes and the other costs and
expenses of the structure. In other words, the Funding available revenue
receipts would be sufficient to pay the amounts payable under items (A) to (E),
(G), (I) and (K) of the Funding pre-enforcement revenue priority of payments.
The actual amount of any excess will vary during the life of the issuer
notes. Two of the key factors determining the variation are as follows:
* the interest rate on the portfolio; and
* the level of arrears experienced.
INTEREST RATE ON THE PORTFOLIO
Funding has entered into a swap in relation to the previous intercompany
loans, the issuer intercompany loan and any new intercompany loan to enable it
to swap amounts of interest received from borrowers which vary on a variable,
tracker or fixed rate basis for amounts it receives from the Funding swap
counterparty which vary in accordance with LIBOR for three-month sterling
deposits, plus a margin expected to cover Funding's obligations to, among
others, the issuer. The swap hedges against the possible variance between a
LIBOR based rate for three-month sterling deposits and a weighted average of
the SVR payable on the variable rate loans (including those capped rate loans
that are not subject to the specified capped rate of interest), the rates of
interest payable on the tracker loans and the fixed rates of interest payable
on the fixed rate loans (including those capped rate loans that are subject to
the specified capped rate of interest).
The terms of the swaps are described in greater detail below in "THE SWAP
AGREEMENTS".
LEVEL OF ARREARS EXPERIENCED
If the level of arrears of interest payments made by the borrowers results
in Funding experiencing an income deficit, Funding will be able to use the
following amounts to cure that income deficit:
first, amounts standing to the credit of the first reserve fund, as
described in "FIRST RESERVE FUND";
second, amounts standing to the credit of the second reserve fund, as
described in "SECOND RESERVE FUND"; and
third, principal receipts, if any, as described in "USE OF FUNDING
PRINCIPAL RECEIPTS TO PAY FUNDING INCOME DEFICIENCY".
Any excess of Funding revenue receipts will be applied on each interest
payment date to the extent described in the Funding pre-enforcement revenue
priority of payments, including to extinguish amounts standing to the credit of
any principal deficiency ledger and to replenish the reserve funds.
USE OF FUNDING PRINCIPAL RECEIPTS TO PAY FUNDING INCOME DEFICIENCY
Four business days prior to each interest payment date, the cash manager
will calculate whether there will be an excess or a deficit of Funding
available revenue receipts (including the reserve funds) to pay items (A) to
(E), (G), (I) and (K) of the Funding pre-enforcement revenue priority of
payments.
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If there is a deficit, then Funding shall pay or provide for that deficit by
the application of Funding available principal receipts, if any, and the cash
manager shall make a corresponding entry in the relevant principal deficiency
sub-ledger, as described in "PRINCIPAL DEFICIENCY LEDGER".
Funding principal receipts may not be used to pay interest on any term
advance 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 term advance.
Funding shall apply any excess Funding available revenue receipts to
extinguish any balance on the principal deficiency ledger, as described in
"PRINCIPAL DEFICIENCY LEDGER".
FIRST RESERVE FUND
A first reserve fund has been established:
* to help meet any deficit in Funding available revenue receipts;
* to help meet any deficit recorded on the principal deficiency
ledger; and
* prior to enforcement of the Funding security, to help repay
principal due on the several previous term AAA advances made by
Holmes Financing (No. 1) PLC, the previous series 1 term AAA
advance made by Holmes Financing (No. 2) PLC, the previous series 1
term AAA advance and the previous series 2 term AAA advance made by
Holmes Financing (No. 3) PLC, the previous series 2 term AAA
advance and the previous series 4 term AAA advance made by Holmes
Financing (No. 4) PLC, the previous series 1 term AAA advance, the
previous series 2 term AAA advances and the previous series 3A1
term AAA advance made by Holmes Financing (No. 5) PLC, the previous
series 1 term AAA advance, the previous series 2 term AAA advance,
the previous series 3 term AAA advance and the previous series 4
term AAA advances made by Holmes Financing (No. 6) PLC and the
issuer series 1 term AAA advance, the issuer series 2 term AAA
advance and the issuer series 3 term AAA advance on their
respective scheduled repayment dates.
The first reserve fund was funded initially on 26th July, 2000 by the first
start-up loan in the sum of [GBP]6,000,000. It was further funded on 29th
November, 2000 by the second start-up loan in the sum of [GBP]7,500,000 and on
23rd May, 2001 by the third start-up loan in the sum of [GBP]12,000,000. In
addition, part of the proceeds of the previous issuer term BB advance made by
Holmes Financing (No. 4) PLC (in an amount equal to [GBP]31,000,000) was
credited by Funding to the first reserve fund on 5th July, 2001. The first
reserve ledger is maintained by the cash manager to record the balance from
time to time of the first reserve fund.
On each interest payment date the amount of the first reserve fund is added
to certain other income of Funding in calculating Funding available revenue
receipts.
Prior to enforcement of the Funding security, after meeting any income
deficit and satisfying any deficit on the principal deficiency ledger, amounts
standing to the credit of the first reserve fund may be used to repay principal
due and payable in relation to the several current term AAA advances from and
including their respective scheduled repayment dates.
The first reserve fund will be replenished from:
firstly, Funding available principal receipts in an amount up to the
amount used to repay the several previous term AAA advances made by
Holmes Financing (No. 1) PLC, the previous series 1 term AAA advance made
by Holmes Financing (No. 2) PLC, the previous series 1 term AAA advance
and the previous series 2 term AAA advance made by Holmes Financing (No.
3) PLC , the previous series 2 term AAA advance and the previous series 4
term AAA advance made by Holmes Financing (No. 4) PLC, the previous
series 1 term AAA advance, the previous series 2 term AAA advances and
the previous series 3A1 term AAA advance made by Holmes Financing (No. 5)
PLC, the previous series 1 term AAA advance, the previous series 2 term
AAA advance, the previous issuer series 3 term AAA advance and the
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previous issuer series 4 term AAA advances made by Holmes Financing (No.
6) PLC and the issuer series 1 term AAA advance, the issuer series 2 term
AAA advance and the issuer series 3 term AAA advance (but only if the
first reserve fund has been used for this purpose); and
secondly, any excess Funding available revenue receipts up to and
including an amount equal to the first reserve fund required amount,
being [GBP][350,000,000].
Funding available revenue receipts will only be applied to replenish the
first reserve fund after paying interest due on the term advances and reducing
any deficiency on the BBB principal deficiency sub-ledger (see "CASHFLOWS --
DISTRIBUTION OF FUNDING AVAILABLE REVENUE RECEIPTS -- DISTRIBUTION OF FUNDING
AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE FUNDING SECURITY").
The seller, Funding and the security trustee may agree to increase the first
reserve fund required amount from time to time. They may also agree to decrease
the first reserve fund required amount (subject to rating agency approval) if
Funding has repaid any amounts owing to the previous issuers, the issuer and
any new issuers, from time to time. If, on the interest payment date falling in
July 2006, the previous notes issued by Holmes Financing (No. 3) PLC and the
previous notes issued by Holmes Financing (No. 4) PLC (other than in respect of
the series 3 class D previous notes and series 4 previous notes) are redeemed
in full, then the first reserve fund required amount will decrease (subject to
rating agency approval as to that amount) by an amount of approximately
[GBP]45,000,000. If, on the interest payment date falling in October 2006,
Holmes Financing (No. 5) PLC exercises its option to redeem the previous notes
issued by it (other than its series 1 class A previous notes and its series 2
class A previous notes), then the first reserve fund required amount will
decrease (subject to rating agency approval as to that amount) by an additional
amount of approximately [GBP]40,000,000. If, on the interest payment date
falling in April 2008, Holmes Financing (No. 6) PLC exercises its option to
redeem the previous notes issued by it (other than its 1 class A previous notes
and the series 2 class A previous notes), then the first reserve required
amount will decrease (subject to rating agency approval) by an additional
amount of approximately [[GBP]80,000,000].
SECOND RESERVE FUND
A second reserve fund was established on 29th November, 2000 to help meet
deficits in Funding available revenue receipts.
The second reserve fund is funded from:
(a) part of the proceeds of the previous term BB advance made by Holmes
Financing (No. 4) PLC (in an amount equal to [GBP]19,000,000) which
was credited by Funding to the second reserve fund on 5th July,
2001; and
(b) excess Funding available revenue receipts, after Funding has paid
all of its obligations in respect of items ranking higher than (Q)
(which item is a credit to the second reserve ledger up to the
second reserve fund required amount) pursuant to the Funding pre-
enforcement revenue priority of payments on each interest payment
date (see "CASHFLOWS -- FUNDING PRE-ENFORCEMENT REVENUE PRIORITY OF
PAYMENTS").
A second reserve ledger is maintained by the cash manager to record the
balance from time to time of the second reserve fund.
On each interest payment date the amount of the second reserve fund is added
to certain other income of Funding in calculating Funding available revenue
receipts.
The second reserve fund is replenished from any excess Funding available
revenue receipts up to and including an amount equal to the second reserve fund
required amount. The "SECOND RESERVE FUND REQUIRED AMOUNT" is an amount equal
to X where X is calculated on each interest payment date as follows:
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((LIBOR for three-month sterling deposits + 1 per cent.) -- (the weighted
average yield on the loans in the mortgages trust -- 0.05 per cent.) +
(the net margin on the Funding swap)) x (the aggregate outstanding
principal balance of all the term advances) x (the weighted average life
of all the term advances)
The weighted average life of the current term advances is calculated based
on the assumptions of:
(1) the lower of a 15 per cent. CPR and the 12 month rolling CPR;
(2) the issuer not exercising its option to redeem the issuer notes
(other than the series 1 class A issuer notes and the series 2
class A issuer notes) on the interest payment date falling in April
2008, Holmes Financing (No. 6) PLC not exercising its option to
redeem its previous notes (other than its series 1 class A previous
notes and its series 2 class A previous notes) on the interest
payment date falling in April 2008, Holmes Financing (No. 5) PLC
not exercising its option to redeem its previous notes (other than
its series 1 class A previous notes and its series 2 class A
previous notes) on the interest payment date falling in October
2006, Holmes Financing (No. 4) PLC not exercising its option to
redeem its previous notes (other than its series 3 class D previous
notes and its series 4 previous notes) on the interest payment date
falling in July 2006, Holmes Financing (No. 4) PLC not exercising
its option to redeem its series 4 previous notes on the interest
payment date falling in October 2006, Holmes Financing (No. 3) PLC
not exercising its option to redeem its previous notes on the
interest payment date falling in July 2006, Holmes Financing (No.
2) PLC not exercising its option to redeem its previous notes on
the interest payment date falling in October 2007 and Holmes
Financing (No. 1) PLC not exercising its option to redeem its
previous notes on the interest payment date falling in July 2010;
and
(3) a minimum life of 2.5 years.
If, on an interest payment date falling in or after April 2008, the issuer
exercises its option to redeem the issuer notes (other than the series 1 class
A issuer notes and the series 2 class A issuer notes), then the second reserve
fund required amount will decrease in accordance with the formula set forth in
this section. The excess funds will then be available to be applied by Funding
towards repayment of amounts owing to Holmes Financing (No. 4) PLC under
its previous term BB advance.
The seller, Funding and the security trustee may agree to increase, decrease
or amend the second reserve fund required amount from time to time.
PRINCIPAL DEFICIENCY LEDGER
AS AT THE CLOSING DATE
A principal deficiency ledger has been established to record:
* any principal losses on the loans allocated to Funding; and/or
* the application of Funding available principal receipts to meet any
deficiency in Funding's available revenue receipts (as described in
"USE OF PRINCIPAL RECEIPTS TO PAY FUNDING INCOME DEFICIENCY"); and/
or
* the application of Funding available principal receipts which are
allocated to fund the Funding liquidity reserve fund up to the
Funding liquidity reserve required amount.
The principal deficiency ledger is split into four sub-ledgers which will
each correspond to all current term advances, as follows:
* the AAA principal deficiency sub-ledger corresponding to all
current term AAA advances;
* the AA principal deficiency sub-ledger corresponding to all current
term AA advances;
* the A principal deficiency sub-ledger corresponding to all current
term A advances; and
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* the BBB principal deficiency sub-ledger corresponding to all
previous term BBB advances.
Losses on the loans and/or the application of Funding available principal
receipts to pay interest on current term advances are recorded as follows:
* first, on the BBB principal deficiency sub-ledger until the balance
of the BBB principal deficiency sub-ledger is equal to the
aggregate principal amount outstanding of all current term BBB
advances;
* second, on the A principal deficiency sub-ledger until the balance
of the A principal deficiency sub-ledger is equal to the aggregate
principal amount outstanding of all current term A advances;
* third, on the AA principal deficiency sub-ledger until the balance
of the AA principal deficiency sub-ledger is equal to the aggregate
principal amount outstanding of all current term AA advances; and
* fourth, on the AAA principal deficiency sub-ledger, at which point
there will be an asset trigger event.
Any excess revenue of Funding as described in "USE OF PRINCIPAL RECEIPTS TO
PAY FUNDING INCOME DEFICIENCY" is, on each interest payment date, applied to
the extent described in the Funding pre-enforcement revenue priority of
payments as follows:
* first, in an amount necessary to reduce to zero the balance on the
AAA principal deficiency sub-ledger;
* second, provided that interest due on the current term AA advances
has been paid, in an amount necessary to reduce to zero the balance
on the AA principal deficiency sub-ledger;
* third, provided that interest due on the current term A advances
has been paid, in an amount necessary to reduce to zero the balance
on the A principal deficiency sub-ledger; and
* fourth, provided that interest due on the previous term BBB
advances has been paid, in an amount necessary to reduce to zero
the balance on the BBB principal deficiency sub-ledger.
FOLLOWING THE CREATION OF NEW INTERCOMPANY LOAN AGREEMENTS
In general, if Funding borrows a new term advance under a new intercompany
loan, and that new term advance does not have a term advance rating of either
AAA, AA, A or BBB, then Funding will establish a new principal deficiency sub-
ledger. That new principal deficiency sub-ledger will correspond to and be
known by the term advance rating of the relevant new term advance.
Losses on the loans and/or the application of Funding available principal
receipts to pay interest on the current term advances will first be recorded on
the lowest ranking principal deficiency sub-ledger, and then in ascending order
of rating priority up to the highest-ranking principal deficiency sub-ledger.
Any excess revenue of Funding will be applied to the highest-ranking principal
deficiency sub-ledger, in descending order of rating priority down to the
lowest ranking principal deficiency sub-ledger.
ISSUER AVAILABLE FUNDS
On each interest payment date in respect of the issuer intercompany loan,
the issuer will receive from Funding an amount equal to or less than the amount
which it needs to pay out on the corresponding interest payment date in respect
of the issuer notes in accordance with the issuer pre-enforcement priority of
payments. It is not intended that any surplus cash will be accumulated in the
issuer.
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On the closing date, the issuer will enter into the issuer dollar currency
swaps with the issuer dollar currency swap providers and the issuer security
trustee under the issuer dollar currency swap agreements, to hedge against the
possible variance between:
* with respect to the series 1 class A issuer notes, until and
including the interest payment date in [April 2004], the interest
received by the issuer in respect of the issuer series 1 term AAA
advance under the issuer intercompany loan, which will be related
to LIBOR for three-month sterling deposits, and the interest which
the issuer is obliged to pay in respect of the series 1 class A
issuer notes, which will be related to USD-LIBOR for one-month
dollar deposits and is payable, during this period, (i) monthly on
the 15th day of each month (or if such day is not a business day,
the next following business day) until the occurrence of a trigger
event or enforcement of the issuer security and (ii) quarterly on
and after the interest payment date occurring thereafter;
* with respect to the series 1 class B issuer notes, the series 1
class M issuer notes, the series 2 issuer notes and the series 3
class A issuer notes, the interest received by the issuer in
respect of the respective term advance under the issuer
intercompany loan, which will be related to LIBOR for three-month
sterling deposits, and the interest which the issuer is obliged to
pay in respect of the series 1 class B issuer notes, the series 1
class M issuer notes, the series 2 issuer notes and the series 3
class A issuer notes, which will be related to USD-LIBOR for three-
month dollar deposits; and
* fluctuations in the exchange rate in respect of principal received
on the issuer intercompany loan, which will be received in sterling
and principal which the issuer is obliged to repay in respect of
the series 1 issuer notes, the series 2 issuer notes and the series
3 class A issuer notes, which must be repaid in dollars.
On the closing date, the issuer will enter into the issuer euro currency
swaps with the issuer euro currency swap provider and the issuer security
trustee under the issuer euro currency swap agreements, to hedge against the
possible variance between:
* with respect to the series 4 issuer notes (other than the series 4
class A2 issuer notes), the interest received by the issuer in
respect of the issuer intercompany loan, which will be related to
LIBOR for three-month sterling deposits, and the interest which the
issuer is obliged to pay in respect of the series 4 issuer notes
(other than the series 4 class A2 issuer notes), which will be
related to EURIBOR for three-month euro deposits; and
* fluctuations in the exchange rate in respect of principal received
on the issuer intercompany loan, which will be received in sterling
and principal which the issuer is obliged to repay in respect of
the series 4 issuer notes (other than the series 4 class A2 issuer
notes), which must be repaid in euro.
THE CLASS B ISSUER NOTES AND THE CLASS M ISSUER NOTES
The order of payments of interest to be made on the classes of notes will be
prioritised so that interest payments on the class M issuer notes will be
subordinated to interest payments on the class B issuer notes and interest
payments on the class B issuer notes will be subordinated to interest payments
on the class A issuer notes, in each case in accordance with the issuer
priority of payments.
Any shortfall in payments of interest on the class B issuer notes and/or the
class M issuer notes will be deferred until the next interest payment date. On
the next interest payment date, the amount of interest due on each class of
notes will be increased to take account of any deferred interest. If on that
interest payment date, there is still a shortfall, that 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 issuer notes, or the class M issuer notes,
then you may not receive all interest amounts payable on those classes of
issuer notes.
We are not able to defer payments of interest due on any interest payment
date in respect of the class A issuer notes. The failure to pay interest on the
class A issuer notes will be an event of default under those classes of issuer
notes.
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The class A issuer notes, the class B issuer notes and the class M issuer
notes will be constituted by the issuer trust deed and will share the same
security. However, upon enforcement of the issuer security or the occurrence of
a trigger event, the class A issuer notes will rank in priority to the class B
issuer notes and the class M issuer notes, the class B issuer notes will rank in
priority to the class M issuer notes.
MORTGAGES TRUSTEE GIC ACCOUNT/FUNDING GIC ACCOUNT
All amounts held by the mortgages trustee are 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 agrees to pay a variable rate of interest on funds in the mortgages
trustee GIC account of LIBOR for three-month sterling deposits.
Amounts held in alternative accounts do not have the benefit of a guaranteed
investment contract but following their receipt are transferred into the
mortgages trustee GIC account on a regular basis and in any event no later than
the next business day after they are deposited in the relevant alternative
account.
All amounts held by Funding are deposited in the Funding GIC account in the
first instance. 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 agrees to pay a variable rate of interest on funds in
the Funding GIC account of LIBOR for three-month sterling deposits.
FUNDING LIQUIDITY FACILITY
The following section contains a summary of the material terms of the
Funding liquidity facility. The summary does not purport to be complete and is
subject to the provisions of the Funding liquidity facility, a form of which
has been filed as an exhibit to the registration statement of which this
prospectus is a part.
GENERAL DESCRIPTION
Prior to the occurrence of a trigger event or enforcement of the Funding
security, the Funding liquidity facility provider agrees to make advances to
Funding for the purpose of paying in full on any interest payment date
principal amounts due on the issuer series 1 term AAA advance, the issuer
series 2 term AAA advance and the issuer series 3 term AAA advance, the
previous series 1 term AAA advance, the previous series 2 term AAA advance, the
previous series 3 term AAA advance and the previous series 4 AAA term advances
made by Holmes Financing (No. 6) PLC, the previous series 1 term AAA advance,
the previous series 2 term AAA advances and the previous series 3A1 term AAA
advance made by Holmes Financing (No. 5) PLC, the previous series 2 term AAA
advance and the previous series 4 term AAA advance made by Holmes Financing
(No. 4) PLC, the previous series 1 term AAA advance and the previous series 2
term AAA advance made by Holmes Financing (No. 3) PLC, the previous series 1
term AAA advance made by Holmes Financing (No. 2) PLC and all the previous term
AAA advances made by Holmes Financing (No. 1) PLC, in each case subject to the
terms of the Funding liquidity facility agreement.
The Funding liquidity facility is used by Funding to make payments, subject
to the conditions described below in "CONDITIONS PRECEDENT TO A FUNDING
LIQUIDITY DRAW", due on the issuer series 1 term AAA advance, the issuer series
2 term AAA advance and the issuer series 3 term AAA advance, the previous
series 1 term AAA advance, the previous series 2 term AAA advance, the previous
series 3 term AAA advance and the previous series 4 term AAA advances made by
Holmes Financing (No.6) PLC, the previous series 1 term AAA advance, the
previous series 2 term AAA advances and the previous series 3A1 term AAA
advance made by Holmes Financing (No. 5) PLC, the previous series 2 term AAA
advance and the previous series 4 term AAA advance made by Holmes Financing
(No. 4) PLC, the previous series 1 term AAA advance and the previous series 2
term AAA advance made by Holmes Financing (No. 3) PLC, the previous series 1
term AAA advance made by Holmes Financing (No. 2) PLC and all the previous term
AAA
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advances made by Holmes Financing (No. 1) PLC, under the current intercompany
loans, and it may also be used to pay principal on any new term AAA advances
under any new intercompany loan.
The Funding liquidity facility is a 364-day committed facility. Each year,
Funding may request extension of the Funding liquidity facility for a further
364 days by giving written notice to the Funding liquidity facility provider
not more than 60 days and not less than 30 days before the expiration of the
364-day period.
FUNDING LIQUIDITY DRAWS
If the cash manager determines on the London business day immediately
preceding an interest payment date that Funding will not have sufficient funds
to make the payments specified in "GENERAL DESCRIPTION" (a shortfall known as
the "FUNDING LIQUIDITY SHORTFALL"), then the cash manager must direct Funding
to request a drawing under the Funding liquidity facility to apply towards the
Funding liquidity shortfall. The drawing will be the lesser of the amount of
the Funding liquidity shortfall and the amount available for drawing under the
Funding liquidity facility. A drawing may only be made by a duly completed
drawdown notice signed by an authorised signatory of Funding.
CONDITIONS PRECEDENT TO A FUNDING LIQUIDITY DRAW
A drawing may be made under the Funding liquidity facility:
* if no event of default exists under the Funding liquidity facility;
* if no asset trigger event has occurred;
* if insufficient amounts are available for drawing from the first
reserve fund; and
* to the extent that funds available for drawing under, as
applicable, the Funding liquidity reserve fund and/or any previous
issuer liquidity facility would be insufficient on the relevant
interest payment date to repay the relevant series of class A notes
by, as applicable, the issuer and/or the previous issuers and/or
any new issuers on that interest payment date.
If a non-asset trigger event has occurred, then the Funding liquidity
facility will be available to repay principal on any of the previous term AAA
advances made by Holmes Financing (No. 1) PLC, the previous series 1 term AAA
term advance made by Holmes Financing (No. 2) PLC, the previous series 1 term
AAA advance and the previous series 2 term AAA advance made by Holmes Financing
(No. 3) PLC, the previous series 2 term AAA advance and the previous series 4
term AAA advance made by Holmes Financing (No. 4) PLC, the previous series 1
term AAA advance, the previous series 2 term AAA advances and the previous
series 3A1 term AAA advance made by Holmes Financing (No. 5) PLC, the previous
series 1 term AAA advance, the previous series 2 term AAA advance, the previous
series 3 term AAA advance and the previous series 4 term AAA advances made by
Holmes Financing (No. 6) PLC and the issuer series 1 term AAA advance, the
issuer series 2 term AAA advance and the issuer series 3 term AAA advance
(subject to the other conditions described in this section) only on the
respective final repayment dates of those term AAA advances.
FUNDING LIQUIDITY FACILITY STAND-BY ACCOUNT
The Funding liquidity facility agreement provides that if:
* the short-term, unsecured, unsubordinated and unguaranteed debt
obligations of the Funding liquidity facility provider cease to be
rated at least P-1 by Moody's, A-1+ by Standard & Poor's and F1+ by
Fitch; or
* the Funding liquidity facility provider does not agree to extend
the Funding liquidity facility beyond each 364-day commitment
period,
then Funding may require the Funding liquidity facility provider to pay an
amount equal to the then undrawn commitment under the Funding liquidity
facility agreement (the "FUNDING STAND-BY DRAWING") into a designated bank
account of Funding (the "FUNDING LIQUIDITY FACILITY STAND-BY
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ACCOUNT"). The Funding liquidity facility stand-by account must be maintained
with a bank having the requisite ratings, which will be the Funding liquidity
facility provider if it has the requisite ratings. Amounts standing to the
credit of the Funding liquidity facility stand-by account will be available for
drawing during the period that the Funding liquidity facility is available in
the circumstances described and for investing in short-term authorised
investments.
All interest accrued on the amount on deposit in the Funding liquidity
facility stand-by account will belong to Funding.
Funding may require that the Funding liquidity facility provider transfer
its rights and obligations under the Funding liquidity facility agreement to a
replacement Funding liquidity facility provider which has the requisite ratings
so long as the then current ratings of the notes (whether the previous notes,
the issuer notes or any new notes) are not adversely affected by that transfer.
INTEREST ON FUNDING LIQUIDITY DRAWS
Interest is payable to the Funding liquidity facility provider on the
principal amount drawn under the Funding liquidity facility. This interest is
payable at a rate based on three-month sterling LIBOR plus a margin of 0.75 per
cent. Unpaid interest is added to the principal amount owed to the Funding
liquidity facility provider and interest accrues on that amount.
A commitment fee is also payable at the rate of 0.10 per cent. per annum on
the undrawn, uncancelled amount of the Funding liquidity facility. The
commitment fee is payable quarterly on each interest payment date.
Interest and fees on the Funding liquidity facility are paid at the same
level of priority as amounts due to the Funding swap provider under the Funding
pre- enforcement priority of payments or, as the case may be, the Funding post-
enforcement priority of payments.
REPAYMENT OF FUNDING LIQUIDITY DRAWINGS
If an amount has been drawn down under the Funding liquidity facility, the
principal amount is repayable on the following interest payment date, from
Funding available principal receipts, prior to making payments on the term
advances.
EVENTS OF DEFAULT UNDER THE FUNDING LIQUIDITY FACILITY
It is an event of default under the Funding liquidity facility, whether or
not that event is within the control of Funding, if, among other things:
(A) Funding does not pay within three business days of the due date any
amount due and payable under the Funding liquidity facility, other
than Funding liquidity subordinated amounts;
(B) an order is made or an effective resolution is passed for Funding's
winding-up or administration, other than a winding-up for the
purposes of merger, amalgamation or reconstruction the terms of
which shall either have been previously approved by the security
trustee in writing or by the Funding secured creditors;
(C) an event of default occurs under any intercompany loan and notice
is or should be served on Funding in relation to that default; or
(D) it is or becomes unlawful for Funding to perform any of its
obligations under the Funding liquidity facility.
CONSEQUENCES OF DEFAULT
After the occurrence of an event of default under the Funding liquidity
facility agreement, the Funding liquidity facility provider may by notice to
Funding:
* cancel the Funding liquidity facility commitment; and/or
* demand that all or part of the loans made to Funding under the
Funding liquidity facility, together with accrued interest and all
other amounts accrued under the Funding liquidity facility
agreement, be immediately due and payable, in which case they shall
become immediately due and payable; and/or
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* demand that all or part of the loans made under the Funding
liquidity facility be repayable on demand, in which case they will
immediately become repayable on demand.
The occurrence of an event of default under the Funding liquidity facility
agreement may constitute an intercompany loan event of default as set out in
"THE ISSUER INTERCOMPANY LOAN AGREEMENT -- ISSUER INTERCOMPANY LOAN EVENTS OF
DEFAULT".
FUNDING LIQUIDITY FACILITY PROVIDER A SECURED CREDITOR
The Funding liquidity facility provider is a secured creditor of Funding
pursuant to the Funding deed of charge. All amounts owing to the Funding
liquidity facility provider will, on enforcement of the Funding security, rank
in priority to the payment of all amounts of interest and principal in respect
of the current term AAA advances.
GOVERNING LAW
The Funding liquidity facility agreement is governed by English law.
Funding liquidity reserve fund
Funding will be required to establish a liquidity reserve fund if the long-
term, unsecured, unsubordinated and unguaranteed debt obligations of the seller
cease to be rated at least A3 by Moody's or A- by Fitch (unless Moody's or
Fitch, as applicable, confirms that the then current ratings of the issuer
notes will not be adversely affected by the ratings downgrade).
Prior to enforcement of the Funding security, the Funding liquidity reserve
fund may be used 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 any issuer of interest and operating and administrative
expenses due on the relevant interest payment date in respect of the
class A notes, the class B notes, the class M notes, the class C notes
and/or the class D notes and to help meet any deficit recorded on the
principal deficiency ledger in respect of the class A notes; and
* the payment by any issuer of principal in respect of the previous
series 1 term AAA advance of Holmes Financing (No. 6) PLC and
the series 1 issuer term AAA advance on October 2003 and April 2004,
respectively.
The Funding liquidity reserve fund, if any, will be funded initially from
Funding available revenue receipts in accordance with the Funding pre-
enforcement revenue priority of payments. The Funding liquidity reserve fund
will be funded up to the "FUNDING 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 first reserve fund on that payment date.
The Funding liquidity reserve fund will be deposited in Funding's name in
the Funding GIC account into which the first reserve fund and second reserve
fund are also deposited. All interest or income accrued on the amount of the
Funding liquidity reserve fund while on deposit in the Funding GIC account will
belong to Funding. The cash manager will maintain a separate Funding liquidity
reserve ledger to record the balance from time to time of the Funding liquidity
reserve fund.
On each payment date prior to enforcement of the Funding security, funds
standing to the credit of the Funding liquidity reserve fund will be added to
certain other income of Funding in calculating Funding available revenue
receipts to make payments due under the intercompany loan.
Once it has been initially funded, the Funding liquidity reserve fund will
be replenished from any Funding available revenue receipts or Funding available
principal receipts, as applicable. Funding available revenue receipts will only
be applied to replenish the Funding liquidity reserve fund after: (i) the
payment of interest due on the class A notes, the class B notes, the class M
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notes, the class C notes and the class D notes and the reduction of any
deficiency on the principal deficiency sub ledger for the class A notes, the
class B notes, the class M notes and the class C notes and (ii) the payment by
the issuer of principal in respect of the previous series 1 term AAA advance of
Holmes Financing (No. 6) PLC and the series 1 issuer term AAA advance on
October 2003 and April 2004, respectively, as described in "CASHFLOWS --
DISTRIBUTION OF FUNDING AVAILABLE REVENUE RECEIPTS PRIOR TO ENFORCEMENT OF THE
FUNDING SECURITY").
Following enforcement of the Funding security, amounts standing to the
credit of the Funding liquidity reserve ledger may be applied in making
payments of principal due under the term advances.
SEVENTH START-UP LOAN
The following section contains a summary of the material terms of the
seventh start-up loan agreement. The summary does not purport to be complete
and is subject to the provisions of the seventh 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. Funding has also entered into the first, second,
third, fourth, fifth and sixth start-up loans, as described in "-- FIRST
RESERVE FUND".
GENERAL DESCRIPTION
On the closing date, Abbey National plc (the "START-UP LOAN PROVIDER"),
acting through its office at Abbey National House, 2 Triton Square, Regent's
Place, London NW1 3AN, will make available to Funding the seventh start-up loan
under the seventh start-up loan agreement. This will be a subordinated loan
facility in an amount of [GBP][__], which will be used for meeting the costs
and expenses incurred by Funding in connection with the assignment of a part of
the seller's share of the trust property to it and the fees payable under the
issuer intercompany loan agreement which relate to the costs of issue of the
issuer notes.
INTEREST ON THE SEVENTH START-UP LOAN
The seventh start-up loan will bear interest until the interest period
ending in [April 2008] at the rate of LIBOR for three-month sterling deposits
plus [0.25] per cent. per annum, and from the interest payment date in [April
2008] at the rate of LIBOR for three-month sterling deposits plus [0.50] per
cent. per annum. For the first interest period, LIBOR will be determined on the
basis of a linear interpolation between LIBOR for two-month and three-month
sterling deposits. Any unpaid interest will be added to the principal amount
owed and will bear interest. Interest is payable by Funding on each interest
payment date.
REPAYMENT OF THE SEVENTH START-UP LOAN
Funding will repay the seventh start-up loan, but only to the extent that it
has Funding available revenue receipts after making higher ranking payments
(see further "SECURITY GRANTED BY FUNDING -- FUNDING PRE-ENFORCEMENT PRIORITY
OF PAYMENTS" and "-- FUNDING POST-ENFORCEMENT PRIORITY OF PAYMENTS"). Amounts
due to the start-up loan provider are payable after amounts due on the current
term advances to the current issuers. After Funding has repaid the seventh
start-up loan, it will have no further recourse to the start-up loan provider.
EVENT OF DEFAULT
It will be an event of default under the seventh start-up loan agreement if
Funding has available revenue receipts to pay amounts due to the start-up loan
provider, and it does not pay them.
The occurrence of an event of default under the seventh start-up loan
agreement may constitute an issuer intercompany loan event of default as set
out in "THE ISSUER INTERCOMPANY LOAN AGREEMENT -- ISSUER INTERCOMPANY LOAN
EVENTS OF DEFAULT".
ACCELERATION
If notice is given that the security granted by Funding under the Funding
deed of charge is to be enforced, then the seventh start-up loan will become
immediately due and payable.
GOVERNING LAW
The seventh start-up loan agreement will be governed by English law.
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THE SWAP AGREEMENTS
GENERAL
Funding has entered into the Funding swap with Abbey National Treasury
Services plc as the Funding swap provider. The issuer will enter into issuer
swaps with the issuer swap providers. In general, the swaps are designed to do
the following:
* Funding swap: to hedge against the possible variance between the
mortgages trustee SVR payable on the variable rate loans, the rates
of interest payable on the tracker loans and the fixed rates of
interest payable on the fixed rate loans (which, for this purpose,
includes those capped rate loans then no longer subject to their
variable rates of interest but instead subject to interest at their
specified capped rates) and a LIBOR based rate for three-month
sterling deposits;
* issuer 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 either (i) a LIBOR based rate for one-
month dollar deposits applicable to the series 1 class A issuer
notes or (ii) a LIBOR based rate for three-month dollar deposits,
applicable to the series 1 class B issuer notes, the series 1 class
M issuer notes, the series 2 issuer notes and the series 3 class A
issuer notes, and to address the difference in periodicity between
the interest payment dates in respect of the intercompany loans,
which occur quarterly and the interest payment dates in respect of
the series 1 class A issuer notes, which occur (i) monthly until
the occurrence of a trigger event or enforcement of the issuer
security and (ii) quarterly on and following the interest payment
date occurring immediately thereafter; and
* issuer 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 4 issuer notes (other than
the series 4 class A2 issuer notes).
THE FUNDING SWAP
Some of the loans in the portfolio pay a variable rate of interest for a
period of time which may either be linked to the mortgages trustee SVR or
linked to an interest rate other than the mortgages trustee SVR, such as
sterling LIBOR or a rate set by the Bank of England. Other loans pay a fixed
rate of interest for a period of time. However, the interest rate payable by
Funding with respect to the issuer term advances is calculated as a margin over
LIBOR for three-month sterling deposits to provide a hedge against the possible
variance between:
(1) the mortgages trustee SVR payable on the variable rate loans, the
rates of interest payable on the tracker loans and the fixed rates
of interest payable on the fixed rate loans; and
(2) a LIBOR based rate for three-month sterling deposits.
In relation to the previous issue by Holmes Financing (No. 1) PLC, Funding
entered into a separate variable rate swap, tracker rate swap and fixed rate
swap, all under the Funding swap agreement. At the time of the previous issue
by Holmes Financing (No. 2) PLC, Funding entered into the Funding swap which:
* replaced the variable rate swap, tracker rate swap and fixed rate
swap relating to the previous issue by Holmes Financing (No. 1)
PLC;
* had a notional amount that is sized to hedge against these
potential interest rate mismatches in relation to both the previous
issues by both Holmes Financing (No. 1) PLC and Holmes Financing
(No. 2) PLC; and
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* provided for the notional amount to be increased to hedge against
similar potential interest rate mismatches in relation to new
issues, including the previous issue by Holmes Financing (No. 3)
PLC, the previous issue by Holmes Financing (No. 4) PLC, the
previous issue by Holmes Financing (No. 5) PLC, the previous issue
by Holmes Financing (No. 6) PLC and this issue.
When Funding entered into the Funding swap, all of the rights and
obligations of Funding and the Funding swap provider under the variable rate
swap, the tracker rate swap and the fixed rate swap ceased to exist and were
replaced by the rights and obligations arising under the Funding swap.
Under the Funding swap, on each distribution date, as defined in the
glossary, the following amounts are calculated:
* the amount produced by applying LIBOR for three-month sterling
deposits (as determined in respect of the corresponding interest
period under the intercompany loans) plus a spread for the relevant
distribution period to the notional amount of the Funding swap as
described later in this section (known as the "DISTRIBUTION PERIOD
SWAP PROVIDER AMOUNT"); and
* the amount produced by applying a rate equal to the weighted
average of:
(i) 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 Alliance & Leicester plc,
Halifax plc, Lloyds TSB plc, HSBC Bank plc, National Westminster
Bank Plc and Woolwich plc (and where those banks have more than
one standard variable rate, the highest of those rates);
(ii) the rates of interest payable on the tracker loans; and
(iii) the rates of interest payable on the fixed rate loans
(including those capped rate loans that are subject to the
specified capped rate of interest),
to the notional amount of the Funding swap (known as the "DISTRIBUTION
PERIOD FUNDING AMOUNT").
On each interest payment date the following amounts will be calculated:
* the sum of each of the distribution period swap provider amounts
calculated during the preceding interest period; and
* the sum of each of the distribution period Funding amounts
calculated during the preceding interest period.
* after these two amounts are calculated in relation to an interest
payment date, the following payments will be made on that interest
payment date.
After these two amounts are calculated in relation to an interest payment
date, the following payments will be made on that interest payment date:
* if the first amount is greater than the second amount, then the
Funding swap provider will pay the difference to Funding;
* if the second amount is greater than the first amount, then Funding
will pay the difference to the Funding swap provider; and
* if the two amounts are equal, neither party will make a payment to
the other.
If a payment is to be made by the Funding swap provider, that payment will
be included in the Funding available revenue receipts and will be applied on
the relevant interest payment date according to the relevant order of priority
of payments of Funding. If a payment is to be made by Funding, it will be made
according to the relevant order of priority of payments of Funding.
The notional amount of the Funding swap in respect of a distribution period
will be an amount in sterling equal to:
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* the aggregate principal amount outstanding of all intercompany
loans during the relevant distribution period, less
* the balance of the principal deficiency ledger attributable to all
intercompany loans during the relevant distribution period, less
* the amount of the principal receipts in the Funding GIC account
attributable to all intercompany loans during the relevant
distribution period.
In the event that the Funding swap is terminated prior to the service of any
issuer intercompany loan enforcement notice or final repayment of any
intercompany loan, Funding shall enter into a new Funding swap on terms
acceptable to the rating agencies, Funding and the security trustee and with a
swap provider whom the rating agencies have previously confirmed in writing to
Funding, the issuer and the security trustee will not cause the then current
ratings of the issuer notes to be downgraded, withdrawn or qualified. If
Funding is unable to enter into a new Funding swap on terms acceptable to the
rating agencies, this may affect amounts available to pay interest on the
intercompany loans.
THE ISSUER DOLLAR CURRENCY SWAPS
The series 1 issuer notes, the series 2 issuer notes and the series 3 class
A issuer notes will be denominated in US dollars and investors will receive
payments of interest and principal on those issuer notes in US dollars.
However, the issuer term advances to be made by the issuer to Funding and
repayments of principal and payments of interest by Funding to the issuer under
the issuer intercompany loan will be made in sterling. To hedge its currency
exchange rate exposure in respect of these notes, the issuer will enter into
three issuer dollar currency swaps relating to the series 1 issuer notes, three
issuer dollar currency swaps relating to the series 2 issuer notes and one
issuer dollar currency swap relating to the series 3 class A issuer notes with
the issuer dollar currency swap providers.
Under each issuer dollar currency swap the issuer will pay to the issuer
dollar currency swap providers:
* on the closing date, an amount in US dollars equal to the net
proceeds of the issue of the series 1 issuer notes, the series 2
issuer notes and the series 3 class A issuer notes, as applicable;
* on each interest payment date, an amount in sterling equal to the
dollar amount of principal payments to be made on the series 1
issuer notes, the series 2 issuer notes and the series 3 class A
issuer notes, as applicable, on that interest payment date, this
dollar amount to be converted into sterling at the relevant issuer
dollar currency swap rate; and
* on each interest payment date, an amount based on (i) a LIBOR based
rate for three-month sterling deposits applicable to interest
payments under the issuer series 1 term advances, the issuer series
2 term advances and the issuer series 3 class A term advance and
(ii) the principal amounts outstanding under the series 1 issuer
notes and the series 3 class A issuer notes, the series 2 issuer
notes on the previous interest payment date, this dollar amount
converted into sterling at the relevant issuer dollar currency swap
rate.
Under each issuer dollar currency swap, the issuer dollar currency swap
providers will pay to the issuer:
* on the closing date, an amount in sterling equal to the net dollar
proceeds of the issue of the series 1 issuer notes, the series 2
issuer notes and the series 3 class A issuer notes, as applicable,
these dollar proceeds to be converted into sterling at the relevant
issuer dollar currency swap rate;
* on each interest payment date, an amount in US dollars equal to the
amount of principal payments to be made on the series 1 issuer
notes, the series 2 issuer notes and the series 3 class A issuer
notes, as applicable; and
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* on each interest payment date, an amount in US dollars equal to the
interest to be paid in US dollars on the series 1 issuer notes, the
series 2 issuer notes and the series 3 class A issuer notes, as
applicable, on that interest payment date.
As used herein, "ISSUER 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 issuer dollar currency swap.
In the event that any issuer dollar currency swap is terminated prior to the
service of an issuer note enforcement notice or the final redemption of the
relevant class of series 1 issuer notes or the series 2 issuer notes or the
series 3 class A issuer notes, as applicable, the issuer shall enter into a
replacement dollar currency swap in respect of that class of issuer notes to
hedge against fluctuations in the exchange rate between US dollars and sterling
and/or the possible variance between LIBOR for three-month sterling deposits
and (i) LIBOR for one-month US dollar deposits in relation to the series 1
class A issuer notes or (ii) LIBOR for three-month US dollar deposits in
relation to the series 1 class B issuer notes, the series 1 class M issuer
notes, the series 2 issuer notes and the series 3 class A issuer notes and/or
to address the difference in periodicity between the interest payment dates
under the intercompany loan and the interest payment dates in respect of the
series 1 class A issuer notes. Any replacement dollar currency swap must be
entered into on terms acceptable to the rating agencies, the issuer and the
issuer security trustee and with a replacement dollar currency swap provider
whom the rating agencies have previously confirmed in writing to the issuer and
the issuer security trustee will not cause the then current ratings of the
issuer notes to be downgraded, withdrawn or qualified. If the issuer is unable
to enter into any replacement dollar currency swaps on terms acceptable to the
rating agencies, this may affect amounts available to pay amounts due under the
issuer notes.
THE ISSUER EURO CURRENCY SWAPS
The series 4 issuer notes (other than the series 4 class A2 issuer notes)
will be denominated in euro and investors will receive payments of interest and
principal on those issuer notes in euro. However, the advances to be made by
the issuer to Funding and repayments of principal and payments of interest by
Funding to the issuer under the issuer intercompany loan will be made in
sterling. To hedge its currency exchange rate and interest rate exposure in
respect of these notes, the issuer will enter into three issuer euro currency
swaps relating to the series 4 issuer notes (other than the series 4 class A2
issuer notes) with the issuer euro currency swap provider.
Under each issuer euro currency swap, the issuer will pay to the issuer euro
currency swap provider:
* on the closing date, an amount in euro equal to the net proceeds of
the issue of the series 4 class A1 issuer notes, the series 4 class
B issuer notes, and the series 4 class M issuer notes, as
applicable;
* on each interest payment date, an amount in sterling equal to the
euro amount of principal payments to be made on the series 4 class
A1 issuer notes, the series 4 class B issuer notes and the series 4
class M issuer notes, as applicable, on that interest payment date,
this euro amount converted into sterling at the relevant issuer
euro currency swap rate; and
* on each interest payment date, an amount in euro based on (i) a
LIBOR based rate for three-month sterling deposits applicable to
interest payments under the issuer series 4 A1 term AAA advance,
the issuer series 4 term AA advance and the issuer series 4 term A
advance and (ii) the principal amounts outstanding under the series
4 class A1 issuer notes, the series 4 class B issuer notes and the
series 4 class M issuer notes on the previous interest payment
date, this euro amount to be converted into sterling at the
relevant issuer euro currency swap rate.
Under each issuer euro currency swap, the issuer euro currency swap provider
will pay to the issuer:
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* on the closing date, an amount in sterling equal to the net euro
proceeds of the issue of the series 4 class A1 issuer notes, the
series 4 class B issuer notes and the series 4 class M issuer
notes, as applicable, these euro proceeds to be converted into
sterling at the relevant issuer euro currency swap rate;
* on each interest payment date, an amount in euro equal to the
amount of principal payments to be made on the series 4 class A1
issuer notes, the series 4 class B issuer notes and the series 4
class M issuer notes, as applicable; and
* on each interest payment date, an amount in euro equal to the
interest to be paid in euro on the series 4 class A1 issuer notes,
the series 4 class B issuer notes and series 4 class M issuer
notes, as applicable, on that interest payment date.
As defined herein, "ISSUER 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 issuer euro currency swap.
In the event that any issuer euro currency swap is terminated prior to the
service of an issuer note enforcement notice or the final redemption of the
series 4 class A1 issuer notes, the series 4 class B issuer notes or the series
4 class M issuer notes, as applicable, the issuer shall enter into a
replacement euro currency swap in respect of that class of issuer 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 in relation to the series 4 class A1
issuer notes, the series 4 class B issuer notes and the series 4 class M issuer
notes, as applicable. Any replacement euro currency swap must be entered into
on terms acceptable to the rating agencies, the issuer and the issuer security
trustee and with a replacement euro currency swap provider whom the rating
agencies have previously confirmed in writing to the issuer and the issuer
security trustee will not cause the then current ratings of the issuer notes to
be downgraded, withdrawn or qualified. If the issuer is unable to enter into
replacement euro currency swaps on terms acceptable to the rating agencies,
this may affect amounts available to pay amounts due under the issuer notes.
RATINGS DOWNGRADE OF SWAP PROVIDERS
Under each of the swap agreements, in the event that the relevant rating(s)
of a swap provider, or its respective guarantor, as applicable, is or are, as
applicable, downgraded by a rating agency below the ratings(s) specified in the
relevant swap agreement (in accordance with the requirements of the rating
agencies) for such swap provider, and, where applicable, as a result of the
downgrade, the then current ratings of the previous notes or the issuer
notes, in respect of the Funding swap, or the issuer notes corresponding to the
relevant issuer swap, in respect of the relevant issuer swap, would or may, as
applicable, be adversely affected, the relevant swap provider will, in
accordance with the Funding swap or the relevant issuer swap, as applicable, be
required to take certain remedial measures which may include providing
collateral for its obligations under the relevant swap, arranging for its
obligations under the relevant swap to be transferred to an entity with the
rating(s) required by the relevant rating agency as specified in the relevant
swap agreement (in accordance with the requirements of the relevant rating
agency), procuring another entity with the rating(s) required by the relevant
rating agency as specified in the relevant swap agreement (in accordance with
the requirements of the relevant rating agency), to become co-obligor in
respect of its obligations under the relevant swap, or taking such other action
as it may agree with the relevant rating agency.
A failure to take such steps will allow the issuer to terminate the relevant
swap.
Any collateral posted by an issuer swap provider following a ratings
downgrade of such issuer swap provider (as set out above) will, following
termination of the relevant issuer swap, be returned to such issuer swap
provider prior to the distribution of issuer principal receipts and issuer
revenue receipts by the issuer security trustee following enforcement of the
issuer security.
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TERMINATION OF THE SWAPS
* The Funding swap will terminate on the date on which the aggregate
principal amount outstanding under all intercompany loans is
reduced to zero.
* Each issuer dollar currency swap other than the series 1 class A
issuer dollar currency swap, the series 2 class A issuer dollar
currency swap and the series 3 class A issuer dollar currency swap
will terminate on the earlier of the interest payment date falling
in July 2040 and the date on which all of the relevant class and
series of issuer notes are redeemed in full. The series 1 class A
issuer dollar currency swap will terminate on the earlier of the
interest payment date falling in April 2004 and the date on which
the series 1 class A issuer notes are redeemed in full. The series
2 class A issuer dollar currency swap will terminate on the earlier
of the interest payment date falling in January 2008 and the date
on which the series 2 class A issuer notes are redeemed in full.
The series 3 class A issuer dollar currency swap will terminate on
the earlier of the interest payment date falling in July 2020 and
the date on which the series 3 class A issuer notes are redeemed in
full.
* Each issuer euro currency swap will terminate on the earlier of the
interest payment date falling in July 2040 and the date on which
all of the relevant classes of series 4 issuer notes (other than
the series 4 class A2 issuer notes) are redeemed in full.
Any swap may also be terminated in any of the following circumstances, each
referred to as a "SWAP EARLY TERMINATION EVENT":
* at the option of one party to the swap, if there is a failure by
the other party to pay any amounts due under that swap;
* in respect of the issuer swaps, if an event of default under the
issuer notes occurs and the issuer security trustee serves an
issuer note enforcement notice;
* in respect of the Funding swap, if an event of default under any
intercompany loan occurs and the security trustee serves an
intercompany loan enforcement notice;
* upon the occurrence of an insolvency of the relevant issuer swap
provider or its guarantor or the issuer, or the merger of the
relevant issuer swap provider without an assumption of the
obligations under the swaps (except in respect of a transfer by
Funding or the issuer to the security trustee or the issuer
security trustee, respectively), or, under the issuer swap
agreements, changes in law resulting in the obligations of one of
the parties becoming illegal, breach of a provision of the issuer
swap agreements by the relevant issuer swap provider which is not
remedied within the relevant grace period, breach by the guarantor
(if any) of the relevant issuer swap provider under the issuer swap
agreements to comply with the provisions of such guarantee, or a
material misrepresentation is made by an issuer swap provider under
the issuer swap agreements;
* if the issuer exercises its option to redeem all the issuer notes
for tax and/or other reasons; and
* if the relevant issuer swap provider or its guarantor, as
applicable, is downgraded and fails to comply with the requirements
of the ratings downgrade provision contained in the relevant issuer
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 issuer swap provider may be liable to make a termination payment to
the other and/or Funding or the Funding swap provider may be liable to make a
termination payment to the other. This termination payment will be calculated
and made in sterling. The amount of any termination payment will be based on
the market value of the terminated swap based on market quotations of the cost
of entering into a swap with the same terms and conditions that would have the
effect of preserving the respective full payment obligations of the parties (or
based upon loss in the event that no market quotation can be obtained). Any
such termination payment could be substantial.
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If any issuer swap is terminated early and a termination payment is due by
the issuer to the relevant issuer swap provider then, pursuant to its
obligations under the issuer intercompany loan, Funding shall pay the issuer an
amount equal to the termination payment due to the relevant issuer dollar
currency swap provider. These payments will be made by Funding only after paying
interest amounts due on the issuer term advances and after providing for any
debit balance on the principal deficiency ledger. The issuer shall apply
amounts received from Funding under the issuer intercompany loan in accordance
with the issuer pre-enforcement revenue priority of payments or, as the case
may be, the issuer post-enforcement priority of payments. The application by
the issuer of termination payments due to an issuer swap provider may affect
the funds available to pay amounts due to the noteholders (see further "RISK
FACTORS -- YOU MAY BE SUBJECT TO EXCHANGE RATE RISKS ON THE SERIES 1 ISSUER
NOTES, THE SERIES 2 ISSUER NOTES AND THE SERIES 3 ISSUER NOTES").
If the issuer receives a termination payment from an issuer dollar currency
swap provider and/or issuer euro currency swap provider, then the issuer shall
apply those funds towards meeting its costs in effecting currency exchanges at
the spot rate of exchange until a replacement dollar currency swap and/or a
replacement euro currency swap is entered into and/or to acquire a replacement
dollar currency swap and/or a replacement euro currency swap, as the case may
be. Noteholders will not receive extra amounts (over and above interest and
principal payable on the issuer notes) as a result of the issuer receiving a
termination payment.
TRANSFER OF THE SWAPS
Each of the issuer swap providers may, at its option, transfer its
obligations under any of the issuer swaps to any other entity. Any such
transfer is subject to certain conditions, including among other things (i)
that the transferee has rating(s) required by the relevant rating agencies as
specified in the relevant swap agreement, or the transferee's performance under
the relevant issuer swap will be guaranteed by an entity with equivalent
ratings, (ii) that the transfer must not cause an event of default or a swap
early termination event under the relevant issuer swap and (iii) if the
transferee entity is located in a different country to both the issuer and the
relevant issuer swap provider, that the rating agencies have confirmed that the
transfer will not result in the then current rating of the relevant series and
class of issuer notes being downgraded.
TAXATION
Neither Funding nor the issuer is obliged under any of the swaps to gross up
payments made by them if withholding taxes are imposed on payments made under
the swaps.
The Funding swap provider and each of the issuer swap providers are always
obliged to gross up payments made by them to Funding or the issuer if
withholding taxes are imposed on payments made under the swaps.
GOVERNING LAW
The issuer swap agreements are governed by English law.
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CASH MANAGEMENT FOR THE MORTGAGES TRUSTEE AND FUNDING
The following section contains a summary of the material terms of the cash
management agreement. The summary does not purport to be complete and is
subject to the provisions of the cash management agreement, a form of which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
Abbey National plc was appointed on 26th July, 2000 by the mortgages
trustee, Funding and the security trustee to provide cash management services
in relation to:
* the mortgages trust; and
* Funding.
CASH MANAGEMENT SERVICES 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 of Funding and the seller in the
trust property in accordance with the terms of the mortgages trust
deed;
(B) maintaining the following ledgers on behalf of the mortgages
trustee:
* the Funding share/seller share ledger, which records the
current shares of the seller and Funding in the trust property;
* the losses ledger, which records losses on the loans;
* the principal ledger, which records principal receipts on the
loans received by the mortgages trustee and payments of
principal from the mortgages trustee GIC account to Funding and
the seller; and
* the revenue ledger, which records revenue receipts on the loans
received by the mortgages trustee and payments of revenue
receipts from the mortgages trustee GIC account to Funding and
the seller;
(C) distributing the mortgages trust available revenue receipts and the
mortgages trustee principal receipts to Funding and the seller in
accordance with the terms of the mortgages trust deed; and
(D) providing the mortgages trustee, Funding, the security trustee and
the rating agencies with a quarterly report in relation to the
trust property.
CASH MANAGEMENT SERVICES TO BE PROVIDED TO FUNDING
The cash manager's duties in relation to Funding include but are not limited
to:
(A) four business days before each interest payment date, determining:
* the amount of Funding available revenue receipts to be applied
to pay interest and fees in relation to the term advances on
the following interest payment date; and
* the amount of Funding available principal receipts to be
applied to repay the term advances on the following interest
payment date;
(B) if required, making drawings under the Funding liquidity facility;
(C) maintaining the following ledgers on behalf of Funding:
* the Funding principal ledger, which records the amount of
principal receipts received by Funding on each distribution
date;
* the Funding revenue ledger, which records all other amounts
received by Funding on each distribution date;
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* the first reserve ledger, which records the amount credited to
the first reserve fund from parts of the proceeds of (i) the
first start-up loan on 26th July, 2000, (ii) the second start-
up loan on 29th November, 2000, (iii) the third start-up loan
on 23rd May, 2001, (iv) the previous term BB advance on 5th
July, 2001 under the intercompany loan made by Holmes Financing
(No.4) PLC and (v) withdrawals and deposits in respect of the
first reserve fund;
* the second reserve ledger, which records the amount credited to
the second reserve fund from part of the proceeds of (i) the
previous term BB advance on 5th July 2001 under the
intercompany loan made by Holmes Financing (No. 4) PLC and (ii)
withdrawals and deposits in respect of the second reserve fund;
* the principal deficiency ledger, which records principal
deficiencies arising from losses on the loans which have been
allocated to Funding's share or the use of Funding's principal
receipts to cover certain senior expenses (including interest
on the term advances);
* the intercompany loan ledger, which records payments of
interest and repayments of principal made on each of the term
advances under the intercompany loans;
* the cash accumulation ledger, which records the amount
accumulated by Funding from time to time to pay the amounts due
on the several bullet term advances and/or, as applicable, the
scheduled amortisation term advances;
* the Funding liquidity facility ledger, which will record
drawings made under the Funding liquidity facility and
repayments of those drawings; and
* the Funding liquidity reserve ledger which records the amounts
credited to the Funding liquidity reserve fund from Funding
available revenue receipts and from Funding available principal
receipts up to the Funding liquidity reserve required amount
and drawings made under the Funding liquidity reserve fund.
(D) investing sums standing to the credit of the Funding GIC account
and the Funding liquidity facility stand-by account in short-term
authorised investments (as defined in the glossary) as determined
by Funding, the cash manager and the security trustee;
(E) making withdrawals from the first reserve fund, the second reserve
fund and the Funding liquidity reserve fund as and when required;
(F) 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 cash
management agreement or, as applicable, the Funding deed of charge;
(G) providing Funding, the issuer, the security trustee and the rating
agencies with a quarterly report in relation to Funding; and
(H) 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.
For the definitions of Funding available revenue receipts, Funding available
principal receipts and the Funding priorities of payments, see "CASHFLOWS".
COMPENSATION OF CASH MANAGER
The cash manager is paid a fee of [GBP]117,500 per annum for its services
which is paid in four equal instalments quarterly in arrear on each interest
payment date. The fee is inclusive of VAT. The fee is subject to adjustment if
the applicable rate of VAT changes.
In addition, the cash manager is entitled to be indemnified for any expenses
or other amounts properly incurred by it in carrying out its duties. The cash
manager is paid by Funding, prior to amounts due to the current issuers on the
current term advances.
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RESIGNATION OF CASH MANAGER
The cash manager may resign only on giving 12 months' written notice to the
security trustee, Funding and the mortgages trustee and if:
* 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
* the ratings of the notes at that time would not be adversely
affected as a result of that replacement (unless otherwise agreed
by an extraordinary resolution of the noteholders of each class).
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:
* the cash manager defaults in the payment of any amount due and
fails to remedy the default for a period of three London business
days after becoming aware of the default;
* 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 is materially prejudicial to the Funding secured
creditors and does not remedy that failure within 20 days after the
earlier of becoming aware of the failure and receiving a notice
from the security trustee; or
* Abbey National plc, while acting as the cash manager, suffers an
insolvency event.
If the appointment of the cash manager is terminated or it resigns, the cash
manager must deliver its books of account relating to the 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 current
intercompany loans and all new intercompany loans (if any) 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 following section contains a summary of the material terms of the issuer
cash management agreement. The summary does not purport to be complete and is
subject to the provisions of the issuer cash management agreement, a form of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part.
Abbey National plc will be appointed on the closing date by the issuer and
the issuer security trustee 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) four business days before each interest payment date, determining:
* the amount of issuer revenue receipts to be applied to pay
interest on the issuer notes on the following interest payment
date and to pay amounts due to other creditors of the issuer;
and
* the amount of issuer principal receipts to be applied to repay
the issuer notes on the following interest payment date;
(B) applying issuer revenue receipts and issuer principal receipts in
accordance with the relevant order of priority of payments for the
issuer set out in the issuer cash management agreement or, as
applicable, the issuer deed of charge;
(C) providing the issuer, Funding, the issuer security trustee and the
rating agencies with quarterly reports in relation to the issuer;
(D) making all returns and filings required to be made by the issuer
and providing or procuring the provision of company secretarial and
administration services to the issuer;
(E) arranging payment of all fees to the London Stock Exchange or, as
applicable, the Financial Services Authority; and
(F) if necessary, performing all currency and interest rate conversions
(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) free of charge, cost or
expense at the relevant exchange rate.
ISSUER'S BANK ACCOUNTS
On the closing date, the issuer will maintain a sterling bank account in its
name with Abbey National plc at 21 Prescot Street, London E1 8AD and a euro
account and a dollar account in its name with Citibank, N.A., London Branch at
336 Strand, London WC2R 1HB (together the "ISSUER TRANSACTION ACCOUNTS"). The
issuer may, with the prior written consent of the issuer security trustee, open
additional or replacement bank accounts.
If the short-term, unguaranteed and unsubordinated ratings of an issuer
account bank cease to be rated A-1+ by Standard & Poor's, P-1 by Moody's or F1+
by Fitch, then the relevant issuer transaction account will be closed and a new
issuer transaction account opened with a bank that has the requisite ratings.
COMPENSATION OF ISSUER CASH MANAGER
The issuer cash manager will be paid a fee of [GBP]117,500 per annum for its
services which will be paid in four equal instalments quarterly in arrear on
each interest 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 be indemnified 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 issuer notes.
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RESIGNATION OF ISSUER CASH MANAGER
The issuer cash manager may resign only on giving 12 months' written notice
to the issuer security trustee and the issuer and if:
* a substitute issuer cash manager has been appointed and a new
issuer cash management agreement is entered into on terms
satisfactory to the issuer security trustee and the issuer; and
* the ratings of the issuer notes at that time would not be adversely
affected as a result of that replacement.
TERMINATION OF APPOINTMENT OF ISSUER CASH MANAGER
The issuer security trustee may, upon written notice to the issuer cash
manager, terminate the issuer cash manager's rights and obligations immediately
if any of the following events occurs:
* the issuer cash manager defaults in the payment of any amount due
and fails to remedy the default for a period of three London
business days after becoming aware of the default;
* the issuer cash manager fails to comply with any of its other
obligations under the issuer cash management agreement which in the
opinion of the issuer security trustee is materially prejudicial to
the noteholders and does not remedy that failure within 20 days
after the earlier of becoming aware of the failure and receiving a
notice from the issuer security trustee; or
* the issuer cash manager suffers an insolvency event.
If the appointment of the issuer cash manager is terminated or it resigns,
the issuer cash manager must deliver its books of account relating to the
issuer notes to or at the direction of the issuer security trustee. The issuer
cash management agreement will terminate automatically when the issuer notes
have been fully redeemed.
GOVERNING LAW
The issuer cash management agreement will be governed by English law.
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DESCRIPTION OF THE ISSUER TRUST DEED
GENERAL
The principal agreement governing the issuer notes will be the trust deed
dated on or about the closing date and made between the issuer and the note
trustee (the "ISSUER TRUST DEED"). The issuer trust deed has five primary
functions. It:
* constitutes the issuer notes;
* sets out the covenants of the issuer in relation to the issuer
notes;
* sets out the enforcement and post-enforcement procedures relating
to the issuer notes;
* contains provisions necessary to comply with the US Trust Indenture
Act of 1939; and
* sets out the appointment, powers and responsibilities of the note
trustee.
The following section contains a summary of the material terms of the issuer
trust deed. The summary does not purport to be complete and is subject to the
provisions of the issuer trust deed, a form of which has been filed as an
exhibit to the registration statement of which this prospectus is a part.
The issuer trust deed sets out the form of the global issuer notes and the
definitive issuer notes. It also sets out the terms and conditions, and the
conditions for the issue of definitive issuer notes and/or the cancellation of
any issuer notes. It stipulates, among other things, that the paying agents,
the registrar, the transfer agent and the agent bank will be appointed. The
detailed provisions regulating these appointments are contained in the issuer
paying agent and agent bank agreement.
The issuer trust deed also contains covenants made by the issuer in favour
of the note trustee and the noteholders. The main covenants are that the issuer
will pay interest and repay principal on each of the issuer notes when due.
Covenants are included to ensure that the issuer remains insolvency-remote, and
to give the note trustee access to all information and reports that it may need
in order to discharge its responsibilities in relation to the noteholders. Some
of the covenants also appear in the terms and conditions of the issuer notes.
See "TERMS AND CONDITIONS OF THE OFFERED ISSUER NOTES". The issuer also
covenants that it will do all things necessary to maintain the listing of the
issuer notes on the official list of the UK Listing Authority and to maintain
the trading of those issuer notes on the London Stock Exchange and to keep in
place a common depositary, paying agents and an agent bank.
The issuer trust deed provides that the class A noteholders' interests take
precedence for so long as the class A issuer notes are outstanding and
thereafter the interests of the class B noteholders take precedence for so long
as the class B issuer notes are outstanding. Certain basic terms of each class
of issuer notes may not be amended without the consent of the majority of the
holders of that class of note. This is described further in "TERMS AND
CONDITIONS OF THE OFFERED ISSUER NOTES".
The issuer trust deed also sets out the terms on 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 issuer trust
deed. The issuer trust deed also sets out the circumstances in which the note
trustee may resign or retire.
The issuer trust deed includes certain provisions mandated by the US Trust
Indenture Act of 1939. Generally, these provisions outline the duties, rights
and responsibilities of the note trustee and the issuer and the rights of the
noteholders. Specifically these 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 to use the same degree of care in
exercising its responsibilities as would be exercised by a prudent
person conducting their own affairs;
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(e) duty of the note trustee to notify all noteholders of any events 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.
TRUST INDENTURE ACT PREVAILS
The issuer trust deed contains a provision that, if any other provision of
the issuer trust deed limits, qualifies or conflicts with another provision
which is required to be included in the issuer trust deed by, and is not
subject to contractual waiver under, the US Trust Indenture Act of 1939 (as
amended), then the required provision of that Act will prevail.
GOVERNING LAW
The issuer trust deed will be governed by English law.
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THE ISSUER NOTES AND THE GLOBAL ISSUER NOTES
The issue of the issuer notes will be authorised by a resolution of the
board of directors of the issuer passed prior to the closing date. The issuer
notes will be constituted by an issuer 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 issuer notes. While the material terms of the
issuer notes and the global notes are described in this prospectus, the
statements set out in this section with regard to the issuer notes and the
global issuer notes are subject to the detailed provisions of the issuer trust
deed. The issuer trust deed will include the form of the global issuer notes
and the form of definitive issuer notes. The issuer trust deed includes
provisions which enable it to be modified or supplemented and any reference to
the issuer trust deed is a reference also to the document as modified or
supplemented in accordance with its terms.
An issuer paying agent and agent bank agreement between the issuer, the note
trustee, JPMorgan Chase Bank, London Branch, as principal paying agent, the US
paying agent, the registrar, the transfer agent and the agent bank regulates
how payments will be made on the issuer notes and how determinations and
notifications will be made. They 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 issuer notes will be represented initially by a
global issuer note in registered form without interest coupons attached. The
series 1 issuer notes, the series 2 issuer notes and the series 3 class A
issuer notes will initially be offered and sold pursuant to a registration
statement, of which this prospectus forms a part, filed with the United States
Securities and Exchange Commission. The series 3 issuer notes (other than the
series 3 class A issuer notes) and the series 4 issuer notes will initially be
offered and sold outside the United States to non-US persons pursuant to
Regulation S under the United States Securities Act of 1933, as amended. The
global issuer notes representing the issuer notes offered by this prospectus
(the "OFFERED GLOBAL ISSUER NOTES") will be deposited on behalf of the
beneficial owners of the issuer notes with JPMorgan Chase Bank, New York
Branch, as the custodian for, and registered in the name of Cede & Co. as
nominee of, The Depository Trust Company -- called "DTC". On confirmation from
the custodian that it holds the global issuer notes, 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 issuer notes. These book-
entry interests will represent the beneficial owner's beneficial interest in
the relevant global issuer notes.
The global issuer notes representing the issuer notes other than those
represented by the offered global issuer notes (the "REG S GLOBAL ISSUER
NOTES") will be deposited on behalf of the beneficial owners of those issuer
notes with, and registered in the name of a nominee of, JPMorgan Chase Bank,
London Branch, as common depositary for Clearstream, Luxembourg and Euroclear.
On confirmation from the common depositary that it holds the Reg S global
issuer notes, Clearstream, Luxembourg or Euroclear, as the case may be, 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 issuer notes. These book-entry interests will represent the beneficial
owner's beneficial interest in the relevant global issuer notes.
The amount of issuer notes represented by each global issuer note is
evidenced by the register maintained for that purpose by the registrar.
Together, the issuer notes represented by the global issuer notes and any
outstanding definitive issuer notes will equal the aggregate principal amount
of the issuer notes outstanding at any time. However, except as described under
"-- DEFINITIVE ISSUER NOTES", definitive certificates representing individual
issuer notes shall not be issued.
Beneficial owners may hold their interests in the global issuer notes only
through DTC, Clearstream, Luxembourg or Euroclear, as applicable, or indirectly
through organisations that are participants in any of those systems. Ownership
of these beneficial interests in a global issuer note 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
217
their participants). By contrast, ownership of direct interests in a global
issuer note 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 issuer notes, beneficial owners of issuer notes may look
only to DTC, Clearstream, Luxembourg or Euroclear, as applicable, or their
respective participants for their beneficial entitlement to those issuer notes.
The issuer expects that DTC, Clearstream, Luxembourg or Euroclear will take any
action permitted to be taken by a beneficial owner of issuer notes only at the
direction of one or more participants to whose account the interests in a
global issuer note is credited and only in respect of that portion of the
aggregate principal amount of issuer 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 issuer trust deed
and the issuer 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, One Canada Square,
London E14 5AL 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 issuer notes are finally redeemed.
PAYMENT
Principal and interest payments on the offered global issuer notes will be
made via the paying agents to DTC or its nominee, as the registered holder of
the offered global issuer notes. DTC's practice is to credit its participants'
accounts on the applicable interest 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 interest payment date.
Payments by DTC, Clearstream, Luxembourg and Euroclear participants to the
beneficial owners of issuer 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. Neither the issuer, the note trustee nor any paying
agent will have any responsibility or liability for any aspect of the records
of DTC, Clearstream, Luxembourg or Euroclear relating to payments made by DTC,
Clearstream, Luxembourg or Euroclear on account of beneficial interests in the
global issuer notes 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 issuer notes.
The offered global issuer notes will be issued as securities registered in the
name of Cede & Co. (DTC's nominee).
DTC has advised us that it is a:
* limited-purpose trust company organised under the New York Banking
Law;
* "BANKING ORGANISATION" within the meaning of the New York Banking
Law;
* member of the Federal Reserve System;
* "CLEARING CORPORATION" within the meaning of the New York Uniform
Commercial Code; and
* "CLEARING AGENCY" registered under the provisions of Section 17A of
the Exchange Act.
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DTC holds securities for its participants and facilitates the clearance and
settlement among its participants of securities transactions, including
transfers and pledges, in deposited securities through electronic book-entry
changes in its participants' accounts. This eliminates the need for physical
movement of securities certificates. DTC participants include securities
brokers and dealers, banks, trust companies, clearing corporations and other
organisations. Indirect access to the DTC system is also available to others
including securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a participant, either
directly or indirectly. The rules applicable to DTC and its participants are on
file with the SEC.
Transfers between participants on the DTC system will occur under DTC rules.
Purchases of issuer notes under the DTC system must be made by or through
DTC participants, which will receive a credit for the issuer 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 global issuer 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 issuer notes unless use of the book- entry system for the
issuer notes described in this section is discontinued.
To facilitate subsequent transfers, all the offered global issuer notes
deposited with DTC are registered in the name of DTC's nominee, Cede & Co. The
deposit of these offered global issuer notes 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 issuer 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 issuer 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 global issuer notes will be sent to DTC.
If less than all of those offered global issuer notes are being redeemed by
investors, DTC's practice is to determine by lot the amount of the interest of
each participant in those offered global issuer notes to be redeemed.
Neither DTC nor Cede & Co. will consent or vote on behalf of the offered
global issuer 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 issuer trust deed, DTC generally will give or take that action, or
authorise the relevant participants to give or take that action, and those
participants would authorise 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 organisations and facilitate the
clearance and settlement of securities transactions between their respective
participants through electronic book-entry changes
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in accounts of those participants, thereby eliminating the need for physical
movement of securities. Clearstream, Luxembourg and Euroclear provide various
services including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg and Euroclear also deal with domestic securities
markets in several countries through established depository and custodial
relationships. Clearstream, Luxembourg and Euroclear have established an
electronic bridge between their two systems across which their respective
participants may settle trades with each other. Transactions may be settled in
Clearstream, Luxembourg and Euroclear in any of numerous currencies, including
United States dollars.
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., a
Belgian banking institution (the "EUROCLEAR OPERATOR"), under licence from
Euroclear plc, an English public limited company. All operations are conducted
by the Euroclear operator. All Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator. The board of
the Euroclear operator establishes policy for the Euroclear system in
accordance with the terms of its licence from Euroclear plc.
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, both as may be amended by
the Euroclear operator, from time to time. 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 issuer 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 issuer trust deed.
No beneficial owner of an interest in a global issuer note will be able to
transfer that interest except in accordance with applicable procedures, in
addition to those provided for under the issuer trust deed, of DTC,
Clearstream, Luxembourg and Euroclear, as applicable. Transfers between
participants in Clearstream, Luxembourg and participants in the Euroclear
system will occur under their rules and operating procedures.
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 the Reg
S global issuer notes.
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GLOBAL CLEARANCE AND SETTLEMENT PROCEDURES
INITIAL SETTLEMENT
The offered global issuer notes will be delivered at initial settlement to
JPMorgan Chase Bank, New York Branch, as custodian for DTC, and the Reg S
global issuer notes will be delivered to JPMorgan Chase Bank, London Branch, as
common depositary for Clearstream, Luxembourg and Euroclear. Customary
settlement procedures will be followed for participants of each system at
initial settlement. Issuer notes will be credited to investors' securities
accounts on the settlement date against payment in same-day funds.
SECONDARY TRADING
Secondary market sales of book-entry interests in issuer 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
herein.
DEFINITIVE ISSUER NOTES
Beneficial owners of issuer notes will only be entitled to receive
definitive issuer notes under the following limited circumstances:
* as a result of a change in UK law, the issuer or any paying agent
is or will be required to make any deduction or withholding on
account of tax from any payment on the issuer notes that would not
be required if the issuer notes were in definitive form;
* in the case of the offered global issuer notes, DTC notifies the
issuer that it is unwilling or unable to hold the offered global
issuer notes or is unwilling or unable to continue as, or has
ceased to be, a clearing agency under the United States Securities
Exchange Act of 1934 and, in each case, the issuer cannot appoint a
successor within 90 days; or
* in the case of the Reg S global issuer notes, Clearstream,
Luxembourg and Euroclear are closed for business for a continuous
period of 14 days or more (other than by reason of legal holidays)
or announce an intention to cease business permanently or do in
fact do so and no alternative clearing system satisfactory to the
issuer note trustee is available.
In no event will definitive issuer notes in bearer form be issued. Any
definitive issuer notes will be issued in registered form in denominations of
$1,000, $10,000 or $100,000 principal amount, in the case of definitive issuer
notes representing the series 1 issuer notes, the series 2 issuer notes and the
series 3 class A issuer notes, [e]500,000, in the case of definitive issuer
notes representing the series 4 issuer notes (other than the series 4 class A2
issuer notes), and [GBP]10,000 or [GBP]100,000, in the case of definitive
issuer notes representing the series 3 issuer notes (other than the series 3
class A issuer notes) and the series 4 class A2 issuer notes and, in each case,
integral multiples thereof. Any definitive issuer notes 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 definitive issuer notes is registered as the
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absolute owner thereof. The issuer paying agent and agent bank agreement
contains provisions relating to the maintenance by a registrar of a register
reflecting ownership of the issuer notes and other provisions customary for a
registered debt security.
Any person receiving definitive issuer notes 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 definitive issuer
notes.
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TERMS AND CONDITIONS OF THE OFFERED ISSUER NOTES
The following is a summary of the material terms and conditions of the
series 1 issuer notes, the series 2 issuer notes and the series 3 class A
issuer notes (the "OFFERED ISSUER NOTES"), numbered 1 to 15. This summary does
not need to be read with the actual terms and conditions of the issuer notes in
order to learn all the material terms and conditions of the offered issuer
notes. The complete terms and conditions of the issuer notes are set out in the
issuer trust deed, a form of which has been filed as an exhibit to the
registration statement.
The issuer notes are the subject of the following documents:
* an issuer trust deed dated the closing date between the issuer and
the note trustee;
* an issuer paying agent and agent bank agreement dated the closing
date between the issuer, the principal paying agent and the agent
bank, the US paying agent, the registrar, the transfer agent and
the note trustee;
* an issuer deed of charge dated the closing date between the issuer,
the note trustee, the issuer security trustee, the issuer swap
providers and certain other parties;
* the issuer dollar currency swap agreements dated the closing date
between the issuer, the issuer dollar currency swap providers and
the issuer security trustee; and
* the issuer euro currency swap agreements dated the closing date
between the issuer, the issuer euro currency swap provider and the
issuer security 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:
* Holmes Financing (No. 7) PLC as issuer;
* JPMorgan Chase Bank, London Branch as security trustee;
* The Bank of New York, London Branch as issuer security trustee and
note trustee;
* JPMorgan Chase Bank, London Branch as principal paying agent and
agent bank;
* J.P. Morgan Bank Luxembourg S.A. as registrar and transfer agent;
* [__] as issuer dollar currency swap provider in respect of the
series 1 issuer notes;
* [__] as issuer dollar currency swap provider in respect of the
series 2 issuer notes;
* [__] as issuer dollar currency swap provider in respect of the
series 3 class A issuer notes; and
* [__] as issuer euro currency swap provider in respect of the series
4 issuer notes (other than the series 4 class A2 issuer notes).
The noteholders are bound by and deemed to have notice of all of the
provisions of the issuer trust deed, the issuer deed of charge, the issuer
intercompany loan agreement, the Funding deed of charge, the issuer cash
management agreement, the issuer paying agent, the agent bank agreement and the
issuer dollar currency swap agreements and the issuer euro currency swap
agreements, which are applicable to them. Noteholders can view copies 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 issuer
notes due solely to their residence outside the UK.
There are no UK governmental laws or regulations other than in relation to
withholding tax, as described in "UNITED KINGDOM TAXATION -- WITHHOLDING TAX",
that restrict payments made to non-UK resident noteholders.
1. FORM, DENOMINATION AND TITLE
The offered issuer notes are being offered and sold to the public in the
United States and to institutional investors outside the United States.
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The offered issuer notes are initially in global registered form, without
coupons attached. Transfers and exchanges of beneficial interests in global
offered issuer notes are made in accordance with the rules and procedures of
DTC, Euroclear and/or Clearstream, Luxembourg, as applicable.
A global note will be exchanged for offered issuer notes in definitive
registered form only under limited circumstances. The denominations of any
offered issuer notes in definitive form will be $1,000, $10,000 or $100,000
each or integral multiples thereof. If the offered issuer notes in definitive
form are issued, they will be serially numbered and issued in an aggregate
principal amount equal to the principal amount outstanding of the relevant
global offered issuer notes and in registered form only.
Title to the global offered issuer notes or to any definitive issuer notes
will pass on registration in the register maintained by the registrar. The
registered holder of any global offered issuer note is the absolute owner of
that note. Definitive offered issuer notes may be transferred in whole upon
surrender of the note and completion of the relevant form of transfer. The
offered issuer notes are not issuable in bearer form.
2. STATUS, SECURITY AND PRIORITY
The class A issuer notes, the class B issuer notes and the class M issuer
notes are direct, secured and unconditional obligations of the issuer and are
all secured by the same security. Payments on each class of issuer notes will
be made equally among all issuer notes of that class.
Without prejudice to the repayment provisions described in number 5 (and
except if a non-asset trigger event occurs or if, prior to enforcement of the
issuer security, amounts are due and payable in respect of more than one series
of the class A issuer notes), the class A issuer notes rank, irrespective of
series, without preference or priority among themselves. Without prejudice to
the repayment provisions described in number 5 below and subject to the
relevant scheduled and/or, as applicable, permitted redemption dates or other
payment conditions of the issuer notes, payments of principal and interest due
and payable on the class A issuer notes will rank ahead of payments of
principal and interest due and payable on the class B issuer notes and the
class M issuer notes subject to the terms and conditions of the issuer notes,
the issuer cash management agreement, the issuer deed of charge, the Funding
deed of charge and the other issuer transaction documents.
Without prejudice to the repayment provisions described in number 5, the
class B issuer notes rank, irrespective of series, without preference or
priority among themselves. Without prejudice to the repayment provisions
described in number 5 below and subject to the relevant scheduled and/or, as
applicable, permitted redemption dates or other payment conditions of the
issuer notes, payments of principal and interest due and payable on the class B
issuer notes will rank ahead of payments of principal and interest due and
payable on the class M issuer notes and will be subordinated to those payments
due and payable on the class A issuer notes subject to the terms and conditions
of the issuer notes, the issuer cash management agreement, the issuer deed of
charge, the Funding deed of charge and the other issuer transaction documents.
Without prejudice to the repayment provisions described in number 5, the
class M issuer notes rank irrespective of series, without preference or
priority among themselves. Without prejudice to the repayment provisions
described in number 5 below and subject to the relevant scheduled and/or, as
applicable, permitted redemption dates or other payment conditions of the
issuer notes, payments of principal and interest due and payable on the class M
issuer notes will be subordinated to payments due and payable on the class A
issuer notes and the class B issuer notes subject to the terms and conditions
of the issuer notes, the issuer cash management agreement, the issuer deed of
charge, the Funding deed of charge and the other issuer transaction documents.
In the event of the issuer security being en forced, the class A issuer notes
will rank in priority to the class B issuer notes and the class A issuer notes
and the class B issuer notes will rank in priority to the class M issuer notes.
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The note trustee and the issuer security trustee are required to have regard to
the interests of all classes of noteholders equally. However, if there are any
class A issuer notes outstanding and if there is or may be a conflict between
the interests of the class A noteholders and the interests of the class B
noteholders and/or the class M noteholders, then the note trustee and the
issuer security trustee will have regard to the interests of the class A
noteholders only. If there are any class B issuer notes outstanding and if
there is or may be a conflict between the interests of the class B noteholders
and the interests of the class M noteholders, then the note trustee and the
issuer security trustee will have regard to the interests of the class B
noteholders only. Except in 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 M noteholders. However, there are provisions limiting
the power of the class B noteholders and the class M noteholders to pass an
effective extraordinary resolution, also described in number 11, depending on
its effect on the class A noteholders. Likewise, there is no limitation on the
power of the class B noteholders to pass an effective extraordinary resolution
the exercise of which is binding on the class M noteholders. However, there are
provisions limiting the power of the class M noteholders to pass an effective
extraordinary resolution, also described in number 11, depending on its effect
on the class B noteholders and the class A noteholders.
The issuer security trustee and the note trustee are entitled to assume that
any exercise by it or them of any power, discretion or duty under the issuer
transaction documents will not be materially prejudicial to the interests of
the noteholders if the rating agencies have confirmed that the current ratings
of the issuer notes will not be adversely affected by that exercise.
The security for the payment of amounts due under the issuer notes is
created by the issuer deed of charge. The security is created in favour of the
issuer security trustee who will hold it on behalf of the noteholders and on
behalf of other secured creditors of the issuer. The security consists of the
following:
(1) an assignment and charge by way of first fixed security of the
issuer's rights under the issuer transaction documents to which it
is a party, including the issuer intercompany loan agreement, the
Funding deed of charge, the issuer dollar currency swap agreements,
the issuer euro currency swap agreements, the issuer paying agent
and agent bank agreement, the issuer subscription agreement, the
issuer underwriting agreement, the issuer corporate services
agreement, the issuer bank account agreement, the issuer cash
management agreement and the issuer trust deed;
(2) a charge by way of first fixed charge (which may take effect as a
floating charge) over the issuer's right, title and interest and
benefit in the issuer transaction accounts and any amounts
deposited in it;
(3) a charge by way of first fixed charge (which may take effect as a
floating charge) over the issuer's right, title, interest and
benefit in all issuer authorised investments made by or on behalf
of the issuer, including all monies and income payable under them;
and
(4) a first ranking floating charge over the issuer's business and
assets not already charged under (1), (2) or (3) (but extending
over any of its assets located in Scotland or governed by Scots
law).
The security is described in detail in the issuer deed of charge which is
described under the heading "SECURITY FOR THE ISSUER'S OBLIGATIONS" in this
prospectus. The issuer deed of charge also sets out how money is to be
distributed between the secured parties if the security is enforced. The
security becomes enforceable when an issuer note event of default occurs, as
described in number 9. If an issuer note event of default occurs, the
redemption of the issuer notes will be accelerated, as described in number 10.
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3. COVENANTS
If any issuer note is outstanding, the issuer will not, unless it is
permitted by the terms of the issuer transaction documents or with the written
consent of the issuer security trustee:
* create or permit to subsist any mortgage, standard security,
pledge, lien, charge or other security interest on the whole or any
part of its present or future assets or undertakings;
* sell, dispose of or grant any option or right to acquire any of its
assets or undertakings or any interest or benefit in its assets or
undertakings;
* permit any other person, except for the issuer security trustee, to
have any equitable or beneficial interest in any of its assets or
undertakings;
* have an interest in any bank account other than the bank accounts
maintained pursuant to the issuer transaction documents;
* carry on any business other than as described in this prospectus
relating to the issue of the issuer notes, the making of the issuer
intercompany loan and the related activities, as described in this
prospectus;
* incur any indebtedness in respect of borrowed money whatsoever or
give any guarantee or indemnity in respect of any indebtedness;
* consolidate with or merge with any person or transfer substantially
all of its properties or assets to any person;
* waive or consent to the modification or waiver of any of the
obligations relating to the issuer security;
* have any employees, premises or subsidiaries;
* pay any dividend or make any other distributions to its
shareholders or issue any further shares;
* purchase or otherwise acquire any issuer notes; or
* engage in any activities in the US (directly or through agents), or
derive any income from US sources as determined under US income tax
principles, or hold any property if doing so would cause it to be
engaged or deemed to be engaged in a trade or business in the US as
determined under US income tax principles.
4. INTEREST
Each offered issuer note bears interest on its principal amount outstanding
from, and including, the closing date. Interest will stop accruing on any part
of the principal amount outstanding of an offered issuer 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 in accordance with this condition, both before and after any judgment
is given, until whichever is the earlier of the following:
* the day on which all sums due in respect of that offered issuer
note, up to that day, are paid; and
* the day which is seven days after the principal paying agent or the
US paying agent has notified the relevant class of noteholders,
either in accordance with number 14 or individually, that the
payment will be made, provided that subsequently payment is in fact
made.
Interest on the series 1 class A issuer notes will be paid monthly in arrear
on each applicable interest payment date. If a trigger event occurs or the
issuer security is enforced prior to the interest payment date falling in April
2004, interest on the series 1 class A issuer notes will be payable quarterly
in arrear on the relevant interest payment dates falling in January, April,
July and October, as applicable.
Interest on the offered issuer notes, other than the series 1 class A issuer
notes, will be paid quarterly in arrear on each quarterly interest payment
date.
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Each period beginning on, and including, the closing date or any interest
payment date and ending on, but excluding, the next interest payment date is
called an interest period, except that for the series 1 class A issuer notes,
following the occurrence of a trigger event or enforcement of the issuer
security, an interest period is the period from (and including) the 15th day of
a month (or if such a day is not a business day, the next succeeding business
day) to (but excluding) the 15th day of the next following month (or if such a
day is not a business day the next succeeding business day). The first interest
payment date for the series 1 class A issuer notes will be 15th April, 2003 for
the interest period from and including the closing date to but excluding 15th
April, 2003. The first interest payment for the offered issuer notes (other
than the series 1 class A issuer notes) will be made on 15th July, 2003 for the
interest period from and including the closing date to but excluding 15th July,
2003.
The order of payments of interest to be made on the classes of issuer notes
will be prioritised so that interest payments due and payable on the class M
issuer notes will be subordinated to interest payments due and payable on the
class B issuer notes and the class A issuer notes and interest payments due and
payable on the class B issuer notes will be subordinated to interest payments
due and payable on the class A issuer notes, in each case in accordance with
the issuer priority of payments.
Any shortfall in payments of interest on the class B issuer notes and/or the
class M issuer notes will be deferred until the next interest payment date. On
the next interest payment date, the amount of interest due on each class of
issuer notes will be increased to take account of any deferred interest, and
interest shall be paid on that deferred interest. If on that interest payment
date there is still a shortfall, that shortfall will be deferred again. This
deferral process will continue until the final repayment date of the issuer
notes, at which point all such deferred amounts will become due and payable and
if there is insufficient money available to pay interest on the class B issuer
notes and/or the class M issuer notes, then it is possible that noteholders may
not receive all interest amounts payable on those classes of issuer notes.
Payments of interest due on an interest payment date in respect of the class
A issuer notes will not be deferred.
The rate of interest for each interest period for the:
* series 1 class A issuer notes will be the sum of one-month USD-
LIBOR plus a margin of __ per cent. per annum;
* series 1 class B issuer notes will be the sum of three-month USD-
LIBOR plus a margin of __ per cent. per annum up to and including
the interest payment date in April 2008 and thereafter the sum of
three-month USD-LIBOR plus a margin of __ per cent. per annum;
* series 1 class M issuer notes will be the sum of three-month USD-
LIBOR plus a margin of __ per cent. per annum up to and including
the interest payment date in April 2008 and thereafter the sum of
three-month USD-LIBOR plus a margin of __ per cent. per annum;
* series 2 class A issuer notes will be the sum of three-month USD-
LIBOR plus a margin of __ per cent. per annum;
* series 2 class B issuer notes will be the sum of three-month USD-
LIBOR plus a margin of __ per cent. per annum up to and including
the interest payment date in April 2008 and thereafter the sum of
three-month USD-LIBOR plus a margin of __ per cent. per annum;
* series 2 class M issuer notes will be the sum of three-month USD-
LIBOR plus a margin of __ per cent. per annum up to and including
the interest payment date in April 2008 and thereafter the sum of
three-month USD-LIBOR plus a margin of __ per cent. per annum; and
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* series 3 class A issuer notes will be the sum of three-month USD-
LIBOR plus a margin of __ per cent. per annum up to and including
the interest payment date in April 2008 and thereafter the sum of
three-month USD-LIBOR plus a margin of __ per cent. per annum.
"USD-LIBOR" means the London Interbank Offered Rate for dollar deposits, as
determined by the agent bank on the following basis:
(1) on the interest determination date for each class of the offered
issuer notes, the agent bank will determine the arithmetic mean,
rounded upwards to five decimal places, of the offered quotations
to leading banks for US dollar deposits for the relevant interest
period.
This will be determined by reference to the display as quoted on the
Moneyline Telerate Screen No. 3750. If the Moneyline Telerate Screen No. 3750
stops providing these quotations, the replacement service, if any, for the
purposes of displaying this information will be used. If the replacement
service stops displaying the information, another page as determined by the
issuer with the approval of the note trustee will be used.
In each of these cases, the determination will be made as at or about 11.00
a.m., London time, on that date. This is called the "SCREEN RATE" for the
respective classes of the offered issuer notes.
The "INTEREST DETERMINATION DATE" 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:
* request the principal London office of each of the reference
banks to provide the agent bank with its offered quotation to
leading banks for US dollar deposits of the equivalent amount
and for the relevant interest 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 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, on any interest determination date, 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 those quotations and the relevant rate for that
interest period will be the arithmetic mean of the quotations as
calculated in (2). If no such banks are agreed 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.
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 as at the interest determination date
and multiplying the product by the actual number of days in that interest
period divided by 360, in each case rounding to the nearest U.S. dollars 0.01,
half a cent being rounded upwards. For these purposes, in the case of the
series 1 class A issuer notes, following the occurrence of a trigger event or
enforcement of the issuer security, the principal amount outstanding will
include any amount of interest which would otherwise be payable on a monthly
interest payment date, which will not then fall due but will instead be
deferred until the next monthly interest payment date and will itself accrue
interest at the rate of interest applicable to subsequent interest periods in
respect of the series 1 class A issuer notes until the next quarterly interest
payment date.
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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 those rates and amounts to each stock exchange and
listing authority on which the issuer notes are admitted to trading or 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 the determination or calculation as it
shall 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.
The agent bank will ensure that there will be four reference banks and an
agent bank while there are issuer notes outstanding.
5. REDEMPTION, PURCHASE AND CANCELLATION
(A) FINAL REDEMPTION
If the offered issuer notes have not previously been redeemed in full as
described in this number 5, the issuer will redeem the issuer notes at their
then principal amount outstanding together with all accrued interest on the
final maturity date in respect of each class of issuer notes.
(B) MANDATORY REDEMPTION
Subject as provided in the next paragraphs, the series 1 class A issuer
notes will be redeemed on each interest payment date in amounts corresponding
to the amounts (if any) repaid by Funding on the corresponding interest payment
date in respect of, and pursuant to, the issuer series 1 term AAA advance of
the issuer intercompany loan; the series 1 class B issuer notes will be
redeemed on each interest payment date in amounts corresponding to the amounts
(if any) repaid by Funding on the corresponding interest payment date in
respect of, and pursuant to, the issuer series 1 term AA advance of the issuer
intercompany loan; the series 1 class M issuer notes will be redeemed on each
interest payment date in amounts corresponding to the amounts (if any) repaid
by Funding on the corresponding interest payment date in respect of, and
pursuant to, the issuer series 1 term A advance of the issuer intercompany
loan; the series 2 class A issuer notes will be redeemed on each interest
payment date in amounts corresponding to the amounts (if any) repaid by Funding
on the corresponding interest payment date in respect of, and pursuant to, the
issuer series 2 term AAA advance of the issuer intercompany loan; the series 2
class B issuer notes will be redeemed on each interest payment date in amounts
corresponding to the amounts (if any) repaid by Funding on the corresponding
interest payment date in respect of, and pursuant to, the issuer series 2 term
AA advance of the issuer intercompany loan; the series 2 class M issuer notes
will be redeemed on each interest payment date in amounts corresponding to the
amounts (if any) repaid by Funding on the corresponding interest payment date
in respect of, and pursuant to, the issuer series 2 term A advance of the
issuer intercompany loan and the series 3 class A issuer notes will be redeemed
on each interest payment date in amounts corresponding to the amounts (if any)
repaid by Funding on the corresponding interest payment date in respect of, and
pursuant to, the issuer series 3 term AAA advance of the issuer intercompany
loan, in each case converted into dollars at the relevant issuer dollar
currency swap rate. The series 1 class A issuer notes may also be redeemed from
the amounts available for drawing under the Funding liquidity reserve fund on
the relevant interest payment date.
If on an interest payment date, prior to enforcement of the issuer security
or the occurrence of an asset trigger event, amounts are outstanding under more
than one series of the class A issuer notes, then the issuer will apply issuer
principal receipts to repay, as the case may be, (1) the series 1 class A
issuer notes prior to making payments of principal on the series 2 class A
issuer notes, the series 3 class A issuer notes and the series 4 class A issuer
notes; (2) the series
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2 class A issuer notes prior to making payments of principal on the series 3
class A issuer notes and the series 4 class A issuer notes; and (3) the series
3 class A issuer notes prior to making payments of principal on the series 4
class A issuer notes.
(C) NOTE PRINCIPAL PAYMENTS, PRINCIPAL AMOUNT OUTSTANDING AND POOL FACTOR
Four business days prior to each interest payment date (the "NOTE
DETERMINATION DATE"), the issuer or the agent bank will determine the
following:
* the amount of each principal payment payable on each offered note,
called the "NOTE PRINCIPAL PAYMENT";
* the principal amount outstanding of each offered note 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
* 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.
The issuer will notify the amounts and dates determined to the agent bank,
paying agents, note trustee, registrar and each stock exchange on which the
issuer notes are listed and shall publish those amounts and dates in accordance
with number 14 as soon as possible after these parties have been notified.
If the issuer or agent bank 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 subsection (C), and each of
these determinations or calculations will be deemed to have been made by the
issuer. If this happens, the issuer, the agent bank and the noteholders will be
bound by the determinations made.
(D) OPTIONAL REDEMPTION IN FULL
The issuer may by giving not less than 30 and not more than 60 days' prior
notice to the note trustee and the noteholders redeem all (but not some only)
of the issuer notes specified in the following bulleted list at the principal
amount outstanding together with any accrued interest on the following dates:
* the series 1 class B issuer notes, the series 1 class M issuer
notes, the series 2 class B issuer notes, the series 2 class M
issuer notes and the series 3 class A issuer notes on any interest
payment date falling on or after April 2008; or
* the series 1 issuer notes on any interest payment date on which the
aggregate principal amount of the series 1 issuer notes then
outstanding is less than 10 per cent. of the aggregate principal
amount outstanding of the series 1 issuer notes as at the closing
date; or
* the series 2 issuer notes on any interest payment date on which the
aggregate principal amount of the series 2 issuer notes then
outstanding is less than 10 per cent. of the aggregate principal
amount outstanding of the series 2 issuer notes as at the closing
date; or
* the series 3 class A issuer notes on any interest payment date on
which the aggregate principal amount of the series 3 issuer notes
then outstanding is less than 10 per cent. of the aggregate
principal amount outstanding of the series 3 issuer notes as at
the closing date.
The issuer may only redeem the offered issuer notes as described in this
subsection if the issuer has provided to the note trustee a certificate to the
effect that it will have funds available to it to make the required payment on
the interest payment date.
(E) OPTIONAL REDEMPTION FOR TAX AND OTHER REASONS
If the issuer satisfies the note trustee that on the next interest payment
date either:
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* the issuer would be required to withhold or deduct from amounts due
on the issuer notes any amount on account of any present or future
taxes or duties or governmental charges; or
* Funding would be required to withhold or deduct from amounts due on
the issuer intercompany loan any amount on account of any present
or future taxes or duties or governmental charges,
then the issuer will use reasonable endeavours 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 materially increase the disclosure requirements under US
law or the costs of issuance.
If the issuer is unable to arrange a substitution as described in this
subsection, then the issuer may by giving not less than 30 and not more than 60
days' prior notice to the note trustee and the noteholders redeem all (but not
some only) of the issuer notes at the principal amount outstanding together
with any accrued interest on the next following interest payment date. The
issuer may only redeem the issuer notes as described in the preceding sentence
if the note trustee is satisfied that the issuer will have funds available to
it to make the required payment on the interest payment date.
If, at any time, the issuer has delivered a certificate to Funding, the
security trustee and the rating agencies to the effect that it would be
unlawful to make, fund or allow to remain outstanding an issuer term advance
made or to be made by it under the issuer intercompany loan agreement and
stating that the issuer requires Funding to prepay the term advance, the issuer
may, by giving not less than 30 (or such shorter period as may be required by
any relevant law) and not more than 60 days' prior notice to the note trustee
and the noteholders, redeem all (but not some only) of the issuer notes at the
principal amount outstanding together with any accrued interest on the next
following interest payment date. The issuer may only redeem the issuer notes as
described in the preceding sentence if the note trustee is satisfied that the
issuer will have funds available to it to make the required payment on the
interest payment date.
If the new Basel Capital accord (as described in the consultative document
"The New Basel Capital Accord" published in January 2001 by the Basel Committee
on Banking Supervision) has been implemented in the United Kingdom, whether by
rule of law, recommendation of best practice or by any other regulation, and
provided that an issuer note enforcement notice has not been served on the
interest payment date falling in April 2007 and on any interest payment date
thereafter, then the issuer may redeem all (but not some only) of the issuer
notes at the principal amount outstanding thereof, together with any accrued
interest thereon, on giving not more than 60 days and not less than 30 days'
(or such shorter period as may be required by any relevant law) prior written
notice thereof to the note trustee and the noteholders in accordance with
Condition 14, provided that, prior to giving any such notice, the issuer shall
have provided to the note trustee a certificate signed by two directors of the
issuer to the effect that it will have the funds, not subject to the interest
of any other person, required to redeem the issuer notes as aforesaid and any
amounts required under the issuer pre-enforcement revenue priority of payments
(or, as the case may be, the issuer post-enforcement revenue priority of
payments) currently set out in the issuer cash management agreement to be paid
in priority to or pari passu with the issuer notes outstanding in accordance
with the terms and conditions thereof.
6. PAYMENTS
Payments of principal and interest in respect of the global issuer notes
will be made only against the presentation of those global issuer notes to or
to the order of the registrar (or another agent that may be appointed in its
place). In the case of final redemption, and provided that payment is made in
full, payment will only be made against surrender of those global issuer notes
to the registrar or replacement agent.
All payments on the offered issuer 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 issuer 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 issuer note, the
registrar will annotate the register of noteholders, indicating the amount and
date of that payment.
If a noteholder holds definitive offered issuer notes, payments of principal
and interest on an offered issuer note (except in the case of a final payment
that pays off the entire principal on the offered issuer note) will be made by
cheque 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 issuer
note 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, registrar or transfer agent and can appoint a successor or additional
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.
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 in respect of the offered issuer notes
will become void if they are not presented within the time limit for payment.
That time limit is ten years from their due date. 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 this withholding
or deduction.
9. EVENTS OF DEFAULT
(A) CLASS A NOTEHOLDERS
The note trustee may give notice of a class A issuer note event of default
(as defined in the following paragraph) in respect of the class A issuer notes
(a "CLASS A ISSUER NOTE ENFORCEMENT NOTICE"), and shall give such notice if it
is indemnified to its satisfaction and it is:
* required to by the holders of at least one quarter of the aggregate
principal amount outstanding of the class A issuer notes; or
* directed to by an extraordinary resolution (as defined in the
issuer trust deed) of the class A noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS A ISSUER NOTE EVENT OF DEFAULT":
* the issuer fails to pay for a period of three business days any
amount of interest or principal on the class A issuer notes when
that payment is due and payable in accordance with these
conditions; or
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* the issuer fails to perform or observe any of its other obligations
under the class A issuer notes, the issuer trust deed, the issuer
deed of charge or any other issuer transaction document, and
(except where that failure is incapable of remedy, in which case no
notice will be required) it remains unremedied for 20 days after
the note trustee has given notice of it to the issuer requiring the
same to be remedied; and the note trustee or, as applicable, the
issuer security trustee, has certified that the failure to perform
or observe is materially prejudicial to the interests of the class
A noteholders; or
* except for the purposes of an amalgamation or restructuring as
described in the point immediately following, the issuer stops or
threatens to stop carrying on all or a substantial part of its
business or is unable to pay its debts within the meaning of
Section 123(1)(a), (b), (c) or (d) of the UK Insolvency Act 1986 or
is unable to pay its debts as they fall due or the value of its
assets falls to less than the amount of its liabilities (taking
into account contingent and prospective liabilities) or otherwise
becomes insolvent; or
* 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 or restructuring previously approved by the note
trustee or by an extraordinary resolution of the class A
noteholders; or
* proceedings are otherwise initiated against the issuer under any
applicable liquidation, insolvency, reorganisation or other similar
laws and those proceedings are not being disputed in good faith
with a reasonable prospect of success; or steps are taken with a
view to obtaining a moratorium in respect of third party action;
or, in relation to the whole or any substantial part of the
business or assets of the issuer, an administration order is
granted or an administrator is appointed out of court or an
administrative receiver or other receiver, liquidator or similar
official is appointed or any encumbrancer takes possession of that
business or those assets or a distress, execution, diligence or
other process is levied or enforced upon or sued out against that
business or those assets and is not discharged within 30 days; or
the issuer initiates or consents to the foregoing proceedings or
makes a conveyance or assignment for the benefit of its creditors
generally; or
* an issuer intercompany loan enforcement notice is served in respect
of the issuer intercompany loan agreement while any of the class A
issuer notes is 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 issuer notes are outstanding. Subject to that occurrence, the
note trustee may give notice of a class B issuer note event of default (as
defined in the following paragraph) in respect of the class B issuer notes (a
"CLASS B ISSUER NOTE ENFORCEMENT NOTICE"), and shall give that notice if it is
indemnified to its satisfaction and it is:
* required to by the holders of at least one quarter of the aggregate
principal amount outstanding of the class B issuer notes; or
* directed to by an extraordinary resolution of the class B
noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS B ISSUER NOTE EVENT OF DEFAULT":
* the issuer fails to pay for a period of three business days any
amount of interest or principal on the class B issuer notes when
that payment is due and payable in accordance with these
conditions; or
* the occurrence of any of the other events in number 9(A) described
above but so that any reference to the class A issuer notes and the
class A noteholders shall be read as references to the class B
issuer notes and the class B noteholders.
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(C) CLASS M NOTEHOLDERS
The terms described in this number 9(C) will have no effect so long as any
of the class A issuer notes or the class B issuer notes are outstanding.
Subject to that occurrence, the note trustee may give notice of a class M
issuer note event of default (as defined in the following paragraph) in respect
of the class M issuer notes (a "CLASS M ISSUER NOTE ENFORCEMENT NOTICE"), and
shall give that notice if it is indemnified to its satisfaction and it is:
* required to by the holders of at least one quarter of the aggregate
principal amount outstanding of the class M issuer notes; or
* directed to by an extraordinary resolution of the class M
noteholders.
If any of the following events occurs and is continuing it is called a
"CLASS M ISSUER NOTE EVENT OF DEFAULT":
* the issuer fails to pay for a period of three business days any
amount of interest or principal on the class M issuer notes when
that payment is due and payable in accordance with these
conditions; or
* the occurrence of any of the other events in number 9(A)
described above but so that any reference to the class A issuer
notes and the class A noteholders shall be read as references to
the class M issuer notes and the class M noteholders.
10. ENFORCEMENT OF ISSUER NOTES
At any time the note trustee and the issuer security trustee may take steps
against the issuer to enforce the provisions of the issuer trust deed and the
issuer notes or the issuer deed of charge or any of the other issuer
transaction documents. At any time after the security under the issuer deed of
charge has become enforceable, the issuer security trustee may, at its
discretion and without notice, institute those proceedings as it thinks fit to
enforce the issuer security. Neither of them shall be bound to take these steps
unless it is indemnified to its satisfaction and:
* it is so requested in writing by holders of at least one quarter of
the aggregate principal amount outstanding of the relevant class of
issuer notes (subject to those restrictions in the issuer trust
deed and/or the issuer deed of charge to protect the interests of
any higher ranking class of noteholders); or
* in the case of the issuer security trustee, it is so requested by
any other issuer secured creditor (subject to those restrictions in
the issuer deed of charge to protect the noteholders); or
* it has been so directed by an extraordinary resolution of
noteholders of the relevant class (subject to those restrictions in
the issuer trust deed and/or the issuer deed of charge to protect
the interests of any higher ranking class of noteholders).
No extraordinary resolution of the class B noteholders will be effective
unless there is an extraordinary resolution of the class A noteholders or a
direction of the class A noteholders to the same effect or none of the class A
notes remain outstanding or the note trustee (or, as the case may be, the
issuer security trustee) is of the opinion it would not be materially
prejudicial to the interests of the class A noteholders. No request or
extraordinary resolution of the class M noteholders will be effective unless
there is an extraordinary resolution of the class B noteholders and the class A
noteholders or a direction of the class B noteholders and the class A
noteholders to the same effect or none of the class A issuer notes and the
class B issuer notes remain outstanding or the note trustee (or, as the case
may be, the issuer security trustee) is of the opinion it would not be
materially prejudicial to the interests of the class A noteholders and the
class B noteholders. 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 issuer notes or the issuer trust deed
unless (1) the note trustee or the issuer security trustee, as the case may be,
has become bound to institute proceedings and has failed to do so within a
reasonable time and (2) the failure is continuing. Notwithstanding the previous
sentence and notwithstanding any other provision of the issuer trust deed, the
right of any
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noteholder to receive payment of principal of and interest on its issuer notes
on or after the due date for the principal or interest, or to institute suit
for the enforcement of payment of that interest or principal, may not be
impaired or affected without the consent of that noteholder. In addition, no
class B noteholder or class M noteholder will be entitled to take proceedings
for the winding up or administration of the issuer unless:
* there are no outstanding issuer notes of a class with higher
priority; or
* if issuer notes of a class with higher priority are outstanding,
there is consent of holders of at least one quarter of the
aggregate principal amount outstanding of the class or classes of
issuer notes with higher priority.
In the event that the issuer security is enforced and the proceeds of that
enforcement are insufficient, after payment of all other claims ranking in
priority, to pay in full any amount due on the class B issuer notes and the
class M issuer notes, the issuer security trustee is required, at the request
of PECOH Limited, to transfer, or to procure the transfer, without payment and
on behalf of the class B noteholders, the class M noteholders and all of the
class B issuer notes and/or all of the class M issuer notes to PECOH Limited,
pursuant to the option granted by the issuer security trustee to PECOH Limited.
The option is granted to acquire all of the class B issuer notes and the class
M issuer notes, plus accrued interest on them. This is called the post-
enforcement call option. Each class B noteholder and class M noteholder
acknowledges that the issuer security 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 issuer notes,
it agrees to be bound in this way.
11. MEETINGS OF NOTEHOLDERS, MODIFICATIONS AND WAIVER
(A) MEETINGS OF NOTEHOLDERS
The issuer trust deed contains provisions for convening meetings of each
series and/ or class of noteholders to consider any matter affecting their
interests, including the modification of any provision of the terms and
conditions of the issuer notes or any of the issuer transaction documents.
In respect of the class A issuer notes, the issuer trust deed provides that:
* a resolution which, in the opinion of the note trustee, affects the
interests of the holders of one series only of the class A issuer
notes shall be deemed to have been duly passed if passed at a
meeting of the holders of the class A issuer notes of that series;
* a resolution which, in the opinion of the note trustee, affects the
interests of the holders of any two or more series of the class A
issuer notes but does not give rise to a conflict of interest
between the holders of those two or more series of the class A
issuer notes, shall be deemed to have been duly passed if passed at
a single meeting of the holders of those two or more series of the
class A issuer notes; and
* a resolution which, in the opinion of the note trustee, affects the
interests of the holders of any two or more series of the class A
issuer notes and gives or may give rise to a conflict of interest
between the holders of those two or more series of the class A
issuer notes, shall be deemed to have been duly passed only if, in
lieu of being passed at a single meeting of the holders of those
two or more series of the class A issuer notes, it shall be duly
passed at separate meetings of the holders of those two or more
series of the class A issuer notes.
In the case of a single meeting of the holders of two or more series of the
class A issuer notes which are not all denominated in the same currency, the
principal amount outstanding of any class A issuer note denominated in US
dollars or euro shall be converted into sterling at the relevant issuer dollar
currency swap rate or the relevant issuer euro currency swap rate, as the case
may be.
In respect of the class B issuer notes, the issuer trust deed provides that:
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* a resolution which, in the opinion of the note trustee, affects the
interests of the holders of one series only of the class B issuer
notes shall be deemed to have been duly passed if passed at a
meeting of the holders of the class B issuer notes of that series;
* a resolution which, in the opinion of the note trustee, affects the
interests of the holders of any two or more series of the class B
issuer notes but does not give rise to a conflict of interest
between the holders of those two or more series of the class B
issuer notes, shall be deemed to have been duly passed if passed at
a single meeting of the holders of those two or more series of the
class B issuer notes; and
* a resolution which, in the opinion of the note trustee, affects the
interests of the holders of any two or more series of the class B
issuer notes and gives or may give rise to a conflict of interest
between the holders of those two or more series of the class B
issuer notes, shall be deemed to have been duly passed only if, in
lieu of being passed at a single meeting of the holders of those
two or more series of the class B issuer notes, it shall be duly
passed at separate meetings of the holders of those two or more
series of the class B issuer notes.
In the case of a single meeting of the holders of two or more series of the
class B issuer notes which are not all denominated in the same currency, the
principal amount outstanding of any class B issuer note denominated in US
dollars or euro shall be converted into sterling at the relevant issuer dollar
currency swap rate or the relevant issuer euro currency swap rate, as the case
may be.
In respect of the class M issuer notes, the issuer trust deed provides that:
* a resolution which, in the opinion of the note trustee, affects the
interests of the holders of one series only of the class M issuer
notes shall be deemed to have been duly passed if passed at a
meeting of the holders of the class M issuer notes of that series;
* a resolution which, in the opinion of the note trustee, affects the
interests of the holders of any two or more series of the class M
issuer notes but does not give rise to a conflict of interest
between the holders of those two or more series of the class M
issuer notes, shall be deemed to have been duly passed if passed at
a single meeting of the holders of those two or more series of the
class M issuer notes; and
* a resolution which, in the opinion of the note trustee, affects the
interests of the holders of any two or more series of the class M
issuer notes and gives or may give rise to a conflict of interest
between the holders of those two or more series of the class M
issuer notes, shall be deemed to have been duly passed only if, in
lieu of being passed at a single meeting of the holders of those
two or more series of the class M issuer notes, it shall be duly
passed at separate meetings of the holders of those two or more
series of the class M issuer notes.
In the case of a single meeting of the holders of two or more series of the
class M issuer notes which are not all denominated in the same currency, the
principal amount outstanding of any class M issuer note denominated in US
dollars or euro shall be converted into sterling at the relevant issuer dollar
currency swap rate or the relevant issuer euro currency swap rate, as the case
may be.
Subject as provided in the following paragraph, the quorum for any meeting
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 relevant series, class or classes of issuer notes or, at any
adjourned meeting, one or more persons representing noteholders of the relevant
series, class or classes of issuer notes, whatever the total principal amount
outstanding of issuer notes so represented.
Certain terms including the alteration of the amount, rate or timing of
payments on the issuer 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 one or more persons holding or
representing in total not less than three quarters of the total principal
amount
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outstanding of the classes of issuer notes of each series for the time being
outstanding or, at any adjourned meeting, at least one quarter of the total
principal amount outstanding of those classes of issuer notes. These
modifications are called "BASIC TERMS MODIFICATIONS".
No extraordinary resolution of the class B noteholders, except as mentioned
below, shall take effect while any class A issuer notes remain outstanding
unless sanctioned by an extraordinary resolution of the class A noteholders, or
the note trustee (or, as the case may be, the issuer security trustee) is of
the opinion that it would not be materially prejudicial to the interests of the
class A noteholders.
No extraordinary resolution of the class M noteholders, except as mentioned
below, shall take effect while any class A issuer notes or class B issuer notes
remain outstanding unless sanctioned by an extraordinary resolution of the
class A noteholders and/or the class B noteholders (as the case may be), or the
note trustee (or, as the case may be, the issuer security trustee) is of the
opinion that it would not be materially prejudicial to the interests of the
class A noteholders and/or the class B noteholders (as the case may be).
Furthermore, an extraordinary resolution of the class A noteholders concerning
a modification of or any waiver or authorisation of any breach of the terms and
conditions of the issuer notes or of the issuer transaction documents (except
as provided below) will not be effective unless it is also sanctioned by
extraordinary resolutions of the class B noteholders and the class M
noteholders or the note trustee (or, as the case may be, the issuer security
trustee) considers that it will not be materially prejudicial to the class B
noteholders and the class M noteholders. If there are no class A issuer notes
outstanding, an extraordinary resolution of the class B noteholders concerning
a modification of or any waiver or authorisation of any breach of the terms and
conditions of the issuer notes or of the issuer transaction documents (except
as provided below) will not be effective unless it is also sanctioned by an
extraordinary resolution of the class M noteholders or the note trustee (or, as
the case may be, the issuer security trustee) considers that it will not be
materially prejudicial to the interests of the class M noteholders.
(B) MODIFICATIONS AND WAIVER
The note trustee and the issuer security trustee may agree, without the
consent of the noteholders, (1) to any modification of, or to the waiver or
authorisation of any breach or proposed breach of, the terms and conditions of
the issuer notes or any of the issuer transaction documents which is not, in
the opinion of the note trustee or the issuer security trustee, materially
prejudicial to the interests of the noteholders or (2) to any modification of
any of the terms and conditions of the issuer notes or any of the issuer
transaction documents which, in the opinion of the note trustee or the issuer
security trustee, is of a formal, minor or technical nature or is to correct a
manifest or demonstrable error.
The note trustee may also, without the consent of the noteholders, determine
that any issuer note event of default shall not be treated as such. Any of
these modifications, authorisations or waivers will be binding on the
noteholders and, unless the note trustee or the issuer security 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 or the issuer security trustee is required in
connection with the exercise of its powers to have regard to the interests of
the noteholders of any series or class, it shall have regard to the interests
of those noteholders as a class. In particular, neither the note trustee nor
the issuer security trustee shall have regard to, or be liable for, the
consequences of that exercise for individual noteholders resulting from their
being domiciled or resident in or connected with any particular territory. In
connection with any such exercise, neither the note trustee nor the issuer
security trustee shall 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 AND THE ISSUER SECURITY TRUSTEE
The note trustee and the issuer security trustee are entitled to be
indemnified and relieved from responsibility in certain circumstances,
including provisions relieving them from taking enforcement proceedings unless
indemnified to their satisfaction.
The note trustee, the issuer security trustee and their related companies
are entitled to enter into business transactions with the issuer, Abbey
National plc or related companies of either of them and to act as note trustee
and issuer security trustee, respectively, 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.
Neither the note trustee nor the issuer security trustee will 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 and/or the issuer security trustee.
13. REPLACEMENT OF ISSUER NOTES
If definitive issuer notes 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 reasonable requests for
evidence and indemnity. The noteholder must surrender any defaced or mutilated
issuer notes before replacements will be issued.
If a global issuer note is lost, stolen, mutilated, defaced or destroyed,
the issuer will deliver a replacement global issuer note to the registered
holder upon satisfactory evidence and surrender of any defaced or mutilated
global issuer note. 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 deemed to have been validly given if
published in the Financial Times and, so long as any of the series 1 issuer
notes or the series 2 issuer notes or the series 3 class A issuer notes are
outstanding, The New York Times. However, a notice will also be treated as
having been duly given if the information contained in that notice appears on
the relevant page of the Reuters screen or other similar service approved by
the note trustee and notified to noteholders. The notice will be deemed given
on the date of first publication or when it first appears on the screen.
While the issuer notes are represented by global issuer notes, notices to
noteholders will be valid if published as described in the previous paragraph
or if delivered to DTC, Euroclear and/or Clearstream, Luxembourg, as
applicable.
The note trustee may approve some other method of giving notice to
noteholders if that method conforms to market practice and the rules of the UK
Listing Authority and if notice of that other method is given to noteholders.
15. GOVERNING LAW
The issuer transaction documents (other than the issuer underwriting
agreement) and the issuer notes are governed by English law. The courts of
England are to have non- exclusive jurisdiction to settle any disputes which
may arise out of or in connection with the issuer transaction documents (other
than the issuer underwriting agreement) and the issuer notes. The issuer and
the other parties to the issuer transaction documents (other than the issuer
underwriting agreement) irrevocably submit to the non-exclusive jurisdiction of
the courts of England. The issuer underwriting agreement is governed by the
laws of the State of New York and the issuer and the other parties to the
issuer underwriting agreement irrevocably agree that any state or federal court
in the State of New York will have exclusive jurisdiction to hear any dispute
arising out of the issuer underwriting agreement.
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RATINGS OF THE ISSUER NOTES
The issuer notes are expected, on issue, to be assigned the following
ratings by Moody's, Standard & Poor's and Fitch. A security 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 organisation if,
in its judgment, circumstances (including, without limitation, a reduction in
the credit rating of the Funding swap provider and/or the issuer dollar
currency swap providers and/or the issuer euro currency swap provider (or,
where relevant, the credit support provider of the Funding swap provider or any
of the issuer swap providers), the mortgages trustee GIC provider, the Funding
GIC provider) in the future so warrant.
RATING
STANDARD &
CLASS OF ISSUER NOTES MOODY'S POOR'S FITCH
- --------------------- ------- ---------- -----
series 1 class A..... P-1 A-1+ F1+
series 2 class A..... Aaa AAA AAA
series 3 class A..... Aaa AAA AAA
series 4 class A1.... Aaa AAA AAA
series 4 class A2.... Aaa AAA AAA
series 1 class B..... Aa3 AA AA
series 2 class B..... Aa3 AA AA
series 3 class B..... Aa3 AA AA
series 4 class B..... Aa3 AA AA
series 1 class M..... A2 A A
series 2 class M..... A2 A A
series 3 class M..... A2 A A
series 4 class M..... A2 A A
The ratings assigned to each class of issuer notes address the likelihood of
full and timely payment to you of all payments of interest on each interest
payment date under those classes of issuer notes. The ratings also address the
likelihood of (in the case of Standard & Poor's and Fitch) "timely", or (in the
case of Moody's) "ultimate", payment of principal on the final maturity date of
each class of issuer notes.
Assignment of the expected ratings to the issuer notes of each class will be
a condition to issue of the issuer notes.
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MATURITY AND PREPAYMENT CONSIDERATIONS
The average lives of the series 1 issuer notes and the series 2 issuer notes
and the series 3 class A issuer notes cannot be stated, as the actual rate of
repayment of the loans and redemption of the mortgages and a number of other
relevant factors are unknown. However, calculations of the possible average
lives of the series 1 issuer notes, the series 2 issuer notes and the series 3
class A issuer notes can be made based on certain assumptions. For example,
based on the assumptions that:
(1) the issuer security has not been enforced;
(2) the seller is not in breach of the terms of the mortgage sale
agreement;
(3) the seller assigns no new loans to the mortgages trustee after the
closing date and the loans are assumed to amortise in accordance
with the assumed constant CPR indicated in the table below (subject
to assumption (4) below);
(4) the seller assigns to the mortgages trustee sufficient new loans
and their related security in the period up to the interest payment
date in April 2008 such that the aggregate principal amount
outstanding of loans in the portfolio at any time is not less than
[GBP][14,000,000,000], or such higher amount as may be required to
be maintained as a result of new issuers providing new term
advances to Funding which Funding uses as consideration for the
assignment of new loans to the trust property;
(5) neither an asset trigger event nor a non-asset trigger event
occurs;
(6) no event occurs that would cause payments on the issuer term AA
advances or the issuer term A advances to be deferred; and
(7) the issuer exercises its option to redeem the issuer notes on the
interest payment date falling in April 2008 in the normal course
and no issuer note enforcement notice has been served in accordance
with paragraph 5(E) of the "TERMS AND CONDITIONS OF THE OFFERED
ISSUER NOTES",
the approximate average life of the series 1 issuer notes, the series 2 issuer
notes and the series 3 class A issuer notes, at various assumed rates of
prepayment for the loans, would be as follows:
POSSIBLE
POSSIBLE POSSIBLE AVERAGE LIFE POSSIBLE POSSIBLE POSSIBLE POSSIBLE
AVERAGE LIFE AVERAGE LIFE OF SERIES 1 AVERAGE LIFE AVERAGE LIFE AVERAGE LIFE AVERAGE LIFE
OF SERIES 1 OF SERIES 1 CLASS M OF SERIES 2 OF SERIES 2 OF SERIES 2 OF SERIES 3
CLASS A CLASS B ISSUER CLASS A CLASS B CLASS M CLASS A
ISSUER NOTES ISSUER NOTES NOTES ISSUER NOTES ISSUER NOTES ISSUER NOTES ISSUER NOTES
(YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS) (YEARS)
------------ ------------ ------------ ------------ ------------ ------------ ------------
5% CPR... 0.93 5.06 5.06 2.96 5.06 5.06 5.06
10% CPR.. 0.93 1.31 1.31 2.81 3.06 3.06 3.93
15% CPR.. 0.93 1.31 1.31 2.81 3.06 3.06 3.93
20% CPR.. 0.93 1.31 1.31 2.81 3.06 3.06 3.93
25% CPR.. 0.93 1.31 1.31 2.81 3.06 3.06 3.93
Assumptions (1) to (6) relate to circumstances which are not predictable. No
assurance can be given that the issuer will be in a position to redeem the
issuer notes on the interest payment date falling in [April 2008]. If the
issuer does not so exercise its option to redeem, then the average lives of the
then outstanding issuer notes would be extended.
The average lives of the issuer notes are subject to factors largely outside
the control of the issuer and consequently no assurance can be given that these
assumptions and estimates will prove in any way to be realistic and they must
therefore be viewed with considerable caution. For more information in relation
to the risks involved in the use of these estimated average lives, see "RISK
FACTORS -- THE YIELD TO MATURITY OF THE ISSUER NOTES MAY BE ADVERSELY AFFECTED
BY PREPAYMENTS OR REDEMPTIONS ON THE LOANS".
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MATERIAL LEGAL ASPECTS OF THE LOANS
The following discussion is a summary of the material legal aspects of
English and Scottish residential property loans and mortgages. It is not an
exhaustive analysis of the relevant law.
ENGLISH LOANS
GENERAL
There are two parties to a mortgage. The first party is the mortgagor, who
is the borrower and homeowner. The mortgagor grants the mortgage over its
property. The second party is the mortgagee, who is the lender. Each loan will
be secured by a mortgage which has a first ranking priority over all other
mortgages secured on the 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. Some flexible loans
are secured by both a first and a second legal charge in favour of the seller.
Each borrower is prohibited under the English mortgage conditions from creating
another mortgage or other secured interest over the relevant property without
the consent of the seller.
NATURE OF PROPERTY AS SECURITY
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
land.
REGISTERED TITLE
Title to registered land is registered at H.M. Land Registry. Each parcel of
land is given a unique title number. Title to the land is established by a land
or (in the case of land which is subject to a mortgage or charge) charge
certificate containing official copies of the entries on the register relating
to that land.
There are four classes of registered title. The most common is title
absolute. A person registered with title absolute owns the land free from all
interests other than those entered on the register, those classified as
overriding interests, those classified as minor interests (as between the
landowner and the beneficiary of those interests only and when the landowner
has notice of those interests) and (in the case of leasehold land) all implied
and express covenants, obligations and liabilities incident to the land.
The land or charge certificate will reveal the present owner of the land,
together with any legal charges and other interests affecting the land.
However, the Land Registration Act 1925 provides that some interests in the
land will bind the land even though they are not capable of registration at
H.M. Land Registry. The land or charge certificate will also contain a plan
indicating the location of the land. However, this plan is not conclusive as to
matters such as the location of boundaries.
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, which includes the granting
of a first legal mortgage. However, a small 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
can be proved by documentary evidence or by proof of continuous exercise of the
rights for a prescribed period and do not require registration. However, other
rights would have to be registered at the Central Land Charges Registry in
order to be effective against a subsequent purchaser of the land.
TAKING SECURITY OVER LAND
Where land is registered, a mortgagee must register its mortgage at H.M.
Land Registry in order to secure priority over any subsequent mortgagee.
Priority of mortgages over registered land is governed by the date of
registration of the mortgage rather than date of creation. However, a
prospective mortgagee is able to obtain a priority period within which to
register his mortgage. If
241
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 property. Without the title
deeds to the property, the borrower is unable to establish the necessary chain
of ownership, and is therefore effectively prevented from dealing with its land
without the consent of the mortgagee. Priority of mortgages over unregistered
land is governed first by the possession of title deeds, and in relation to
subsequent mortgages by the registration of a land charge.
THE SELLER AS MORTGAGEE
The sale of the English mortgages by the seller to the mortgages trustee
will take effect in equity only. The mortgages trustee will not apply to H.M.
Land Registry or the Central 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 MORTGAGES, WHICH MAY ADVERSELY
AFFECT THE PAYMENTS ON THE ISSUER NOTES".
ENFORCEMENT OF MORTGAGES
If a borrower defaults under a loan, the English mortgage conditions provide
that all monies under the loan will become immediately due and payable. The
seller or its successors or assigns would then be entitled to recover all
outstanding principal, interest and fees under the covenant of the borrower
contained in the English mortgage conditions to pay or repay those amounts. In
addition, the seller or its successors or assigns may enforce its mortgage in
relation to the defaulted loan. Enforcement may occur in a number of ways,
including the following:
* The mortgagee may enter into possession of the 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 property
and to third parties as occupier of the property.
* The mortgagee may lease the property to third parties.
* The mortgagee may foreclose on the property. Under foreclosure
procedures, the mortgagor's title to the property is extinguished
so that the mortgagee becomes the owner of the property. The remedy
is, because of procedural constraints, rarely used.
* The mortgagee may appoint a receiver to deal with income from the
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 possession of the property, in theory the
mortgagee is not liable for the receiver's acts or as occupier of
the property. In practice, the receiver will require indemnities
from the mortgagee that appoints it.
* The mortgagee may sell the 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 property sold pursuant to a mortgagee's power of
sale becomes the owner of the property.
SCOTTISH LOANS
GENERAL
A standard security is the only means of creating a fixed charge over
heritable or long leasehold property in Scotland. Its form must comply with the
requirements of the Conveyancing and Feudal Reform (Scotland) Act 1970 (the
"1970 ACT"). There are two parties to a standard security. The first party is
the grantor, who is the borrower and homeowner. The grantor grants the standard
security over its property (and is generally the only party to execute the
standard security). The second party, who is the lender, is termed the
heritable creditor. Each Scottish loan
242
will be secured by a standard security which has a first ranking priority over
all other standard securities secured on the property and over all unsecured
creditors of the borrower. Some flexible loans are secured by both a first and
a second ranking standard security in favour of the seller.
The 1970 Act automatically imports a statutory set of "Standard Conditions"
into all standard securities, although the majority of these may be varied by
agreement between the parties. The seller, along with most major lenders in the
residential mortgage market in Scotland, has elected to vary the Standard
Conditions by means of its own set of Scottish mortgage conditions, the terms
of which are in turn imported into each standard security. The main provisions
of the Standard Conditions which cannot be varied by agreement relate to
enforcement, and in particular the notice and other procedures required as a
preliminary to the exercise of the heritable creditor's rights on a default by
the borrower.
NATURE OF PROPERTY AS SECURITY
While title to all land in Scotland is registered there are currently two
possible forms of registration, namely the Land Register and Sasine Register.
Both systems of registration can include both heritable (the Scottish
equivalent to freehold) and long leasehold land.
LAND REGISTER
This system of registration was established by the Land Registration
(Scotland) Act 1979. Since that time it has been introduced on a county by
county basis, and will apply to the whole of Scotland by 1st April 2003. Once a
county has been designated as falling within the system, the first sale of any
parcel of land (including a long leasehold) therein or the occurrence of
certain other events in relation thereto (but not the granting of a standard
security alone) trigger its registration in the Land Register, when it is given
a unique title number. Title to the land is established by a land certificate
containing official copies of the entries on the Register relating to that
land. Similarly, the holder of any standard security over the land in question
receives a charge certificate containing official copies of the entries
relating to that security. A person registered in the Land Register owns the
land free from all interests other than those entered on the Register, those
classified as overriding interests and any other interests implied by law.
The land certificate will reveal the present owners of the land, together
with any standard securities and other interests (other than certain overriding
interests) affecting the land. The land certificate will also contain a plan
indicating the location of the land. While this plan is not in all
circumstances conclusive as to the location of the boundaries of the land, it
cannot be amended if this would be to the prejudice of a proprietor in
possession of the land, unless this indemnity has been expressly excluded in
the land certificate itself.
SASINE REGISTER
Title to all land in Scotland where no event has yet occurred to trigger
registration in the Land Register, and all land within the six counties of
Scotland to which the Land Register does not yet apply, falls to be recorded in
the General Register of Sasines. Title to such land is proved by establishing a
chain of documentary evidence of title going back at least ten years. Where the
land is affected by third party rights, some of those rights can be proved by
documentary evidence or by proof of continuous exercise of the rights for a
prescribed period and do not require registration. However, other rights would
have to be recorded in the Sasine Register in order to be effective against a
subsequent purchaser of the land.
TAKING SECURITY OVER LAND
A heritable creditor must register its standard security in the Land
Register or the Sasine Register (as applicable) in order to secure priority
over any subsequent standard security. Priority of standard securities is
(subject to express agreement to the contrary between the security holders)
governed by the date of registration rather than the date of creation. There is
no equivalent in Scotland to the priority period system which operates in
relation to registered land in England and Wales.
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THE SELLER AS HERITABLE CREDITOR
The sale of the Scottish mortgages by the seller to the mortgages trustee
will be given effect by a declaration of trust by the seller (and any sale of
Scottish mortgages in the future will be given effect by further declarations
of trust), by which the beneficial interest in the Scottish mortgages will be
transferred to the mortgages trustee. Such beneficial interest (as opposed to
the legal title) cannot be registered in the Land or Sasine Registers. The
consequences of this are explained in the section "RISK FACTORS -- THERE MAY BE
RISKS ASSOCIATED WITH THE FACT THAT THE MORTGAGES TRUSTEE HAS NO LEGAL TITLE TO
THE MORTGAGES, WHICH MAY ADVERSELY AFFECT THE PAYMENTS ON THE ISSUER NOTES".
ENFORCEMENT OF MORTGAGES
If a borrower defaults under a loan, the Scottish mortgage conditions
provide that all monies under the loan will become immediately due and payable.
The seller or its successors or assignees would then be entitled to recover all
outstanding principal, interest and fees under the obligation of the borrower
contained in the Scottish mortgage conditions to pay or repay those amounts. In
addition, the seller or its successors or assignees may enforce its standard
security in relation to the defaulted loan. Enforcement may occur in a number
of ways, including the following (all of which arise under the 1970 Act):
* The heritable creditor may enter into possession of the property.
If it does so, it does so in its own right and not as agent of the
borrower, and so may be personally liable for mismanagement of the
property and to third parties as occupier of the property.
* The heritable creditor may lease the property to third parties.
* The heritable creditor may sell the property, subject to various
duties to ensure that the sale price is the best that can
reasonably be obtained. The purchaser of a property sold pursuant
to a heritable creditor's power of sale becomes the owner of the
property.
* The heritable creditor may, in the event that a sale cannot be
achieved, foreclose on the property. Under foreclosure procedures
the borrower's title to the property is extinguished so that the
heritable creditor becomes the owner of the property. The remedy is
however rarely used.
In contrast to the position in England and Wales, the heritable creditor has
no power to appoint a receiver under the standard security.
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UNITED KINGDOM TAXATION
The following section summarises the material UK tax consequences of the
purchase, ownership and disposition of the issuer notes based on current law
and practice in the UK. Slaughter and May, 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 the seller to UK tax counsel that the
profit in Funding's profit and loss account will not exceed 0.01 per cent. of
the Funding available revenue receipts and that the profit in the issuer's
profit and loss account will not exceed 0.02 per cent. of the interest on the
issuer term advances under the issuer intercompany loan are correct. It further
assumes that all payments made pursuant to the final documentation are
calculated on arm's length terms. The summary does not purport to be a complete
analysis of all tax considerations of the purchase, ownership and disposition
of the issuer notes. It relates to the position of persons who are the absolute
beneficial owners of issuer notes and may not apply to certain classes of
persons such as dealers or persons connected with the issuer. Prospective
noteholders who are unsure as to their tax position should seek their own
professional advice.
TAXATION OF US RESIDENTS
As discussed in more detail under "WITHHOLDING TAX" below, UK tax counsel is
of the opinion that no UK withholding tax will be required in relation to
interest payments on the issuer notes provided that the issuer notes are listed
on a recognised stock exchange, which includes the London Stock Exchange.
Residents of the US are generally not subject to tax in the UK on payments
on the issuer notes under the terms of the double taxation treaty between the
US and the UK (the "TREATY"), subject to completion of administrative
formalities, except where the issuer 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 issuer 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 (the "NEW
TREATY") has been negotiated between the UK and the US but must be ratified by
both the UK Parliament and the US Senate before it can enter into force. It is
not known when these procedures will be completed. UK tax counsel is of the
opinion that the above description of the treatment of residents of the US
under the Treaty will also apply (assuming that the noteholders resident in the
US satisfy the requirements of the Limitation on Benefits article of the New
Treaty) if the New Treaty enters into force without further amendment provided
that the amounts paid on the issuer notes do not exceed the return on
comparable debt instruments. To the extent that the amounts paid do exceed such
a return, the UK may tax the excess in accordance with UK domestic law.
Subject to the opinion set out in the preceding paragraph, UK tax counsel is
of the opinion that, as discussed in more detail under "DIRECT ASSESSMENT OF
NON-UK RESIDENT HOLDERS OF ISSUER 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 by direct
assessment in respect of any payments on the issuer 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.
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 per
cent., 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.
245
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 issuer notes, the parties to the transaction, or any aspects of
the transaction.
WITHHOLDING TAX
There will be no UK withholding tax in relation to interest payments on the
issuer notes provided that, so far as concerns deduction by the issuer or its
paying agents, the issuer notes are listed (and remain so listed) on a
"RECOGNISED STOCK EXCHANGE", as defined in Section 841 of the Income and
Corporation Taxes Act 1988 ("ICTA"). On the basis of the UK Inland Revenue's
published interpretation of the relevant legislation, securities which are to
be listed on a stock exchange in the UK will satisfy this requirement if they
are listed by a competent authority in the UK and are admitted to trading on a
recognised stock exchange in the UK. The London Stock Exchange is currently a
recognised stock exchange for this purpose. The Inland Revenue is instead able
to obtain information about individual holders of the issuer notes to whom or,
in certain circumstances, for whose benefit interest is paid. Information so
obtained may, in certain circumstances, be exchanged by the Inland Revenue with
the tax authorities of other jurisdictions.
On 21st January, 2003, the European Council of Economics and Finance
Ministers ("ECOFIN") agreed on proposals under which, with effect from 1st
January, 2004 each Member State will be required to provide to the tax
authorities of each other Member State details of payments of interest (or
similar income) paid by a person within the first Member State's jurisdiction
to any individual resident in that other Member State, except that, for a
transitional period, Belgium, Luxembourg and Austria will instead be required
to operate a withholding system in relation to such payments (the ending of
such transitional period being dependent upon the conclusion of certain other
agreements relating to information exchange with certain other countries).
Additionally, it was agreed by ECOFIN that the adoption of the proposals by the
European Union would require certain other non-Member State countries to adopt
a similar withholding system in relation to such payments. It is expected that
the final text of a directive to implement the proposals will be decided at the
ECOFIN meeting in March, 2003.
DIRECT ASSESSMENT OF NON-UK RESIDENT HOLDERS OF ISSUER NOTES TO UK TAX ON
INTEREST
The interest on the issuer notes has a UK source. Accordingly, payments on
the issuer notes will in principle be within the charge to UK tax even if paid
without withholding or deduction. However, it is the opinion of UK tax counsel
that such payments will not be chargeable to UK tax in the hands of a
noteholder who is not resident for tax purposes in the UK unless such holder
carries on a trade, profession or vocation in the UK through a UK branch or
agency in connection with which the payments are received or to which the
issuer notes are attributable, in which case (subject to exemptions for
interest received by certain categories of agent such as some brokers and
investment managers) tax may be levied on the UK branch or agency (unless the
provisions of the New Treaty apply to allow relief from such tax).
TAXATION OF RETURNS: COMPANIES WITHIN THE CHARGE TO UK CORPORATION TAX
Noteholders who are within the charge to UK corporation tax (other than
authorised unit trusts) will normally be subject to tax on all profits and
gains, including interest, arising on or in connection with the issuer notes
under the loan relationship rules contained in the Finance Act 1996. Any such
profits and gains will generally fall to be calculated in accordance with the
statutory accounting treatment of the issuer notes in the hands of the relevant
noteholder, and will generally be charged to tax as income in respect of each
accounting period to which they are allocated, in accordance with that
accounting treatment. Relief may be available in respect of losses or for
related expenses on a similar basis.
For holders of series 1 issuer notes, series 2 issuer notes, series 3 class
A issuer notes and series 4 issuer notes (other than series 4 class A2 issuer
notes) within the charge to UK corporation tax (other than authorised unit
trusts and investment trusts), these issuer 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 issuer notes as a result of changes in the
sterling/US dollar
246
exchange rate or the sterling/euro exchange rate, as appropriate, during each
accounting period in which such a holder holds these issuer notes will
generally be taxed or relieved by reference to the holder's accounting
treatment of the issuer 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 issuer notes is received or to which the
issuer notes are attributable will generally be liable to UK tax on the amount
of any interest received in respect of the issuer notes. The issuer notes
(other than the series 3 class B issuer notes, the series 3 class M issuer
notes and the series 4 class A2 issuer notes) will not be qualifying corporate
bonds within the meaning of section 117 of the Taxation of Chargeable Gains Act
1992, and therefore a disposal of such an issuer note by such a noteholder may
give rise to a chargeable gain or an allowable loss for the purpose of UK
capital gains tax. The series 3 class B issuer notes, the series 3 class M
issuer notes and the series 4 class A2 issuer notes will constitute such
qualifying corporate bonds, and therefore a disposal by such a noteholder of
such an issuer note will not give rise to a chargeable gain or an allowable
loss for the purposes of UK capital gains tax.
A disposal of issuer notes by a noteholder who is resident or ordinarily
resident in the UK for tax purposes or who carries on a trade in the UK through
a branch or agency to which the issuer notes are attributable may also give
rise to a charge to tax on income in respect of an amount representing interest
accrued on the issuer notes since the preceding payment date. For issuer notes
which constitute variable rate securities, taxation in respect of such a
disposal will be computed on the basis that such amount as the Inland Revenue
considers to be just and reasonable will be treated as accrued income. However,
the transferee of a variable rate security will not be entitled to any relief
on such amount. All of the issuer notes (except the series 1 class A issuer
notes and the series 2 class A issuer notes) will constitute variable rate
issuer notes for this purpose.
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 global issuer notes or on the issue or transfer of a
note in 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 per
cent., 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 seller has confirmed to Slaughter and May that the
profit in the profit and loss account will not exceed 0.01 per cent. of the
Funding available revenue receipts. In respect of the issuer, the seller has
confirmed to Slaughter and May that the profit in the profit and loss account
will not exceed 0.02 per cent., of the interest on the issuer term advances
under the issuer intercompany loan. You are referred to the risk factor "TAX
PAYABLE BY FUNDING OR THE ISSUER MAY ADVERSELY AFFECT OUR ABILITY TO MAKE
PAYMENTS ON THE ISSUER NOTES".
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, apart from a liability to UK corporation tax on amounts,
such as trustee fees and expenses, which are paid to the mortgages trustee for
its own benefit. 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.
247
UNITED STATES TAXATION
The following section summarises the material federal income tax consequences
of the purchase, ownership and disposition of the series 1 class A issuer
notes, series 1 class B issuer notes, series 1 class M issuer notes, series 2
class A issuer notes, series 2 class B issuer notes, series 2 class M issuer
notes and series 3 class A issuer notes (the "US ISSUER 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 issuer note (any such United States person
or holder, a "US HOLDER"). In general, the summary assumes that a holder
acquires a US issuer 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 issuer
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 issuer 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 issuer 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.
GENERAL
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.
Cleary, Gottlieb, Steen & Hamilton, 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 "-- CHARACTERISATION OF THE
US ISSUER NOTES" and "-- US ISSUER NOTES AS DEBT OF FUNDING", US tax counsel is
also of the opinion that, although there is no authority on the treatment of
instruments substantially similar to the US issuer notes, the US issuer notes
will be treated as debt for US federal income tax purposes (either of the
issuer, or of Funding as described below). 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 issuer 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 issuer notes consult their
own tax advisors as to the US federal income tax consequences of the purchase,
ownership and disposition of the US issuer notes, including the possible
application of state, local, non-US or other tax laws, and other US tax issues
affecting the transaction.
As used in this section, the term "UNITED STATES PERSON" means a person who
is a citizen or resident of the United States, a US domestic corporation or
partnership, any estate the income of which is subject to US federal income tax
regardless of the source of its income, or any trust if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more US persons have the authority to control all
substantial decisions of the trust.
248
TAX STATUS OF THE ISSUER, FUNDING, MORTGAGES TRUSTEE AND MORTGAGES TRUST
Under the transaction 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 from sources within the United States
as determined under US federal income tax principles, and not to hold any
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 mortgages trust or any of their assets as a REMIC or a
FASIT (two types of securitisation vehicles having a special tax status under
the Code).
CHARACTERISATION OF THE US ISSUER NOTES
Although there is no authority regarding the treatment of instruments that
are substantially similar to the US issuer notes, it is the opinion of US tax
counsel that the US issuer notes will be treated as debt for US federal income
tax purposes (either of the issuer or of Funding, as described under "US ISSUER
NOTES AS DEBT OF FUNDING"). The issuer intends to treat the US issuer notes as
indebtedness of the issuer for all purposes, including US tax purposes. The
discussion in the next section assumes this result.
The US issuer notes will not be qualifying real property 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 ISSUER NOTES
QUALIFIED STATED INTEREST AND ORIGINAL ISSUE DISCOUNT. A US holder of a US
issuer note will treat stated interest on such US note as ordinary interest
income when paid or accrued, in accordance with its tax method of accounting.
It is not anticipated that the US issuer notes will have original issue
discount.
SALES AND RETIREMENT. In general, a US holder of a US issuer note will have
a basis in such note equal to the cost of the US issuer note to such holder,
and reduced by any payments thereon other than payments of stated interest.
Upon a sale or exchange of the US issuer note, a US holder will generally
recognise gain or loss equal to the difference between the amount realised
(less any accrued interest, which would be taxable as such) and the holder's
tax basis in the US issuer note. Such gain or loss will be long-term capital
gain or loss if the US holder has held the US issuer 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.
US ISSUER NOTES AS DEBT OF FUNDING
The IRS could possibly seek to characterise the series 1 class A issuer
notes, the series 1 class B issuer notes, the series 1 class M issuer notes,
the series 2 class A issuer notes, the series 2 class B issuer notes, the
series 2 class M issuer notes, and the series 3 class A issuer notes as
ownership interests in the issuer series 1 term AAA advance, the issuer series
1 term AA advance, the issuer series 1 term A advance, the issuer series 2 term
AAA advance, the issuer series 2 term AA advance, the issuer series 2 term A
advance, and the issuer series 3 term AAA advance, respectively, rather than as
debt of the issuer. If the IRS were successful in such a characterisation, a US
holder of a US issuer note would be treated as owning (i) a pro rata share of
the related issuer term advance between Funding and the issuer ("RELATED
ADVANCE"), which will be treated as debt for US federal income tax purposes and
(ii) an interest in the related issuer dollar currency swap. Treasury
regulations permit taxpayers meeting certain requirements to integrate a debt
instrument and a related currency hedge and to treat them for most tax purposes
as if they were a synthetic debt instrument having the terms of the debt
instrument and hedge
249
combined. Integrating the related advance and issuer dollar currency swap would
create a synthetic debt instrument having the characteristics of the US issuer
notes and hence would produce largely the same result as if the US issuer notes
were not recharacterised as debt of Funding.
The integration regulations apply only if a taxpayer creates a record
identifying the debt instrument and hedge on or before the close of the date
the hedge is entered into. The issuer will create a record that is intended to
provide such identification effective for each US holder as of the date of
acquisition of a US issuer note. By its acquisition of a US issuer note, each
US holder will be treated as having appointed the issuer as its agent for this
purpose. The IRS could challenge the effectiveness of such an identification
made on behalf of a group of taxpayers. The integration rules would not apply
to a US holder that is related to the issuer dollar currency swap provider.
If the issuer dollar currency swap terminated before the US issuer notes
were retired, and the integration regulations applied, then a US holder may be
considered to recognise gain or loss as if the holder had sold for fair market
value his interest in the related advance. Moreover, for periods following such
termination, the integration rules would no longer apply to the related advance
except in the discretion of the IRS.
If the issuer dollar currency swap were not integrated with the related
advance, then a US holder would calculate separately income and deductions from
the issuer dollar currency swap and income from the related advance. For most
holders, the tax consequences of treating the issuer dollar currency swap and
related advances separately would be similar to the treatment if they were
combined, but there could be differences. For example, income from the issuer
dollar currency swap may be sourced differently from income from the related
advance. Individual taxpayers may be allowed deductions for payments made under
the issuer dollar currency swap only as a miscellaneous itemised deduction
(which is allowed for regular tax purposes only subject to limitations and is
not allowed for alternative minimum tax purposes). US holders may wish to
consult their own tax advisors regarding the possible treatment of US issuer
notes as debt of Funding, application of the integration rules, and the
consequences of an inability to integrate the issuer dollar currency swap and
the related advance.
250
ERISA CONSIDERATIONS
The US issuer 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 US issuer 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 servicer, 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 US issuer notes is acquired or held by
a Plan with respect to which the issuer, the servicer, 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 issuer 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 any such issuer
notes.
Each purchaser and subsequent transferee of any US issuer 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 a Plan or an entity
whose underlying assets include the assets of any 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 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.
251
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 form debt may be considered an "equity interest" if it has "substantial
equity features". If the issuer were deemed under the Plan Asset Regulation to
hold plan assets by reason of a Plan's investment in any of the US issuer
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. While no assurance can be
given, the issuer anticipates that the US issuer notes offered hereby would be
considered "publicly-offered securities" under the Plan Asset Regulation.
Any insurance company proposing to purchase any of the US issuer 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 Insurance Company General Account Regulations, 65 Fed. Reg.
No. 3 (January 5, 2000) (to be codified at 29 C.F.R. pt. 2550) that became
generally applicable on 5th July, 2001.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold any of the US issuer
notes should determine whether, under the documents and instruments governing
the Plan, an investment in such issuer notes is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. Any Plan proposing to invest in
such issuer notes (including any governmental plan) should consult with its
counsel to confirm that such investment will not result in a non-exempt
prohibited transaction and will satisfy the other requirements of ERISA and the
Code (or, in the case of a governmental plan, any substantially similar state,
local or other federal law).
The sale of any US issuer notes to a Plan is in no respect a representation
by the seller, the issuer, the servicer, 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.
252
ENFORCEMENT OF FOREIGN JUDGMENTS IN ENGLAND AND WALES
The issuer is a UK public limited company incorporated with limited
liability in England and Wales. Any final and conclusive judgment of any United
States federal or state court having jurisdiction recognised by England or
Wales in respect of an obligation of the issuer in respect of the issuer notes
which is 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 that United States federal or state court, as
applicable, unless:
* the proceedings in that United States federal or state court, as
applicable, involved a denial of the principles of natural or
substantial justice;
* 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 between the same
parties concerning the same issues as are dealt with in the
judgment of the United States federal or state court, as
applicable;
* enforcement would breach section 5 of the Protection of Trading
Interests Act 1980; or
* enforcement proceedings are not instituted within six years after
the date of the judgment.
A judgment by a court may be given in some cases only in sterling. 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.
All of the directors and executive officers of the issuer reside outside the
United States. Substantially all or a substantial portion of the assets of all
or many of those persons are located outside the United States. As a result, it
may not be possible for holders of the issuer notes to effect service of
process within the United States upon those persons or to enforce against them
judgments obtained in United States courts predicated upon the civil liability
provisions of federal securities laws of the United States. Based on the
restrictions referred to in this section, 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.
253
UNITED STATES LEGAL INVESTMENT CONSIDERATIONS
The series 1 class A issuer notes will be eligible for purchase by money
market funds under Rule 2a-7 under the United States Investment Company Act of
1940, as amended.
None of the issuer notes will constitute "MORTGAGE RELATED SECURITIES" under
the United States Secondary Mortgage Market Enhancement Act of 1984, as
amended.
Except as stated above, no representation is made as to the proper
characterisation of the issuer notes for legal investment purposes, financial
institutional regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase the issuer notes under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of the issuer notes. Accordingly, all institutions whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their
legal advisors in determining whether and to what extent the issuer notes
constitute legal investments or are subject to investment, capital or other
restrictions.
EXPERTS
The financial statements of Holmes Funding Limited as of 31st December, 2002
and 2001 and for each of the years ended 31st December 2002 and 31st December,
2001 and the period from 24th April, 2000 (date of incorporation) to 31st
December, 2000 included in this prospectus, have been audited by Deloitte &
Touche, independent auditors, as stated in their report appearing herein, and
have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of Holmes Financing (No. 7) PLC as of 14th
February, 2003, included in this prospectus, have been audited by Deloitte &
Touche, independent auditors, as stated in their report appearing herein, and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
LEGAL MATTERS
Certain matters of English law regarding the issuer notes, including matters
relating to the validity of the issuance of the issuer notes will be passed
upon for the issuer and the underwriters by Slaughter and May, London, England.
Certain matters of United States law regarding the issuer notes, including
matters of United States federal income tax law with respect to the series 1
issuer notes and the series 2 issuer notes will be passed upon for the issuer
by Cleary, Gottlieb, Steen & Hamilton, New York. Certain matters of English law
and United States law will be passed upon for the underwriters by Allen &
Overy, London, England.
254
UNDERWRITING
United States
The issuer has agreed to sell and Credit Suisse First Boston LLC, Deutsche
Bank Securities Inc., J.P. Morgan Securities Inc., Lehman Brothers Inc., Morgan
Stanley & Co. Incorporated and Salomon Smith Barney Inc. (together the "CLASS A
UNDERWRITERS") for the series 1 class A issuer notes, the series 2 class A
issuer notes and the series 3 class A issuer notes, listed in the following
tables have agreed to purchase the principal amount of those issuer notes
listed in those tables (also called the "class A offered issuer notes"). The
issuer has agreed to sell and J.P. Morgan Securities Inc. and Salomon Smith
Barney Inc. have agreed to purchase the principal amount of the series 1 class
B issuer notes, the series 1 class M issuer notes, the series 2 class B issuer
notes and the series 2 class M issuer notes listed in the following table (also
called the "class B\M offered issuer notes" and, together with the class A
offered issuer notes, the "offered issuer notes"). The terms of these purchases
are governed by an issuer underwriting agreement between the issuer, J.P.
Morgan Securities Inc., Salomon Smith Barney Inc. and others.
PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF THE SERIES 1 OF THE SERIES 2 OF THE SERIES 3
CLASS A ISSUER CLASS A ISSUER CLASS A ISSUER
UNDERWRITERS NOTES NOTES NOTES
- -------------------------------------- ---------------- ------------------ -----------------
Credit Suisse First Boston LLC........ US$[__] US$[__] US$[__]
Deutsche Bank Securities Inc.......... US$[__] US$[__] US$[__]
J.P. Morgan Securities Ltd............ US$[__] US$[__] US$[__]
Lehman Brothers Inc................... US$[__] US$[__] US$[__]
Morgan Stanley & Co. Incorporated..... US$[__] US$[__] US$[__]
Salomon Brothers International Limited US$[__] US$[__] US$[__]
---------------- ------------------ -----------------
Total................................. US$[750,000,000] US$[1,250,000,000] US$[500,000,000]
================ ================== =================
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF THE AMOUNT OF THE AMOUNT OF THE AMOUNT OF THE
SERIES 1 CLASS B SERIES 1 CLASS M SERIES 2 CLASS B SERIES 2 CLASS M
UNDERWRITERS ISSUER NOTES ISSUER NOTES ISSUER NOTES ISSUER NOTES
- --------------------------------------- ---------------- ---------------- ---------------- ----------------
J.P. Morgan Securities Ltd............. US$[11,250,000] US$[19,125,000] US$[18,750,000] US$[31,875,000]
Salomon Brothers International Limited. US$[11,250,000] US$[19,125,000] US$[18,750,000] US$[31,875,000]
---------------- ---------------- ---------------- ----------------
Total.................................. US$[22,500,000] US$[38,250,000] US$[37,500,000] US$[63,750,000]
================ ================ ================ ================
In addition, Barclays Bank PLC and UBS Warburg Ltd. have also agreed to pay
and subscribe for the series 4 class A issuer notes and J.P. Morgan Securities
Ltd. and Salomon Brothers International Limited have also agreed to pay and
subscribe for the series 3 class B issuer notes, the series 3 class M issuer
notes, the series 4 issuer notes, none of which are being offered pursuant to
this prospectus, on the closing date.
The issuer has agreed to pay to the underwriters of the series 1 class A
issuer notes a selling commission of __ per cent. of the aggregate principal
amount of the series 1 class A issuer notes and a management and underwriting
fee of __ per cent. of the aggregate principal amount of the series 1 class A
issuer notes. The issuer has also agreed to pay to the underwriters of the
series 1 class B issuer notes a selling commission of __ per cent. of the
aggregate principal amount of the series 1 class B issuer notes and a
management and underwriting fee of __ per cent. of the aggregate principal
amount of the series 1 class B issuer notes. The issuer has also agreed to pay
the underwriters of the series 1 class M issuer notes a selling commission of
__ per
255
cent. of the aggregate principal amount of the series 1 class M issuer notes
and a management and underwriting fee of __ per cent. of the aggregate
principal amount of the series 1 class M issuer notes.
The issuer has agreed to pay to the underwriters of the series 2 class A
issuer notes a selling commission of __ per cent. of the aggregate principal
amount of the series 2 class A issuer notes and a management and underwriting
fee of __ per cent. of the aggregate principal amount of the series 2 class A
issuer notes. The issuer has also agreed to pay to the underwriters of the
series 2 class B issuer notes a selling commission of __ per cent. of the
aggregate principal amount of the series 2 class B issuer notes and a
management and underwriting fee of __ per cent. of the aggregate principal
amount of the series 2 class B issuer notes. The issuer has also agreed to pay
the underwriters of the series 2 class M issuer notes a selling commission of
__ per cent. of the aggregate principal amount of the series 2 class M issuer
notes and a management and underwriting fee of __ per cent. of the aggregate
principal amount of the series 2 class M issuer notes. The issuer has agreed to
pay to the underwriters of the series 3 class A issuer notes a selling
commission of __ per cent. of the aggregate principal amount of the series 3
class A issuer notes and a management and underwriting fee of __ per cent. of
the aggregate principal amount of the series 3 class A issuer notes.
In the event of default by an underwriter, the issuer underwriting agreement
provides that in certain circumstances the issuer underwriting agreement may be
terminated.
The underwriters have advised the issuer that they propose initially to
offer the series 1 class A issuer 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 __ per cent. for each series 1 class A issuer
note. The underwriters may allow, and those dealers may re-allow, concessions
up to __ per cent. of the principal balance of the series 1 class A issuer
notes to some brokers and dealers.
The underwriters have advised the issuer that they propose initially to
offer the series 1 class B issuer notes and the series 1 class M issuer 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 __ per
cent. for each series 1 class B issuer note and up to __ per cent. for each
series 1 class M issuer note. The underwriters may allow, and those dealers may
re-allow, concessions up to __ per cent. of the principal balance of the series
1 class B issuer notes, and up to __ per cent. of the principal balance of the
series 1 class M issuer notes, to some brokers and dealers.
The underwriters have advised the issuer that they propose initially to
offer the series 2 class A issuer 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 __ per cent. for each series 2 class A issuer
note. The underwriters may allow, and those dealers may re-allow, concessions
up to __ per cent. of the principal balance of the series 2 class A issuer
notes to some brokers and dealers.
The underwriters have advised the issuer that they propose initially to
offer the series 2 class B issuer notes and the series 2 class M issuer 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 __ per
cent. for each series 2 class B issuer note and up to __ per cent. for each
series 2 class M issuer note. The underwriters may allow, and those dealers may
re-allow, concessions up to __ per cent. of the principal balance of the series
2 class B issuer notes and up to __ per cent of the principal balance of the
series 2 class M issuer notes to some brokers and dealers.
The underwriters have advised the issuer that they propose initially to
offer the series 3 class A issuer 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 __ per cent. for each series 3 class A issuer
note. The underwriters may allow, and those dealers may re-allow, concessions
up to __ per cent. of the principal balance of the series 3 class A issuer
notes to some brokers and dealers.
Additional offering expenses are estimated to be US$[__].
256
The issuer and Abbey National plc 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, short covering transactions, stabilising transactions and penalty
bids for the offered issuer notes under Regulation M under the United States
Securities Exchange Act of 1934, as amended.
* Short sales involve the sale by the underwriters of more offered
issuer notes than they are required to purchase in the offering.
This type of short sale is commonly referred to as a "naked" short
sale due to the fact that the underwriters do not have an option to
purchase these additional offered issuer notes in the offering. The
underwriters must close out any naked short position by entering
into short covering transactions as described below. 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 issuer notes in the open market after pricing that could
adversely affect investors who purchase in the offering.
* Short covering transactions involve purchases of the offered issuer
notes in the open market after the distribution has been completed
in order to cover naked short positions.
* Stabilising transactions permit bids to purchase the offered issuer
notes so long as the stabilising bids do not exceed a specified
maximum.
* Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the offered issuer notes
originally sold by that syndicate member are purchased in a short
covering transaction.
Similar to other purchase transactions, these transactions may have the
effect of raising or maintaining the market price of the offered issuer notes
or preventing or retarding a decline in the market price of the offered issuer
notes. As a result, these transactions may cause the prices of the offered
issuer 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 issuer notes will be registered under the United States
Securities Act of 1933, as amended.
The offered issuer 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:
* in relation to any offered issuer notes which have a maturity of
one year or more and which are to be admitted to the official list
maintained by the UK Listing Authority, it has not offered or sold,
and will not offer or sell, offered issuer notes to persons in the
United Kingdom prior to admission of the offered issuer 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 the purposes
of their business, 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;
257
* it has only communicated or caused to be communicated and it will
only communicate or cause to be communicated any invitation or
inducement to engage in investment activities (within the meaning
of section 21 of the Financial Services and Markets Act 2000)
received by it in connection with the issue of any issuer notes in
circumstances in which section 21(1) of the FSMA does not apply to
the issuer; and
* it has complied and will comply with all applicable provisions of
the FSMA with respect to anything done by it in relation to the
offered issuer notes in, from or otherwise involving the United
Kingdom.
ITALY
Each underwriter acknowledges that the series 1 class A issuer notes may not
be placed, offered or distributed to Italian investors at any time.
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 issuer
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 issuer 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 issuer notes or distribute or publish any
prospectus, form of application, offering circular/prospectus, 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 issuer notes by it
will be made on the same terms.
Neither the issuer nor the underwriters represent that offered issuer 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.
With regard to the issue of offered issuer notes, the underwriters will be
required to comply with such other additional or modified restrictions (if any)
as the issuer and the underwriters shall agree.
The underwriters will, unless prohibited by applicable law, furnish to each
person to whom they offer or sell offered issuer 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 authorised to give any
information or to make any representation not contained in the prospectus in
connection with the offer and sale of offered issuer notes to which the
prospectus relates.
This prospectus may be used by the underwriters for offers and sales related
to market-making transactions in the offered issuer notes. Any or each of the
underwriters 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 of the underwriters has any obligation to make a market in the
offered issuer notes, and any market-making may be discontinued at any time
without notice. The underwriters are participating in the initial distribution
of the offered issuer notes.
REPORTS TO NOTEHOLDERS
The issuer cash manager will prepare quarterly and annual reports that will
contain information about the issuer notes. The financial information contained
in the reports will not be prepared in accordance with generally accepted
accounting principles of any jurisdiction. Unless and until definitive issuer
notes are issued, the reports will be sent to the holders of the global issuer
notes. No reports will be sent to investors by the issuer cash manager.
258
Beneficial owners of the issuer notes will be entitled to receive from the
servicer on a monthly basis a report containing information about the loans in
the mortgages trust and certain other data if they have furnished the servicer
with the beneficial ownership certification described in the servicing
agreement.
WHERE INVESTORS CAN FIND MORE INFORMATION
The issuer has filed a registration statement for the offered issuer notes
with the SEC. This prospectus is part of the registration statement, but the
registration statement includes additional information.
The cash manager and/or the servicer will file with the SEC all required
periodic and special SEC reports and other information about the offered issuer
notes.
Investors may read and copy any reports, statements or other information
filed with the SEC at the SEC's public reference room in Washington, D.C.
Investors may request copies of these documents, upon payment of a duplicating
fee, by writing to the SEC. Investors should call the SEC at 1 800 732 0330 for
further information on the operation of the public reference room. SEC filings
are also available to the public on the SEC's Internet site at http://
www.sec.gov.
LISTING AND GENERAL INFORMATION
Application has been made to the Financial Services Authority in its
capacity as competent authority under the Financial Services and Markets Act
2000, as amended (the "UK LISTING AUTHORITY"), for the issuer notes to be
admitted to the official list (the "OFFICIAL LIST") maintained by the UK
Listing Authority and to the London Stock Exchange plc (the "LONDON STOCK
EXCHANGE") for the issuer notes to be admitted to trading on the London Stock
Exchange. It is expected that listing of the issuer notes on the Official List
of the UK Listing Authority and the admission to trading of those issuer notes
on the London Stock Exchange will be granted on or about l, 2003, subject only
to the issue of the global issuer notes. Prior to listing, however, dealings
will be permitted by the London Stock Exchange in accordance with its rules.
Transactions will normally be effected for settlement, in the case of the
series 1 issuer notes, the series 2 issuer notes and the series 3 class A
issuer notes, in dollars, in the case of the series 4 issuer notes (other than
the series 4 class A2 issuer notes), in euro and in the case of the series 3
issuer notes (other than the series 3 class A issuer notes) and the series 4
class A2 issuer notes, in sterling and for delivery on the third working day
after the date of the transaction.
The issuer accepts responsibility for the information contained in this
prospectus. To the best of the knowledge and belief of the issuer (which has
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 this information. The issuer accepts
responsibility accordingly.
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 litigation or arbitration proceedings pending or
threatened.
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 issuer notes are listed on the official list of
the UK Listing Authority and are trading on the London Stock Exchange, the most
recently published audited annual accounts of the issuer from time to time
shall be available at the specified office of the principal paying agent in
London. The issuer does not publish interim accounts.
259
The latest statutory accounts of Funding have been prepared and were drawn
up to 31st December, 2002. So long as the issuer notes are listed on the
Official List of the UK Listing Authority and are trading on the London Stock
Exchange, the most recently published audited annual accounts of Funding from
time to time shall be available at the specified office of the principal paying
agent in London. Funding does not normally 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 issuer underwriting agreement and the issuer subscription agreement.
Since 23rd January, 2003 (being the date of incorporation of the issuer) and
31st December, 2002 (being the date of the most recent financial reports of
Funding), 29th December, 1998 (being the date of incorporation of Holdings),
28th April, 2000 (being the date of incorporation of the mortgages trustee) and
28th April, 2000 (being the date of incorporation of the post-enforcement call
option holder), there has been (1) no material adverse change in the financial
position or prospects of the issuer, Funding, Holdings or the the post-
enforcement call option holder or the mortgages trustee and (2) no significant
change in the financial or trading position of the issuer, Funding, Holdings,
the post-enforcement call option holder or the mortgages trustee.
The issue of the issuer notes was authorised pursuant to a resolution of the
board of directors of the issuer passed on __, 2003.
The offered issuer notes have been accepted for clearance through DTC,
Clearstream, Luxembourg and Euroclear under the following Common Codes, CUSIP
numbers and ISINs:
CLASS OF ISSUER NOTES COMMON CODES CUSIP ISIN
- --------------------- ------------ ----- ----
Series 1 class A..... __ __ __
Series 1 class B..... __ __ __
Series 1 class M..... __ __ __
Series 2 class A..... __ __ __
Series 2 class B..... __ __ __
Series 2 class M..... __ __ __
Series 3 class A..... __ __ __
Copies of the following documents may be inspected at the offices of
Slaughter and May, One Bunhill Row, London EC1Y 8YY during usual business
hours, on any weekday (Saturdays and 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 financial statements of Holmes Financing (No. 7 plc) as of 14th
February, 2003 and the independent auditors' report thereon;
(C) the financial statements of Holmes Funding Limited as of 31st
December, 2002 and 31st December, 2001 and for each of the years
ended 31st December, 2002 and 31st December, 2001 and the period
from 24th April, 2000 (date of incorporation) to 31st December,
2000 and the independent auditors' report thereon;
(D) prior to the closing date, drafts (subject to minor amendment) or
copies, and after the closing date, copies of the following
documents:
* the issuer underwriting agreement;
* the issuer subscription agreement;
* the issuer intercompany loan agreement;
* the mortgages trust deed (as amended and restated);
* the mortgage sale agreement (as amended and restated)
1 Presumably not required as no mortgages are being sold.
260
* the issuer deed of charge;
* the Funding deed of charge (as amended and restated);
* the Funding liquidity facility agreement (as amended);
* the issuer dollar currency swap agreements;
* the issuer euro currency swap agreements;
* the Funding swap agreement (as amended and restated);
* the issuer trust deed;
* the issuer paying agent and agent bank agreement;
* the servicing agreement (as amended and restated);
* the cash management agreement (as amended);
* the issuer cash management agreement;
* the Funding guaranteed investment contract;
* the mortgages trustee guaranteed investment contract;
* the issuer post-enforcement call option agreement;
* the bank account agreement;
* the issuer bank account agreement;
* the master definitions and construction schedule (including the
amended and restated master definitions and construction
schedule and the issuer master definitions and construction
schedule);
* the seventh start-up loan agreement;
* the corporate services agreement; and
* the issuer corporate services agreement;
(E) the independent auditors' consent letter;
(F) the opinion of Slaughter and May as to validity;
(G) the opinion of Slaughter and May as to UK tax matters;
(H) the opinion of Cleary, Gottlieb, Steen & Hamilton as to US tax
matters; and
(I) the opinion of Tods Murray WS as to Scots law matters.
261
GLOSSARY
Principal terms used in this prospectus are defined as follows:
"$", "US$", "US the lawful currency for the time being of the United
DOLLARS" and States of America
"DOLLARS"
"[E]", "EURO" and the single currency introduced at the third stage of
"EURO" European Economic and Monetary Union pursuant to the
Treaty establishing the European Communities, as amended
from time to time
"[GBP]", "POUNDS" the lawful currency for the time being of the United
and "STERLING" Kingdom of Great Britain and Northern Ireland
"CHF", "SFR" and the lawful currency for the time being of the Swiss
"SWISS FRANCS" Confederation
"A PRINCIPAL one of four sub-ledgers on the principal deficiency ledger
DEFICIENCY SUB- which specifically records any principal deficiency in
LEDGER" respect of any term A advances
"AA PRINCIPAL one of four sub-ledgers on the principal deficiency ledger
DEFICIENCY SUB- which specifically records any principal deficiency in
LEDGER" respect of any term AA advances
"AAA PRINCIPAL one of four sub-ledgers on the principal deficiency ledger
DEFICIENCY SUB- which specifically records any principal deficiency in
LEDGER" respect of any term AAA advances
"ABBEY NATIONAL" Abbey National plc (see "THE ABBEY NATIONAL GROUP")
"ABBEY SVR" the standard variable rate set by the seller which applies
to all variable rate loans (other than tracker loans)
beneficially owned by the seller on the seller's
residential mortgage book
"ACCOUNT BANK" Abbey National plc, situated at 21 Prescot Street, London
E1 8AD
"ACCRUED INTEREST" in respect of a given date, the interest which has accrued
from the last regular payment date up to that date, but
which is not currently payable
"AGENT BANK" JPMorgan Chase Bank, London Branch
"ALTERNATIVE any transaction accounts of the mortgages trustee other
ACCOUNTS" than the mortgages trustee GIC account
"ALTERNATIVE requirements which vary the insurance provisions of the
INSURANCE mortgage conditions
REQUIREMENTS"
"ANTICIPATED CASH the anticipated number of months required to accumulate
ACCUMULATION sufficient principal receipts to pay the relevant bullet
PERIOD" amount, as described further in "THE MORTGAGES TRUST --
CASH MANAGEMENT OF TRUST PROPERTY -- PRINCIPAL RECEIPTS"
"ANTS" or "ABBEY Abbey National Treasury Services plc
NATIONAL TREASURY
SERVICES"
"ARREARS OF in respect of a given date, interest, principal (if
INTEREST" applicable) and expenses which are due and payable on that
date
262
"ASSET TRIGGER the occurrence of an amount being debited to the AAA
EVENT" principal deficiency sub-ledger
"AUTHORISED J.P. Morgan Securities Ltd., authorised under section 31
ADVISER" of the FSMA, the adviser to the issuer in relation to
compliance with UK listing rules
"AUTHORISED means:
INVESTMENTS"
(a) sterling gilt-edged securities; and
(b) sterling demand or time deposits, certificates of
deposit and short-term debt obligations (including
commercial paper) provided that in all cases such
investments have a maturity date falling no later
than the next following interest payment 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
authorised person under the Financial Services and
Markets Act 2000) are rated at least equal to
either A-1+ by Standard & Poor's, P-1 by Moody's
and F1+ by Fitch or their equivalents by three
other internationally recognised rating agencies
"BANK ACCOUNT the agreement entered into on 26th July, 2000 between the
AGREEMENT" account bank, the mortgages trustee and Funding which
governs the operation of the mortgages trustee GIC
account, the Funding GIC account and the Funding
transaction account
"BASIC TERMS the modification of terms, including altering the amount,
MODIFICATION" rate or timing of payments on the issuer notes, the
currency of payment, the priority of payments or the
quorum or majority required in relation to these terms
"BBB PRINCIPAL one of two sub-ledgers on the principal deficiency ledger
DEFICIENCY SUB- which specifically records any principal deficiency in
LEDGER" respect of any term BBB advances
"BBR" the Bank of England repo rate
"BENEFICIARIES" both Funding and the seller together as beneficiaries of
the mortgages trust
"BOOKING FEE" a fee payable by the borrower in respect of applications
for certain types of loans
"BORROWER" in relation to a loan, the individual or individuals
specified as such in the relevant mortgage together with
the individual or individuals (if any) from time to time
assuming an obligation to repay such loan or any part of
it
"BULLET AMOUNT" means:
(a) in respect of the previous series 1 term AAA
advance made by Holmes Financing (No. 1) PLC, the
sum of [GBP]600,000,000;
(b) in respect of the previous series 2 term AAA
advance made by Holmes Financing (No. 1) PLC, the
sum of [GBP]650,000,000;
263
(c) in respect of the previous series 3 term AAA
advance made by Holmes Financing (No. 1) PLC, the
sum of [GBP]575,000,000;
(d) in respect of the previous series 4 term AAA
advance made by Holmes Financing (No. 1) PLC, the
sum of [GBP]250,000,000;
(e) in respect of the previous series 2 term AAA
advance made by Holmes Financing (No. 3) PLC, the
sum of [GBP]750,000,000;
(f) in respect of the previous series 2 term AAA
advance made by Holmes Financing (No. 4) PLC, the
sum of [GBP]490,000,000;
(g) in respect of the previous series 4 term AAA
advance made by Holmes Financing (No. 4) PLC, the
sum of [GBP]350,000,000;
(h) in respect of the previous series 2A1 term AAA
advance made by Holmes Financing (No. 5) PLC, the
sum of [GBP]527,500,000;
(i) in respect of the previous series 2A2 term AAA
advance made by Holmes Financing (No. 5) PLC, the
sum of [GBP]170,000,000;
(j) in respect of the previous series 3A1 term AAA
advance made by Holmes Financing (No. 5) PLC, the
sum of [GBP]375,000,000;
(k) in respect of the previous series 2 term AAA
advance made by Holmes Financing (No. 6) PLC, the
sum of [GBP]801,077,000;
(l) in respect of the previous series 3 term AAA
advance made by Holmes Financing (No. 6) PLC, the
sum of [GBP]633,500,000;
(m) in respect of the previous series 4A1 term AAA
advance made by Holmes Financing (No. 6) PLC, the
sum of [GBP]641,026,000;
(n) in respect of the previous series 4A2 term AAA
advance made by Holmes Financing (No. 6) PLC, the
sum of [GBP]129,230,000;
(o) in respect of the issuer series 2 term AAA
advance, the sum of [GBP]789,640,000; and
(p) in respect of any new term advance, scheduled for
repayment in full on a single interest payment
date, the principal due in respect of such new
term advance (if any)
"BULLET TERM any term advance which is scheduled to be repaid in full
ADVANCE" on one interest payment date. Issuer bullet term advances
will be deemed to be pass-through term advances if:
(a) an issuer bullet term advance is not repaid in
full on its scheduled repayment date;
(b) a trigger event occurs;
(c) the issuer security is enforced; or
(d) the Funding security is enforced
264
"BUNGALOW" a one storeyed house
"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 1st January to the end of
31st December
"CAPITALISED" means, in respect of a fee or other amount, added to the
principal balance of a loan
"CAPPED RATE loans that are subject to a maximum rate of interest and
LOANS" charge interest at the lesser of the SVR (or, as the case
may be, the tracker rate) or the specified capped rate
"CASH ACCUMULATION a ledger maintained by the cash manager to record the
LEDGER" amount accumulated by Funding from time to time to pay the
amounts due on the bullet term advances and/or, as
applicable, the scheduled amortisation term advances
"CASH ACCUMULATION the period of time estimated to be the number of months
PERIOD" prior to the relevant interest payment date of a bullet
amount necessary for Funding to accumulate sufficient
principal receipts so that ultimately the relevant class
of notes will be redeemed in full in the amount of the
relevant bullet amount, as described further in "THE
MORTGAGES TRUST -- CASH MANAGEMENT OF TRUST PROPERTY --
PRINCIPAL RECEIPTS"
"CASH MANAGEMENT the cash management agreement entered into on 26th July,
AGREEMENT" 2000 (as amended on 29th November, 2000) between the cash
manager, the mortgages trustee, Funding and the security
trustee, as described further in "CASH MANAGEMENT FOR THE
MORTGAGES TRUSTEE AND FUNDING"
"CASH MANAGER" Abbey National plc, acting, pursuant to the cash
management agreement, as agent for the mortgages trustee,
Funding and the security trustee, inter alia, to manage
all cash transactions and maintain certain ledgers on
behalf of the mortgages trustee, Funding and the security
trustee
"CASHBACK" the agreement by the seller to pay an amount to the
relevant borrower on the completion of the relevant loan
"CHALET" a house with overhanging eaves
"CLASS A ISSUER the series 1 class A issuer notes, the series 2 class A
NOTES" issuer notes, the series 3 class A issuer notes and the
series 4 class A issuer notes
"CLASS B ISSUER the series 1 class B issuer notes, the series 2 class B
NOTES" issuer notes, the series 3 class B issuer notes and the
series 4 class B issuer notes
"CLASS A OFFERED the series 1 class A issuer notes, the series 2 class
ISSUER NOTES" A issuer notes and the series 3 class A issuer notes
"CLASS B\M OFFERED the series 1 class B issuer notes, the series 1 class M
ISSUER NOTES" issuer notes, the series 2 class B issuer notes and the
series 2 class M issuer notes
"CLASS M ISSUER the series 1 class M issuer notes, the series 2 class M
NOTES" issuer notes, the series 3 class M issuer notes and the
series 4 class M issuer notes
265
"CLASS A PREVIOUS the series 1 class A previous notes, the series 2 class A
NOTES" previous notes, the series 3 class A previous notes, the
series 4 class A previous notes and the series 5 class A
previous notes
"CLASS B PREVIOUS the series 1 class B previous notes, the series 2 class B
NOTES" previous notes, the series 3 class B previous notes, the
series 4 class B previous notes and the series 5 class B
previous notes
"CLASS A
UNDERWRITERS" Credit Suisse First Boston LLC, Deutsche Bank Securities
Inc., J.P Morgan Securities Inc., Lehman Brothers Inc.,
Morgan Stanley & Co. Incorporated and Salomon Smith Barney
Inc.
"CLASS C PREVIOUS the series 1 class C previous notes, the series 2 class C
NOTES" previous notes, the series 3 class C previous notes, the
series 4 class C previous notes and the series 5 class C
previous notes
"CLASS D PREVIOUS the series 3 class D previous notes
NOTES"
"CLEARING AGENCY" an agency registered under the provisions of section 17A
of the United States Securities Exchange Act of 1934
"CLEARING a corporation within the meaning of the New York Uniform
CORPORATION" Commercial Code
"CLEARSTREAM, Clearstream Banking, societe anonyme
LUXEMBOURG"
"CLOSING DATE" __March, 2003
"CODE" United States Internal Revenue Code of 1986
"COMMON JPMorgan Chase Bank, London Branch
DEPOSITARY"
"CONVERTED" a property converted into one or more residential
dwellings that was either previously used for non-
residential purposes or comprised a different number of
residential dwellings
"CORE TERMS" the main subject matter of the contract
"CORPORATE the agreement entered into on 26th July, 2000 between the
SERVICES corporate services provider, Holdings, Holmes Financing
AGREEMENT" (No. 1) PLC, Funding, the mortgages trustee, the post
enforcement call option holder, Abbey National plc, the
previous security trustee and the security trustee which
governs the provision of corporate services by the
corporate services provider to the Holmes Financing (No.
1) PLC, Funding, the mortgages trustee, Holdings and the
post enforcement call option holder
"CORPORATE SPV Management Limited
SERVICES
PROVIDER"
"CML" Council of Mortgage Lenders
"CPR" on any calculation date means the annualised principal
repayment rate of all the loans comprised in the trust
property during the previous calculation period calculated
as follows:
1 -- ((1 -- R) ^ (12))
266
where "R" equals the result (expressed as a percentage) of
the total principal receipts received during the period of
one month (or, if shorter, from and including the closing
date) ending on that calculation date divided by the
aggregate outstanding principal balance of the loans
comprised in the trust property as at the first day of
that period
"CRYSTALLISE" when a floating charge becomes a fixed charge
"CURRENT FUNDING the share of Funding in the trust property on the closing
SHARE" date, calculated in accordance with the formula described
in "THE MORTGAGES TRUST -- FUNDING SHARE OF THE TRUST
PROPERTY"
"CURRENT FUNDING the percentage share of Funding in the trust property on
SHARE PERCENTAGE" the closing date, calculated in accordance with the
formula described in "THE MORTGAGES TRUST -- FUNDING SHARE
OF THE TRUST PROPERTY"
"CURRENT the previous intercompany loan agreements and the issuer
INTERCOMPANY LOAN intercompany loan agreement
AGREEMENTS"
"CURRENT the previous intercompany loans and the issuer
INTERCOMPANY intercompany loan
LOANS"
"CURRENT LOANS" loans contained in the current portfolio
"CURRENT mortgages contained in the current portfolio
MORTGAGES"
"CURRENT NOTES" the previous notes and the issuer notes
"CURRENT the current loans, the current mortgages and the current
PORTFOLIO" related security, and any accrued interest on the current
loans and other amounts derived from the current loans and
other amounts, held on trust by the mortgages trustee on
the closing date
"CURRENT RELATED the current mortgages and other security for the current
SECURITY" loans contained in the current portfolio
"CURRENT SELLER the share of the seller in the trust property on the
SHARE" closing date, calculated in accordance with the formula
described in "THE MORTGAGES TRUST -- SELLER SHARE OF THE
TRUST PROPERTY"
"CURRENT SELLER the percentage share of the seller in the trust property
SHARE PERCENTAGE" on the closing date, calculated in accordance with the
formula described in "THE MORTGAGES TRUST -- SELLER SHARE
OF THE TRUST PROPERTY"
"CURRENT START-UP the first start-up loan agreement, the second start-up
LOAN AGREEMENTS" loan agreement, the third start-up loan agreement, the
fourth start-up loan agreement, the fifth start-up loan
agreement, the sixth start-up loan agreement and the
seventh start-up loan agreement
"CURRENT SWAP the previous swap agreements and the issuer swap
AGREEMENTS" agreements
"CURRENT SWAP the occurrence of an event of default (as defined in the
PROVIDER DEFAULT" relevant current swap agreement) where the relevant
current swap provider is the defaulting party (as defined
in the relevant current swap agreement)
"CURRENT SWAP the previous swap providers and the issuer swap providers
PROVIDERS"
"CURRENT TERM the previous term advances and the issuer term advances
ADVANCES"
267
"DTC" The Depository Trust Company
"DEFERRED the consideration payable to the seller in respect of the
CONSIDERATION" loans assigned to the mortgages trustee from time to time,
which is payable out of Funding available revenue receipts
after making payments of a higher order of priority as set
out in the Funding pre-enforcement revenue priority of
payments and the Funding post-enforcement priority of
payments
"DILIGENCE" the process (under Scots Law) by which a creditor attaches
the property of a debtor to implement or secure a court
decree or judgment
"DISTRIBUTION the eighth day of each month or, if not a London business
DATE" day, the next succeeding London business day and any other
day on which Funding acquires a further interest in the
trust property
"DISTRIBUTION the period from (and including) one distribution date, to
PERIOD" (but excluding) the next distribution date and in respect
of the first distribution date, the period from (and
including) the closing date to (but excluding) the first
distribution date
"EARLY REPAYMENT any fee which a borrower is required to pay in the event
FEE" that he or she is in default or his or her loan becomes
repayable for any other mandatory reason or he or she
repays all or any part of the relevant loan before a
specified date
"ENGLISH LOAN" a loan secured by an English mortgage
"ENGLISH MORTGAGE" a mortgage secured over a property in England or Wales
"ENGLISH MORTGAGE the mortgage conditions applicable to English loans
CONDITIONS"
"ERISA" the US Employee Retirement Income Security Act of 1974.
See further "ERISA CONSIDERATIONS"
"EURIBOR" EURIBOR will be determined by the agent bank on the
following basis:
(1) on the applicable interest determination date
applicable to the series 4 class A1 issuer notes,
the series 4 class B issuer notes and the series 4
class M issuer notes, the agent bank will
determine the arithmetic mean, rounded upwards to
five decimal places, of the offered quotations to
leading banks for deposits in euro for the
relevant interest period (or, in the case of the
first interest period, a linear interpolation of
such offered quotations for three-month and
four-month euro deposits (rounded upwards, if
necessary, to five decimal places).
This will be determined by reference to the display as
quoted on the Moneyline Telerate Screen No. 248. If the
Moneyline 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.
268
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 4 class A1
issuer notes, the series 4 class B issuer notes and the
series 4 class M issuer notes;
(2) if, on any such interest determination date, the
screen rate is unavailable, the agent bank will:
* request the principal London office of
each of the reference banks to provide
the agent bank with its offered
quotation to prime banks for euro
deposits of the equivalent amount, and
for the relevant period, in the Eurozone
inter-bank market as at or about 11.00
a.m. (Brussels time); and
* calculate the arithmetic mean, rounded
upwards to five decimal places, of those
quotations;
(3) if, on any such 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, on any such interest determination date, 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
arithmetic mean of the quotations as calculated in
(2). If no such banks are agreed then the relevant
rate for that interest period will be the rate in
effect for the last preceding interest period for
which (1) or (2) was applicable.
"EUROCLEAR" Euroclear Bank S.A./N.V., as operator of the Euroclear
System
"FIFTH START-UP the loan made by the start-up loan provider to Funding
LOAN" under the fifth start-up loan agreement
"FIFTH START-UP the agreement entered into on 8th November, 2001 between
LOAN AGREEMENT" the start-up loan provider and Funding under which the
fifth start-up loan was made by the start-up loan provider
to Funding
"FINAL MATURITY in respect of the series 1 class A issuer notes means the
DATE" interest payment date falling in [April 2004];
in respect of the series 1 class B issuer notes means the
interest payment date falling in [July 2040];
in respect of the series 1 class M issuer notes means the
interest payment date falling in [July 2040];
in respect of the series 2 class A issuer notes means the
interest payment date falling in [January 2008];
in respect of the series 2 class B issuer notes means the
interest payment date falling in [July 2040];
269
in respect of the series 2 class M issuer notes means the
interest payment date falling in [July 2040];
in respect of the series 3 class A issuer notes means the
interest payment date falling in [July 2020];
in respect of the series 3 class B issuer notes means the
interest payment date falling in [July 2040];
in respect of the series 3 class M issuer notes means the
interest payment date falling in [July 2040];
in respect of the series 4 class A1 issuer notes means the
interest payment date falling in [July 2040]
in respect of the series 4 class A2 issuer notes means the
interest payment date falling in [July 2040];
in respect of the series 4 class B issuer notes means the
interest payment date falling in [July 2040];
in respect of the series 4 class M issuer notes means the
interest payment date falling in [July 2040]; and
"FINAL REPAYMENT in respect of the issuer intercompany loan means the
DATE interest payment date falling in [July 2040]
"FIRST RESERVE an amount provided from part of the proceeds of the first
FUND" start-up loan, second start-up loan, third start-up loan
and the previous issuer term BB advance by Holmes
Financing (No. 4) PLC, as withdrawn and credited from time
to time, which may be used by Funding to meet any deficit
in revenue or to repay amounts of principal, as described
further in "CREDIT STRUCTURE -- FIRST RESERVE FUND"
"FIRST RESERVE [GBP][350,000,000], but if the previous notes issued by
FUND REQUIRED Holmes Financing (No. 3) PLC and the previous notes issued
AMOUNT" by Holmes Financing (No. 4) PLC (other than the series 3
class D previous notes and the series 4 previous notes
issued by Holmes Financing (No. 4) PLC) are redeemed in
full in July 2006, then the first reserve fund required
amount shall reduce (subject to rating agency approval of
the amount) by an amount of [GBP]45,000,000 and if the
previous notes (other than the series 1 class A previous
notes and the series 2 class A previous notes) issued by
Holmes Financing (No. 5) PLC are redeemed in full in
October 2006, then the first reserve fund required amount
shall reduce (subject to rating agency approval of the
amount) by an additional amount of [GBP]40,000,000. If, on
the interest payment date falling in April 2008, Holmes
Financing (No. 6) PLC exercises its option to redeem the
previous issuer notes issued by it (other than the series
1 class A issuer notes and the series 2 class A issuer
notes), then the first reserve required amount will
decrease (subject to rating agency approval by an
additional amount of approximately [[GBP]80,000,000]
"FIRST RESERVE a ledger maintained by the cash manager to record the
LEDGER" amount credited to the first reserve fund from the current
start-up loans, and subsequent withdrawals and deposits in
respect of the first reserve fund
270
"FIRST START-UP the loan made by the previous start-up loan provider to
LOAN" Funding under the first start-up loan agreement which was
used in part to fund the first reserve fund
"FIRST START-UP the agreement entered into on 26th July, 2000 between the
LOAN AGREEMENT" previous start-up loan provider and Funding under which
the first start-up loan was made by the previous start-up
loan provider to Funding
"FITCH" Fitch Ratings Ltd.
"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
"FLAT" a set of rooms, usually on one floor, forming a complete
residence which is equivalent to an apartment
"FLEXIBLE LOAN" a type of loan product that typically incorporates
features that give the borrower options to, among other
things, make further drawings on the loan account and/or
to overpay or underpay interest and principal in a given
month
"FLOATING CHARGE" a form of charge 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, at which point it
crystallises into a fixed security
"FOURTH START-UP the loan made by the start-up loan provider to Funding
LOAN" under the fourth start-up loan agreement
"FOURTH START-UP the agreement entered into on 5th July, 2001 between the
LOAN AGREEMENT" start-up loan provider and Funding under which the fourth
start-up loan was made by the start-up loan provider to
Funding
"FSA" the Financial Services Authority
"FUNDING" Holmes Funding Limited
"FUNDING 2" a new entity, being a wholly owned subsidiary of Holdings,
which may be established by Holdings, from time to time to
issue new notes and (with the agreement of the seller and
Funding) to acquire an interest in the trust property
"FUNDING AVAILABLE an amount equal to the sum of:
PRINCIPAL
RECEIPTS"
(a) all Funding principal receipts;
(b) the amount (if any) credited to the principal
deficiency ledger pursuant to items (F), (H) and (J) in
the Funding pre-enforcement revenue priority of
payments;
(c) prior to enforcement of the Funding security or the
occurrence of a trigger event, amounts available to be
drawn under the Funding liquidity facility; and
(d) in respect of the several previous term AAA advances
made by Holmes Financing (No. 1) PLC and the previous
series 2 term AAA advance made by Holmes Financing (No.
3) PLC, the previous series 2 term AAA advance and the
series 4
271
term AAA advance made by Holmes Financing (No. 4) PLC,
the previous series 2 term AAA advances and the previous
series 3A1 term AAA advance made by Holmes Financing
(No. 5) PLC, the previous series 1 term AAA advance, the
previous series 2 term AAA advance, the previous series
3 term AAA advance and the previous series 4 term AAA
advances made by Holmes Financing (No. 6) PLC and the
issuer series 1 term AAA advance, the issuer series 2
term AAA advance and the issuer series 3 term AAA
advance, the amount standing to the credit of the first
reserve ledger (but less any amounts applied or to be
applied on the relevant date in payment of interest and
other revenue expenses as set out in items (A) to (L)
(inclusive) of the Funding pre-enforcement revenue
priority of payments)
less
(e) the amount of Funding principal receipts to be applied
on the next interest payment date to pay items (A) to
(E) (inclusive), (G) and (I) of the Funding
pre-enforcement revenue priority of payments
"FUNDING AVAILABLE an amount equal to the sum of:
REVENUE RECEIPTS"
(a) all mortgages trust available revenue receipts
distributed to Funding during the interest period
ending on the immediately following interest payment
date;
(b) other net income of Funding including all amounts of
interest received on amounts standing to the credit of
the Funding GIC account, the Funding transaction
account and/or the Funding liquidity facility stand-by
account and/or authorised investments and/or amounts
received by Funding under the Funding swap agreement
(other than any early termination amount received by
Funding under the Funding swap agreement), in each case
to be received on or prior to the immediately following
interest payment date; and
(c) the amount standing to the credit of the reserve
ledgers
"FUNDING DEED OF the deed of charge entered into on 26th July, 2000 between
CHARGE" Funding, Holmes Financing (No. 1) PLC, the corporate
services provider, the account bank, the Funding GIC
provider, the security trustee, the seller, the start-up
loan providers, the cash manager and the Funding swap
provider and acceded to on 29th November, 2000 by Holmes
Financing (No. 2) PLC, on 23rd May, 2001 by Holmes
Financing (No. 3) PLC, on 5th July, 2001 by Holmes
Financing (No. 4) PLC, on 8th November, 2001 by Holmes
Financing (No. 5) PLC, amended and restated and acceded to
by Holmes Financing (No. 6) PLC on 7th November, 2002 and
as acceded to by the issuer on the closing date
"FUNDING GIC the account of Funding held at Abbey National plc at 21
ACCOUNT" Prescot Street, London E1 8AD. Amounts deposited to the
credit of the Funding GIC account will receive a rate of
interest determined in accordance with the Funding
guaranteed investment contract
"FUNDING GIC Abbey National plc
PROVIDER"
272
"FUNDING the guaranteed investment contract entered into on 26th
GUARANTEED July, 2000 between Funding and the Funding GIC provider
INVESTMENT under which the Funding GIC provider agrees to pay Funding
CONTRACT" a guaranteed rate of interest on the balance of the
Funding GIC account, as described further in "CREDIT
STRUCTURE -- MORTGAGES TRUSTEE GIC ACCOUNT/ FUNDING GIC
ACCOUNT"
"FUNDING LIQUIDITY the liquidity facility agreement entered into on 26th
FACILITY AGREEMENT" July, 2000 and made between Funding and the Funding
liquidity facility provider in relation to the provision
of a [GBP][25,000,000] liquidity facility to Funding, as
described further in "CREDIT STRUCTURE -- FUNDING
LIQUIDITY FACILITY"
"FUNDING LIQUIDITY The Royal Bank of Scotland plc, acting through its offices
FACILITY at Waterhouse Square, 138-142 Holborn, London EC1N 2TH
PROVIDER"
"FUNDING LIQUIDITY the designated bank account of Funding into which the
FACILITY STAND-BY undrawn amounts of the Funding liquidity facility will be
ACCOUNT" deposited if the Funding liquidity facility provider does
not extend the Funding liquidity facility commitment
period or if the rating of the Funding liquidity facility
provider falls below the requisite ratings as described in
"CREDIT STRUCTURE -- FUNDING LIQUIDITY FACILITY"
"FUNDING LIQUIDITY where there are insufficient amounts to repay principal on
SHORTFALL" the previous term AAA advances made by Holmes Financing
(No. 1) PLC, the previous series 1 term AAA advance made
by Holmes Financing (No. 2) PLC, the previous series 1
term AAA advance and the previous series 2 term AAA
advance made by Holmes Financing (No. 3) PLC, the previous
series 2 term AAA advance and the previous series 4 term
AAA advance made by Holmes Financing (No. 4) PLC, the
previous series 1 term AAA advance, the previous series 2
term AAA advances and the previous series 3A1 term AAA
advance made by Holmes Financing (No. 5) PLC and the
previous series 1 term AAA advance, the previous series 2
term AAA advance, the previous series 3 term AAA advance
and the previous series 4 term AAA advances made by Holmes
Financing (No. 6) PLC and the issuer series 1 term AAA
advance, the issuer series 2 term AAA advance and the
issuer series 3 term AAA advance, after taking into
account the amount available for drawing under the
previous issuer liquidity facility and/or, as applicable,
the funding liquidity reserve fund amount for the funding
liquidity reserve fund
"FUNDING LIQUIDITY reserve fund established on downgrade of the seller to meet
RESERVE FUND" interest and principal (in limited circumstances) on all
the outstanding notes
"FUNDING LIQUIDITY an amount calculated in accordance with the formula set
RESERVE REQUIRED out in the "CREDIT STRUCTURE -- FUNDING LIQUIDITY RESERVE
AMOUNT" FUND"
"FUNDING LIQUIDITY the sum of (i) any additional amounts due to any
SUBORDINATED withholding taxes and increased costs on the provision of
AMOUNTS" the Funding liquidity facility and (ii) any additional
costs incurred by the Funding liquidity facility provider
to comply with the requirements of the Bank of England,
the Financial Services Authority and/or the European
Central Bank and/or changes to the capital adequacy rules
applicable to the Funding liquidity facility provider and
Funding
273
"FUNDING POST- the order in which, following the enforcement of the
ENFORCEMENT Funding security, the security trustee will apply the
PRIORITY OF amounts received following enforcement of the Funding
PAYMENTS" security, as set out in "SECURITY FOR FUNDING'S
OBLIGATIONS"
"FUNDING PRE- the order in which, prior to enforcement of the Funding
ENFORCEMENT security, the cash manager will apply the Funding
PRINCIPAL available principal receipts on each interest payment
PRIORITY OF date, as set out in "SECURITY FOR FUNDING'S OBLIGATIONS"
PAYMENTS"
"FUNDING PRE- the order in which, prior to enforcement of the Funding
ENFORCEMENT security, the cash manager will apply the Funding
REVENUE PRIORITY available revenue receipts on each interest payment date,
OF PAYMENTS" as set out in "SECURITY FOR FUNDING'S OBLIGATIONS"
"FUNDING PRINCIPAL a ledger maintained by the cash manager to record the
LEDGER" amount of principal receipts received by Funding from the
mortgages trustee on each distribution date
"FUNDING PRINCIPAL the principal receipts paid by the mortgages trustee to
RECEIPTS" Funding on each distribution date
"FUNDING REVENUE a ledger maintained by the cash manager to record all
LEDGER" amounts received by Funding from the mortgages trustee on
each distribution date other than principal receipts,
together with interest received by Funding on its
authorised investments or pursuant to the bank account
agreement
"FUNDING SECURED the security trustee, the previous security trustee, the
CREDITORS" Funding swap provider, the Funding liquidity facility
provider, the cash manager, the account bank, the previous
issuers, the seller, the corporate services provider, the
previous start-up loan provider, the start-up loan
provider, the issuer and any other entity that accedes to
the terms of the Funding deed of charge from time to time
"FUNDING SECURITY" security created by Funding pursuant to the Funding deed
of charge in favour of the Funding secured creditors
"FUNDING SHARE" the Funding share of the trust property from time to time,
as calculated on each distribution date
"FUNDING SHARE the Funding share percentage of the trust property from
PERCENTAGE" time to time as calculated on each distribution date
"FUNDING SHARE/ the ledger of such name maintained by the cash manager
SELLER SHARE pursuant to the cash management agreement to record the
LEDGER" Funding share, the Funding share percentage, the seller
share and seller share percentage of the trust property
"FUNDING STAND-BY the amount which is equal to the undrawn commitment under
DRAWING" the Funding liquidity facility agreement
"FUNDING SWAP" the swap documented under the Funding swap agreement which
enables Funding to hedge against the possible variance
between the mortgages trustee SVR payable on the variable
rate loans, the fixed rates of interest payable on the
fixed rate loans and the rates of interest payable on the
tracker loans and a LIBOR based rate for three-month
sterling deposits, as described further in "THE SWAP
AGREEMENTS -- THE FUNDING SWAP"
274
"FUNDING SWAP the ISDA master agreement and schedule thereto entered
AGREEMENT" into on 26th July, 2000 (as amended and restated on 29th
November, 2000, as further amended by a side letter dated
6th December, 2000 and as further amended by deed on 23rd
May, 2001) between Funding, the Funding swap provider and
the security trustee and any confirmation documented
thereunder from time to time between Funding, the Funding
swap provider and the security trustee (as each of the
same may be amended, restated, varied or supplemented from
time to time)
"FUNDING SWAP Abbey National Treasury Services plc
PROVIDER"
"FUNDING SWAP the occurrence of an event of default under the Funding
PROVIDER DEFAULT" swap agreement where the Funding swap provider is the
defaulting party (as defined in the Funding swap
agreement)
"FUNDING the account in the name of Funding maintained with the
TRANSACTION account bank pursuant to the bank account agreement or
ACCOUNT" such additional or replacement account as may for the time
being be in place
"FURTHER ADVANCE" an advance made following a request from an existing
borrower for a further amount to be lent to him or her
under his or her mortgage, where Abbey National plc has a
discretion as to whether to accept that request
"GLOBAL ISSUER the issuer notes in global form
NOTES"
"GROUP" the seller and its subsidiaries
"HIGH LOAN-TO- a fee incurred by a borrower as a result of taking out a
VALUE FEE" loan with an LTV ratio in excess of a certain percentage
specified in the offer
"HIGHER VARIABLE variable rate loans subject to an interest rate at a
RATE LOANS" margin above the Abbey SVR or the mortgages trustee SVR,
as applicable
"HOLDINGS" Holmes Holdings Limited
"HOUSE" a building for human habitation
"ICTA" Income and Corporation Taxes Act 1988
"IN ARREARS" in respect of a mortgage account, occurs when one or more
monthly payments in respect of a mortgage account have
become due and unpaid by a borrower
"INSOLVENCY EVENT" in respect of the seller, the servicer or the cash manager
or the issuer cash manager (each, for the purposes of this
definition, a "RELEVANT ENTITY") means:
(a) an order is made or an effective resolution passed or
documents filed contemplating the winding up of or
administration of the relevant entity;
(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) or
becomes unable to pay its debts as they fall due or the
value of its assets falls to less than the
275
amounts of its liabilities (taking into account, for
both these purposes, contingent and prospective
liabilities) or otherwise becomes insolvent; and
(c) proceedings are initiated against the relevant entity
under any applicable liquidation, administration,
reorganisation (other than a reorganisation where the
relevant entity is solvent) or other similar laws, save
where such proceedings are being contested in good
faith or steps are taken with a view to obtaining a
moratorium in respect of any third party action; or 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 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 fifteen
London business days; or if the relevant entity
initiates or consents to judicial proceedings relating
to itself under any applicable liquidation,
administration, insolvency, reorganisation or other
similar laws or takes steps in relation to the
appointment of an administrator out of court or makes a
conveyance or assignment for the benefit of its
creditors generally
"INTERCOMPANY LOAN the current intercompany loan agreements and all new
AGREEMENTS" intercompany loan agreements
"INTERCOMPANY LOAN a ledger maintained by the cash manager to record payments
LEDGER" of interest and repayments of principal made on each of
the current term advances and any new term advances under
any intercompany loans
"INTEREST (a) in respect of the series 1 issuer notes, the
DETERMINATION series 2 issuer notes and the series 3 class A
DATE" issuer 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 4 issuer notes (other than the
series 4 class A2 issuer notes) means the date which is
two TARGET business days before the first day of the
interest period for which the rate will apply;
(c) in respect of the series 3 issuer notes (other than the
series 3 class A issuer notes) and the series 4 class
A2 issuer 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; and
(d) in respect of the issuer term advances, 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
"INTEREST PAYMENT (a) in relation to the series 1 class A issuer notes,
DATE" the 15th day of each consecutive month in each
year up to and including the earliest of (i) the
interest payment date in April 2004, (ii) the
occurrence of a trigger event or (iii) enforcement
of the issuer security, and thereafter the 15th
day of January, April, July and October in each
year; and
276
(b) in all other cases, the 15th day of January, April,
July and October in each year,
or, in each of the preceding cases, if such day is not a
business day, the next succeeding business day
"INTEREST PERIOD" (a) in relation to the series 1 class A issuer notes, the
period from (and including) an interest payment date
(or in respect of the first interest period, the
closing date) to (but excluding) the next following
(or first) interest payment date, except that
following the occurrence of a trigger event or the
enforcement of the issuer security, the interest
period for the series 1 class A issuer notes will be
the period from (and including) the 15th day of a
month (or, if such day is not a business day, the next
succeeding business day) to (but excluding) the 15th
day of the next following month (or, if such day is
not a business day, the next succeeding business day);
and
(b) in all other cases is the period from (and including)
the applicable interest payment date to (but excluding)
the next following applicable interest payment date
"INVESTMENT PLAN" in respect of an interest only loan, a repayment mechanism
selected by the borrower and intended to provide
sufficient funds to redeem the full principal of a
mortgage loan at maturity
"ISA" means an individual savings account within the Individual
Savings Account Regulations 1998 (as amended) and which
shelters investments in the account from income tax and
capital gains tax
"ISSUER ACCOUNT the sterling account bank and the non-sterling account
BANKS" bank
"ISSUER BANK the agreement to be entered into on the closing date
ACCOUNT between the issuer account banks and the issuer which
AGREEMENT" governs the operation of the issuer transaction accounts
"ISSUER BULLET the issuer series 2 term AAA advance
TERM ADVANCE"
"ISSUER CASH the issuer cash management agreement to be entered into on
MANAGEMENT the closing date between the issuer cash manager, the
AGREEMENT" issuer and the issuer security trustee, as described
further in "CASH MANAGEMENT FOR THE ISSUER"
"ISSUER CASH Abbey National plc acting, pursuant to the issuer cash
MANAGER" management agreement, as agent for the issuer and the
issuer security trustee to manage all cash transactions
and maintain certain ledgers on behalf of the issuer
"ISSUER CORPORATE an agreement to be entered into on the closing date
SERVICES between the issuer, the corporate services provider and
AGREEMENT" the issuer security trustee, which governs the provision
of corporate services by the corporate services provider
to the issuer
"ISSUER DEED OF the deed of charge to be entered into on the closing date
CHARGE between, among others, the issuer and the issuer security
trustee, under which the issuer charges the issuer
security in favour of the issuer security trustee for the
benefit of the issuer secured creditors, as described
further in "SECURITY FOR THE ISSUER'S OBLIGATIONS"
277
"ISSUER DOLLAR the ISDA master agreements, schedules and confirmations to
CURRENCY SWAP be entered into on the closing date relating to the issuer
AGREEMENTS" dollar currency swaps entered into on or before the
closing date between the issuer, the issuer dollar
currency swap providers and the issuer security trustee
"ISSUER DOLLAR the occurrence of an event of default under an issuer
CURRENCY SWAP dollar currency swap (as defined in the relevant issuer
PROVIDER DEFAULT" dollar currency swap agreement) where an issuer dollar
currency swap provider is the defaulting party (as defined
in the relevant issuer dollar currency swap agreement)
"ISSUER DOLLAR __ as the series 1 class A issuer dollar currency swap
CURRENCY SWAP provider, the series 1 class B issuer dollar currency swap
PROVIDERS" provider, the series 1 class M issuer dollar currency swap
provider, __ as the series 2 class A issuer dollar currency
swap provider, the series 2 class B issuer dollar currency
swap provider, the series 2 class M issuer dollar currency
swap provider, and __ as the series 3 class A issuer dollar
currency swap provider
"ISSUER DOLLAR the rate at which dollars are converted to sterling or, as
CURRENCY SWAP the case may be, sterling is converted to dollars under
RATE" the relevant issuer dollar currency swap or, if there is
no such issuer dollar currency swap rate in effect at such
time, the "spot" rate at which dollars are converted into
sterling or as the case may be, sterling is converted into
dollars on the foreign exchange markets
"ISSUER DOLLAR the sterling-dollar currency swaps which enable the issuer
CURRENCY SWAPS" to receive and pay amounts under the issuer intercompany
loan in sterling and to receive and pay amounts under the
series 1 issuer notes and the series 2 issuer notes, the
series 2 issuer notes and the series 3 class A issuer
notes as described further in "THE SWAP AGREEMENTS -- THE
ISSUER DOLLAR CURRENCY SWAPS"
"ISSUER EURO the ISDA master agreements, schedules and confirmations
CURRENCY SWAP relating to the issuer euro currency swaps entered into on
AGREEMENTS" the closing date between the issuer, the issuer euro
currency swap provider and the issuer security trustee
"ISSUER EURO [__] as the series 4 class A1 issuer euro currency swap
CURRENCY SWAP provider, the series 4 class B issuer euro currency swap
PROVIDER" provider and the series 4 class M issuer euro currency
swap provider
"ISSUER EURO the occurrence of an event of default under an issuer euro
CURRENCY SWAP currency swap (as defined in the relevant issuer euro
PROVIDER DEFAULT" currency swap agreement) where an issuer euro currency
swap provider is the defaulting party (as defined in the
relevant issuer euro currency swap agreement)
"ISSUER EURO the rate at which euro is converted to sterling or, as the
CURRENCY SWAP case may be, sterling is converted to euro under the
RATE" relevant issuer euro currency swap or, if there is no such
issuer euro currency swap rate in effect at such time, the
"spot" rate at which euros are converted into sterling or,
as the case may be, sterling is converted into euros on
the foreign exchange markets
278
"ISSUER EURO the sterling-euro currency swaps which enable the issuer
CURRENCY SWAPS" to receive and pay amounts under the issuer intercompany
loan in sterling and to receive and pay amounts under the
series 4 issuer notes (other than the series 4 class A2
issuer notes) in euro, as described further in "THE SWAP
AGREEMENTS -- THE ISSUER EURO CURRENCY SWAPS"
"ISSUER the loan of the issuer term advances made by the issuer to
INTERCOMPANY Funding on the closing date under the issuer intercompany
LOAN" loan agreement
"ISSUER the issuer intercompany loan agreement to be entered into
INTERCOMPANY LOAN on the closing date between Funding, the issuer and the
AGREEMENT" security trustee
"ISSUER an enforcement notice served by the security trustee in
INTERCOMPANY LOAN relation to the enforcement of the Funding security
ENFORCEMENT following an issuer intercompany loan event of default
NOTICE" under the issuer intercompany loan
"ISSUER an event of default under the issuer intercompany loan
INTERCOMPANY LOAN agreement
EVENT OF DEFAULT"
"ISSUER NOTE an enforcement notice served by the note trustee or the
ENFORCEMENT NOTICE" issuer security trustee in relation to the enforcement of
the issuer security following an issuer note event of
default under the issuer notes
"ISSUER NOTE EVENT an event of default under the provisions of number 9 of
OF DEFAULT" the issuer notes where the issuer is the defaulting party
"ISSUER NOTES" includes all of the class A issuer notes, the class B
issuer notes and the class M issuer notes
"ISSUER PAYING the agreement to be entered into on the closing date which
AGENT AND AGENT sets out the appointment of the paying agents, the
BANK AGREEMENT" registrar, the transfer agent and the agent bank for the
issuer notes
"ISSUER POST- the agreementOtoAbeEentered into on the closing date under
ENFORCEMENT which the note trustee agrees on behalf of the holders of
CALL OPTION the class B issuer notes and the class M issuer notes,
AGREEMENT that following enforcement of the issuer security, the
post-enforcement call option holder may call for the class
B issuer notes and the class M issuer notes
"ISSUER POST- the order in which, following enforcement of the issuer
ENFORCEMENT security, the issuer security trustee will apply the
PRIORITY OF amounts received following enforcement of the issuer
PAYMENTS" security, as set out in "SECURITY FOR THE ISSUER'S
OBLIGATIONS"
"ISSUER PRE- the order in which, prior to enforcement of the issuer
ENFORCEMENT security, the issuer cash manager will apply the issuer
REVENUE PRIORITY revenue receipts on each interest payment date, as set out
OF PAYMENTS" in "CASHFLOWS -- DISTRIBUTION OF ISSUER REVENUE RECEIPTS"
"ISSUER PRINCIPAL an amount equal to the sum of all principal amounts repaid
RECEIPTS" by Funding to the issuer under the issuer intercompany
loan
"ISSUER REVENUE an amount equal to the sum of:
RECEIPTS"
(a) interest paid by Funding on the relevant interest
payment date in respect of the issuer term advances
under the issuer intercompany loan;
279
(b) fees to be paid by Funding on the relevant date under
the terms of the issuer intercompany loan agreement;
(c) interest payable on issuer bank accounts and authorised
investments which will be received on or before the
relevant date; and
(d) other net income of the issuer including amounts
received or to be received under the issuer swap
agreements on or before the relevant date (without
double counting).
"ISSUER SECURED the issuer security trustee, the issuer dollar currency
CREDIT" swap providers, the issuer euro currency swap provider,
the note trustee, the noteholders, the issuer account
banks, the paying agents, the registrar, the transfer
agent, the agent bank, the corporate services provider and
the issuer cash manager
"ISSUER SECURITY" security created by the issuer pursuant to the issuer deed
of charge in favour of the issuer secured creditors
"ISSUER SECURITY The Bank of New York, London Branch at One Canada Square,
TRUSTEE" London, E14 5AL
"ISSUER SERIES 4 the issuer series 4A1 term AAA advance and the issuer
TERM AAA series 4A2 term AAA advance
ADVANCES"
"ISSUER the agreements to be entered into on the date of this
SUBSCRIPTION prospectus between the managers and the issuer relating to
AGREEMENT" the sale of the series 3 issuer notes (other than the
series 3 class A issuer notes) and the series 4 issuer
notes
"ISSUER SWAP the issuer dollar currency swap agreements and the issuer
AGREEMENTS" euro currency swap agreements
"ISSUER SWAP an issuer dollar currency swap provider default or an
PROVIDER DEFAULT" issuer euro currency swap provider default, as the context
requires
"ISSUER SWAP the issuer dollar currency swap providers and the issuer
PROVIDERS" euro currency swap provider or any of them, as the context
requires
"ISSUER SWAPS" the issuer dollar currency swaps and the issuer euro
currency swaps
"ISSUER TERM A the advances to be made by the issuer to Funding under the
ADVANCES" issuer intercompany loan agreement from the proceeds of
issue of the series 1 class M issuer notes, the series 2
class M issuer notes, the series 3 class M issuer notes
and the series 4 class M issuer notes
"ISSUER TERM AA the advances made by the issuer to Funding under the
ADVANCES" issuer intercompany loan agreement from the proceeds of
issue of the series 1 class B issuer notes, the series 2
class B issuer notes, the series 3 class B issuer notes
and the series 4 class B issuer notes
"ISSUER TERM AAA the advances made by the issuer to Funding under the
ADVANCES" issuer intercompany loan agreement from the proceeds of
issue of the series 1 class A issuer notes, the series 2
class A issuer notes, the series 3 class A issuer notes
and the series 4 class A issuer notes
280
"ISSUER TERM the divisions into which the advance to Funding under the
ADVANCES" issuer intercompany loan will be split, being the issuer
series 1 term AAA advance, the issuer series 2 term AAA
advance, the issuer series 3 term AAA advance, the issuer
series 4 term AAA advances, the issuer series 1 term AA
advance, the issuer series 2 term AA advance, the issuer
series 3 term AA advance, the issuer series 4 term AA
advance, the issuer series 1 term A advance, the issuer
series 2 term A advance, the issuer series 3 term A
advance and the issuer series 4 term A advance
"ISSUER the documents listed in paragraph [(D)] in "LISTING AND
TRANSACTION GENERAL INFORMATION"
DOCUMENTS"
"ISSUER TRUST the principal agreement to be entered into on the closing
DEED" date governing the issuer notes, as further described in
"DESCRIPTION OF THE ISSUER TRUST DEED"
"ISSUER the agreement to be entered into on the date of this
UNDERWRITING prospectus between the underwriters and the issuer
AGREEMENT" relating to the sale of the series 1 issuer notes, the
series 2 issuer notes and the series 3 class A issuer
notes.
"LENDING CRITERIA" the criteria applicable to the granting of an offer of a
mortgage to a borrower, as may be amended from time to
time and as further described in "THE LOANS -- LENDING
CRITERIA"
"LIBOR" or the London Interbank Offered Rate for sterling deposits,
"STERLING LIBOR" as determined by the agent bank on the following basis:
(1) on the applicable interest determination date
applicable to the series 3 class B issuer notes, the
series 3 class M issuer notes and the series 4 class A2
issuer notes the agent bank will determine the
arithmetic mean, rounded upwards to five decimal
places, of the offered quotations to leading banks for
deposits in sterling for the relevant interest period
(or, in the case of the first interest period, the
linear interpolation of the arithmetic mean of such
offered quotations for three-month and four-month
sterling deposits (rounded upwards, if necessary, to
five decimal places)).
This will be determined by reference to the display as
quoted on the Moneyline Telerate Screen No. 3750. If the
Moneyline Telerate Screen No. 3750 stops providing these
quotations, the replacement service for the purposes of
displaying this information will be used. If the replacement
service stops displaying the information, another page as
determined by the issuer with the approval of the note
trustee will be used.
In each of these cases, the determination will be made as at
or about 11.00 a.m., London time, on that date. This is
called the screen rate for the series 3 class B issuer
notes, the series 3 class M issuer notes and the series 4
class A2 issuer notes;
(2) if, on any such interest determination date, the screen
rate is unavailable, the agent bank will:
281
* request the principal London office of each of the
reference banks to provide the agent bank with its
offered quotation to leading banks for sterling
deposits of the equivalent amount, and for a time
equal to the relevant interest 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 such 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 arithmetic mean of
the quotations as calculated in (2). If no such banks
are agreed 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.
See also the definitions of EURIBOR and USD-LIBOR
"LINK-DETACHED" a house joined to another house or houses typically by way
of an attached garage
"LOAN" each loan referenced by its 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 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
"LONDON BUSINESS a day (other than a Saturday or Sunday) on which banks are
DAY" generally open for business in London
"LONDON STOCK London Stock Exchange plc
EXCHANGE"
"LOSSES" the realised losses experienced on the loans in the
portfolio
"LOSSES LEDGER" the ledger of such name created and maintained by the cash
manager pursuant to the cash management agreement to
record the losses on the portfolio
"LTV RATIO" or the ratio of the outstanding balance of a loan to the
"LOAN-TO-VALUE value of the mortgaged property securing that loan
RATIO"
"LTV TEST" a test which assigns a credit enhancement value to each
loan in the portfolio based on its current loan-to-value
ratio and the amount of mortgage indemnity cover on that
loan. The weighted average credit enhancement value for
the portfolio is then determined
"MAISONETTE" a flat on more than one floor used as a residence
282
"MANAGERS" Barclays Bank PLC, J.P. Morgan Securities Ltd., Salomon
Brothers International Limited and UBS Warburg Ltd.
"MASTER together, the amended and restated master definitions and
DEFINITIONS AND construction schedule and the issuer master definitions
CONSTRUCTION and construction schedule, which are schedules of
SCHEDULE" definitions used in the issuer transaction documents
"MIG POLICIES" the mortgage indemnity guarantee policies
"MINIMUM RATE loans subject to a minimum rate of interest
LOANS"
"MINIMUM SELLER an amount included in the current seller share which is
SHARE" calculated in accordance with the mortgages trust deed and
which, as at the closing date, will be approximately
[GBP]960,000,000
"MOODY'S" Moody's Investors Service Limited
"MORTGAGE" the legal charge or standard security securing a loan
"MORTGAGE ACCOUNT" all loans secured on the same property will be
incorporated in the same mortgage account
"MORTGAGE the terms and conditions applicable to the loans as
CONDITIONS" contained in the seller's "MORTGAGE CONDITIONS" booklet
for England and Wales or Scotland applicable from time to
time
"MORTGAGEE" the party in whose favour a mortgage is granted
"MORTGAGE RELATED as defined in the US Secondary Mortgage Markets
SECURITIES" Enhancement Act 1984, as amended
"MORTGAGE SALE the mortgage sale agreement entered into on 26th July,
AGREEMENT" 2000 as amended on 29th November, 2000 and as amended and
restated on 23rd May, 2001, 5th July, 2001, 8th November,
2001, 7th November, 2002 and on the closing date and made
between the seller, the mortgages trustee, Funding and the
security trustee in relation to the assignment of the
portfolio to the mortgages trustee, as further described
in "ASSIGNMENT OF THE LOANS AND THEIR RELATED SECURITY"
"MORTGAGE TERMS" all the terms and conditions applicable to a loan,
including without limitation the applicable mortgage
conditions and offer conditions
"MORTGAGES TRUST" the bare trust of the trust property held by the mortgages
trustee as to both capital and income on trust absolutely
for Funding (as to the Funding share) and the seller (as
to the seller share), so that each has an undivided
beneficial interest in the trust property
"MORTGAGES TRUST the mortgages trust deed made by the mortgages trustee,
DEED" Funding and the seller prior to the closing date of the
previous issue by Holmes Financing (No. 1) PLC (as amended
on 29th November, 2000 and 23rd May, 2001 and as amended
and restated on 5th July, 2001, 8th November, 2001, 7th
November, 2002 and on the closing date), as further
described in "THE MORTGAGES TRUST"
283
"MORTGAGES TRUST an amount equal to the sum of:
AVAILABLE REVENUE
RECEIPTS"
(a) revenue receipts on the loans (but excluding principal
receipts); and
(b) interest payable to the mortgages trustee on the
mortgages trustee GIC account and the alternative
accounts;
less
(c) third party amounts
"MORTGAGES Holmes Trustees Limited
TRUSTEE"
"MORTGAGES TRUSTEE the mortgages trustee GIC account and the alternative
ACCOUNTS" accounts
"MORTGAGES TRUSTEE the account in the name of the mortgages trustee
GIC ACCOUNT" maintained with the account bank pursuant to the terms of
the bank account agreement and the mortgages trustee
guaranteed investment contract or such additional or
replacement account as may for the time being be in place
"MORTGAGES TRUSTEE Abbey National plc
GIC PROVIDER"
"MORTGAGES TRUSTEE the guaranteed investment contract entered into between
GUARANTEED the mortgages trustee and the mortgages trustee GIC
INVESTMENT provider under which the mortgages trustee GIC provider
CONTRACT" agrees to pay the mortgages trustee a guaranteed rate of
interest on the balance of the mortgages trustee GIC
account, as described further in "CREDIT STRUCTURE --
MORTGAGES TRUSTEE GIC ACCOUNT/FUNDING GIC ACCOUNT"
"MORTGAGES TRUSTEE the order in which the cash manager applies principal
PRINCIPAL receipts on the loans on each distribution date to each of
PRIORITY OF Funding and the seller, depending on whether a trigger
PAYMENTS" event has occurred, as set out in "THE MORTGAGES TRUST"
"MORTGAGES TRUSTEE the order in which the cash manager applies the mortgages
REVENUE PRIORITY trust available revenue receipts on each distribution
OF PAYMENTS" date, as set out in "THE MORTGAGES TRUST"
"MORTGAGES TRUSTEE the standard variable rate which applies to certain
SVR" variable rate loans in the portfolio as set by the
servicer, as described further in "THE SERVICING
AGREEMENT"
"NATIONAL MORTGAGE the lending policy of the seller as varied from time to
LENDING POLICY" time
"NEW INTERCOMPANY a loan of a new issuer term advance made by a new issuer
LOAN" and "NEW to Funding under a new intercompany loan agreement entered
INTERCOMPANY LOAN into by Funding with a new issuer
AGREEMENT"
"NEW ISSUE" the issue of new notes to investors by a new issuer to
fund a new intercompany loan
"NEW ISSUER" a new wholly owned subsidiary of Holdings that is not
established as at the closing date and which, if
established, will make a new intercompany loan to Funding
284
"NEW LOANS" loans, other than the current loans, which the seller may
assign, from time to time, to the mortgages trustee
pursuant to the terms of the mortgage sale agreement
"NEW NOTES" an issue of notes by a new issuer
"NEW RELATED the security for the new loans which the seller may assign
SECURITY" to the mortgages trustee pursuant to the mortgage sale
agreement
"NEW START-UP a new start-up loan to be made available to Funding by a
LOAN" and "NEW new start-up loan provider when Funding enters into a new
START-UP LOAN intercompany loan agreement
PROVIDER"
"NEW START-UP LOAN a new start-up loan agreement to be entered into by a new
AGREEMENT" start-up loan provider, Funding and the security trustee
"NEW SWAP a swap agreement to be entered into by a new issuer, a new
AGREEMENT" and swap provider and the issuer security trustee
"NEW SWAP
PROVIDER"
"NEW TERM A term advances to be advanced to Funding by new issuers
ADVANCES" under new intercompany loan agreements from the proceeds
of issues of new notes with a rating of A
"NEW TERM AA term advances to be advanced to Funding by new issuers
ADVANCES" under new intercompany loan agreements from the proceeds
of issues of new notes with a rating of AA
"NEW TERM AAA term advances to be advanced to Funding by new issuers
ADVANCES" under new intercompany loan agreements from the proceeds
of issues of new notes with a rating of AAA
"NEW TERM term advances to be advanced to Funding by new issuers
ADVANCES" under a new intercompany loan agreement
"NEW TERM BBB term advances to be advanced to Funding by new issuers
ADVANCES" under new intercompany loan agreements from the proceeds
of issues of new notes with a rating of BBB
"NEW YORK BUSINESS means a day (other than a Saturday or a Sunday) on which
DAY" banks are generally open in the city of New York
"NON-ASSET TRIGGER this will occur if:
EVENT"
(a) an insolvency event occurs in relation to the seller;
(b) the seller is terminated as servicer and a new servicer
is not appointed within 60 days;
(c) the seller share at any time is equal to or less than
the minimum seller share; or
(d) the outstanding principal balance of loans comprising
the trust property at any time during the period from
and including the closing date to but excluding the
interest payment date in [April 2004] is less than
[GBP][21] billion or, during the period from and
including the interest payment date in [April 2004] to
but excluding the interest payment date in [July 2006]
is less than [GBP][14] billion or, at any time during
the period from and
285
including the interest payment date in [July 2006] to but
excluding the interest payment date in [July 2010] is less
than [GBP][2.5] billion
"NON-STERLING Citibank, N.A., London Branch, situated at 336 Strand,
ACCOUNT BANK" London WC2R 1HB
"NOTEHOLDERS" the holders of issuer notes, or any of them as the context
requires
"NOTE PRINCIPAL the amount of each principal payment payable on each note
PAYMENT"
"NOTE TRUSTEE" The Bank of New York, London Branch at One Canada Square,
London, E14 5AL
"OFFER CONDITIONS" the terms and conditions applicable to a specific loan as
set out in the relevant offer letter to the borrower
"OUTSTANDING following enforcement of a loan, the amount outstanding on
AMOUNT" the payment of that loan after deducting money received
under the applicable mortgage indemnity guarantee policy
"PASS-THROUGH TERM means a term advance which has no scheduled repayment date
ADVANCE" other than the final repayment date. On the closing date,
the pass-through term advances are the issuer series 4
term AAA advances, the issuer series 4 term AA advances
and the issuer term A advances, the previous series 5 term
AAA advance, the previous term AA advances and the
previous term BBB advances made by Holmes Financing (No.
6) PLC, the previous series 3A2 term AAA advance, the
previous term AA advances and the previous term BBB
advances made by Holmes Financing (No. 5) PLC, the
previous series 3 term AAA advance made by Holmes
Financing (No. 4) PLC, the previous series 3 term AAA
advance made by Holmes Financing (No. 3) PLC, the previous
series 4 term AAA advance made by Holmes Financing (No. 2)
PLC, the previous term AA advances the previous term BBB
advances and the previous term BB advances. If a bullet
term advance is not repaid in full on its scheduled
repayment date or if a scheduled amortisation term advance
is not repaid by its final scheduled repayment date, then
it will be deemed to be a pass-through term advance. If a
trigger event occurs or the Funding security is enforced,
then the bullet term advances and the scheduled
amortisation term advances will be deemed to be pass-
through term advances. If the issuer security is enforced,
then the issuer term advances which are bullet term
advances or scheduled amortisation term advances will be
deemed to be pass-through term advances
"PAYING AGENTS" the principal paying agent and the US paying agent
"PAYMENT HOLIDAY" a period during which a borrower may suspend payments
under a mortgage loan where the borrower is permitted
under the mortgage terms to do so and will therefore not
be in breach of the mortgage terms
"PENSION PLAN" a financial plan arranged by a borrower to provide for
such borrower's expenses during retirement
"PORTFOLIO" at any time the loans and their related security assigned
to the mortgages trustee and held by the mortgages trustee
on trust for the beneficiaries
286
"POST ENFORCEMENT means the call option granted to PECOH in respect of the
CALL OPTION" class B issuer notes, the class M issuer notes and the
class C issuer notes under the issuer post-enforcement
call option agreement
"POST ENFORCEMENT PECOH Limited
CALL OPTION
HOLDER" or
"PECOH"
"PREVIOUS CLOSING in respect of Holmes Financing (No. 1) PLC, 26th July,
DATES" 2000, in respect of Holmes Financing (No. 2) PLC, 29th
November, 2000, in respect of Holmes Financing (No. 3)
PLC, 23rd May, 2001, in respect of Holmes Financing (No.
4) PLC, 5th July, 2001, in respect of Holmes Financing
(No. 5) PLC, 8th November, 2001 and in respect of Holmes
Financing (No. 6) PLC, 7th November, 2002
"PREVIOUS the intercompany loan agreements made between the previous
INTERCOMPANY LOAN issuers and Funding
AGREEMENTS"
"PREVIOUS the loan of the previous term advances made by the
INTERCOMPANY previous issuers to Funding under the previous
LOANS" intercompany loan agreements
"PREVIOUS ISSUER Abbey National plc situated at 21 Prescot Street, London
ACCOUNT BANKS" E1 8AD and Citibank, N.A., London Branch situated at 336
Strand, London WC2R 1HB
"PREVIOUS ISSUER the liquidity facility agreements entered into between the
LIQUIDITY previous issuers and the respective previous issuer
FACILITY liquidity facility providers
AGREEMENTS"
"PREVIOUS ISSUER The Royal Bank of Scotland plc, acting through its office
LIQUIDITY at Waterhouse Square, 138-142 Holborn, London EC1N 2TH, in
FACILITY respect of the previous issuer liquidity facility
PROVIDERS" agreement relating to Holmes Financing (No. 1) PLC, and
Barclays Bank PLC, in respect of the previous issuer
liquidity facility agreements relating to Holmes Financing
(No. 2) PLC, Holmes Financing (No. 3) PLC, Holmes
Financing (No. 4) PLC and Holmes Financing (No. 5) PLC
"PREVIOUS ISSUER (i) changes to the capital adequacy rules applicable to
LIQUIDITY the previous issuer liquidity facility providers and
SUBORDINATED (ii) the amount of the increase in the margin with
AMOUNTS" respect to theinterest payable under the previous
issuer liquidity facility agreement and the amount of
the increase in the commitment fee payable under the
previous issuer liquidity facility agreements
"PREVIOUS ISSUERS" Holmes Financing (No. 1) PLC, Holmes Financing (No. 2)
PLC, Holmes Financing (No. 3) PLC, Holmes Financing (No.
4) PLC, Holmes Financing (No. 5) PLC and Holmes Financing
(No. 6) PLC
"PREVIOUS ISSUES" the issue of the previous notes by the previous issuers
"PREVIOUS ISSUER The Bank of New York, London Branch at One Canada Square,
SECURITY TRUSTEE" London, E14 5AL and JPMorgan Chase Bank, London Branch at
Trinity Tower, 9 Thomas More Street, London E1W 1YT
"PREVIOUS the holders of previous notes, or any of them as the
NOTEHOLDERS" context requires
"PREVIOUS NOTE The Bank of New York, London Branch at One Canada Square,
TRUSTEE" London, E14 5AL and JPMorgan Chase Bank, London Branch at
Trinity Tower, 9 Thomas More Street, London E1W 1YT
287
"PREVIOUS NOTES" includes all of the class A previous notes, the class B
previous notes, the class C previous notes and the class D
previous notes
"PREVIOUS START-UP the first start-up loan agreement, the second start-up
LOAN AGREEMENTS" loan agreement, the third start-up loan agreement, the
fourth start-up loan agreement, the fifth start-up loan
agreement and the sixth start-up loan agreement
"PREVIOUS SECURITY JPMorgan Chase Bank, London Branch at Trinity Tower, 9
TRUSTEE" Thomas More Street, London E1W 1YT
"PREVIOUS SWAP the swap agreements entered into between the previous
AGREEMENTS" issuers and the previous swap providers in relation to the
previous swaps
"PREVIOUS SWAP Barclays Bank PLC, UBS AG (acting through its business
PROVIDERS" group UBS Warburg), General Re Financial Securities
Limited, Westdeutsche Landesbank Girozentrale, Credit
Suisse First Boston International, Citibank, N.A., London
Branch and Banque AIG, London branch or any of them as the
context requires
"PREVIOUS SWAPS" the dollar currency swaps, the euro currency swaps and the
fixed-floating interest swap entered into by Holmes
Financing (No. 1) PLC, the dollar currency swaps and the
euro currency swaps entered into by Holmes Financing (No.
2) PLC the dollar currency swaps and the euro currency
swaps entered into by Holmes Financing (No. 3) PLC, the
dollar currency swaps, the euro currency swaps and the
Swiss franc currency swap entered into by Holmes Financing
(No. 4) PLC, the dollar currency swaps, the euro currency
swaps and the Swiss franc currency swap entered into by
Holmes Financing (No. 5) PLC and the dollar currency
swaps, the euro currency swaps and the Swiss franc
currency swap entered into by Holmes Financing (No. 6)
PLC, each under the previous swap agreements
"PREVIOUS TERM AA the advances made by the previous issuers to Funding under
ADVANCES" the previous intercompany loan agreements from the
proceeds of issue of the series 1 class B previous notes,
the series 2 class B previous notes, the series 3 class B
previous notes, the series 4 class B previous notes and
the series 5 class B previous notes
"PREVIOUS TERM AAA the advances made by the previous issuers to Funding under
ADVANCES" the previous intercompany loan agreements from the
proceeds of issue of the series 1 class A previous notes,
the series 2 class A previous notes, the series 3 class A
previous notes, the series 4 class A previous notes and
the series 5 class A previous notes
"PREVIOUS TERM the term advances made under the previous intercompany
ADVANCES" loans, funded from the proceeds of the previous notes, as
described in "DESCRIPTION OF THE PREVIOUS ISSUERS, THE
PREVIOUS NOTES AND THE PREVIOUS INTERCOMPANY LOANS"
"PREVIOUS TERM BB the advance made by Holmes Financing (No. 4) PLC to
ADVANCE" Funding under the previous intercompany loan agreement
from the proceeds of issue of its series 3 class D
previous notes
"PREVIOUS TERM BBB the advances made by the previous issuers to Funding under
ADVANCES" the previous intercompany loan agreements from the
proceeds of issue of the series 1 class C previous notes,
the series 2 class C previous notes, the series 3 class C
previous notes, the series 4 class C previous notes and
the series 5 class C previous notes
288
"PRINCIPAL the ledger of such name maintained by the cash manager,
DEFICIENCY comprising on the closing date four sub-ledgers, the AAA
LEDGER" principal deficiency sub-ledger, the AA principal
deficiency sub-ledger, the A principal deficiency sub-
ledger and the BBB principal deficiency sub-ledger and
which records any deficiency of principal (following a
loss on a loan or the application of principal receipts to
meet any deficiency in Funding available revenue receipts)
in respect of payments due under the current intercompany
loans
"PRINCIPAL LEDGER" the ledger of such name maintained by the cash manager on
behalf of the mortgages trustee pursuant to the cash
management agreement to record principal receipts on the
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 GIC account
"PRINCIPAL PAYING JPMorgan Chase Bank, London Branch acting through its
AGENT" specified office at Trinity Tower, 9 Thomas More Street,
London E1W 1YT
"PRINCIPAL PAYMENT the average monthly rolling principal payment rate on the
RATE" loans
"PRINCIPAL all principal amounts received from borrowers in respect
RECEIPTS" of the loans or otherwise paid or recovered in respect of
the loans and their related security representing monthly
repayments of principal, prepayments of principal,
redemption proceeds and amounts recovered on enforcement
representing principal (but excluding principal received
or treated as received in respect of a loan subsequent to
the completion of enforcement procedures and certain early
repayment fees)
"PRODUCT SWITCH" a variation to the financial terms and conditions of a
loan other than:
(a) any variation agreed with a borrower to control or
manage arrears on the loan;
(b) any variation in the maturity date of the loan unless,
while the previous intercompany loan made by Holmes
Financing (No. 1) PLC is outstanding, it is extended
beyond July 2038;
(c) any variation imposed by statute;
(d) any variation of the rate of the principal available
and/or the rate of interest payable in respect of the
loan where that rate is offered to the borrowers of
more than 10 per cent. by outstanding principal amount
of loans comprised in the trust property in any
interest period; or
(e) any variation in the frequency with which the interest
payable in respect of the loan is charged
"PURPOSE-BUILT" in respect of a residential dwelling, built or made for
such a residential purpose (as opposed to converted)
"RATING" rating assigned by the rating agencies to the current
notes or new notes
"RATING AGENCIES" each of Moody's, Standard & Poor's and Fitch
289
"REASONABLE, includes a lender acting within the policy applied by the
PRUDENT MORTGAGE seller from time to time to the originating, underwriting
LENDER" and servicing of loans beneficially owned by the seller
outside the mortgages trust
"RECEIVER" a receiver appointed by the issuer security trustee and/or
the security trustee, respectively pursuant to the issuer
deed of charge and/or the Funding deed of charge
"REFERENCE BANKS" at the closing date, the London office of each of the
following banks: ABN AMRO Bank N.V., Barclays Bank PLC,
Citibank, N.A. and The Royal Bank of Scotland plc
"REGISTERS OF the Land Register of Scotland and/or the General Register
SCOTLAND" of Sasines
"REGISTRAR" J.P. Morgan Bank Luxembourg S.A. at 5, Rue Plaetis, L-2338
Luxembourg, Grand Duchy of Luxembourg
"REGULATED a contract is a regulated mortgage contract if, at the
MORTGAGE time it is entered into: (i) the contract is one under
CONTRACT" which the lender provides credit to an individual or to
the trustee; (ii) the contract provides that the
obligation of the individual/trustee to repay is to be
secured by a first legal mortgage or standard security on
land (other than timeshare accommodation) in the UK; and
(iii) at least 40% of that land is used, or is intended to
be used, as or in connection with a dwelling by the
individual or (in the case of credit provided to the
trustee) by an individual who is a beneficiary of the
trust, or by a related person
"REINSTATEMENT" means in relation to a property that has been damaged,
repairing or rebuilding that property to the condition
that it was in prior to the occurrence of the damage
"RELATED SECURITY" in relation to a loan, the security for the repayment of
that loan including the relevant mortgage and all other
matters applicable thereto acquired as part of the
portfolio assigned to the mortgages trustee
"RELEVANT ISSUERS" the previous issuers, the issuer and any new issuers, as
applicable
"REVENUE LEDGER" the ledger(s) of such name created and maintained by the
cash manager on behalf of the mortgages trustee pursuant
to the cash management agreement to record revenue
receipts on the loans and interest from alternative
accounts and the mortgages trustee GIC account and
payments of revenue receipts from the mortgages trustee
GIC account to Funding and the seller on each distribution
date. The revenue ledger and the principal ledger together
reflect the aggregate of all amounts of cash standing to
the credit of the mortgages trustee GIC account and the
alternative accounts
"REVENUE RECEIPTS" amounts received by the mortgages trustee in respect of
the loans other than principal receipts and third party
amounts and whether received in the mortgages trustee GIC
account or any alternative account
"SCHEDULED (a) in respect of the issuer series 1 term AAA advance,
AMORTISATION the sum of [GBP]236,890,000 due on each scheduled
AMOUNT" repayment date of the issuer series 1 term AAA
advance;
(b) in respect of the issuer series 3 term AAA advance, the
sum of [GBP]157,928,000 due on each scheduled repayment
date of the issuer series 3 term AAA advance;
290
(c) in respect of the previous series 1 term AAA advance
made by Holmes Financing (No. 6) PLC, the sum of
[GBP]480,646,000 due on each scheduled repayment date
of the previous series 1 term AAA advance;
(d) in respect of the previous series 1 term AAA advance
made by Holmes Financing (No. 4) PLC, the sum of
[GBP]191,250,000 due on each scheduled repayment date
of the previous series 1 term AAA advance; and
(e) in respect of the previous series 3 term AAA advance
made by Holmes Financing (No. 2) PLC, the sum of
[GBP]125,000,000 due on each scheduled repayment date
of the previous series 3 term AAA advance
(f) in respect of the previous series 2 term AAA advance
made by Holmes Financing (No. 2) PLC, the sum of
[GBP]175,750,000 due on each repayment date of the
previous series 2 term AAA advance
"SCHEDULED the issuer series 1 term AAA advance, the issuer series 3
AMORTISATION TERM term AAA advance, the previous series 1 term AAA advance
ADVANCES" made by Holmes Financing (No. 6) PLC, the previous series
1 term AAA advance made by Holmes Financing (No. 4) PLC,
the previous series 2 term AAA advance and the previous
series 3 term AAA advance made by Holmes Financing (No. 2)
PLC and any new term advance that is payable in scheduled
amounts on more than one scheduled repayment date
"SCHEDULED (a) in respect of the series 1 class A issuer notes, the
REDEMPTION DATES" interest payment dates in January 2004 and April 2004;
(b) in respect of the series 2 class A issuer notes, the
interest payment date in January 2006; and
(c) in respect of the series 3 class A issuer notes, the
interest payment dates in January 2007 and April 2007
"SCHEDULED (a) in respect of the issuer series 1 term AAA advance,
REPAYMENT DATES" the interest payment dates in January 2004 and April
2004;
(b) in respect of the issuer series 2 term AAA advance, the
interest payment date in January 2006;
(c) in respect of the issuer series 3 term AAA advance, the
interest payment dates in January 2007 and April 2007;
(d) in respect of the previous series 1 term AAA advance
made by Holmes Financing (No. 6) PLC, the interest
payment dates in July 2003 and October 2003;
(e) in respect of the previous series 2 term AAA advance
made by Holmes Financing (No. 6) PLC, the interest
payment date in April 2005;
(f) in respect of the previous series 3 term AAA advance
made by Holmes Financing (No. 6) PLC, the interest
payment date in April 2007;
291
(g) in respect of the previous series 4A1 term AAA advance
made by Holmes Financing (No. 6) PLC, the interest
payment date in October 2007;
(h) in respect of the previous series 4A2 term AAA advance
made by Holmes Financing (No. 6) PLC, the interest
payment date in October 2007;
(i) in respect of the previous series 2 term AAA advance
made by Holmes Financing (No. 5) PLC, the interest
payment date in October 2004;
(j) in respect of the previous series 3A1 term AAA advance
made by Holmes Financing (No. 5) PLC, the interest
payment date in October 2006;
(k) in respect of the previous series 1 term AAA advance
made by Holmes Financing (No. 4) PLC, the interest
payment dates in October 2003, January 2004, April 2004
and July 2004;
(l) in respect of the previous series 2 term AAA advance
made by Holmes Financing (No. 4) PLC, the interest
payment date in July 2006;
(m) in respect of the previous series 4 term AAA advance
made by Holmes Financing (No. 4) PLC, the interest
payment date in October 2006;
(n) in respect of the previous series 2 term AAA advance
made by Holmes Financing (No. 3) PLC, the interest
payment date in January 2005;
(o) in respect of the previous series 2 term AAA advance
made by Holmes Financing (No. 2) PLC, the interest
payment dates in October 2003, January 2004, April 2004
and July 2004;
(p) in respect of the previous series 3 term AAA advance
made by Holmes Financing (No. 2) PLC, the interest
payment dates in October 2005, January 2006, April 2006
and July 2006;
(q) in respect of the previous series 1 term AAA advance
made by Holmes Financing (No. 1) PLC, the interest
payment date in July 2003;
(r) in respect of the previous series 2 term AAA advance
made by Holmes Financing (No. 1) PLC, the interest
payment date in July 2005;
(s) in respect of the previous series 3 term AAA advance
made by Holmes Financing (No. 1) PLC, the interest
payment date in July 2007;
(t) in respect of the previous series 4 term AAA advance
made by Holmes Financing (No. 1) PLC, the interest
payment date in July 2010;
(u) in respect of any new term advance which is intended to
be a bullet term advance, the scheduled repayment date
of that bullet term advance; and
292
(v) in respect of any new term advance which is intended to
be a scheduled amortisation term advance, the scheduled
repayment dates for those scheduled amortisation term
advances
"SCOTTISH LOAN" a loan secured by a Scottish mortgage
"SCOTTISH a mortgage secured over a property in Scotland
MORTGAGE"
"SCOTTISH MORTGAGE the mortgage conditions applicable to Scottish loans
CONDITIONS"
"SEC" The United States Securities and Exchange Commission
"SECOND RESERVE reserve fund established on 29th November, 2000 and funded
FUND" from excess Funding available revenue receipts, as
described further in "CREDIT STRUCTURE -- SECOND RESERVE
FUND", and further funded on 5th July, 2001 from part of
the proceeds of the previous term BB advance
"SECOND RESERVE an amount calculated in accordance with the formula set
FUND REQUIRED out in "CREDIT STRUCTURE -- SECOND RESERVE FUND"
AMOUNT"
"SECOND RESERVE a ledger maintained by the cash manager to record the
LEDGER" amount credited to the second reserve fund, and subsequent
withdrawals and deposits in respect of the second reserve
fund
"SECOND START-UP the loan made by the previous start-up loan provider to
LOAN" Funding under the second start-up loan agreement which was
used in part to fund the first reserve fund
"SECOND START-UP the agreement entered into on 29th November, 2000 between
LOAN AGREEMENT" the previous start-up loan provider and Funding under
which the second start-up loan was made by the previous
start-up loan provider to Funding
"SECURITY TRUSTEE" JPMorgan Chase Bank, London Branch at Trinity Tower, 9
Thomas More Street, London E1W 1YT
"SELLER" Abbey National plc
"SELLER'S POLICY" the originating, underwriting, administration, arrears and
enforcement policy applied by the seller from time to time
to loans and their related security owned solely by the
seller
"SELLER SHARE" the seller share of the trust property from time to time
as calculated on each distribution date
"SELLER SHARE the seller share percentage of the trust property from
PERCENTAGE" time to time as calculated on each distribution date
"SEMI-DETACHED" a house joined to another house on one side only
"SENIOR EXPENSES" amounts ranking in priority to interest due on the term
advances
"SERIES 1 CLASS A the $[750,000,000] series 1 class A floating rate issuer
ISSUER NOTES" notes due [April 2004]
"SERIES 1 CLASS B the $[22,500,000] series 1 class B floating rate issuer
ISSUER NOTES" notes due [July 2040]
293
"SERIES 1 CLASS M the $[38,250,000] series 1 class M floating rate issuer
ISSUER NOTES" notes due [July 2040]
"SERIES 2 CLASS A the $[1,250,000,000] series 2 class A floating rate issuer
ISSUER NOTES" notes due [January 2008]
"SERIES 2 CLASS B the $[37,500,000] series 2 class B floating rate issuer
ISSUER NOTES" notes due [July 2040]
"SERIES 2 CLASS M the $[63,750,000] series 2 class M floating rate issuer
ISSUER NOTES" notes due [July 2040]
"SERIES 3 CLASS A the $[500,000,000] series 3 class A floating rate issuer
ISSUER NOTES" notes due [July 2020]
"SERIES 3 CLASS B the [GBP][15,000,000] series 3 class B floating rate
ISSUER NOTES" issuer notes due [July 2040]
"SERIES 3 CLASS M the [GBP][20,000,000] series 3 class M floating rate
ISSUER NOTES" issuer notes due [July 2040]
"SERIES 4 CLASS A the series 4 class A1 issuer notes and the series 4 class
ISSUER NOTES" A2 issuer notes
"SERIES 4 CLASS A1 the [e][500,000,000] series 4 class A1 floating rate
ISSUER NOTES" issuer notes due [July 2040]
"SERIES 4 CLASS A2 the [GBP][250,000,000] series 4 class A2 floating rate
ISSUER NOTES" issuer notes due [July 2040]
"SERIES 4 CLASS B the [e][41,000,000] series 4 class B floating rate issuer
ISSUER NOTES" notes due [July 2040]
"SERIES 4 CLASS M the [e][56,000,000] series 4 class M floating rate issuer
ISSUER NOTES" notes due [July 2040]
"SERIES 1 CLASS A the series 1 class A previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 1 CLASS B the series 1 class B previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 1 CLASS C the series 1 class C previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 2 CLASS A the series 2 class A previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 2 CLASS A1 the series 2 class A1 previous notes issued by the
PREVIOUS NOTES" previous issuers, as described further in "DESCRIPTION OF
THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 2 CLASS A2 the series 2 class A2 previous notes issued by the
PREVIOUS NOTES" previous issuers, as described further in "DESCRIPTION OF
THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
294
"SERIES 2 CLASS B the series 2 class B previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 2 CLASS C the series 2 class C previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 3 CLASS A the series 3 class A previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 3 CLASS A1 the series 3 class A1 previous notes issued by the
PREVIOUS NOTES" previous issuers, as described further in "DESCRIPTION OF
THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 3 CLASS A2 the series 3 class A2 previous notes issued by the
PREVIOUS NOTES" previous issuers, as described further in "DESCRIPTION OF
THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 3 CLASS B the series 3 class B previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 3 CLASS C the series 3 class C previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 3 CLASS D the series 3 class D previous notes issued by Holmes
PREVIOUS NOTES" Financing (No. 4) PLC, as described further in
"DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES
AND THE PREVIOUS INTERCOMPANY LOANS"
"SERIES 4 CLASS A the series 4 class A previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 4 CLASS B the series 4 class B previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 4 CLASS A1 the series 4 class A1 previous notes issued by Holmes
PREVIOUS NOTES" Financing (No. 6) PLC as described further in "DESCRIPTION
OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE
PREVIOUS INTERCOMPANY LOANS"
"SERIES 4 CLASS A2 the series 4 class A2 previous notes issued by Holmes
PREVIOUS NOTES" Financing (No. 6) PLC as described further in "DESCRIPTION
OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE
PREVIOUS INTERCOMPANY LOANS"
"SERIES 4 CLASS C the series 4 class C previous notes issued by the previous
PREVIOUS NOTES" issuers, as described further in "DESCRIPTION OF THE
PREVIOUS ISSUERS, THE PREVIOUS NOTES AND THE PREVIOUS
INTERCOMPANY LOANS"
"SERIES 5 CLASS A the series 5 class A previous notes issued by Holmes
PREVIOUS NOTES" Financing (No. 6) PLC, as described further in
"DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES
AND THE PREVIOUS INTERCOMPANY LOANS"
"SERIES 5 CLASS B the series 5 class B previous notes issued by Holmes
PREVIOUS NOTES" Financing (No. 6) PLC, as described further in
"DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES
AND THE PREVIOUS INTERCOMPANY LOANS"
295
"SERIES 5 CLASS C the series 5 class C previous notes issued by Holmes
PREVIOUS NOTES" Financing (No. 6) PLC, as described further in
"DESCRIPTION OF THE PREVIOUS ISSUERS, THE PREVIOUS NOTES
AND THE PREVIOUS INTERCOMPANY LOANS"
"SERIES 1 CLASS A __
ISSUER DOLLAR
CURRENCY SWAP
PROVIDER"
"SERIES 1 CLASS B __
ISSUER DOLLAR
CURRENCY SWAP
PROVIDER"
"SERIES 1 CLASS M __
ISSUER DOLLAR
CURRENCY SWAP
PROVIDER"
"SERIES 2 CLASS A __
ISSUER DOLLAR
CURRENCY SWAP
PROVIDER"
"SERIES 2 CLASS B __
ISSUER DOLLAR
CURRENCY SWAP
PROVIDER"
"SERIES 2 CLASS M __
ISSUER DOLLAR
CURRENCY SWAP
PROVIDER"
"SERIES 3 CLASS A [__]
ISSUER DOLLAR
CURRENCY SWAP
PROVIDER"
"SERIES 4 CLASS A1 [__]
ISSUER EURO
CURRENCY SWAP
PROVIDER"
"SERIES 4 CLASS B [__]
ISSUER EURO
CURRENCY SWAP
PROVIDER"
"SERIES 4 CLASS M [__]
ISSUER EURO
CURRENCY SWAP
PROVIDER"
"SERIES 1 ISSUER the series 1 class A issuer notes, the series 1 class B
NOTES" issuer notes and the series 1 class M issuer notes
"SERIES 2 ISSUER the series 2 class A issuer notes, the series 2 class B
NOTES" issuer notes and the series 2 class M issuer notes
"SERIES 3 ISSUER the series 3 class A issuer notes, the series 3 class B
NOTES" issuer notes and the series 3 class M issuer notes
"SERIES 4 ISSUER the series 4 class A issuer notes, the series 4 class B
NOTES" issuer notes and the series 4 class M issuer notes
"SERVICER" Abbey National plc or such other person as may from time
to time be appointed as servicer of the portfolio pursuant
to the servicing agreement
296
"SERVICING the agreement entered into on 26th July, 2000 (as amended
AGREEMENT" and restated on 29th November, 2000 and as further amended
and restated on 23rd May, 2001), between the servicer, the
mortgages trustee, the security trustee and Funding under
which the servicer agrees to administer the loans and
their related security comprised in the portfolio, as
described further in "THE SERVICING AGREEMENT"
"SEVENTH START-UP the loan made by the start-up loan provider to Funding
LOAN" under the seventh start-up loan agreement
"SEVENTH START-UP the agreement entered into on the closing date between the
LOAN AGREEMENT" start-up loan provider and Funding under which the seventh
start-up loan will be made by the start-up loan provider
to Funding
"SHORTFALL" the deficiency of Funding available income receipts on an
interest payment date over the amounts due by Funding
under the Funding pre-enforcement revenue priority of
payments
"SIXTH START-UP the loan made by the start-up loan provider to Funding
LOAN" under the sixth start-up loan agreement
"SIXTH START-UP the agreement entered into on 7th November, 2002 between
LOAN AGREEMENT" the start-up loan provider and Funding under which the
sixth start- up loan was made by the start-up loan
provider to Funding
"SPECIFIED MINIMUM the rate specified in the offer conditions
RATE"
"STABILISED RATE" the rate to which any loan reverts after the expiration of
any period during which any alternative method(s) of
calculating the interest rate specified in the offer
conditions are used
"STANDARD & Standard & Poor's Rating Services, a division of The
POOR'S" McGraw-Hill Companies, Inc.
"START-UP LOAN the current start-up loan agreements and all new start-up
AGREEMENTS" loan agreements
"START-UP LOAN Abbey National plc, in its capacity as provider of the
PROVIDER" first start-up loan, the second start-up loan, the third
start-up loan, the fourth start-up loan, the fifth start-
up loan, the sixth start-up loan and the seventh start-up
loan
"SVR" the Abbey SVR or the mortgages trustee SVR, as applicable
"SVR LOAN" a loan which is subject to the mortgages trustee SVR or,
as applicable, the Abbey SVR
"SWAP AGREEMENTS" the Funding swap agreement and the issuer swap agreements
"SWAP EARLY a circumstance in which a swap agreement can be terminated
TERMINATION prior to its scheduled termination date
EVENT"
"SWAP PROVIDERS" the Funding swap provider and/or any of the issuer swap
providers
"TARGET BUSINESS a day on which the Trans-European Automated Real-time
DAY" Gross settlement Express Transfer (TARGET) System is open
297
"TERM A ADVANCES" the issuer term A advances and any new term A advance made
by a new issuer to Funding that has a term advance rating
of "A" or its equivalent
"TERM AA ADVANCES" the previous term AA advances, the issuer term AA advances
and any new term AA advance made by a new issuer to
Funding that has a term advance rating of "AA" or its
equivalent
"TERM AAA the previous term AAA advances, the issuer term AAA
ADVANCES" advances and any new term AAA advance made by a new issuer
to Funding that has a term advance rating of "AAA" or its
equivalent
"TERM ADVANCES" the term AAA advances, the term AA advances, the term A
advances, the term BBB advances and the term BB advances
outstanding from time to time
"TERM BB ADVANCES" the previous term BB advance and any new term BB advance
made by a new issuer to Funding that has a term advance
rating of "BB" or its equivalent
"TERM BBB the previous term BBB advances and any new term BBB
ADVANCES" advance made by a new issuer to Funding that has a term
advance rating of "BBB" or its equivalent
"TERM ADVANCE the designated rating assigned to a term advance which
RATING" corresponds to the rating of the class of notes when first
issued to provide funds for that term advance so that, for
example, any term AAA advance has a term advance rating of
"AAA" to reflect the ratings of Aaa/AAA/AAA then assigned
to the corresponding notes (other than the issuer series 1
class A issuer notes or the previous series 1 class A
notes of Holmes Financing (No. 6) PLC)
"TERRACED" a house in a row of houses built in one block in a uniform
style
"THIRD PARTY includes:
AMOUNTS"
(a) payments of high loan-to-value fees due to the seller;
(b) amounts under a direct debit which are repaid to the
bank making the payment if such bank is unable to
recoup that amount itself from its customer's account;
or
(c) payments by borrowers of early repayment fees and
product charges which are due to the seller
"THIRD START-UP the loan made by the start-up loan provider to Funding
LOAN" under the third start-up loan agreement which will be used
in part to fund the first reserve fund
"THIRD START-UP the agreement entered into on 23rd May, 2001 between the
LOAN AGREEMENT" start-up loan provider and Funding under which the third
start- up loan was made by the start-up loan provider to
Funding
"TRACKER LOAN" a loan where interest is linked to a variable interest
rate other than the SVR. For example, the rate on a
tracker loan may be set at a margin above sterling LIBOR
or above rates set by the Bank of England
"TRACKER RATE" the rate of interest applicable to a tracker loan (before
applying any cap or minimum rate)
298
"TRANSACTION the issuer transaction documents, the other documents
DOCUMENTS" listed in paragraph (D) in "LISTING AND GENERAL
INFORMATION", the previous intercompany loan agreements,
the previous start-up loan agreements, the previous swap
agreements, other documents relating to the issue of
previous notes by the previous issuers and any new
intercompany loan agreements, new start-up loan
agreements, new swap agreements, other documents relating
to issues of new notes by new issuers, the mortgages
trustee guaranteed investment contract and all other
agreements referred to therein
"TRANSFER AGENT" J.P. Morgan Bank Luxembourg S.A. at 5 Rue Plaetis, L-
2238, Luxembourg
"TRIGGER EVENT" an asset trigger event and/or a non-asset trigger event
"TRUST PROPERTY" includes:
(a) the sum of [GBP]100 settled by SPV Management Limited
on trust on the date of the mortgage trust deed;
(b) the current portfolio of loans and their related
security assigned to the mortgages trustee by the
seller;
(c) any new loans and their related security assigned to
the mortgages trustee by the seller after the closing
date;
(d) any drawings under flexible loans;
(e) any interest and principal paid by borrowers on their
loans;
(f) any other amounts received under the loans and related
security (excluding third party amounts);
(g) rights under the MIG policies; and
(h) amounts on deposit and interest earned on such amounts
in the mortgages trustee GIC account and in the
alternative accounts
"UK LISTING the Financial Services Authority in its capacity as
AUTHORITY" competent authority under the Financial Services and
Markets Act 2000
"UNDERPAYMENT" a reduced payment by the borrower under a flexible loan
and where such reduced payment is in place of the monthly
payment set out in the mortgage offer (or any changed
monthly payment subsequently notified by the lender to the
borrower), where there are sufficient available funds to
fund the difference between the monthly payment and this
reduced payment and where the borrower is not in breach of
the mortgage terms for making such payment
"UNDERWRITERS" J.P. Morgan Securities Inc. and Salomon Smith Barney Inc.
-- in respect of the series 1 issuer notes, the series 2
issuer notes and the series 3 class A issuer notes
"UNITED STATES a beneficial owner of issuer notes who is a "UNITED STATES
HOLDER" PERSON"
"UNITED STATES PERSON" (a) a citizen or resident of the United States;
(b) a domestic partnership;
299
(c) a domestic corporation;
(d) any estate (other than a foreign estate); and
(e) any trust if: (i) a court within the United States
is able to exercise primary supervision over the
administration of the trust; and (ii) one or more
United States fiduciaries have the authority to
control all substantial decisions of the trust
"US PAYING AGENT" JPMorgan Chase Bank, New York Branch at 450 West 33rd
Street, New York, NY 10001-2697
"US TAX COUNSEL" Cleary, Gottlieb, Steen & Hamilton
"USD-LIBOR" the London Interbank Offered Rate for dollar deposits, as
determined by the agent bank on the following basis:
(1) on the applicable interest determination date
applicable to the series 1 class A issuer notes,
the series 1 class B issuer notes, the series 1
class M issuer notes, the series 2 class A issuer
notes, the series 2 class B issuer notes, the
series 2 class M issuer notes and the series 3
class A issuer notes, the agent bank will
determine the arithmetic mean, rounded upwards to
five decimal places, of the offered quotations to
leading banks for deposits in dollars for the
relevant interest period. The USD-LIBOR for the
first interest period shall be (in the case of the
series 1 class A issuer notes) the arithmetic mean
of such offered quotations for one-month US dollar
deposits and (in all other cases) the linear
interpolation of the arithmetic mean of such
offered quotations for three-month and four-month
US dollar deposits (rounded upwards, if necessary,
to five decimal places).
This will be determined by reference to the display as
quoted on the Moneyline Telerate Screen No. 3750. If the
Moneyline Telerate Screen No. 3750 stops providing these
quotations, the replacement service for the purposes of
displaying this information will be used. If the replacement
service stops displaying the information, another page as
determined by the issuer with the approval of the note
trustee will be used.
In each of these cases, the determination will be made as at
or about 11.00 a.m., London time, on that date. This is
called the screen rate for the series 1 class A issuer
notes, the series 1 class B issuer notes, the series 1 class
M issuer notes, the series 2 class A issuer notes, the
series 2 class B issuer notes, the series 2 class M issuer
notes and the series 3 class A issuer notes;
(2) if, on any such interest determination date, 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 dollar
deposits of the equivalent amount and
for a time equal to the relevant
interest period, in the London
inter-bank market as at or about 11.00
a.m. (London time); and
300
* calculate the arithmetic mean, rounded
upwards to five decimal places, of those
quotations;
(3) if on any such 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 arithmetic mean of the
quotations as calculated in (2). If no such banks
are agreed 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
"VALUATION" a methodology for determining the value of a property
which would meet the standards of a reasonable, prudent
mortgage lender (as referred to under "THE SERVICER AND
THE SERVICING AGREEMENT -- THE SERVICING AGREEMENT --
UNDERTAKINGS BY THE SERVICER") and which has been approved
by the Director of Group Property and Survey of the seller
"VALUATION FEE" a fee incurred by borrowers as a result of the seller or
servicer obtaining a valuation of the property
"VARIABLE MORTGAGE the rate of interest which determines the amount of
RATE" interest payable each month on a variable rate loan
"VARIABLE RATE a loan where the interest rate payable by the borrower
LOAN" varies in accordance with a specified variable rate
"VAT" value added tax
"WAFF" weighted average repossession frequency
"WALS" weighted average loss severity
"WE" and "US" the issuer
"WITHHOLDING TAX" a tax levied under UK law, as further described in "UNITED
KINGDOM TAXATION -- WITHHOLDING TAX"
301
ANNEX A
PERIODIC REPORT RE HOLMES TRUSTEES LIMITED AND HOLMES FUNDING LIMITED
FOR PERIOD 09 JANUARY 2003 TO 10 FEBRUARY 2003
All values are in thousands of pounds sterling unless otherwise stated
MORTGAGE ASSET ANALYSIS
Analysis of Mortgage Trust Movements
CURRENT PERIOD
NUMBER [GBP]000'S
-------- ----------
Brought Forward 362,863 23,922,700
Replenishment.. 13,751 1,029,745
Repurchased.... (6,035) (417,374)
Redemptions.... (10,946) (830,987)
Losses......... (22) (22)
Other Movements 0 1
-------- ----------
Carried Forward 359,611 23,704,063
======== ==========
CUMULATIVE
NUMBER [GBP]000'S
--------- -----------
Brought Forward 115,191 6,399,214
Replenishment.. 488,770 34,463,746
Repurchased.... (109,685) (7,708,432)
Redemptions.... (134,465) (9,449,954)
Losses......... (200) (512)
Other Movements 0 1
--------- -----------
Carried Forward 359,611 23,704,063
========= ===========
PERIOD CPR ANNUALISED CPR
---------- --------------
1 Month.. 5.27% 83.00% **(including
redemptions
and
repurchases)
3 Month.. 14.28% 71.82%
12 Month. 47.80% 47.80%
**The annualised CPR's are expressed as a percentage of the outstanding balance
at the end of the period
Asset Profiles
Weighted Average Seasoning..... 33.21 months
Weighted Average Loan size..... [GBP]65,915.85
Weighted Average LTV 77.68% *** (see below)
Weighted Average Remaining Term 19.21 Years
302
Product Type Analysis
[GBP]000'S %
---------- -------
Variable Rate 11,705,066 49.38%
Fixed Rate... 6,215,205 26.22%
Tracker Rate. 5,783,791 24.40%
---------- -------
23,704,063 100.00%
========== =======
As at 10th February 2002 approximately 5% of the loans were flexible loans
Mortgage Standard Variable Rate
EFFECTIVE DATE RATE
- ---------------- -----
01 November 2002 5.94%
01 December 2001 6.10%
Geographic Analysis
REGION NUMBER [GBP]000'S %
- ------------------------ ------- ---------- -------
East Anglia............. 12,658 834,476 3.52%
East Midlands........... 16,182 1,067,474 4.50%
Greater London.......... 81,452 5,370,100 22.65%
North................... 11,615 765,190 3.23%
North West.............. 33,408 2,202,462 9.29%
Scotland................ 3,380 223,944 0.94%
South East.............. 115,399 7,607,004 32.09%
South West.............. 27,798 1,832,856 7.73%
Wales................... 13,737 906,476 3.82%
West Midlands........... 21,001 1,383,170 5.84%
Yorkshire and Humberside 17,585 1,159,323 4.89%
Unknown................. 5,396 351,588 1.48%
------- ---------- -------
Total................... 359,611 23,704,063 100.00%
======= ========== =======
Original LTV Bands
RANGE NUMBER [GBP]000'S %
- ------------- ------- ---------- -------
0.00 - 25.00. 6,585 269,327 1.14%
25.01 - 50.00 40,107 2,168,531 9.15%
50.01 - 75.00 95,138 6,722,850 28.36%
75.01 - 80.00 19,068 1,380,542 5.82%
80.01 - 85.00 24,622 1,842,368 7.77%
85.01 - 90.00 53,387 4,095,277 17.28%
90.01 - 95.00 120,704 7,225,168 30.48%
------- ---------- -------
Total........ 359,611 23,704,063 100.00%
======= ========== =======
*** The balance is the current outstanding balance on the account including
accrued interest. The LTV is that at origination and excludes any
capitalised high loan to value fees, valuation fees or booking fees.
303
Arrears
BAND NUMBER PRINCIPAL OVERDUE %
- ------------------------ ------- ---------- ------- -------
Current................. 350,672 23,167,059 (2,040) 97.76%
1.00 - 1.99 months...... 5,474 334,288 2,609 1.41%
2.00 - 2.99 months...... 1,573 92,271 1,341 0.39%
3.00 - 3.99 months...... 781 44,842 938 0.19%
4.00 - 4.99 months...... 408 24,130 649 0.10%
5.00 - 5.99 months...... 234 12,643 427 0.05%
6.00 -11.99 months...... 399 20,743 1,013 0.09%
12 months and over...... 33 1,723 161 0.01%
Properties in Possession 37 1,169 97 0.00%
------- ---------- ------- -------
Total................... 359,611 23,698,868 5,195 100.00%
======= ========== ======= =======
Definition of Arrears
This arrears multiplier is calculated as the arrears amount (which is the
difference between the expected monthly repayments and the amount that has
actually been paid, i.e. a total of under and/or over payments) divided by the
monthly amount repayable. It is recalculated every time the arrears amount
changes, i.e. on the date when a payment is due.
Shares of Trust last Distribution Date (10 February 2003)
[GBP]000'S %
---------- ----------
Funding Share....... 13,633,717 57.51637%
Seller Share........ 10,070,346 42.48363%
---------- ----------
23,704,063 100.00000%
========== ==========
Minimum Seller Share 947,954 4.00%
Cash Accumulation Ledger
[GBP]000'S
----------
Brought Forward............... 811,000
Additional Amounts Accumulated 60,562
Payment of Notes.............. (811,000)
----------
Carried Forward............... 60,562
==========
Liquidity Facilities
DRAWN [GBP]000'S UNDRAWN [GBP]000'S
---------------- ------------------
Holmes Funding.... [GBP]0 [GBP]25,000
Holmes Financing 1 [GBP]0 [GBP]25,000
Holmes Financing 2 [GBP]0 [GBP]25,000
Holmes Financing 3 [GBP]0 [GBP]25,000
Holmes Financing 4 [GBP]0 [GBP]25,000
Holmes Financing 5 [GBP]0 [GBP]25,000
Holmes Financing 6 [GBP]0 [GBP]25,000
304
Excess Spread
Quarter to 15/1/03... 0.5960%
Quarter to 15/10/2002 0.5892%
Quarter to 15/7/2002. 0.5891%
Quarter to 15/4/2002. 0.5414%
Reserve Funds
FIRST RESERVE SECOND RESERVE
------------------- ------------------
Balance as at 15/01/2003........ [GBP]195,410,721.15 [GBP]56,890,739.99
Required Amount as at 15/01/2003 [GBP]291,000,000.00 [GBP]73,825,687.00
Percentage of Notes............. 1.43% 0.42%
Properties in Possession
Stock
CURRENT PERIOD
NUMBER [GBP]000'S
------ ----------
Brought Forward...... 25 822
Repossessed in Period 22 857
Sold in Period....... (10) (413)
------ ----------
Carried Forward...... 37 1,266
====== ==========
CUMULATIVE
NUMBER [GBP]000'S
------ ----------
Repossessed to date 248 11,398
Sold to date....... (211) (10,132)
------ ----------
Carried Forward.... 37 1,266
====== ==========
Repossession Sales Information
AVERAGE TIME POSSESSION TO SALE 79 DAYS
AVERAGE ARREARS AT TIME OF SALE [GBP]3,095
MIG Claim Status
NUMBER [GBP]000'S
------ ----------
MIG Claims made.............. 135 1,017
MIG Claims outstanding....... 10 103
Average time claim to payment 35
Trigger Events
There has been no debit to the AAA Principal Deficiency Ledger
The Seller has not suffered an Insolvency Event
The Seller is still the Servicer
The Outstanding Principal balance is in excess of [GBP]21 billion
305
RETIRED CLASS A NOTES
DATE RETIRED HOLMES 1 HOLMES 2 HOLMES 3 HOLMES 4 HOLMES 5 HOLMES 6
- ------------ -------- -------- -------- -------- -------- --------
02Q3........ --- 703 --- --- 352 0
02Q4........ --- --- --- --- 352 0
03Q1........ --- --- 750 --- --- 0
OUTSTANDING CLASS A NOTES
EXPECTED REDEMPTION HOLMES 1 HOLMES 2 HOLMES 3 HOLMES 4 HOLMES 5 HOLMES 6
- ------------------- -------- -------- -------- -------- -------- --------
03Q2............... --- --- --- --- --- ---
03Q3............... 600 --- --- --- --- 481
03Q4............... --- 176 --- 191 --- 481
04Q1............... --- 176 --- 191 --- ---
04Q2............... --- 176 --- 191 --- ---
04Q3............... --- 176 --- 191 --- ---
04Q4............... --- --- --- --- 698 ---
05Q1............... --- --- 750 --- --- ---
05Q2............... --- --- --- --- --- 801
05Q3............... 650 --- --- --- --- ---
05Q4............... --- 125 --- --- --- ---
06Q1............... --- 125 --- --- --- ---
06Q2............... --- 125 --- --- --- ---
06Q3............... --- 125 500 1,340 --- ---
06Q4............... --- --- --- 350 875 ---
07Q1............... --- --- --- --- --- ---
07Q2............... --- --- --- --- --- 634
07Q3............... 575 --- --- --- --- ---
07Q4............... --- 300 --- --- --- 770
08Q1............... --- --- --- --- --- ---
08Q2............... --- --- --- --- --- 500
08Q3............... --- --- --- --- --- ---
08Q4............... --- --- --- --- --- ---
09Q1............... --- --- --- --- --- ---
09Q2............... --- --- --- --- --- ---
09Q3............... --- --- --- --- --- ---
09Q4............... --- --- --- --- --- ---
10Q1............... --- --- --- --- --- ---
10Q2............... --- --- --- --- --- ---
10Q3............... 250 --- --- --- --- ---
10Q4............... --- --- --- --- --- ---
306
[ LOGO Diagram of Expected Redemption of Class A Notes ]
307
INDEX OF APPENDICES
The following appendices contain the text of the independent auditors'
reports on each of the issuer and Funding, received by the directors of the
issuer and Funding respectively from the independent auditors to the issuer and
Funding, being, in each case, Deloitte & Touche. The information contained in
the appendices constitutes an integral part of the prospectus. None of the
appendices comprise the statutory accounts of either the issuer or Funding. No
statutory accounts have been prepared or delivered to the Registrar of
Companies in England and Wales on behalf of the issuer since its incorporation.
The first statutory accounts of the issuer will be drawn up to 31st December,
2003. The latest statutory accounts of Funding have been prepared and were
drawn up to 31st December, 2002. The accounting reference date for each of the
issuer and Funding will be the last day of December. The next statutory
accounts for both the issuer and Funding will be drawn up to 31st December,
2003, and annually on the last day of December thereafter.
During the period from incorporation on 23rd January, 2003 until the date of
this prospectus, the issuer had not traded, and did not have any receipts or
payments apart from the subscriptions of share capital 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 the financial statements of Holmes Financing (No. 7 plc) as of 14th
February, 2003 and the independent auditors' report thereon;
Appendix B the financial statements of Holmes Funding Limited as of 31st
December, 2002 and 31st December, 2001 and for each of the years
ended 31st December, 2002 and 31st December, 2001 and the period
from 24th April, 2000 (date of incorporation) to 31st December 2000
and the independent auditors' report thereon;
308
APPENDIX A
HOLMES FINANCING (NO. 7) PLC
INDEPENDENT AUDITORS' REPORT
TO THE DIRECTORS AND SHAREHOLDERS OF:
HOLMES FINANCING (NO. 7) PLC
We have audited the accompanying balance sheet of Holmes Financing (No. 7)
PLC (the "Company") as of February 14, 2003. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet presents fairly, in all material respects,
the financial position of the Company as at February 14, 2003 in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche
London, England
February 28, 2003.
309
HOLMES FINANCING (NO. 7) PLC
BALANCE SHEET
FEBRUARY 14, 2003
ASSETS NOTE [GBP]
- ------------------------------------------------------------------------ ---- -------
Cash and cash equivalents............................................... 12,502
-------
12,502
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Common Stock (authorised 100,000 shares, [GBP]1.00 par value, issued and
outstanding 50,000 shares comprising 2 fully paid and 49,998 partly paid
to 25 pence each)....................................................... 3 50,000
Less receivable from stockholders....................................... 3 (37,498)
-------
Total liabilities and stockholders' equity.............................. 12,502
=======
See Notes to the Balance Sheet
310
HOLMES FINANCING (NO. 7) PLC
NOTES TO THE BALANCE SHEET
1. ACCOUNTING POLICIES
(1) The financial information set out in the balance sheet has been prepared
in accordance with accounting principles generally accepted in the United
States of America.
(2) The financial statements of the Company have been prepared in pounds
sterling ([GBP]), the currency of the United Kingdom, which is the
Company's operating currency.
(3) From incorporation to the balance sheet date, no transactions have been
undertaken except for the issue of share capital and consequently no
statement of income or statement of cash flows have been produced.
2. NATURE OF OPERATIONS
The Company was incorporated in England and Wales on January 23, 2003. The
principal purpose of the Company is to issue asset backed floating rate notes
and enter into all financial arrangements in that connection. The Company has
not had any trading activity to date.
3. COMMON STOCK
The Company was incorporated with authorised capital of [GBP]100,000 comprising
100,000 ordinary shares of [GBP]1 each.
On February 5, 2003, 49,998 ordinary shares were partly paid to 25 pence, and 2
subscriber shares were fully paid up. The balance of [GBP]37,498 is payable by
the stockholders upon the Company's demand.
4. HOLDING COMPANY
The parent company of the Company is Holmes Holdings Limited, a company
registered in England and Wales, which holds all of the beneficial interest in
the issued shares of the Company. SPV Management Limited, a company registered
in England and Wales, holds all of the beneficial interest in the issued shares
of Holmes Holdings Limited on a discretionary trust for persons employed as
nurses in the United Kingdom and for charitable purposes.
311
APPENDIX B
HOLMES FUNDING LIMITED
INDEPENDENT AUDITORS' REPORT
TO THE DIRECTORS AND SHAREHOLDERS OF:
HOLMES FUNDING LIMITED
We have audited the accompanying statements of financial position of Holmes
Funding Limited (the "Company" and a wholly owned subsidiary of Holmes Holdings
Limited) as of December 31, 2002 and December 31, 2001, and the related
statements of income, comprehensive loss, changes in stockholders' deficit, and
cash flows for the years ended December 31, 2002 and December 31, 2001 and the
period from April 24, 2000 (date of inception) to December 31, 2000. These
financial statements are the responsibility of that Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2002 and
December 31, 2001, and the results of its operations and its cash flows for the
years ended December 31, 2002 and December 31, 2001 and the period from April
24, 2000 (date of inception) to December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche
London, England
February 28, 2003.
312
HOLMES FUNDING LIMITED
STATEMENT OF INCOME
Amounts in thousands of pounds
YEAR YEAR PERIOD FROM
ENDED ENDED 24.04.00 TO
31.12.02 31.12.01 31.12.00
NOTE [GBP]'000 [GBP]'000 [GBP]'000
- ---------------------------------------------------------------------------------------- ---- --------- --------- -----------
INTEREST INCOME
Income from investment in Trust......................................................... 4 642,704 501,978 87,292
Bank interest........................................................................... 24,556 6,070 516
Interest on related party loans......................................................... 4 (523,580) (414,322) (76,998)
Interest on start-up loans.............................................................. (2,654) (2,399) (442)
--------- --------- -----------
NET INTEREST INCOME..................................................................... 141,026 91,327 10,368
Provision for loan losses in Trust...................................................... (11,644) (1,475) (2,051)
--------- --------- -----------
Net interest income after write down of investment in Trust............................. 129,382 89,852 8,317
Losses on derivative instruments........................................................ (128,824) (254,539) ---
Operating expenses...................................................................... 5 (52,081) (51,221) (10,298)
--------- --------- -----------
LOSS BEFORE TAXATION.................................................................... (51,523) (215,908) (1,981)
Taxation................................................................................ 6 11,753 69,074 (4)
--------- --------- -----------
NET LOSS................................................................................ (39,770) (146,834) (1,985)
========= ========= ===========
STATEMENTS OF COMPREHENSIVE LOSS
Net loss................................................................................ (39,770) (146,834) (1,985)
Other comprehensive income
Cumulative effect of accounting change -- adoption of SFAS133........................... --- 3,560 ---
Transfer to earnings of mark to market amount receivable in OCI (net of tax of [GBP]186) (434) --- ---
--------- --------- -----------
OTHER COMPREHENSIVE INCOME.............................................................. (434) 3,560 ---
--------- --------- -----------
COMPREHENSIVE LOSS...................................................................... (40,204) (143,274) (1,985)
========= ========= ===========
The accompanying notes are an integral part of these financial statements
313
HOLMES FUNDING LIMITED
STATEMENTS OF FINANCIAL POSITION
Amounts in thousands of pounds
31.12.02 31.12.01
NOTE [GBP]'000 [GBP]'000
- ------------------------------------------------------------------------ ---- ---------- ----------
ASSETS
Cash and cash equivalents............................................... 1,202,356 250,770
Accrued interest receivable from Trust.................................. 4 --- 16,267
Other assets............................................................ 11,925 7,591
---------- ----------
Total current assets.................................................... 1,214,281 274,628
Investment in Trust (net of allowances of [GBP]15,053, 2001: [GBP]3,526) 4 13,679,484 11,969,990
Other assets............................................................ 98,260 94,771
---------- ----------
Total assets............................................................ 14,992,025 12,339,389
========== ==========
LIABILITIES
Related party loans..................................................... 4 961,292 704,000
Accrued interest payable on related party loans......................... 4 178,889 111,522
Accrued interest payable on start-up loans.............................. 5,496 2,841
Current fair value of derivative instruments............................ 17,989 ---
Other current liabilities............................................... 900 933
---------- ----------
TOTAL CURRENT LIABILITIES............................................... 1,164,566 819,296
Related party loans..................................................... 4 13,593,987 11,319,516
Start-up loans.......................................................... 7 62,450 56,350
Non-current fair value of derivative instruments........................ 254,387 232,602
Other non-current liabilities........................................... 102,098 56,884
---------- ----------
TOTAL LIABILITIES....................................................... 15,177,488 12,484,648
---------- ----------
STOCKHOLDERS' DEFICIT
Common stock (two shares of [GBP]1 each)................................ 10 --- ---
Accumulated retained loss............................................... (188,589) (148,819)
Accumulated other comprehensive income (net of tax)..................... 3,126 3,560
---------- ----------
TOTAL STOCKHOLDERS' DEFICIT............................................. (185,463) (145,259)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT............................. 14,992,025 12,339,389
========== ==========
The accompanying notes are an integral part of these financial statements
314
HOLMES FUNDING LIMITED
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Amounts in thousands of pounds
31.12.02 31.12.01 31.12.00
[GBP]'000 [GBP]'000 [GBP]'000
- --------------------------------------------------------------------------------- --------- --------- ---------
COMMON STOCK (AUTHORISED 100 SHARES, PAR VALUE [GBP]1 PER SHARE)
--------- --------- ---------
Balance, beginning of period and end of period................................... --- --- ---
--------- --------- ---------
RETAINED LOSS
Balance, beginning of period..................................................... (148,819) (1,985) ---
Net loss......................................................................... (39,770) (146,834) (1,985)
--------- --------- ---------
Balance, end of period........................................................... (188,589) (148,819) (1,985)
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period..................................................... 3,560 --- ---
Amortisation of effect of change in accounting principle (net of tax of [GBP]186) (434) 3,560 ---
--------- --------- ---------
Balance, end of period........................................................... 3,126 3,560 ---
--------- --------- ---------
TOTAL STOCKHOLDERS' DEFICIT...................................................... (185,463) (145,259) (1,985)
========= ========= =========
The accompanying notes are an integral part of these financial statements
315
HOLMES FUNDING LIMITED
STATEMENTS OF CASH FLOWS
Amounts in thousands of pounds
YEAR YEAR PERIOD FROM
ENDED ENDED 24.04.00 TO
31.12.02 31.12.01 31.12.00
NOTE [GBP]'000 [GBP]'000 [GBP]'000
- ----------------------------------------------------------------------- ---- ---------- ---------- -----------
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net loss............................................................... (39,770) (146,834) (1,985)
Write down of investment in Trust...................................... 11,527 1,475 2,051
Transfer (from)/to Other comprehensive income.......................... (434) 3,560 ---
Decrease/(increase) in accrued interest receivable..................... 4 16,267 10,462 (26,729)
Increase in other assets............................................... (7,823) (89,996) (12,366)
Increase in accrued interest payable................................... 4 70,022 69,674 44,689
Decrease in fair value of derivative instruments....................... 39,774 232,602 ---
Increase in other liabilities.......................................... 45,181 47,301 10,516
---------- ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. 134,744 128,244 16,176
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment in Trust........................................ 4 (3,999,221) (7,313,000) (4,660,516)
Partial maturity of investment in Trust................................ 4 2,278,200 --- ---
---------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES.................................. (1,721,021) (7,313,000) (4,660,516)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party loans entered into......................... 4 2,531,763 7,363,000 4,660,516
Proceeds from start-up loans entered into.............................. 6,100 30,100 26,250
---------- ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............................. 2,537,863 7,393,100 4,686,766
---------- ---------- -----------
Net increase in cash and cash equivalents from continuing operations... 951,586 208,344 42,426
Cash and cash equivalents at beginning of period....................... 250,770 42,426 ---
---------- ---------- -----------
Cash and cash equivalents at end of period............................. 1,202,356 250,770 42,426
---------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for taxation............................... 19 2 ---
Cash paid during the period for interest............................... 515,776 347,243 ---
The accompanying notes are an integral part of these financial statements
316
HOLMES FUNDING LIMITED
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) The financial statements of Holmes Funding Limited have been prepared in
accordance with generally accepted accounting standards in the United
States of America, in pounds sterling ([GBP]), the currency of the United
Kingdom, which is the Company's operating currency.
(2) The Company is domiciled in the United Kingdom.
(3) All transactions arise from continuing operations.
(4) Cash and cash equivalents include all cash balances and highly liquid
instruments having original maturities of three months or less.
(5) Interest receivable is calculated on an accruals basis.
(6) The investment in the Trust is carried at the outstanding unpaid
principal balance of the underlying mortgage loans less any related
allowance for loan losses.
Allowances are made against Trust asset when, as a result of regular
appraisals of the mortgage assets in the underlying trust, it is
considered that recovery is not probable. Impairment is determined by
management by reference to historical default rates, historical loss
severity, and the degree to which underlying loans are in areas.
Provisions made during the year are charged to the income statement.
(7) The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(8) As discussed in Note 8, the Company has interest rate swaps, which are
used to manage its exposures to market rate movements. As the hedging
criteria of Statement of Financial Accounting Standards No.133 Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133") have not
been met during the periods presented, these swaps have been marked to
market through the statements of income and an estimated loss of
[GBP]128.8 million and [GBP]254.5 million have been recorded in the
statement of income for the years ended December 31, 2002 and 2001. The
terms of the swaps are matched with the payment profile of the interest
on the related party loans, such that the Company has an economic hedge
which, from a cash flow perspective, would not require an outflow of cash
without a corresponding cash inflow.
In the opinion of the directors, the unrealised loss and the resulting
stockholders' deficit does not impact on the appropriateness of the going
concern assumption in preparing the financial statements for the period,
as the realisation of the losses on derivative instruments will be offset
by future cash inflows from the investment in Trust.
The Company adopted SFAS 133 on January 1, 2001. The transitional
adjustment as at that date was an increase in accumulated other
comprehensive income of [GBP]5,083 less deferred tax of [GBP]1,523. This
represented recognition of fair value in excess of carrying value of
derivatives used in cash flow type hedges and is being written back to
the statements of income over the expected redemption profile of the
underlying assets in the Trust. During the year to December 31, 2002
[GBP]620 was released to the statement of income, along with an
associated tax effect of [GBP]186, which reduced other comprehensive
income by [GBP]434.
(9) Provision for deferred tax under the liability method is required in full
for temporary differences. Deferred tax assets are recognised subject to
any adjustment for valuation allowances. In the opinion of the Directors,
the deferred tax asset is recoverable as the realisation of the losses on
derivative instruments will be offset by taxable income from the
investment in Trust against which the deferred tax asset will then be
applied.
317
(10) In preparing the financial statements, management use estimates and
assumptions that may affect reported amounts and disclosures. Estimates
are used when accounting for derivatives, allowance for loan losses and
deferred tax.
The Company is subject to risks and uncertainties which may cause actual
results to differ from estimated results, such as impairment losses and
changes in derivative valuation.
2. HOLDING COMPANY
The parent company of the Company is Holmes Holdings Limited, a company
registered in England and Wales, which holds all of the beneficial interest in
the issued shares of the Company. SPV Management Limited, a company registered
in England and Wales, holds all of the beneficial interest in the issued shares
of Holmes Holdings Limited on a discretionary trust for persons employed as
nurses in the United Kingdom and for charitable purposes.
3. OPERATING ACTIVITIES
The principal purpose of the Company is to acquire an equitable interest in a
portfolio of mortgages and enter into all financial arrangements in that
connection.
4. RELATED PARTY TRANSACTIONS
On July 26, 2000 the Company acquired an equitable interest in the assets of
Holmes Trustees Limited (the "TRUST"), a fellow subsidiary of Holmes Holdings
Limited, for a cash consideration of [GBP]2,256,000. The assets of the Trust
comprise mortgage loans secured on residential property in England and Wales.
The Company acquired further equitable interests in the assets of the Trust as
follows:
DATE CASH CONSIDERATION [GBP]
- ----------------- ------------------------
November 29, 2000 2,404,516
May 23, 2001..... 2,167,000
July 5, 2001..... 2,667,000
November 8, 2001. 2,479,000
November 7, 2002. 3,999,221
The Company receives income from the Trust in proportion to its share of the
total mortgage assets of the Trust. During the current period the Company
received income from the Trust of [GBP]641,692 (2001: [GBP]501,978; 2000:
[GBP]86,877), of which none was receivable at December 31, 2002 (2001:
[GBP]16,267).
In order to finance the purchase of the shares in the Trust assets, the Company
received loans from Holmes Financing (No. 1) plc, Holmes Financing (No. 2) plc,
Holmes Financing (No. 3) plc, Holmes Financing (No. 4) plc, Holmes Financing
(No. 5) plc and Holmes Financing (No. 6) plc, all subsidiaries of Holmes
Holdings Limited. The inter-company loans are made up of 59 separate sub-loans,
with interest determined by reference to the London Interbank Offering Rate
("LIBOR") for three-month sterling deposits plus a margin, as follows:
318
LOANS FROM HOLMES FINANCING (NO. 1) PLC
ORIGINAL MARGIN*
AMOUNT ORIGINAL MARGIN* MARGIN* THEREAFTER
[GBP]'000 FINAL MATURITY DATE % UNTIL %
--------- ------------------- ---------------- --------- ----------
600,000 July 2005 0.14 July 2010 N/A
650,000 July 2007 0.19 July 2010 N/A
575,000 July 2010 0.26 July 2010 N/A
250,000 July 2013 0.25 July 2010 1.25
21,000 July 2040 0.38 July 2010 1.38
23,000 July 2040 0.41 July 2010 1.41
24,000 July 2040 0.45 July 2010 1.45
11,000 July 2040 0.62 July 2010 1.62
28,000 July 2040 1.03 July 2010 2.03
30,000 July 2040 1.15 July 2010 2.15
30,000 July 2040 1.60 July 2010 2.60
14,000 July 2040 1.75 July 2010 2.75
LOANS FROM HOLMES FINANCING (NO. 2) PLC
ORIGINAL MARGIN*
AMOUNT ORIGINAL MARGIN* MARGIN* THEREAFTER
[GBP]'000 FINAL MATURITY DATE % UNTIL %
--------- ------------------- ---------------- ------------ ----------
703,000 July 2017 0.15 October 2007 0.59
500,000 July 2023 0.24 October 2007 0.48
300,000 July 2040 0.29 October 2007 0.82
26,011 July 2040 0.47 October 2007 1.73
19,000 July 2040 0.45 October 2007 1.45
12,600 July 2040 0.55 October 2007 1.81
34,447 July 2040 1.42 October 2007 2.68
25,000 July 2040 1.50 October 2007 2.50
21,000 July 2040 1.69 October 2007 2.95
LOANS FROM HOLMES FINANCING (NO. 3) PLC
ORIGINAL MARGIN*
AMOUNT ORIGINAL MARGIN* MARGIN* THEREAFTER
[GBP]'000 FINAL MATURITY DATE % UNTIL %
--------- ------------------- ---------------- --------- ----------
750,000 January 2005 0.11 July 2006 N/A
750,000 January 2005 0.15 July 2006 N/A
500,000 July 2040 0.26 July 2006 0.74
23,000 July 2040 0.36 July 2006 1.10
23,000 July 2040 0.45 July 2006 1.13
15,000 July 2040 0.42 July 2006 1.14
37,500 July 2040 1.31 July 2006 2.50
37,500 July 2040 1.38 July 2006 2.61
31,000 July 2040 1.55 July 2006 2.85
319
LOANS FROM HOLMES FINANCING (NO. 4) PLC
ORIGINAL MARGIN*
AMOUNT ORIGINAL MARGIN* MARGIN* THEREAFTER
[GBP]'000 FINAL MATURITY DATE % UNTIL %
--------- ------------------- ---------------- ------------ ----------
765,000 July 2015 0.19 July 2006 0.39
490,000 July 2008 0.29 July 2006 0.58
850,000 July 2040 0.23 July 2006 0.46
350,000 October 2009 0.24 October 2006 0.50
26,500 July 2040 0.41 July 2006 1.125
22,000 July 2040 0.46 July 2006 0.95
25,000 July 2040 0.46 July 2006 1.22
11,000 July 2040 0.43 October 2006 0.86
39,500 July 2040 1.28 July 2006 2.58
33,000 July 2040 1.58 July 2006 2.70
36,000 July 2040 1.38 July 2006 2.68
19,000 July 2040 1.50 October 2006 2.50
30,000 July 2040 4.75 July 2006 5.75
16,500 July 2040 5.19 July 2006 6.39
3,500 July 2040 5.12 July 2006 6.32
LOANS FROM HOLMES FINANCING (NO. 5) PLC
ORIGINAL MARGIN*
AMOUNT ORIGINAL MARGIN* MARGIN* THEREAFTER
[GBP]'000 FINAL MATURITY DATE % UNTIL %
--------- ------------------- ---------------- ------------ ----------
527,500 October 2006 0.21 N/A N/A
170,000 October 2006 0.21 October 2004 0.26
375,000 October 2008 0.24 October 2006 0.68
500,000 July 2040 0.23 October 2006 0.46
24,500 July 2040 0.37 October 2006 0.98
24,500 July 2040 0.46 October 2006 1.15
33,000 July 2040 0.44 October 2006 1.10
36,500 July 2040 1.49 October 2006 2.75
36,500 July 2040 1.58 October 2006 2.84
47,500 July 2040 1.56 October 2006 2.82
320
LOANS FROM HOLMES FINANCING (NO. 6) PLC
ORIGINAL MARGIN*
AMOUNT ORIGINAL MARGIN* MARGIN* THEREAFTER
[GBP]'000 FINAL MATURITY DATE % UNTIL %
--------- ------------------- ---------------- ---------- ----------
500,000 July 2040 0.24 April 2008 0.74
55,114 July 2040 1.41 April 2008 2.67
45,501 July 2040 1.52 April 2008 2.78
44,231 July 2040 1.63 April 2008 2.89
36,110 July 2040 1.60 April 2008 2.86
32,043 July 2040 0.40 April 2008 1.06
29,000 July 2040 1.55 April 2008 2.81
26,916 July 2040 0.43 April 2008 1.13
25,642 July 2040 0.54 April 2008 1.34
21,539 July 2040 0.53 April 2008 1.32
17,000 July 2040 0.52 April 2008 1.30
961,292 October 2003 0.00 April 2008 N/A
801,077 April 2008 0.18 April 2008 N/A
641,026 October 2009 0.24 April 2008 0.75
633,500 October 2009 0.25 April 2008 0.75
129,230 October 2009 0.34 April 2008 0.61
* Margin expressed as percentage over LIBOR.
In the period interest on the loans amounted to [GBP]524,200 (2001:
[GBP]414,322; 2000: [GBP]76,998), of which [GBP]119,744 was owing at December
31, 2002 (2001: [GBP]111,320). Interest payments are made on a quarterly basis
in arrears.
Transactions between the Company and the related parties are made on an arm's-
length basis.
5. OTHER EXPENSES
The principal element of other expenses is covenanted payments to the
originator of the mortgages held by the Trust which are based on the
performance of the Trust.
6. TAXATION
Taxation has been provided on income before taxation at United Kingdom
statutory rates. The expected tax provision is equal to the actual tax
provision in each of 2002, 2001 and 2000. The deferred income tax balances
reflect the impact of temporary differences between the carrying amounts of
assets and liabilities and their tax bases and are stated at enacted tax rates
expected to be in effect when taxes are actually paid or recovered.
YEAR ENDED YEAR ENDED PERIOD FROM 24.4.00 TO
31.12.02 31.12.01 31.12.00
[GBP]'000 [GBP]'000 [GBP]'000
---------- ---------- ----------------------
Current tax expense........... 34 12 4
Deferred tax (benefit) expense (11,787) (69,086) ---
---------- ---------- ----------------------
Taxation (benefit) expense.... (11,763) (69,074) 4
========== ========== ======================
The rate used for deferred tax is 30%.
321
Components of deferred tax assets (liabilities)
31.12.02 31.12.01
[GBP]'000 [GBP]'000
--------- ---------
Asset arising from marking interest rate swaps to market 75,702 67,563
Asset arising on provision against investment in trust.. 4,449 ---
Liability arising from deferring discount incentives.... (615) ---
--------- ---------
Closing balance......................................... 79,536 67,563
========= =========
Due within 1 year....................................... 4,847 555
Due in more than 1 year................................. 74,689 67,008
--------- ---------
79,536 67,563
========= =========
In the opinion of management a valuation allowance against the deferred tax
asset is not required as it is more likely than not that the deferred tax asset
will be realised.
322
Reconciliation from tax expense to the tax expense if profits were all taxed at
the UK statutory rate of tax of 30%
2002 2001 2000
[GBP]'000 [GBP]'000 [GBP]'000
--------- --------- ---------
Loss on ordinary activities before tax..................................................... (51,523) (215,908) (1,981)
========= ========= =========
Tax charged in the statements of income.................................................... (11,753) (69,074) 4
Effects of:
Benefit of small companies corporation tax rate............................................ 3 6 ---
Adjustments to tax charge in respect of previous periods................................... (3,707) 4,296 (598)
--------- --------- ---------
Loss on ordinary activities multiplied by standard rate of corporation tax in the UK of 30% (15,457) (64,772) (594)
========= ========= =========
7. START-UP LOANS
Six start-up loans have been entered into, as follows:
AMOUNT [GBP]'000 MARGIN OVER LIBOR FOR THREE-MONTH STERLING DEPOSITS
- -------------------- ---------------- ----------------------------------------------------
First start-up loan 13,000 0.30% per annum until July 2010, 0.55% thereafter
Second start-up loan 13,250 0.30% per annum until October 2007, 0.55% thereafter
Third start-up loan 17,500 0.25% per annum until July 2006, 0.50% thereafter
Fourth start-up loan 7,500 0.25% per annum until July 2006, 0.50% thereafter
Fifth start-up loan 5,100 0.25% per annum until October 2006, 0.50% thereafter
Sixth start-up loan 6,100 0.25% per annum until April 2008, 0.50% thereafter
The loans are repayable when the Company has sufficient funds, as specified in
the relevant prospectus which stipulates the order of priority in which
available revenue receipts are distributed.
8. DERIVATIVE INSTRUMENTS
The Company pays interest on related party loans with which it finances the
investment in the Trust. The Company utilises interest rate swaps to convert
this expenditure into a mixed variable and fixed rate based cash inflow to
match the interest receivable by the Company from its investment in the Trust.
The maximum length of time over which the Company is hedging its exposure to
the variability of the future cash outflows from interest payments on the
inter-company loans from the Trust and future cash inflows from the Trust is 39
years, in line with the final maturity dates of the inter-company loans.
The interest rate swap the Company has entered into receives LIBOR based
interest streams to match the payments it expects to make to the related party,
and pays mixed fixed rate interest and variable rate interest.
At December 31, 2002 the total notional value of the swaps was [GBP]13,694,000
(2001: [GBP]11,973,000). The fair value has been estimated by discounting the
future cash flows under the swap agreements, which results in estimated swap
liabilities of [GBP]272,376 (2001: [GBP]232,602). These swap liabilities are
shown in other liabilities.
323
9. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk exist if a number of counterparties are engaged
in similar activities and have similar economic characteristics that would
cause their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions.
The Company's significant exposures to credit risk arise from the ability of
the Trust to pay income on the Company's investment, and the ability of the
interest rate swap provider to meet its obligations to the Company.
The Trust's assets comprise mortgage loans secured on residential property in
England and Wales. These loans are originated by Abbey National plc, who also
service the loans assigned to the Trust. Abbey National plc applies a national
mortgage lending policy supported by a number of processes, including credit
scoring, which enhance the ability to manage and monitor the credit risk
quality of mortgage assets, manage arrears and collections and optimise the
values raised from properties in possession.
The interest rate swap provider is a subsidiary of Abbey National plc, Abbey
National Treasury Services plc ("ANTS"). The obligations of ANTS are guaranteed
by a deed poll made by Abbey National plc.
10. COMMON STOCK
The Company is authorised to issue 100 shares of common stock, with a par value
of [GBP]1 per share. Upon incorporation, two subscriber shares were issued to
Holmes Holdings Limited, and have been fully paid. All shares issued rank
equally for dividends and have equal voting rights.
324
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
325
ISSUER
HOLMES FINANCING (NO. 7) PLC
Abbey National House
2 Triton Square
Regent's Place
London NW1 3AN
SERVICER
ABBEY NATIONAL PLC
Abbey National House
2 Triton Square
Regent's Place
London NW1 3AN
REGISTRAR AND TRANSFER AGENT US PAYING AGENT
J.P. MORGAN BANK LUXEMBOURG S.A. JPMORGAN CHASE BANK,
5 rue Plaetis New York Branch
L-2238 Luxembourg 450 West 33rd Street
Grand Duchy of Luxembourg New York
NY 10001-2697
SECURITY TRUSTEE, AGENT BANK AND PRINCIPAL PAYING AGENT NOTE TRUSTEE AND ISSUER SECURITY TRUSTEE
JPMORGAN CHASE BANK, LONDON BRANCH THE BANK OF NEW YORK
Trinity Tower One Canada Square
9 Thomas More Street London E14 5AL
London E1W 1YT
LEGAL ADVISERS TO THE UNDERWRITERS, THE MANAGERS, THE NOTE TRUSTEE,
THE ISSUER SECURITY TRUSTEE AND THE SECURITY TRUSTEE
as to English law and US law as to Scots law
ALLEN & OVERY TODS MURRAY WS
One New Change 66 Queen Street
London EC4M 9QQ Edinburgh EH2 4NE
LEGAL ADVISERS TO THE ISSUER AND THE SERVICER
as to English law as to US law as to English law as to Scots law
SLAUGHTER AND MAY CLEARY, GOTTLIEB, STEEN & HAMILTON SLAUGHTER AND MAY TODS MURRAY WS
One Bunhill Row One Liberty Plaza One Bunhill Row 66 Queen Street
London EC1Y 8YY New York London EC1Y 8YY E dinburgh EH2 4NE
New York 10006
AUTHORISED ADVISER
J.P. MORGAN SECURITIES LTD.
125 London Wall
London EC2Y 5AJ
Through and including [__, 2003], 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.
HOLMES FINANCING (NO. 7) PLC
$[750,000,000] SERIES 1 CLASS A FLOATING RATE ISSUER NOTES DUE [APRIL 2004]
$[22,500,000] SERIES 1 CLASS B FLOATING RATE ISSUER NOTES DUE [JULY 2040]
$[38,250,000] SERIES 1 CLASS M FLOATING RATE ISSUER NOTES DUE [JULY 2040]
$[1,250,000,000] SERIES 2 CLASS A FLOATING RATE ISSUER NOTES DUE [JANUARY 2008]
$[37,500,000] SERIES 2 CLASS B FLOATING RATE ISSUER NOTES DUE [JULY 2040]
$[63,750,000] SERIES 2 CLASS M FLOATING RATE ISSUER NOTES DUE [JULY 2040]
$[500,000,000] SERIES 3 CLASS A FLOATING RATE ISSUER NOTES DUE [JULY 2020]
------------------
PROSPECTUS
------------------
CO-ARRANGERS AND UNDERWRITERS
JPMORGAN SCHRODER SALOMON SMITH BARNEY
CO-UNDERWRITERS FOR THE CLASS A ISSUER NOTES
CREDIT SUISSE FIRST BOSTON DEUTSCHE BANK LEHMAN BROTHERS MORGAN STANLEY
5th March, 2003
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[GBP][__]), 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 $[233,387.75]
Fees and expenses of qualification under state securities laws (including legal fees) $**
Printing and engraving expenses $**
Legal fees and expenses $**
Accounting fees and expenses $**
Trustee's fees and expenses $**
Rating agency fees $**
Miscellaneous $**
Software costs $**
-------------
Total $**
=============
* All amounts except the SEC registration fee are estimates.
**To be provided by amendment.
ITEM 32. SALES TO SPECIAL PARTIES
Not applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
HOLMES FINANCING (NO. 7) PLC (THE "ISSUER")
Subject to the provisions of the Companies Act 1985 as amended, 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 favour 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.
HOLMES FUNDING LIMITED ("FUNDING")
Subject to the provisions of the Companies Act 1985 as amended, 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 favour or in which he is
acquitted or in connection with any application in which relief is granted to
him by the court from liability for negligence, default, breach of duty or
breach of trust in relation to the affairs of Funding.
HOLMES TRUSTEES LIMITED (THE "MORTGAGES TRUSTEE")
Subject to the provisions of the Companies Act 1985 as amended, 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 trustee against any liability incurred by
him in defending any proceedings, whether civil or criminal, in which judgment
is given
II-1
in his favour 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
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 each of Holmes Financing (No. 7) PLC and
Holmes Funding Limited are filed as part of this registration
statement. There are no additional schedules to the financial
statements.
(b) Exhibits:
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- ----------- ----------------------------------------------------------------------- --------------
1.1 Form of Underwriting Agreement for the series 1 notes, the series 2
notes and the series 3 Class A notes(7)
3.1.1 Memorandum and Articles of Association of Holmes Financing (No. 7)
PLC
3.1.2 Memorandum and Articles of Association of Holmes Funding
Limited(1)
3.1.3 Memorandum and Articles of Association of Holmes Trustees
Limited(1)
4.1 Form of Intercompany Loan Terms and Conditions(1), Form of
Amendment Agreement to Intercompany Loan Terms and
Conditions(2) and Form of Loan Confirmation(7)
4.2 Form of Amended and Restated Mortgages Trust Deed(4)
4.3 Form of Amended and Restated Mortgage Sale Agreement(7)
4.4 Form of Deed of Charge of Holmes Financing (No. 7) PLC(7)
4.5 Form of Deed of Charge of Holmes Funding Limited(1), Form of Deed
of Accession in relation to Funding Deed of Charge(2), Form of
Second Deed of Accession in relation to Funding Deed of Charge(3),
Form of Third Deed of Accession in relation to Funding Deed of
Charge(4), Form of Fourth Deed of Accession in relation to Funding
Deed of Charge(5), Form of Amended and Restated Funding Deed of
Charge(6) and Form of Deed of Accession in relation to the Amended
and Restated Funding Deed of Charge(7)
4.6 Form of Issuer Trust Deed(7)
4.7 Form of Issuer Paying Agent and Agent Bank Agreement(7)
4.8 Form of Cash Management Agreement(1) and Form of Amendment
Agreement to Cash Management Agreement(2)
4.9 Form of Issuer Cash Management Agreement(7)
4.10 Form of Amended and Restated Servicing Agreement(3)
4.11 Form of Post-Enforcement Call Option Agreement(7)
5.1 Opinion of Slaughter and May as to validity(7)
8.1 Opinion of Cleary, Gottlieb, Steen & Hamilton as to U.S. tax matters
8.2 Opinion of Slaughter and May as to U.K. tax matters(7)
10.1.1 Form of Funding Liquidity Facility Agreement(1) and Form of
Amendment to Funding Liquidity Facility Agreement(5)
10.2.1 Form of series 1 class A Dollar Currency Swap Agreement(7)
10.2.2 Form of series 1 class B Dollar Currency Swap Agreement(7)
10.2.3 Form of series 1 class M Dollar Currency Swap Agreement(7)
10.2.4 Form of series 2 class A Dollar Currency Swap Agreement(7)
II-2
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- ----------- ----------------------------------------------------------------------- --------------
10.2.5 Form of series 2 class B Dollar Currency Swap Agreement(7)
10.2.6 Form of series 2 class M Dollar Currency Swap Agreement(7)
10.2.7 Form of series 3 class A Dollar Currency Swap Agreement(7)
10.3 Form of Amended and Restated Funding Swap Agreement(2) and
Deed of Amendment to Funding Swap Agreement(5)
10.4 Form of First Start-up Loan Agreement(1), Form of Second Start-Up
Loan Agreement(2), Form of Third Start-Up Loan Agreement(3), Form
of Fourth Start-Up Loan Agreement(4), Form of Fifth Start-Up Loan
Agreement(5), Form of Sixth Start-Up Loan Agreement(6) and Form of
Seventh Start-Up Loan Agreement(7)
10.5.1 Form of Amended and Restated Master Definitions and Construction
Schedule(7)
10.5.2 Form of Issuer Master Definitions and Construction Schedule(7)
10.6.1 Form of Corporate Services Agreement(2)
10.6.2 Form of Issuer Corporate Services Agreement(7)
23.1 Consent of Slaughter and May (included in Exhibits 5.1 and 8.2)(7)
23.2 Consent of Cleary, Gottlieb, Steen & Hamilton (included in Exhibit 8.1)
23.3 Consent of auditors(7)
25.1 Statement of Eligibility of Trustee (Form T-1)(7)
(1) Incorporated by reference from the Form S-11 filed by Holmes Financing (No.
1) PLC (File No. 333-12250) which became effective on July 24, 2000.
(2) Incorporated by reference from the Form S-11 filed by Holmes Financing (No.
2) PLC (File No. 333-12834) which became effective on November 17, 2000.
(3) Incorporated by reference from the Form S-11 filed by Holmes Financing (No.
3) PLC (File No. 333-13444) which became effective on May 14, 2001.
(4) Incorporated by reference from the Form S-11 filed by Holmes Financing (No.
4) PLC (File No. 333-13576) which became effective on June 27, 2001.
(5) Incorporated by reference from the Form S-11 filed by Holmes Financing (No.
5) PLC (File No. 333-14002) which became effective on October 30, 2001.
(6) Incorporated by reference from the Form S-11 filed by Holmes Financing (No.
6) PLC (File No. 333-99349) which became effective on October 30, 2002.
(7) To be provided by amendment.
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 defence of any
action, suit or proceeding) is asserted against any of the registrants by
such director, officer or controlling person in connection with the
securities being registered, the relevant registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
B. Each of the undersigned registrants hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant 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.
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(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 authorised, in the city of London, on 5th March, 2003.
HOLMES FINANCING (NO. 7) PLC
By: /s/ Martin McDermott
-------------------------------------------------------------------------
Name: SPV Management Limited
by its authorised person
Martin McDermott
for and on its behalf
Title: Director
HOLMES FUNDING LIMITED
By: /s/ Martin McDermott
-------------------------------------------------------------------------
Name: SPV Management Limited
by its authorised person
Martin McDermott
for and on its behalf
Title: Director
HOLMES TRUSTEES LIMITED
By: /s/ Martin McDermott
-------------------------------------------------------------------------
Name: SPV Management Limited
by its authorised person
Martin McDermott
for and on its behalf
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.
HOLMES FINANCING (NO. 7) PLC
SIGNATURE TITLE DATE
- ----------------------------------- -------------------------------------- -------------
By: /s/ Martin McDermott
--------------------------------
Name: Martin McDermott Director (Principal Financial Officer, 5 March, 2003
Principal Executive Officer and
Principal Accounting Officer)
By: /s/ Martin McDermott
--------------------------------
Name: SPV Management Limited Director 5 March, 2003
by its authorised person
Martin McDermott
for and on its behalf
By: /s/ Richard Wise
--------------------------------
Name: /s/ Richard Wise Director 5 March, 2003
--------------------------------
HOLMES FUNDING LIMITED
SIGNATURE TITLE DATE
- ----------------------------------- -------------------------------------- -------------
By: /s/ Martin McDermott
--------------------------------
Name: Martin McDermott Director (Principal Financial Officer, 5 March, 2003
Principal Executive Officer and
Principal Accounting Officer)
By: /s/ Martin McDermott
--------------------------------
Name: SPV Management Limited Director 5 March, 2003
by its authorised person
Martin McDermott
for and on its behalf
By: /s/ Richard Wise
--------------------------------
Name: Richard Wise Director 5 March, 2003
--------------------------------
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HOLMES TRUSTEES LIMTED
SIGNATURE TITLE DATE
- ----------------------------------- -------------------------------------- -------------
By: /s/ Martin McDermott
--------------------------------
Name: Martin McDermott Director (Principal Financial Officer, 5 March, 2003
Principal Executive Officer and
Principal Accounting Officer)
By: /s/ Martin McDermott
--------------------------------
Name: SPV Management Limited Director 5 March, 2003
by its authorised person
Martin McDermott
for and on its behalf
By: /s/ Richard Wise
--------------------------------
Name: Richard Wise Director 5 March, 2003
--------------------------------
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SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
HOLMES FINANCING (NO. 7) PLC
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Holmes Financing (No. 7)
PLC has signed this registration statement or amendment thereto in New York,
New York on 5th March, 2003.
By: /s/ Donald J. Puglisi
Name: Donald J. Puglisi
Office: Authorized Representative in the United States
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
HOLMES FUNDING LIMITED
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Holmes Funding Limited
has signed this registration statement or amendment thereto in New York, New
York on 5th March, 2003.
By: /s/ Donald J. Puglisi
Name: Donald J. Puglisi
Office: Authorized Representative in the United States
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF
HOLMES TRUSTEES LIMITED
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of Holmes Trustees Limited
has signed this registration statement or amendment thereto in New York, New
York on 5th March, 2003.
By: /s/ Donald J. Puglisi
Name: Donald J. Puglisi
Office: Authorized Representative in the United States
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